Photo courtesy of Matthew Kosloski via Unsplash.com.
Rounding out our series of articles about the Windfall Elimination Provision, or WEP, I thought we should talk a bit about the maximum impact that WEP can have on you.
In other articles we’ve discussed this in part, but it hasn’t necessarily been fleshed out completely. As you may know, the maximum WEP reduction is equal to the lesser of 50% of the first “bend point” for each year or 50% of the amount of the pension from income that was not subject to Social Security taxation. In 2015 this is $413 per month at most.
What’s important to know is that this reduction is against your Primary Insurance Amount (PIA), not necessarily against your benefit amount. Depending upon when you file relative to your Full Retirement Age, the WEP impact to your benefit could be more or less than that amount.
Wait – what?
As you may recall, the Primary Insurance Amount (PIA) is only equal to your benefit if you file at exactly your Full Retirement Age (FRA). If you file at some age (even a month) before or after your FRA, the PIA is only a foundation used to calculate your benefit. If you file before FRA, your benefit will be something less than the PIA; after, your benefit will be something more than your PIA.
So, as a result, if your PIA is reduced by the maximum WEP impact ($413 for 2015), the actual benefit reduction will be more or less than that amount unless you file at exactly your FRA.
For example, Sue has an unreduced, pre-WEP PIA (Primary Insurance Amount) of $1,500 and she is subject to the maximum WEP impact of $413. Sue is deciding when to file for her Social Security benefit – she will be 62 in 3 months, so she could file early, or she could wait until age 70 to file. Her FRA is 66 years of age.
If Sue decides to file at age 62, her benefit would be calculated as 75% of her PIA. Since her PIA is $1,500 and the maximum WEP impact is $413, her WEP impacted PIA will be $1,087 ($1,500 minus $413). Her benefit at age 62 will be $815.30 – for a dollar-reduction (maximum WEP impact) of $309.70 because if WEP had not impacted her PIA her benefit would have been $1,125.
On the other hand, if Sue decides to file age her own age 70, her benefit is calculated as 132% of her PIA – reflecting the maximum Delayed Retirement Credits. Since her maximum WEP impact-reduced PIA is $1,087 (as calculated above), her benefit at age 70 will be $1,434.80. In this case, her maximum WEP impact is $545.20. This is because if the Sue’s PIA had not been subject to the maximum WEP impact, it would have been $1,980 at her age 70.
So, the real maximum WEP impact to your benefit can be anywhere from $309.70 to $545.20 for 2015.
Sterling Raskie, MSFS, CFP®, ChFC®
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Hello – sorry to join this conversation 4 years later……
I have a question about WEP, specifically the statement from SSA that max WEP reduction is limited to one half of the non-covered pension. See: https://www.ssa.gov/planners/retire/wep-chart.html bottom of page “* Important: The maximum amount may be overstated. The WEP reduction is limited to one-half of your pension from non-covered employment.”
Is there a POMS reference I can use for this?
In my case I have delayed to 70, obtained first few payments, of which I fully agree with the SSA calculation of the reduction of first bend point to 40% (less than 20 years SSA contributions), and their calculations for DRCs and inflation adjustments.
However I filed an appeal (Request for Reconsideration), stating the info on the website referenced above, gave them the details and photocopies of my foreign pension (Can Pension Plan), requested reconsideration due to the “limited to one-half” and received back (5.5mo later) that the calculation was reviewed and stood uncorrected. There was no reference whatsoever to whether they considered my request on the “limited to one-half” or not.
I will now file a request for ALJ hearing, as the next step. However, I would like to include a stronger reference to the “limited to one-half” condtion within the request for hearing.
Thank you for any reference or further information you can provide.
You’re looking to apply the “WEP Guarantee” to your case – and you’ll find this in POMS RS 00605.370 WEP Guarantee.
Good luck with your appeal – hope this helps.
Doug Smith – did you ever file a request for an ALJ hearing, and if so, did you get a resolution?
