CSRS Workers: Beware of ‘Windfall’ Trap

Heads up! A piece of civil service law commonly known as the Windfall Elimination Provision (WEP), reduces the Social Security benefit payable to nearly all CSRS employees. That’s because they will be receiving an annuity from a retirement system where they didn’t pay Social Security taxes.

As a result, they’ll face a modified formula used to compute their Social Security benefit. The way the law works, only those with 30 or more years of “substantial earnings” under Social Security will receive a full benefit. Every other eligible CSRS employee will receive a lesser amount, usually much less.

To see how the provision might affect you, let’s look at the formula used to compute the benefits of employees who aren’t affected by it. For example, if you are a CSRS Offset or FERS employee who turned 62 in 2003, the formula would look like this:

The total of these three multiplications would be your monthly pension from Social Security.

However, if you are a CSRS employee, the WEP will reduce that 90 percent factor by 5 percent for each year of “substantial earnings” fewer than 30. Fortunately, the reduction bottoms out at 40 percent for those who have 20 or fewer years of substantial earnings, otherwise CSRS employees with limited Social Security coverage could kiss their Social Security benefits goodbye.

To meet the substantial earnings criterion, you must have earned much more per year than the amount needed to earn Social Security credits. For example, in 2003 you’d only have to earn $3,560 to get a full year’s credit (four quarters) from Social Security. However, to receive credit for substantial earnings, you’d have to make $16,125!

While there have been unsuccessful moves in Congress to completely eliminate the WEP. Killing it is highly unlikely. But, there’s a chance that it may be modified, to reduce the adverse impact. Two bills introduced in the current session of Congress – S.1011 and H.R.2011 – would eliminate the WEP for those with a combined income of $2000 or less and use a sliding scale to reduce the impact on others whose income is greater than that.

Keep a good thought.