Getting Your Financial Ducks In A Row Rotating Header Image

Windfall Elimination Provision for Social Security

windfall by Kam's WorldIf you have worked in a job where your pay was subject to Social Security tax withholding, and also have worked in a job where Social Security tax is not  withheld, such as for a government agency or an employer in another country, the pension you receive from the non-Social Security taxed job may cause a reduction in your Social Security benefits.  This reduction is known as the Windfall Elimination Provision (WEP) – and it’s named such since it was enacted to eliminate the “windfall” that would otherwise be received by a worker who fit into this description.  Without the WEP, the worker would effectively be double-dipping by receiving full benefits from both plans.

This provision primarily affects Social Security benefits when you have earned a pension in any job where you did not pay Social Security tax and you also worked in other jobs long enough to qualify for Social Security benefits.    However, federal service where Social Security taxes are withheld (Federal Employees’ Retirement System) will not reduce your Social Security benefits.  The WEP may apply if:

  • you reached age 62 after 1984; or
  • you became disabled after 1985; and
  • you first became eligible for a monthly pension based on work where you did not pay Social Security taxes after 1985, even if you are still working.

Here’s How It Works

True to form, the Social Security Administration doesn’t make it easy to figure all this out…

You start out by understanding your Primary Insurance Amount, which begins with your Average Indexed Monthly Earnings (AIME), and then take the Bend Points for the current year into account.  For 2010 and 2011, the first Bend Point is $761 and the second Bend Point is $4,586.  As we discussed in the article on Primary Insurance Amount (PIA), the amount of your AIME that makes up the first Bend Point is multiplied by 90%; the amount from the first Bend Point to the second Bend Point is multiplied by 32%; and finally everything over the second Bend Point is multiplied by 15%.  These three figures are added up to create your PIA.

However – if the WEP applies to your situation and you reached age 62 after 1989, the 90% factor (applied to the first Bend Point) is reduced to 40%.  Effectively, this reduces the PIA for most folks by $380.50 per month (for 2010).  The reduction factor is phased in if you reached age 62 between 1986 and 1989.

Exceptions

Again true to form, the SSA has exceptions to the rule.  If it turns out that your service in the Social Security taxed job was for 30 years or more and you earned “substantial” wages (substantial is defined as $19,800 for 2010 and 2011 and has been indexed over the years), then your 90% factor is not reduced at all.  If you had “substantial” earnings for at least 21 years but less than 30 years, the 90% factor is reduced by 5% each year less than 30 years that you had “substantial” earnings in the Social Security-taxed job, with the lowest factor being 40%.

Additionally, the WEP doesn’t apply to Survivor’s benefits (but the Government Pension Offset does).  Other exceptions include the following:

  • You are a federal worker first hired after December 31, 1983;
  • You were employed on December 31, 1983 by a nonprofit organization that did not withhold Social Security taxes from your pay at first, but then began withholding Social Security taxes from your pay;
  • Your only pension is based on railroad employment; or
  • The only work you did where you did not pay social Security taxes was before 1957.

Parting Shots

There is a limit to the amount that your Social Security benefit can be reduced: no matter what your factor has been reduced to (from the original 90%), the resulting reduction cannot be more than 50% of your pension based on earnings after 1956 on which you did not pay Social Security taxes.

And lastly, the WEP also applies to Disability benefits from Social Security, using the same factors.

As always, if you have questions, leave a comment below (or use one of the other contact methods to the right!).

Photo by Kam's World
Social Security Owner's ManualThe latest edition of A Social Security Owner's Manual, 2013 Edition, can be purchased by clicking this link. If you'd prefer the Kindle version (and let's face it, ALL the cool kids do!), you can find that at this Kindle version link.

29 Comments

  1. [...] not be hit with the expat penalty, leaving me with $613/month upon retirement.  Yet, since some financial experts argue that expat social security does get hit with the expat penalty, so I guess that I have yet to [...]

  2. [...] penalty only applies to government employees working abroad, contrary to what is claimed by some financial experts.  They also said that my monthly benefit would be $613 and would not be reduced by the WEP [...]

