Expert's View

If you are a CSRS-covered employee (either CSRS or CSRS Offset), there are two provisions of law that can negatively affect your retirement income. While they won’t affect your CSRS annuity, they may reduce – and even eliminate – any Social Security benefit to which you may otherwise be entitled. They are the Windfall Elimination Provision and the Government Pension Offset. In this article, I’ll talk about the former.

If you are a CSRS-covered employee who becomes 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 2010 you’d only have to earn $4,360. However, for those earnings to be considered substantial, you’d have to earn $19,800.

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To help you understand what the impact of the WEP is, let’s start with the formula used to compute the Social Security benefit of a non-CSRS-covered retiree who turned 62 in 2010:

* The first $761 of average indexed monthly earnings (AIME) would be multiplied by 90 percent;

* Everything from $761 to $4,856 of the AIME would be multiplied by 32 percent;

* AIME above $4,856 would be multiplied by15 percent.

When adjusted by your total years of Social Security coverage, the sum of these three multiplications would be your monthly benefit from Social Security.

Now, if you are covered by CSRS, the WEP will reduce that 90 percent multiplier by 5 percentage points for each year of substantial earnings fewer than 30. Fortunately, the multiplier bottoms out at 40 percent for those who have 20 or fewer years of substantial earnings, otherwise CSRS employees with limited Social Security coverage would get nothing. Instead, they will always get something.

Before you fall down and spin around on the floor kicking your heels and screaming, “This is unfair!” you need to understand the rationale for the WEP. Here’s how the Social Security Administration explains it:

“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.”

While bills have been introduced in nearly every session of Congress for the past 20 years that would modify or eliminate the WEP, they haven’t gotten very far. Unless one of them does, the WEP will continue to be the law of the land.

Next week I’ll talk about the Government Pension Offset.