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Windfall Elimination Provision (WEP) Guide:
How the Social Security WEP Affects Federal Retirees & Spouses
Edward A. Zurndorfer, CFP
Most Americans pay into the Social Security system by having the Federal
Insurance Contribution Act (FICA) tax deducted from their paychecks. Currently,
the FICA tax of 6.2 percent is applied to an employee's wages.
Many individuals, including federal employees covered by the Civil Service
Retirement System (CSRS), Americans employed in foreign countries by foreign
employers, and some state public employees do not contribute to Social Security.
In spite of their not being able to contribute to the Social Security system in
their jobs, many of the aforementioned individuals have at some time during
their working careers been able to earn the required minimum 40 "quarters of
coverage" or credits to qualify for Social Security retirement payments. Before
1983, these workers were able to receive the maximum benefits from both Social
Security and their public pensions.
However, in 1983 Congress passed the "Windfall Elimination Provision" (WEP)
in order to eliminate this advantage. In particular, if an individual is covered
by a public pension plan (such as CSRS) and has less than 30 years of
"substantial" Social Security covered earnings while working in the private
sector, the amount of Social Security benefits they receive will be reduced. The
Social Security benefits are reduced for affected individuals; those:
- reaching age 62 after December 31, 1985;
- becoming disabled after December 31, 1985; or
- becoming first eligible for a monthly pension after December 31, 1985 based
on non-covered Social Security employment.
Why did Congress create the WEP in 1983?
Perhaps the motivation to create it was to remove any possible inequalities
of Social Security benefits of employees not paying into Social Security but
paying into a government retirement plan. These employees would earn their 40
credits outside of federal service and subsequently earn Social Security
benefits that are as relatively high as those benefits earned by employees who
paid into Social Security their entire working careers. The "inequality" problem
occurs because the threshold for coverage of Social Security retirement benefits
is rather low and monthly retirement benefits accrue rather quickly at the lower
end of the earnings scale. For 2008, full retirement benefits accrue at 90
percent of the first $711 of an individual's average indexed monthly earnings
(AIME) and then accrue at a lesser rate of 32 percent, finally reaching an
accrual rate of 15 percent. The most important thing for federal employees to
understand is that the WEP will reduce, but will not eliminate, an individual's
Social Security benefit by as much as 55 percent.
Which federal workers are affected by the WEP and how do they
determine how the WEP affects their Social Security benefits?
The Social Security Administration (SSA) has a publication, SSA Publication
No. 05-10045 (downloadable at www.ssa.gov)
which explains the WEP. Perhaps the most important portion in the SSA
publication is the table (reproduced below) that shows the effect of the WEP on
an affected annuitant's Social Security benefits.
CSRS and CSRS-Offset employees, and "Trans-FERS" (employees who joined FERS
in 1987 or 1998 after working at least five years under CSRS), could be affected
by the WEP. FERS-covered employees are not affected by the WEP because they have
regularly paid into Social Security. With respect to CSRS-Offset employees (many
of whom are entitled to two Social Security checks - one check based on federal
CSRS Offset service and the other check based on non-federal service), the WEP
could affect the Social Security retirement check that is based solely on
non-federal service.
3 steps to calculate the WEP reduction in your Social Security
retirement benefit, if you are affected
To calculate the potential reduction of the WEP on affected individual's
Social Security retirement benefit, he or she needs to reference two tables on
the SSA Web site at www.ssa.gov and follow
these three steps.
Step 1
Determine the number of years of "substantial" earnings. An individual needs
to look at his or her Social Security statement (received annually) and
determine how many years of "substantial" Social Security wages he or she has
accumulated. The SSA has a table on its Web site (at www.ssa.gov/pubs/10045.html) that
lists "substantial" earnings per year since 1937. For example, "substantial
earnings" during 2005 was $16,725.
Step 2
Once the number of years of substantial earnings has been established, the
reduction in benefits is found by referring to the WEP chart on the SSA Web site
at www.ssa.gov/retire2/wep-chart.htm
and attached below. For example, suppose a 62 year CSRS annuitant (age 62 is the
"eligibility year" or ELY) with 15 years of "substantial earnings" begins to
receive Social Security during 2008. On the chart under "20 or less years" of
substantial earnings, this individual's Social Security would be reduced by
$355.50. For example, if the individual was to receive a monthly benefit of
$600, then the actual benefit due to the WEP reduction would be $600 less
$355.50, or $244.50 per month.
Step 3
There is a limit on the WEP reduction equal to 50 percent of the non-Social
Security pension (e.g. CSRS). For example, if the CSRS annuitant above receives
a CSRS annuity pension of $300 a month, the WEP reduction would be limited to
$150.
Some other considerations about the WEP
- The WEP does not affect an individual who continues to work and is drawing
Social Security benefits. For example, a federal employee who has
reached full retirement age continues to work for the federal
government and is drawing his or her own Social Security retirement
benefits. Those benefits will not be affected by the WEP. The
WEP takes effect once the individual retires from federal
service.
- If a federal annuitant affected by the WEP is married, then his or her
spouse (or former spouse) is eligible for half of the annuitant's Social
Security retirement benefit ("spousal/former spousal" benefit). This assumes
that the spouse's or the former spouse's own Social Security benefits are less
than half of the annuitant's Social Security benefits. However, spousal/formal
spousal Social Security benefits are also affected by the WEP. If the annuitant
dies and the spouse/former spouse is entitled to the deceased's Social Security
("survivor" benefit), then the WEP no longer applies. In other words, the
spouse/former is entitled to the deceased federal annuitant's full Social
Security benefit without a reduction for the WEP.
Because the effect of the WEP is not included on an individual's Social
Security annual reporting statement, many federal employees are shocked when
they start receiving their Social Security retirement or disability benefits. As
a result of Congressional hearings that provided woeful tales of individuals who
expected Social Security payments based on the information provided by the SSA
but ended up with much less, Congress passed the Social Security Protection Act
of 2004. This law requires better disclosure of payment adjustments due to the
WEP.
Maximum Monthly Amount Your Benefit May Be Reduced Because Of The
Windfall Elimination Provision (WEP)
Click here to download the WEP chart (PDF file)
About the Author
Edward A. Zurndorfer is a Certified Financial Planner (CFP). He
is currently is an instructor of many federal employee retirement
seminars for the National Institute of Transition Planning, and an author of numerous books on federal benefits. Ed is also a retired federal employee
with 32 years of service at the Department of Commerce, and a
former columnist for Federal Times.
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