This article is written to provide you with the reasoning for the Windfall Elimination Provision (WEP). There has always been a debate as to whether this provision is fair or not. Share your comments below describing your thoughts.
For years there has been much talk about repealing the Windfall Elimination Provision (WEP) for those retirees who receive another government pension. It is estimated that the WEP affects approximately 3% of all Social Security recipients. There is support for a House vote in Congress under a bill called the “Social Security Fairness Act” to eliminate this provision.
The two main objectives of Social Security were to replace a portion of your working years income in your retirement years and to provide a greater amount of replacement income for those on the lower end of the income scale. So, if you were a low earner during your working years, you would receive a greater Social Security benefit percentage wise than a higher earner in their working years.
Social Security uses a calculation called “Average Indexed Monthly Earnings” (AIME). This calculation takes into account your highest 35 years of earnings, adjusts them for inflation and calculates your Social Security monthly benefit at your full retirements age. Below is a chart showing your monthly benefit at full retirement age based on your AIME. As you can see, as your yearly earnings increase, the replacement benefit percentage decreases. This is the social aspect of Social Security.
Now let’s suppose you receive what’s called a “non-covered” pension, which is work where no Social Security tax is withheld. These pensions include teachers, public sector workers such as firefighters, police , state, local or county employees. Let’s also assume that you earn $84,000 in that job and have a side job subject to Social Security withholding and earn $12,000. When you apply for Social Security benefits, to Social Security you look like a “low earner”, which you are not. Social Security does not have access to information relating to your “non-covered” pension. Because of that, when Social Security calculates your benefit, you have a replacement percentage of 90%. If your Social Security benefit was calculated as if all your earnings were in the Social Security system on total earnings of $96,000, your replacement rate would be 40%, not 90%. Since you really are not a low earner because your total income is $96,000, Social Security reduces your monthly Social Security benefit by the Windfall Elimination Provision (WEP) to adjust for the higher replacement percentage which you would not be entitled to if all of your earnings were in the Social Security system.
The maximum WEP reduction for 2025 is $613 if you have less than 20 years of substantial income in the Social Security system. If you have more than 30 years of substantial earnings in the Social Security system, there is no Windfall Elimination Provision reduction. Between 20 and 30 years of substantial earnings, there is a sliding scale for the reduction, basically 10% a year from year 20 to year 30, or $61 per year. The Windfall Elimination percentage will never exceed 50% of your Social Security benefit. If your Social Security benefit at full retirement age is $500, the maximum reduction for the WEP is $250.
So, you can see that there is logic as to why the Windfall Elimination Provision was enacted. Is it fair?-you decide.
Remember, take the wrong benefit at the wrong time, it’s always smaller and forever.