Social Security’s Windfall Elimination Provision (WEP)-A Common Sense Explanation
Are you a public sector/civil service employee under (STRS, PERS, CSRS, Railroad Retirement, etc.) that also has worked in the Social Security system?
You need to read this article. This applies to only about 3% of Social Security recipients, but if you’re in that 3%, read on, otherwise you can go get that cup of coffee.
If your primary pension is a public employee pension (STRS, PERS, CSRS, Railroad Retirement, etc.), Social Security considers this as “noncovered work.” If you receive a Social Security benefit as a worker, your Social Security benefits may be reduced.
Keep in mind this provision does not come into play until you start drawing your public pension. So, if you started to draw your Social Security benefits before receiving your public pension, there will be no reduction in your Social Security benefits until you start to receive your public pension. When you start your public pension, you should tell Social Security.
This is a very confusing area for most people. Keep this primary thought in mind to make this a little easier: this provision only applies to a person who is receiving a public pension and Social Security benefits.
Before we go further, let’s discuss why this provision was put in place back in 1984. When Social Security calculates your monthly benefit, the calculation proportionately produces a larger benefit for the lower earner. By that I mean, someone making $25,000 a year will receive a proportionally higher Social Security benefit than a person earning $100,000. Granted, the person earning $100,000 a year will receive a larger Social Security benefit amount, but that benefit is proportionately smaller based on their salary of $100,000 than the person earning $25,000. For example, a university professor earning $100,000 a year under STRS, has a second job in the Social Security system that pays her $25,000. When she applies for Social Security benefits, what does she look like to Social Security, correct, a low earner because all Social Security knows is, she makes $25,000, but she’s really not a low earner. The Windfall Elimination Provision is designed to calculate her Social Security benefit as if she is a high earner at $125,000 all in the Social Security system. Whether you think this is fair or unfair, now you understand the logic behind the provision.
The Windfall Elimination Provision-WEP, only applies to your own Social Security benefit. Think of the “W” in Windfall to mean “worker”. The Windfall Elimination Provision does not directly apply to spouses, ex-spouses or survivors, it applies only to you. Having said that, it will indirectly affect your spouse, ex-spouse or survivor as their Social Security benefit if any which is based on your Social Security benefit will be smaller if your worker benefit is reduced by WEP. The maximum WEP reduction in 2020 is $480. The WEP reduction will never reduce your Social Security benefit to zero. If you have less than 20 years of “substantial earnings” in the Social Security system, the full $480 reduction applies. The WEP provision phases out completely if you have 30 years or more of “substantial earnings” in the Social Security system. So, there would be no reduction in your Social Security benefits if you have 30 or more years of substantial earnings in the Social Security system. Substantial earning is defined in a Social Security chart. You can find the chart at the Social Security website but for our purposes, “substantial earnings” range from $900 in 1937 to $25,575 in 2020.
The maximum WEP reduction is limited to 50% of your non-covered pension.
Below is a chart showing the reduction amounts for 2020.
As Paul Harvey would say, “And now you know the rest of the story.” Hope this article brings the Windfall Elimination Provision more into focus. Understanding and coordinating retirement benefits could put thousands more in your pocket over your lifetime. You only get one shot at making the right Social Security claiming strategy. Be informed and make the right decision.