Social Security, Government Pensions, WEP and You

WEP Reductions
Why the Reduction in Benefits?

The rules of the Social Security Administration (SSA) for retirement benefits are “progressive”. Those that make minimal wages receive a higher percentage of their pre-retirement income. According to the Social Security Administration (SSA) low paid workers get benefits equal to 55 percent of their pre-retirement earning. In contrast, high paid workers receive about 25 percent of their pre-retirement earnings. The Windfall Elimination Provision (WEP) is a federal law that reduces Social Security retirement benefits that can be received by workers who will collect a government pension, and also receive Social Security retirement benefits. In other words, WEP assists the SSA in keeping retirement income for government workers “progressive”.

Do You Get Benefits from Covered and Non-Covered Work?

In the United States there are two types of work: (1) covered work (where you pay Social Security taxes) and (2) non-covered (you do not pay Social Security taxes). Often state and local government employees (public school teachers, police, firemen, librarians, and so on) do not pay Social Security taxes and their employment is considered uncovered work. Individuals can work for the Federal government and their employment is covered work because they pay Social Security taxes.

For folks that pay Social Security taxes the Windfall Elimination Provision (WEP) and the Government Pension Offset Provision (GPO) does not affect their Social Security benefits. However, many employees have a mix of earnings and retirement benefits from both covered and uncovered work. These folks will often be the subject of the Windfall Elimination Provision (WEP) and Government Pension Offset Provision (GPO). However, some workers can still escape the WEP and GPO provisions. This article focuses on WEP reductions and exceptions.

How WEP Reduces Social Security Retirement Benefits

Using an SSA formula your Social Security retirement benefits are calculated on the highest 35 years of your employment. Next this number is adjusted for inflation and weighted according to SSA rules. Finally the WEP formula is used to determine the actual amount of Social Security retirement benefits you will receive. It is important to point out that the law protects you if you get a low pension. The Social Security Administration (SSA) will not reduce your Social Security benefit more than half (50 percent) of your pension for earnings after 1956 on which you did not pay Social Security taxes.

CalSTRS (http://www.calstrs.com/sites/main/files/file-attachments/socialsecurity_2013_v2.pdf), the California State Teachers Retirement System, provides the information in Table 1.0 and Table 2.0 to show how WEP affects workers. Table 1.0 illustrates how Social Security benefits are normally calculated. Using the SSA formula an example worker has Average Indexed Monthly Earnings (AIME) of $2,000. This amount is further refined using SSA formulas to a Primary Insurance Amount (PIA) of $1,328. This is the amount the worker will receive without the WEP provision.

Table 1.0 Work with Average Indexed Monthly Earnings (AIME) of $2,000 and Retiring in 2014
Regular Formula
90 Percent of first $816 $734.40
32 Percent of next $1,184 $378.88
15 Percent of remainder $00,00

Total $1,113.28

Table 2.0 illustrates how the retiree’s Social Security benefits will be reduced using the WEP formula.

Table 2.0 Work with Average Indexed Monthly Earnings (AIME) of $2,000 and Retiring in 2014
WEP Formula
40 Percent of first $816 $326.00
32 Percent of next $1,184 $378.88
15 Percent of remainder $00,00

Total $705.28

Table 1.0 and Table 2.0 show how the Windfall Elimination Provision (WEP) can provide a retiring worker with an unexpected and unpleasant surprise. A comparison of the examples in Table 1.0 and Table 2.0 indicate that Social Security retirement benefits will be reduced by 36.65 percent, a total reduction of $4,896 per year. If the retiree lives for 35 years past his or her retirement date that is a total of $171,360 in expected income that will never materialize.

There are WEP Exceptions
There are several exceptions that can reduce the influence or eliminate the impact of WEP. (In advance of retiring, it is wise to contact your local Social Security Representative to verify that you qualify for any of these exceptions.) Examples of these exceptions are:
• If you receive a pension based on someone else’s work, this pension will not cause WEP to impact your Social Security benefits (nor your spouse’s benefits).
• You are a Federal worker first hired after December 31, 1983.
• If you receive a pension for a non-covered job from a foreign (non-U.S Government) that has an agreement with SSA.
• You have received a lump sum payment of a pension from a non-covered job and have lived past the actuarially-defined timespan that the pension was determined to last.
• Your only pension is for railroad employment

Additionally, if you paid Social Security taxes on 30 years of “substantial” earnings you are not subject to WEP. The Social Security Administration (SSA) provides a chart that shows the maximum monthly amount Social Security retirement benefits can be reduced by WEP if you have fewer than 30-years of substantial earnings at http://www.socialsecurity.gov/planners/retire/wep-chart.html

About ksindell

Kathleen Sindell, Ph.D. is the author of numerous academic, popular, and professional finance articles, Web sites, proposals, and books. This includes the bestselling reference book, "Investing Online for Dummies, Eds 1-5" (listed for two consecutive years on the Wall Street Journal's Bestselling Business Book List). Her most recent book "Social Security: Maximize your Benefits" has been listed in Amazon's Top 100 Bestselling Retirement Planning Books. It is important to note that "Social Security: Maximize Your Benefits, 2nd Edition" was just released. Sindell has an in-depth understanding of the financial services industry and has held Series 7, 63, and 65 licenses. Dr. Sindell is regularly tapped as a financial services expert on ABC World News, The Nightly Business Report, and at popular online and print outlets. Kathleen Sindell, Ph.D. is a member of the Board of Directors for the Financial Planning Association, National Capital Area (FPA NCA), is on the Editorial Advisory Panel of the Journal of Financial Planning, and is Co-Chair of the Metro Washington Financial Planning Day. Sindell is a Course Chair II, CFP Program Academic Officer, and adjunct full-professor at the University of Maryland, UMUC, School of Undergraduate Studies. Contact Information: ksindell@kathleensindell.com or 703-299-1700
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