In last week’s article about how CSRS and Social Security interact for CSRS Offset employees, I concluded by saying that there was another provision of law that could affect that Social Security benefit – the windfall elimination provision. If you are a CSRS-covered employee (either CSRS or CSRS Offset), the WEP can negatively affect your retirement income. While it won’t affect the CSRS portion of your annuity, it may reduce the Social Security benefit to which you are entitled.
If you are a CSRS or CSRS Offset retiree who will be eligible for a Social Security benefit at age 62, the WEP will reduce that benefit unless you have 30 or more years of “substantial earnings” under Social Security. Substantial earnings are greater than the amount you must earn to receive a Social Security credit. For example, to receive a year’s worth of Social Security credits in 2014 you’d only have to earn $4,800. However, for earnings to be considered substantial, you’d have to earn $21,750. Note: If you don’t retire until age 62 or later and are eligible for a Social Security benefit at that time, that’s when the WEP will be applied.
To find out how the WEP might affect you, here’s the formula used to compute the Social Security benefit of a non-CSRS-covered retiree who turned 62 in 2014:
* 90 percent of the first $816 of average indexed monthly earnings (AIME), plus
* 32 percent of the AIME in excess of $816 through $4,917, plus
* 15 percent of the AIME over $4,917AIME above $4,483 would be multiplied by15 percent
When adjusted by your total years of Social Security coverage, the sum of these three amounts would be your monthly benefit from Social Security.
For those of you who are covered by CSRS, the WEP will reduce that 90 percent multiplier by 5 percentage points per year if you have fewer than 30 years of substantial earnings under Social Security. Fortunately, the reduction ends at 40 percent for those who have 20 or fewer years of substantial earnings.
Here’s how the Social Security Administration explains the logic behind the WEP:
“Social Security benefits are intended to replace only a percentage of a worker’s pre-retirement earnings. The way Social Security benefit amounts are figured, lower-paid workers get a higher return than highly paid workers. For example, lower-paid workers could get a Social Security benefit that equals about 55 percent of their pre-retirement earnings. The average replacement rate for highly paid workers is about 25 percent.
“Before 1983, people who worked mainly in a job not covered by Social Security had their Social Security benefits calculated as if they were long-term, low-wage workers. They had the advantage of receiving a Social Security benefit representing a higher percentage of their earnings, plus a pension from a job where they did not pay Social Security taxes. Congress passed the Windfall Elimination Provision to remove that advantage.”
Since the WEP became law, bills have been introduced in nearly every session of Congress to modify or eliminate the WEP. However, none of them have gone anywhere. Unless one of them does, the WEP will continue to be the law of the land.