  3. [...] you’re subject to the Windfall Elimination Provision (WEP), your Social Security retirement benefit can be reduced in the first bend point to as little [...]

  4. [...] Windfall Elimination Provision for Social Security [...]

  5. IanNo Gravatar says:

    JB,

    We Brits are masters of understatement. This provision is literally daylight robbery – I get punished for working and contributing more. This provision appears to impact poor people more than richer people to boot.

    Wondering though if I don’t tell either side about the existance of credits in other’s system how would they connect UK Ian to US Ian?

    Thanks,

    1. jblankenshipNo Gravatar says:

      Ian -

      I appreciate your humor with the situation… I find it’s necessary to keep from losing your mind.

      Regarding keeping things secret, something tells me that “the twain shall meet” at some point. And then you’ll likely either lose payments going forward until any overage is paid up, or you’ll be billed for the overage in a lump sum. In either case it’s not a good scenario. Best of luck to you!

      jb

  6. IanNo Gravatar says:

    JB,

    Thank you. I am pretty sure that I will not have sufficient years (max 25 of the required 30) in the UK system to qualify there without the inclusion of some US SS credits as provides for under the agreement – so I will not get a full UK pension. If I am reading the agreement papagraph correctly that will mean no WEP on my US SS. I would have 100% of my US SS and 83% of the UK pension.

    The reason I am concerned was that I am considering making 5 years worth of type 3 (voluntary) contributions into the UK system and that would would give me 30 years in the UK system and a full UK pension. That becomes a less desirable option if I am then negatively inpact by the WEP. I would have 80% of US SS and 100% of UK SS. This will probably be a lower amount than in the scenario above.

    To complicate things further though, independent of the above, if I earn a private pension in the UK the WEP seems to kick in anyway. In that case the type 3 contributions might still make sense.

    It seems that in practice I am going to lose 20% of my US SS in nearly ever conceivable scenario unless the WEP is repealed. It seems to be an unjust provision and if meant to address the internal US issues of pensions related to non-SS taxed income then it could be rewritten to remove exclude consideration of overseas pensions entirely.

    1. jblankenshipNo Gravatar says:

      I hope things work out well for you, Ian.

      I had to laugh – did you actually just use the term “seems to be an unjust provision” with regard to US tax law? I hope you’re not just realizing this now, after being here for 21 years?

      Cheers,

      jb

  7. IanNo Gravatar says:

    I am also trying to make sense of the Windfall Elimination Provision. My siutaion also involves the UK but us the reverse of the gentlemen above – I am a UK citizen who has been in the US since 1989 and currently has 21 “substantial” years of SS coverage, however I am planning to return home next year. I have been able to calculate my PIA etc. and hence the maximum impact of any overseas pensions such as the UK’s Old Age Pension. I agree that the inclusion in the WEP of pensions from “employer in another company” is descriminatory as WEP does not apply to any non-social security pensions I have earned in the US. What I am looking for clarification on is where it says in the TotalizationAgreement with the UK:

    “If you qualify for Social Security benefits from both the United States and the United Kingdom and didn’t need the agreement to qualify for either benefit, the amount of your U.S. benefit may be reduced. This is a result of a provision in U.S. law that can affect the way your benefit is figured if you also receive a pension based on work that was not covered by U.S. Social Security. For more information, call our toll-free number, 1-800-772-1213, and get the publication, Windfall Elimination Provision”

    Does this mean that if I only qualify for UK retirement benefits becuase of this Agreement the WEP does not apply to the UK benefits? Thanks.

    1. jblankenshipNo Gravatar says:

      Ian -

      I think you’re reading it correctly, if I’m following your situation correctly. If you only qualify for your UK pension because of the inclusion of your US SS credits, then the WEP effect is already in place, meaning that the two pensions are coordinated with one another. If you continue working and earning pension credits upon your return to the UK, you might be in the position described by the paragraph you quoted, and therefore your US SS benefit could be impacted via the WEP.

