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 href="http://www.ssa.gov/pubs/10045.html">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 href="http://www.ssa.gov/retire2/wep-chart.htm">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)

href="http://www.myfederalretirement.com/public/WEP%20-%20Windfall%20Elimination%20Provision%20-%20Federal%20Employees.pdf"

target=_blank>Click here to download the href="http://www.myfederalretirement.com/public/WEP%20-%20Windfall%20Elimination%20Provision%20-%20Federal%20Employees.pdf"

target=_blank>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, a weekly

columnist for Federal Employees News Digest, an author of numerous books for

1105 Media's Government Publications Group, and is the moderator of the Q&A

forum on FederalSoup.com. Ed is also a retired federal employee

with 32 years of service at the Department of Commerce, and a

former columnist for Federal Times.