The Windfall Elimination Provision: How Does It Work



The Windfall Elimination Provision: How Does It Work? To Whom Does It Apply?

By Robert F. Benson

Sunday, June 6, 2010

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Before his recent retirement, Robert Benson served 35 years in various Federal agencies, as both a management analyst and IT specialist. He is a graduate of Northwestern University and developed the software at fedbens.us and and fedretire.us.

The Windfall Elimination Provision (WEP) is a cost-cutting law passed during the Reagan administration. WEP reduces, but does not eliminate, the earned Social Security benefit of a person who is also receiving a pension from a system where no Social Security payments were withheld.

Generally, the full retirement benefit (aka: "Primary Insurance Amount," or PIA) for Social Security is determined by: multiplying the first, lowest tier of the retiree's Average Indexed Monthly Earnings (AIME) by 90%, multiplying the second tier by 32%, and the third by 15%, and then adding the three together.

These percentages ensure that low income retirees get a larger portion of their AIME than higher earners. But for persons receiving a pension where Social Security was not withheld, the formula is different.

WEP modifies the three-tier formula so the retiree gets a smaller percentage—40% instead of 90%—of his earnings at the first-tier level.

Each year the tier levels are adjusted to allow for increases in the average "Wage Index," but the percentages applied to each tier are unchanged. For 2010, the first tier is set at $761, meaning the WEP reduction cannot exceed (90% of 761) – (40% of 761), or $380.50.

Limits:

The WEP reduction cannot be more than one half the amount of the other pension. Thus, if a person is receiving, say, $440 monthly from his other pension, his Social Security WEP reduction could not exceed $220.

If the retiree had significant earnings under Social Security, for a relatively long time, this is recognized by a gradual decrease in the percent of the cut. Starting with 21 years of 'substantial' earnings under Social Security, the WEP reduction is gradually phased out, until 30 years, when there is no reduction at all.

Special case. When a person's AIME is less than the first tier amount, the WEP reduction works out to be more than 50% of the total that would otherwise be due. For example: his AIME is $500. He will receive 40% of the $500, or $200. Without WEP, he would have received 90%, or $450. The $250 reduction in this case is 55.5% of the unreduced amount.

Persons affected. Federal employees under the "old" CSRS retirement system, or under CSRS-Offset, but only for the "pure" CSRS employment. Also, police officers, fire fighters, school teachers and all others receiving pensions from agencies not participating in Social Security.

Nearly every year since enactment of the WEP law, bills have been introduced in Congress to repeal, or mitigate, the Windfall Elimination Provision. None have passed. Given the current economic climate, there is, unfortunately, scant reason for optimism in this area.

To use software to calculate the exact WEP reduction in a specific case, go to fedbens.us and click on #8 on the menu. Further information is available at .

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