The Windfall Elimination Provision (WEP) is a Social Security rule that may reduce your benefits if you receive a pension from an employer where that pension is based on years of earnings that were not covered under the Social Security system.
Windfall Elimination Provision May Apply To You If
WEP most frequently applies if you worked for a federal, state or local government agency or for an employer in another country. WEP can often affect fire fighters, law enforcement employee, postal workers and educators who work for government agencies or municipalities that have their own pension system and do not participate in Social Security. For example, WEP affects teachers in fourteen states: Alaska, California, Colorado, Connecticut, Illinois, Kentucky, Louisiana, Maine, Massachusetts, Minnesota, Missouri, Nevada, Ohio, and Texas. (Source: OLR Research Report)
The windfall elimination provision does not apply if:
- the only pension you will receive is from railroad benefits
- the only pension you will receive is from Federal employment covered under the FERS system
- you have 30 or more years of substantial earnings for work covered under Social Security
How Do I Know If I Have 30 Years of Substantial Earnings?
If you have more than 30 years of work covered by Social Security and earned as much or more than what Social Security deems were “substantial earnings” in each those years then WEP will not apply to you. The substantial earnings schedule is provided on the Windfall Elimination Provision page of the Social Security website, so you can compare your earnings history to that schedule to see if your earnings history is deemed substantial.
If the Windfall Elimination Provision does apply to you a modified formula is used to determine the amount of your benefits.
Here’s how it works:
In step 3 of How to Calculate Your Social Security Benefits the normal formula is shown, as follows (2012 numbers used):
- You take 90% of the first $767 of AIME.
- You take 32% of the next $3,856 of AIME.
- You take 15% of any amount over that second bend point.
- You total those three numbers.
If the Windfall Elimination Provision applies a lower number is inserted to replace the “90%” that you see in the formula. The lower number to use is determined by how many years of work you have that were covered under the Social Security system. On the Windfall Elimination Provision page of the Social Security website (mentioned above) it shows you what number to insert into the formula based on how many years of covered work and earnings that you have had.
How Much Might My Benefits Be Reduced?
The reduction in benefits can be as high as one half of the pension you receive, but not more than that. For example, if your pension was $2,000 a month, you could see your Social Security benefits reduced by $1,000 a month, but not by $1,100 a month. Only pensions for work not covered under Social Security count - so if you had two pensions and one was from an employer where earnings were covered under Social Security that pension eligibility would not affect your Social Security benefits.
The Windfall Elimination Provision Affects Me - Now How Do I Get an Accurate Estimate of My Social Security Benefits
Several of the online Social Security calculators have features where you can input your work history and benefits as stated on your Social Security statement, and they will calculate an estimate of your benefits after the affects of rules like the Windfall Elimination Provision. I think paying a nominal fee to use one of these calculators to estimate benefits is a good place to start when doing your planning.
As you get closer to the age where you may begin benefits you will need to contact the Social Security office to have them prepare a benefit estimate for you after calculating the effects of WEP.
How does the Windfall Elimination Provision affect benefits for your dependents?
The Windfall Elimination provision affects your benefits and thus your primary insurance amount (PIA). Dependent benefits are calculated using your PIA as a starting place. If the Windfall Elimination Provision affects your benefits it will also affect dependents benefits that are calculated based on your record, however it will not affect a widow/widowers benefit that your spouse may receive after your death. The widow/widower’s benefit is recalculated without WEP upon your death. Dependents can also be affected if the dependent receives their own pension from work not covered under Social Security. This is a separate rule called the Government Pension Offset.
Why does the Windfall Elimination Provision exist?
This Social Security rule was put in place to keep people from "double dipping". Social Security is designed to be a system in which everyone pays in over their working life times. Such systems work only if everyone (for the most part) does pay in. If someone worked only enough quarters under the Social Security system to qualify for basic benefits, and then had non-covered work, under an un-modified formula they would be receiving a decent Social Security benefit as well as their pension, and the system wasn't designed for this circumstance. The windfall elimination provision was put in place to eliminate this ability to double dip.