Photo credit: jb
If you have worked in a job where your pay was subject to Social Security tax withholding, and also have worked in another 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). 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 the pension and Social Security.
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, since Social Security tax is applied to earnings. 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 WEP Works
True to form, the Social Security Administration doesn’t make it easy to figure all this out…
You must 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 2022 the first Bend Point is $1,024 and the second Bend Point is $6,172. 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 between the first Bend Point and the second Bend Point is multiplied by 32%; and finally any amount above the second Bend Point is multiplied by 15%. These three figures are added up to create your PIA.
However – if WEP applies to your situation and you reached age 62 after 1989, the 90% factor (applied to the first Bend Point) can be reduced to as little as 40%. Effectively, this reduces the PIA by as much as $512 per month (for 2022). The reduction factor was 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 $27,300 for 2022 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 between 21 and 30 years that you had “substantial” earnings in the Social Security-taxed job, starting at 45% for 21 years of substantial earnings.
Additionally, the WEP doesn’t apply to Survivor’s benefits or Spousal 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. Likewise, if your AIME is less than the first bend point and all of your PIA is within that 90% bracket, the minimum Social Security benefit is 50% of your original PIA.
And lastly, the WEP also applies to Disability benefits from Social Security, using the same factors.