When your Social Security retirement benefit is subject to the Windfall Elimination Provision (WEP), you’re likely painfully aware of the reduction to your own benefit by this provision. What you may not be aware of is that the effect goes beyond your own benefit – your spouse’s and other dependents’ benefits are also impacted by this provision. However, the impact of WEP does not continue after your death.
Spousal Benefit impacted by WEP
The Windfall Elimination Provision results in a recalculation of the Primary Insurance Amount, or PIA, of the individual who is receiving a pension based upon earnings that were not subject to Social Security taxation. Since the PIA is recalculated and reduced by the WEP, all benefits based on that PIA are likewise reduced.
This means that even though the WEP does not directly impact Spousal Benefits of an individual, the Spousal Benefit is still reduced since the PIA of the other spouse is impacted. This impact occurs regardless of whether the person receiving the Spousal Benefit is receiving a pension based on earnings that were not subject to Social Security taxation.
For example, Danny was a government employee for many years, and he also had a side job where he paid Social Security tax on his earnings. He is eligible for a Social Security benefit of $1,200 (before WEP impact) in addition to his government pension of $2,000 (monthly figures).
Danny’s wife Sandy did not work outside the home. When Danny files for his own Social Security Benefit, Sandy is looking forward to receiving a Spousal Benefit based on Danny’s record. But Sandy will be surprised to find out that the amount of her Spousal Benefit will not be $600 per month (50% of Danny’s projected $1,200), but rather it will only be $396 per month. This is due to the fact that Danny’s PIA of $1,200 is reduced by WEP at the rate of $408/month (for 2014). Danny’s recalculated PIA therefore becomes $792 ($1,200 minus $408), and 50% of that figure is $396. (Both Danny and Sandy are at Full Retirement Age when benefits are applied for).
Survivor Benefits not impacted by WEP
The good news is that the impact of WEP does not reach beyond the grave. After the primary numberholder (Danny from our example above) has passed away, the pension based on the earnings not subject to Social Security taxes ceases to be paid to Danny. Even if Sandy receives a survivor pension from Danny’s government work, WEP will no longer impact any Social Security benefits that Sandy receives based upon Danny’s record. Danny’s PIA is restored to the former level, and the Survivor Benefit that Sandy is eligible to receive will be based upon the restored, $1,200/month PIA.
Notes – If Sandy also had earnings from government employment not subject to Social Security taxation, these could reduce both her Spousal Benefit and the Survivor Benefit due to the Government Pension Offset (GPO).
In addition, if Danny’s side-job earnings had been substantial in more than 20 years, the impact of the WEP would be reduced; eliminated if the substantial earnings occurred in 30 or more years.