Why Joe Biden Should Reform, Not Repeal, The Windfall Elimination Provision
Is Social Security a “pension benefit”? Not really. It’s a social insurance program, which means something entirely different. As I I explained last month, Social Security is meant to provide a baseline level of retirement provision for all American workers. We contribute for our entire working lives, but our contributions aren’t about directly “earning” benefits as with an employer pension, but supporting the entire system, which provides disproportionately-higher benefits for low earners, people with gaps and fewer years in their earnings history, married people with little or no working history, spouses and children of deceased workers, and so on.
In that sense, it’s never been appropriate to measure individual “return on investment” in the same way you would measure returns on a 401(k) account. And it’s never truly been appropriate for some workers to opt-out of the system, though that’s the reality of our system, for better or for worse. Who are these opt-outs? Public employees in 15 sates; clergy who choose this option, and federal government workers hired before 1984. As I’ve written in the past, workers in these categories who also work at “regular” Social Security-participating jobs in the private sector benefit unfairly from provisions meant to provide special assistance to low-income workers. (Don’t believe me? Check out what the center-left Brookings Institute wrote in September.)
And that’s where the Windfall Elimination Provision comes in. This reduction to Social Security benefits attempts to remove the “excess” benefits that are really meant to boost the benefits of low-income workers. But retirees who are affected look at their Social Security benefits as if the unadjusted formula is something that they have “earned” every bit as much as their employee pension, and, based on this perception, think these reductions are unjust — a complaint I hear frequently in reader comments and correspondence. The NEA, as the largest teachers’ union, has repeatedly called for the WEP to be eliminated, misleading their members by using this problematic rhetoric: “The WEP causes hard-working people to lose a significant portion of the benefits they earned themselves.” They urge their supporters to support the Social Security Fairness Act, which would completely repeal the WEP and the related GPO. So have other organizations, such as Illinois’ State Universities Annuitants Association. And incoming president Joe Biden has promised to do exactly that — for instance, in the “unity task force recommendations.”
But — again — this is not about remedying unfairness. It’s about giving teachers and other Social Security opt-outs extra benefits not really meant for them.
What’s more, to the extent that the WEP is too blunt a tool and penalizes some people too much, there are reform proposals that make a heck of a lot more sense.
Here are three.
First, that Brookings report I linked to above? The author points to the easiest possible reform: just move every worker into Social Security so that these consequences of opting out become a non-issue. To be sure, though, it’s still necessary to find fairer ways of dealing with benefit adjustments during the transition period.
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Second, there are two pieces of legislation that directly target the WEP.
Sponsored by Democrats, H.R. 4540, the Public Servants Protection and Fairness Act, was introduced last year by Rep. Richard Neal (D-MA), Chairman of the House Committee on Ways and Means. It would make three changes: for future retirees, it would switch from the existing formula to a new one based on proration of lifetime earnings more in keeping with the fundamental premise of Social Security as a lifetime-earnings benefit; it would boost existing retirees’ benefits by up to $150 (or remove the existing reduction, if less than this); and it would reflect the WEP reductions in Social Security statements so that there are no surprises at retirement. Those future retirees for whom the new method would worsen, rather than improve, benefits, would keep the original reduction.
On the Republican side, H.R. 3934, the Equal Treatment of Public Servants Act, was introduced by Rep. Kevin Brady (R- TX) is nearly identical except with a $100 rather than $150 increase for current retirees, and with the restriction that the “greater of” benefit provision would not apply to those entering the workforce in the future, that is, those who become eligible for benefits after the year 2060.
Third, the Committee for a Responsible Federal Budget produced a set of ideas for economic growth-promoting Social Security reform in a report in 2019; one of their proposals was a “mini-PIA.” Their objective is not to address the WEP directly but to promote changes to Social Security that promote work (or at least don’t penalize it), and they address, in this proposal, the fact that workers don’t earn any extra benefits for working more than 35 years.
Here’s how it works:
At the moment, Social Security takes all years of covered earnings, indexes them (that is, adjusts them for increases in average wages since the particular years that pay was earned), takes the highest 35 years, sums these and divides by 35, to get the average indexed earnings to use to calculate Social Security benefits, or the PIA (Primary Insurance Amount, the basic Social Security benefit). For someone with more than 35 years of work history, the extra years are “lost” and don’t have any effect on benefits. In principle, working an “extra” year at a pay rate higher than one of the 35 will boost benefits by some amount, however small — but that part-time job in high school or college or at the end of your career, not so much. For someone with less than 35 years, years of zero earnings don’t reduce benefits in proportion to the number of years, because they reduce the average earnings, and the nature of the Social Security benefit structure is to provide relatively greater benefits as a percentage of pay for lower than higher earners. Both these elements of the formula benefit not just people with large gaps in their work history but also people with continuous work history but some of their working lifetime with employers who opt out of Social Security.
In the proposed “mini-PIA” approach, each year of pay would be treated separately — indexed to adjust the wages up to current-year levels, then used to calculate a single-year partial benefit or “mini-PIA.” All these “mini-PIAs” would be added together, for as many years as a person had work history. For someone who worked more than 35 years, benefits would increase for every extra year they worked. (Don’t worry, a later part of the report addresses solvency issues.) For someone who had “real” gaps in work history that are not smoothed out by the year-by-year calculation, the proposal also promotes a new “poverty protection benefit.”
What’s it matter?
Of course, the WEP matters a great deal for those affected by it. But these proposals are also representative of a larger issue: does Congress work for a solution which is a fair and reasonable solution to the problem, or do politicians become trapped by promising interest groups their complete demands will be met? It is worth recognizing here that the NEA, though it opposes the WEP in its entirety, provides links and forms for its membership to e-mail their Congressmen to urge either the full repeal or the proration reform (or both, apparently).
And here’s the perspective of the “Mass Retirees” advocacy group, in calling for the legislation to be attached to an upcoming federal appropriation or budget bill:
“[I]t is highly unlikely that legislation fully repealing the WEP and GPO laws will pass the House – never mind the US Senate, where a 60 vote majority is needed to pass legislation. As has been the case throughout the 37 year history of reform efforts, full repeal legislation is unlikely to pass Congress.
For this reason, Mass Retirees is focused on passing WEP reform and then working to improve the benefit from there. As I have said in the past, we cannot allow another generation of public retirees to suffer while we await the perfect solution. After 37 years of waiting, the time to act is now.”
Advocating for sensible and reasonable solutions, rather than trying to grab the maximum possible, is something we sorely need now.
As always, you’re invited to comment at JaneTheActuary.com!