      Hope that helps -

      jb

  8. Marge CantelloNo Gravatar says:

    I just don’t get it!!! If I worked to qualify for Social Security benefits then why was I only given 1/3 of what I earned. That’s similar to working 30 hours and getting paid for 10 hours??? What has working under Civil Service got to do with working under Social Security? I am now 72 years old and have to make the decision to either work the rest of my life or learn to live in poverty. Is this my American dream?

  9. william cookNo Gravatar says:

    Jim,
    I am in the final stages of the application for Social Security retirement benefits,and have an almost identical set of circumstances to David.I fully expected to receive the lower formula amount when I received the U.K.state pension in 3 years time,what I did not expect was for the reduced formula to be applied based on a personal voluntary contributory Company pension being received from the U.K.Do you have any insight on this,as I am considering an appeal?
    ps I would refer David to the”Totalization Agreement with the United Kingdom”on the Social Security.gov web site.I am 99.9%sure that impact is only effective on receipt of U.K.benefit.

    1. jblankenshipNo Gravatar says:

      William -

      You may have basis for an appeal, as the WEP is (in theory) supposed to primarily impact recipients of plans such as government pensions, but “employer in another country” is also specifically listed as a source of data to determine WEP impact. I’ll be interested in hearing the outcome of your case if you do appeal.

      jb

  10. BillNo Gravatar says:

    I have the quarters but have never earned substantial income under Social Security. Although I remain in the Federal Government as a full time employee, I’ve been collecting my Social Security at the full rate for over two years, ever since I turned 65. Since I plan to retire on December 31st, I called Social Security to find out what effect the Windfall Elimination Provision would have on my $711.00 monthly allotment. The agent I talked to could not give me a firm figure, but since I have been under the substantial earnings cutoff for all but two or three of the 25 years I have held second jobs (I’m an adjunct professor at a local college, a job that has other compensations besides money.), she said my check would be reduced to 40 percent of the $711. That would be about $284.00. That’s fine, but I thought that by law they could not reduce the allotment below half of what a person receives, but perhaps that applies only to folks with “substantial” earnings. Also, the agent said that when I receive a cost of living raise on my CSRS retirement, my Social Security will be reduced by that amount. She added that I would be penalized if I failed to report the increase immediately to Social Security. Is all of this true? I’ll trust your word over hers.

    1. jblankenshipNo Gravatar says:

      Bill –
      You’ve got the same information that I have – As I understand it, your reduction to your Social Security benefit should not be more than 50% of your non-covered pension. I got that information from SSA Publication No. 05-10045, which reads in part:

      If you get a relatively low pension, you are protected. The reduction in your Social Security benefit cannot be more than one-half of the amount of your pension that is based on earnings after 1956 on which you did not pay Social Security taxes.

      You should be okay – although you might go to your local SSA office and ask them to clarify and agree with this assertion.

      Hope this helps!

      jb

  11. janNo Gravatar says:

    Hi DAvid,

    please look at the provisions of the US-UK “totalization agreement” on social security benefits.

    j

  12. DavidNo Gravatar says:

    Thanks Jim,

    Thats kind of what I have been gathering so far. I’ve also downloaded the AnyPIA calculator and if I enter an amount for non-covered amount, then it does indeed whack it quite hard (drops from $1375 pm to $1181 pm).

    We’ll see what happens when I submit a claim later this year

    Cheers

    David

  13. DavidNo Gravatar says:

    Jim,
    I keep reading this and the official docs but cannot get a defintive answer. WEP appears to be implemented if you have a pension from a job where SS was not deducted. I have been told that a state pension from a foreign government (UK) would cause the WEP to be implemented.

    In my case, I lived in the UK until age 45 paying taxes and National Insurance Contributions. I continued to pay NI after leaving the UK for USA and am now fully paid up for 100% UK Basic State Pension.

    I also have over 40 quarters of work paying Social Security in the USA and am entitled to a Social Security Income when I choose to retire.

    If I decide to take my US Social Security benefits now, does my UK Basic Pension affect my US Social Security – I won’t get the UK pension until 2011?

