The formula used to compute Social Security benefits ensures that lower-paid workers get a higher percentage or pre-retirement income. Image: Evgenia Parajanian/Shutterstock.com
By: Reg JonesPardon me for not getting excited, but bills have once again been introduced to repeal or modify the Windfall Elimination Provision (WEP) and the Government Pension Offset (GPO). They’ve been introduced in every session of Congress since those provisions became law. And they’ve never gone anywhere.
The reason they’ve been introduced is because those provisions adversely affect the Social Security benefits of anyone who worked in a job where Social Security deductions weren’t taken from their pay. This week I’ll focus on the WEP, next week on the GPO.
Under the WEP, anyone who reaches age 62 after 1985 and is eligible for an annuity based in whole or in part on work where they didn’t pay Social Security taxes will have a lower computational formula used to calculate their Social Security benefit. Therefore, only those with 30 or more years of substantial earnings under Social Security will receive the full benefit. Anyone with fewer years of substantial earnings will receive proportionately less.
To find out how that works, I’ll start with the basic formula that applies to everyone who has been covered by Social Security. If you start drawing Social Security benefits this year, the first $1,115 of your average monthly earnings would be multiplied by 90 percent, the next $5,606 by 32 percent, and all earnings above $6,721 by 15 percent. By design, the formula is weighted in favor of lower income workers.
That formula has been modified for those who are (or will be) receiving an annuity from a retirement system that doesn’t withhold Social Security taxes, like CSRS. The change is in the first multiplier. Only those employees with 30 or more years of “substantial” earnings will have the first $1,024 of average earnings multiplied by 90 percent. (In 2023, the earnings amount considered to be substantial is $29,700.) For each year fewer than 30 years of substantial earnings, the multiplier will be reduced. That reduction is a full 5 percent per year. For example, the multiplier for 25 years would be 65 percent; for 20 or fewer it would be only 40 percent.
While the continuing argument against the WEP has been that it’s unfair, that’s a matter of opinion. The law was designed to eliminate what was seen as an unintended windfall that federal retirees had been enjoying for years. The Social Security Administration explanation for the change is this:
Social Security benefits replace a percentage of a worker’s pre-retirement earnings. The formula used to compute Social Security benefits includes factors that ensure that lower-paid workers get a higher percentage return than their more well-to-do counterparts. For example, lower-paid workers could conceivably get a Social Security benefit that equals up to 90 percent of their pre-retirement earnings. Highly paid workers receive rates of return that are considerably less. (The average is about 42 percent.)
Before the law was changed in 1983, employees who spent time in jobs not covered by Social Security had their benefits computed as if they were long-term, low-wage workers. Thus they received the advantage of the higher percentage of Social Security benefits in addition to their other pension. The modified formula eliminates this windfall.
While you may not like it, what the Congress took away was an unearned benefit. If you expect to be hit by the WEP, plan ahead. If you don’t, the combination of your CSRS annuity and your Social Security benefit may not be enough to meet your needs.
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