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By: FEDweek StaffFor the umpteenth time, efforts are underway in the Congress to repeal the Windfall Elimination Provision (WEP) and the Government Pension Offset (GPO). Both laws have long been a thorn in the side of employees covered by the Civil Service Retirement System (CSRS). That’s because they negatively 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 reaching age 62 after 1985 and is eligible for Social Security and also for an annuity based in whole or part on work where they didn’t pay Social Security taxes—such as CSRS—will have a lower computational formula used to calculate their Social Security benefit.
To learn how this provision of law may affect you, look at your own work history. First, have you earned enough credits under Social Security to qualify for a benefit? You must have earned 40 credits (that is, 40 calendar quarters).
Second, was the amount of money you earned to get those credits “substantial”? The law’s requirement that those earnings be substantial created a higher hurdle than that required for eligibility. That amount increases each year; in 2022 you would have had to earn at least $27,300 to have it considered to be substantial earnings.
So, how much money could you lose because of the WEP? For comparison, let’s start with the basic formula that applies to everyone who has been covered by Social Security all along, such as FERS employees. If they retired and turned 65 in 2022, the first $1,024 of their average monthly earnings would be multiplied by 90 percent, the next earnings up to $6,172 by 32 percent, and all earnings above that by 15 percent. As you can see, the formula is weighted in favor of lower income workers.
The WEP adds a modifier to that formula for those also eligible for an annuity not including Social Security (again, such as CSRS): only those with 30 or more years of substantial earnings will have the first $1,024 of average earnings multiplied by 90 percent. For each year fewer than 30 years of substantial earnings, the multiplier will be reduced by 5 percentage points per year, down to 20 years of such coverage. For example, the multiplier for 25 years is 65 percent. For 20 or fewer it is 40 percent.
In dollar terms, the maximum reduction works out to be just above $500 a month.
It is commonly argued that the WEP should be eliminated because it was some kind of accident or unintended consequence of a not well thought out change in law during the Social Security reforms of the 1980s. Actually, it was a deliberate choice. Here’s how the SSA explains it:
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.
That is, Congress acted to take away what it considered to be an unearned benefit. Knowing that is no comfort to those of you feeling its effect, or who will after retiring in the future. But that’s the law unless and until it is changed.
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