I spend a lot of time answering individual readers’ questions about the windfall elimination provision. I’ll attempt to answer many of the basic questions for a broader audience here.
The windfall elimination provision primarily affects you if you earned an annuity in any job where you did not pay Social Security taxes — such as a job under the Civil Service Retirement System — and you also worked in other jobs long enough to qualify for a Social Security benefit.
To qualify for a Social Security benefit, you need a minimum of 40 credits, which are earned at a rate of four credits per year. In 1970, $200 in Social Security earnings would qualify for one credit. In 2010, you’d need to earn $1,120 from wages or self-employment to get one credit. To get four credits, you’d have to earn $4,480. Thus, 10 years of working and paying Social Security taxes likely qualifies you for a Social Security benefit.
To calculate a full Social Security benefit, SSA separates your average earnings into three amounts and multiplies the amounts using three factors. For example, for a worker who turns 62 in 2010, the first $761 of average monthly earnings is multiplied by 90 percent; earnings from $762 to $4,586, by 32 percent; and the remainder, by 15 percent. The sum of the three amounts equals the total monthly payment amount.
But you will not receive that full benefit if you also receive a CSRS annuity. Unless you have at least 30 years of so-called substantial earnings under Social Security, the windfall elimination provision will reduce your Social Security benefit. Substantial earnings range from $1,950 in 1970 to $19,800 in 2010. For each year of substantial earnings under 30 years, the 90 percent figure in your Social Security benefit calculation is reduced by five percentage points. The reduction bottoms out at 40 percent if you have 20 or fewer years of substantial earnings.
So, if you have the minimum 10 years and 40 credits needed to receive a Social Security benefit, the formula applied would be the same as that for someone who has up to 20 years of credits.
It wasn’t always this way. Before Jan. 1, 1984, federal retirees could receive both their annuity and an unreduced Social Security benefit. The law was changed as part of a major overhaul that required newly hired federal employees, and many of those returning to work for the government, to be covered by Social Security — under CSRS Offset or the Federal Employees Retirement System.
The reason for the change is spelled out by the Social Security Administration: “The formula used to compute Social Security benefits includes factors that ensure that lower-paid workers get a higher percentage of return than their more well-to-do counterparts. … Before the law was changed in 1983, employees who spent time in jobs not covered by Social Security had their benefits computed as if they were long-term, low-wage workers. Thus they received the advantage of the higher percentage of Social Security benefits in addition to their other pension. The modified formula eliminates this windfall.”
If you want to find out how the windfall elimination provision would affect you, there are two online calculators that can help you. The one provided by the Social Security Administration requires that you have precise information about your earnings. You’ll find it at www.ssa.gov/|retire2/anyPiaWepjs04.htm. The other, which is less demanding but still reasonably accurate, is at www.FEDbens.us.
Although most CSRS employees and retirees are subject to the windfall elimination provision, there are a few exemptions for:
å Employees first hired after Dec. 31, 1983, who were covered by an interim system of CSRS and Social Security.
å Employees who were age 62 or became disabled before Jan. 1, 1986, and were eligible for a Social Security retirement or disability benefit.
å Employees who were eligible for an immediate retirement from the federal government before Jan. 1, 1986.
While Congress took away what it viewed as an unearned benefit when it enacted the windfall elimination provision, over the last few decades some lawmakers have introduced bills to modify or eliminate it. To date, none of those bills has gotten very far. Even if a bill passes, it’s unlikely the change would be retroactive.