In this blog we’ve covered the Windfall Elimination Provision (WEP) from many different angles. Here we’ll go into some more depth on the actual calculation of the WEP, including how some of the factors are determined.
As you are likely aware, the Windfall Elimination Provision or WEP impacts your Social Security benefit when you are receiving a pension based on work where Social Security tax was not applied to the earnings. The point of WEP is ostensibly to act as an offset, since the reason no Social Security tax was applied to the earnings is because the pension is intended to replace Social Security benefits for that worker. WEP impact is applied as a reduction to the first bend point of the calculation of the Primary Insurance Amount. (Calculation of the PIA is explained further here.)
WEP Impact Calculation
For calculating WEP impact, it is important understand a few things about how Social Security views your pension.
First of all, the pension must be based on your earnings from the non-SS-covered employment, and not simply on your years of service.
The pension must also be your own pension, not the pension of a spouse or someone else. In other words, receiving a survivor pension from a non-SS-covered job in itself will not trigger WEP impact to your benefits.
The pension amount for calculation is considered as a monthly benefit. If the pension is paid on a different schedule such as quarterly or in a lump sum, Social Security will determine a monthly amount based upon the amount you’re receiving (or received) on the alternate schedule.
WEP impact is computed based upon a single-life annuity (unreduced) rather than on an amount of annuity payment that has been reduced to provide a survivor annuity.
When WEP impact is calculated, the amount of the pension is considered first. If 1/2 of the pension (based on the parameters given above) is more than $413 (for 2015), then the maximum WEP impact is limited to $413. Each year this figure is increased with the bend points.
On the other hand, if the pension is less than double the maximum WEP impact ($413 in 2015), then the WEP impact is reduced to half of the amount of your pension (as a monthly amount).
In addition to the factors above, WEP impact is further adjusted if you have had substantial earnings over your lifetime from a job that was subject to Social Security tax. If these substantial earnings were received for 21 or more years, the maximum WEP impact is reduced by 5% for each year more than 20 that you received the substantial earnings.
In all cases using the figure of 50% of your pension amount and/or 50% of the first bend point, the larger of the calculated benefit is the amount you will receive.
Below are a couple examples to help explain how this works.
Example 1. Rick is due to receive a lump sum pension from his work for the state government. This lump sum benefit calculates to a monthly pension amount of $300. Rick also worked part-time for 20 years in a job that was covered by Social Security. He is due (before WEP calculation) a Social Security benefit of $900 per month.
Rick began receiving Social Security benefits earlier this year at his Full Retirement Age. When he receives the lump sum from his state pension, WEP impact will apply to his Social Security benefit.
Using the numbers we referenced above, we calculate two amounts: when we reduce his SS benefit by $413, the amount is $487; reducing his SS benefit by 50% of the pension amount (calculated at $300/month) the resulting amount is $750. The higher of the two figures, $750 is what Rick’s WEP impacted Social Security benefit will be.
Example 2. Brad worked alongside Rick for several years. However, Brad, being a more highly-skilled worker, has a pension coming from the state government in the amount of $1,400 per month. Brad had the same part-time job as Rick, which garnered him a Social Security benefit of $900 per month before WEP impact.
Running the numbers for Brad, reducing his SS benefit by $413 we come up with $487; reducing his SS benefit by 50% of his pension amount ($1,400/month) we come up with $200 ($900 minus $700). So the higher of those two amounts, $487, is what Brad will receive in Social Security benefits after the WEP impact.
Example 3. Freddy worked the exact same job as Brad, earning the monthly pension of $1,400. The difference is that Freddy worked a different part-time job, at which he earned substantial earnings for 24 years, and his Social Security benefit (before WEP impact) will be $1,200 per month.
To run the numbers for Freddy, instead of $413 we’ll have to adjust this figure, since Freddy had substantial earnings for more than 20 years. In fact, the four additional years (above 20) of substantial earnings results in reducing the WEP impact figure by 5% per year. So for the first calculation we reduce Freddy’s Social Security benefit by only 30% of the first bend point, or $248 for 2015, resulting with $952; again, subtract 50% of his non-SS-covered pension ($700) and we get $500. The higher amount, $952, is what Freddy will receive in Social Security benefits.