I wrote to you a few days ago hoping that your expertise would help me in my decision-making
I applied for Social Security at the end of October in order to be held harmless for Medicare/Social Security as I was paying my Medicare directly.
Now the Congress has passed their new legislation regarding Medicare payments I have a couple of questions about how to go forward. I am 68 and I am working full time I am also subject to WEP and have 26 years of substantial earnings and started receiving my retirement pension in December 2008 when I was 61.
I was told at Social Security that depending on what Congress did I could withdraw my Social Security or suspend my benefits. After following up with them I’m not sure what it is that I can do.
Can I withdraw? I know that I am FRA and if I do withdraw I realize that I will have to pay a higher rate of Medicare because of the new law but not as high as it would have been. Then I know that my Social Security stops and everything goes back to the way it was and I return to earning delete retirement credits and I will go back to earning substantial years of earnings.
If I suspend I’ll stay in the hold harmless group for Medicare payments but will I be able to earn substantial years of earnings for WEP? No one at social security can answer that question definitely. They did tell me that I would be able to still get laid retirement credits if I suspend
Since it’s been less than 12 months since you filed you can withdraw and pay back the benefits you’ve received.
You also are eligible to suspend due to your date of birth.
In either case you can earn substantial years of earnings to apply toward eliminating WEP.
jb
I am happy to hear that I can still earn years of substantial earnings if I suspend especially after going to the trouble of filing in order to protect myself from the Medicare increase.
It’s been difficult to find anyone at social security that can give a definitive answer and navigating the website is confusing as well.
I’ve read a lot of your postings and appreciate that you share your knowledge with all of us as we wade through and try to find the best solutions for our futures.
Thank you so much!!
Liz
I have one more question regarding the Medicare/social security “hold harmless” provision. I have already received my first social security payment and my Medicare was deducted. Does the fact that this has occurred put me in the “hold harmless” group or do I need to have a certain number of payments deducted?
Thanks once again for your assistance.
Liz
I do not know – that’s a good question for Medicare.
Attempting to interpret WEP calculations is, to steal an old Richard Prior line…. “Harder than Chinese Arithmetic!”
It seems that with each article or bit of information I explore regarding the dreaded WEP, it becomes more confounding to actually sit down with a spreadsheet and determine the actual, honest-to-goodness impact on ones bottom-line Social Security benefit.
I struggle with the presumption of a “maximum WEP impact of “X” dollars for a given year. Why? Because if one looks at their own SS summary sheet from the SSA, you accept that it assumes a 90% application rate of the PIA within its calculations since the SSA does not yet know about any WEP subject income.
Whereas, I know my PIA will be applied at the 40% rate also accepting that the starting final basic amount will be lower. However, does this mean that if the SS summary sheet presupposes my monthly benefit at say, $1,000 a month, one cannot simply subtract the maximum WEP penalty of $413 (for 2015) but must first instead attempt to factor in the 40% PIA ahead of this presupposed amount? Your willingness to shine any real light on this conundrum would be greatly appreciated.
Sean –
That’s actually a pretty safe assumption to make, if you believe that WEP will impact you to the fullest. You can take the figure that SSA gives for your FRA benefit amount (your Primary Insurance Amount or PIA) and subtract the current year’s maximum WEP affect from it to determine your after-WEP PIA.
jb
Hi Jim – My wife’s non S.S. “pension” was paid as a lump sum of $3000. How is the WEP calculated on a lump sum, and doesn’t the reduction go away after a specified length of time? Thanks.
James – When a non-SS pension is paid as a lump sum the SSA calculates a monthly equivalent from that lump sum using actuarial tables based on your wife’s life. Given a $3,000 total amount, the monthly pension can’t be very much, so the resulting WEP impact will be very small as well.
If your wife outlives the period of time that the actuarial tables use to determine the monthly equivalent, then the impact of WEP should be eliminated at that time.
Hope this helps –
jb