    Many thanks for your help

    David

    1. jblankenshipNo Gravatar says:

      Hello, David -

      The way I understand it is that your Social Security benefit can be reduced by as much as 40% of the first bend point – for 2010 that is the first $761 of your PIA. The amount of the reduction is supposed to be guaranteed to be no more than half of your pension from the non-covered employment.

      What I don’t know for sure is how the SSA calculates this reduction in the case where you’re not collecting the other pension. Perhaps the reduction will not come into affect until you begin the other pension?? I’d check with the SSA to find out for sure (and come back here to let us know what you find!).

      Hope this helps -

      jb

  14. Nicholas LeporeNo Gravatar says:

    I have a question regarding my situation.
    I collect a pension from the state of Mass., which I share with my x wife. I have put 25 years in SS by working outside my public teaching job. I plan to put 30 years in so I can collect without a penalty. I am presently teaching p/t in a private school and meeting substantial earnings, but will have to work until I’m 74 to meet that goal. In the past I missed substantial earnings by small amounts: 1989 by $134.00, 1991 by $2.00, 1993 by $830.00 and 1999 by $134.00. Is there any way I can have some of these reviewed and accepted by SS or have my previous employer adjust the yearly figures (by adjusting the following years figure) to meet substantial earnings? Thank you

    1. jblankenshipNo Gravatar says:

      Hello, Nicholas -

      All I can tell you is that it can’t hurt to ask – I would definitely go to your local Social Security Administration office and present your information. (I wouldn’t hold my breath though.)

      On the other hand, the reductions will be pretty minimal for your situation, when you’re at age 70 with (for example) 26 years in substantial earnings. By my calculations, using 2010 figures, the WEP reduction would amount to roughly $152 per month – not money you’d wish to throw away, but at age 70 looking at four more years of work, you might consider otherwise. Just a thought.

      I wish you well -

      jb

  15. Charlotte DNo Gravatar says:

    Will do, it may take a while but I hope the end result is positive.

    Stay tuned.

    cd

  16. Charlotte DNo Gravatar says:

    Mr. Blankenship, you have been very helpful. If you would like I could let you know how things turn out in case anyone else has this problem. Thanks again.

    cd

    1. jblankenshipNo Gravatar says:

      Please do, Charlotte – I’m sure I’m not the only one who will be interested in your result!

      Best wishes,

      jb

  17. Charlotte DNo Gravatar says:

    Thank you for your prompt answer back. I thought that may be the only road, what type of attorney would I contact? Would it be Social Security benefits or civil?

    cd

    1. jblankenshipNo Gravatar says:

      I suppose a civil attorney could probably get you started in the right direction – it’s not necessarily a Social Security issue as much as it is a question of your rights to complete information. Best of luck to you.

      jb

  18. Charlotte DNo Gravatar says:

    I worked as a per diem for a little over 4 years at a local school district from 1989 to 1992. When hired I was asked if I wanted to join the the NYS Retirement System. I was told since I wouldn’t being making a lot of money if I didn’t join at this time I could always buy my time back. which I did when I was hired full time at another district. At no time was I told at the first job, that they were not deducting Social Security contributions from my check. When I went to the Social Security department to sign up for retirement benefits I found out about the Windfall Elimination Provision and how it effect a portion of my Social Security income. How is this possible when not given the option by being asked if this is what I wanted. I would never had refused contributing into SS. If you could give me any information or tell me what legal rights I may have it would be greatly appreciated.

    1. jblankenshipNo Gravatar says:

      I’m very sorry to hear about your situation, Charlotte. Unfortunately, I don’t know of any recourse that you would have in this situation, but I’m also not an attorney. I suggest that you talk to an attorney about the situation to see if there is any legal position that you could take.

      Best wishes to you -

      jb

  19. [...] This post was mentioned on Twitter by CurtisASmith,CFP®, Jim Blankenship. Jim Blankenship said: Here's the lowdown on the Windfall Elimination Provision for Social Security benefits: http://su.pr/1f5L1u [...]

%d bloggers like this: