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Explaining windfall elimination provision
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A few weeks ago, I wrote a column about something called the “government pension offset.” It is a law that essentials says this: If you get a pension from a job that was not covered by Social Security, that pension will be treated just like a Social Security retirement pension, and it will be used to offset any benefits you might be due on a spouse’s Social Security record.
There is a companion law called the “windfall elimination provision,” more commonly known by its acronym, WEP, which usually reduces any Social Security retirement benefits earned at side jobs by folks who spent the bulk of their life working at a job that was not covered by Social Security. Most folks impacted by WEP despise the law, until they understand why it exists.
To explain the reason for the law, I’ve got to start out telling you a true story. It’s the story of my neighbor Frank and his maid, Maria. They are both 66 years old. Frank is a retired mid-level manager with our local utility company. He gets a high Social Security benefit — about $2,400. Maria is divorced and has worked all of her life at low-paying jobs. She continues to work to supplement her meager $1,150 per month Social Security check.
Even though Maria gets a much smaller Social Security benefit than Frank, she might find some comfort knowing that she is getting a better deal out of the program than he is. Or to put that another way, Maria’s Social Security check represents a higher percentage of her lifetime earnings than Frank’s monthly benefit.
And that has always been one of the basic tenets of the Social Security program: to raise the standard of living of lower-income workers in retirement. That is accomplished via a benefit formula structured to give poor people a better deal than their wealthier counterparts. They don’t get higher benefits. After all, Frank’s monthly Social Security check is much higher than Maria’s. But when comparing the rates of return they get based on their past incomes and the taxes they paid into the system, Maria comes out ahead.
I don’t have the space to get into the nitty gritty of the Social Security benefit computation formula in this column today. (I’ve done it in many past columns.) But in a nutshell, I can tell you that Maria’s $1,150 benefit represents about 90 percent of her average lifetime monthly wage. Whereas Frank’s $2,400 Social Security check is probably about 40 percent of his average monthly pre-retirement income.
So poor people get a rate of return that can be up to 90 percent. Average-income people get a return rate in the 40 percent range. People with very high incomes might get around a 30 percent rate of return. And knowing that, I can now move on to a further clarification of the windfall elimination provision.
To do so, I will use myself as an example. I spent the bulk of my life working for the federal government. People hired by the government after 1982 pay into Social Security just like most other people. But folks such as myself, who were hired before then, were covered by the civil service retirement system, not Social Security. And now that I am retired, I get a monthly civil-service pension. But I spent some time at jobs where I did pay into Social Security — a few years before I got hired by the feds and some more years after I retired. And that includes the compensation I get for writing this column, for which I pay Social Security self-employment taxes.
I currently have about 15 years of Social Security covered employment. And that’s enough to get me a small Social Security check. (Ten years of Social Security work is the minimum.) My Social Security check isn’t breaking the government’s bank; it’s only about $175 per month. And that includes a WEP reduction, which I will explain.
Had my benefit been figured using the regular Social Security formula, I would have received the same 90 percent rate of return that my neighbor’s maid is getting. Why? Because I look like a poor person to the Social Security Administration’s computers. I’ve got only 15 years of covered earnings. The Social Security benefit formula uses a 35-year base. In other words, there are 20 years of “zero” earnings on my Social Security record. That makes me look as poor as Maria, and that’s why I’d normally get the same 90 percent return rate.
But let’s be honest: I’m not poor. I had a decent-paying government job most of my life that isn’t reflected in my Social Security earnings history. So I shouldn’t get the same rate of return that the system set up for lower income people. Instead, my earnings pattern is much more like my neighbor Frank’s. I should get the same rate of return (about 40 percent) as Frank gets, and for that matter, as all other average-income Americans get.
And that’s what the windfall elimination provision does. When that WEP formula is applied to my Social Security computation, it gives me the roughly 40 percent return rate rather than the 90 percent rate intended for the very poorest of our citizens.
It’s a law that makes perfect sense. Yet it has many teachers, police officers and other public employees who spent most of their working lives in jobs not covered by Social Security — but who, like me, paid into Social Security in side jobs — up in arms. They think they have been singled out for Social Security benefit reductions that just aren’t fair.
But almost all of these folks are not lifetime low-income workers like my neighbor’s maid, Maria. She deserves the 90 percent return rate that she is getting. But if you are someone who spent your lifetime as a teacher or a police officer, or a federal government employee like me, you are simply not in the same boat as Maria. And you shouldn’t get a poor person’s Social Security return rate. You should get a rate similar to all average-income Americans -- about 40 percent. And that’s what the windfall elimination provision is all about.
One final note on this topic: There are some people who divided their careers between Social Security-covered jobs and non-Social Security-covered jobs. And the WEP law recognizes that. The more years of Social Security earnings you have, the less the WEP reduction. To learn more about that, you need to read a fact sheet produced by SSA titled “Windfall Elimination Provision.” If you are reading this column online, here is a link to it: Otherwise, you can find it at At the bottom of the home page, click the “Publications” link. You will find the fact sheet in the “Retirement” section under “Topics.”