Widely Misunderstood Reductions

The “Windfall Elimination Provision” affects how your retirement or disability benefits are figured if you receive an annuity from work not covered by Social Security taxes, such as work under the Civil Service Retirement System (CSRS). The formula used to figure your benefit amount is modified, giving you a lower Social Security benefit.

The provision primarily affects people who earn an annuity from working under CSRS throughout their federal careers and also worked at other jobs where they paid Social Security taxes long enough to qualify for retirement or disability benefits under that system. It also may affect you if you earned a pension in another type of job where you didn’t pay Social Security taxes.
The modified formula applies to you if you reach 62 or become disabled after 1985 and first become eligible after 1985 for a monthly pension based in whole or in part on work where you did not pay Social Security taxes. You are considered eligible to receive a pension if you meet the requirements of the pension, even if you continue to work.

The modified formula is used to figure your Social Security benefit beginning with the first month you get both a Social Security benefit and the other annuity.

Social Security benefits replace a percentage of a worker’s pre-retirement earnings. The formula used to compute benefits includes factors that ensure 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 60 percent of their pre-retirement earnings. The average replacement rate for highly paid workers is about 25 percent.

Before 1983, benefits for people who spent time in jobs not covered by Social Security were computed as if they were long-term, low-wage workers. They received the advantage of the higher percentage benefits in addition to their other pension. The modified formula eliminates this.

Social Security benefits are based on the worker’s average monthly earnings adjusted for inflation. When SSA figures your benefits, it separates your average earnings into three amounts and multiply the amounts using three different factors. For example, for a worker who turns 62 in 2005, the first $627 of average monthly earnings is multiplied by 90 percent; the next $3,152 is multiplied by 32 percent; and the remainder by 15 percent.

The first, 90 percent, factor is reduced in the modified formula and phased in for workers who reached age 62 or became disabled between 1986 and 1989. For those who reach 62 or become disabled in 1990 or later, the 90 percent factor is reduced to 40 percent.

There are exceptions to this rule. For example, the 90 percent factor is not reduced if you have 30 or more years of “substantial” earnings in a job where you paid Social Security taxes. The ‘Substantial’ Earnings Needed table lists the amount of earnings considered “substantial” for each year.

If you have 21 to 29 years of substantial earnings, the 90 percent factor is reduced to somewhere between 45 and 85 percent. The Percentage Reductions table shows the percentage used, depending on the number of years of substantial earnings. *