Order Code 98-35 EPW
Updated March 26, 2003January 9, 2004
CRS Report for Congress
Received through the CRS Web
Social Security:
The Windfall Benefit Provision
Geoffrey KollmannLaura Haltzel
Domestic Social Policy Division
Summary
The windfall elimination provision reduces the Social Security benefits of workers
who also have pension benefits from employment not covered by Social Security. Its
purpose is to remove an advantage these workers would otherwise receive because of
Social Security’s benefit formula that favors workers with smaller amounts of Social
Security-covered career earnings. Opponents contend that the provision is basically
inaccurate and often unfair. In both the 107th and 108th Congresses, five and two bills,
respectively,bills have been
introduced that would modify or repeal the provision. This
report will be updated
annually or upon legislative activity.1
Background
Social Security monthly benefits are computed by applying a formula to an average
of a person’s earnings from work subject to the Social Security tax. The formula applies
three progressive factors — 90%, 32%, and 15% — to three different levels, or brackets,
of average monthly covered earnings (these earnings brackets change each year to reflect
changes in national wage levels). The result is known as the “primary insurance amount,”
or PIA, and is rounded down to the nearest 10 cents. The formula is designed so that
workers with low average career earnings receive a PIA that is a larger proportion of their
earnings than do workers with high average earnings. For persons who reach age 62, die
or become disabled in 20032004, the PIA is determined thus:
1
Factor
Average career monthly earnings
90%
first $606612, plus
32%
$606612 through $3,653689, plus
15%
over $3,653
689
This report by written by former CRS analyst Geoffrey Kollmann.
Congressional Research Service ˜ The Library of Congress
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A different Social Security benefit formula — referred to as the “windfall
elimination provision” — applies to many workers who also are entitled to a pension from
Congressional Research Service ˜ The Library of Congress
CRS-2
work not covered by Social Security (e.g., work under the Federal Civil Service
Retirement System). Under these rules, the 90% factor in the first band of the formula is
replaced by a factor of 40%. The effect is to lower the proportion of their earnings in the
first bracket that are converted to benefits. The following table illustrates how the
provision works in 20032004.
Table 1. Monthly PIA for Worker With Average
Monthly Earnings of $1,000
Regular formula
“Windfall elimination
formula”
$545.40550.80
90% of first $606612
32% of $606612 through $3,653
126.08689
124.16
15% over $3,653689
00.00
Total
671.40
$242.40674.96
$244.80
40% of first $606612
32% of $696612 through $3,653
126.08689
124.16
15% over $3,653689
00.00
Total
368.4096
Thus, under the windfall elimination formula the benefit for the worker is $303306.00
($671.40674.96-$368.4096) less per month than under the regular formula. Note that once average
monthly earnings exceed the first level in the formula of $606612, the amount of the
reduction remains at $303306.00 per month because the lower replacement factor of the first
level no longer applies. For example, if the worker had $2,000 of average monthly
earnings instead of $1,000, the windfall reduction still would be $303306.00 per month.
The provision includes a guarantee (designed to help protect workers with low
pensions) that the reduction in benefits caused by the windfall elimination formula can
never exceed more than one-half of the pension based on noncovered work. The
provision also exempts workers who have 30 or more years of “substantial” employment
covered under Social Security (i.e., having earned at least one-quarter of the Social
Security maximum taxable wage base for each year in question). Also, lesser reductions
apply to workers with 21 through 29 years of substantial covered employment, as follows:
Years of Social Security coverage
First factor in
formula
20
21
22
23
24
25
26
27
28
40%
45%
50%
55%
60%
65%
70%
75%
80%
29
30
85% 90%
The provision does not apply: (1) to employees of governments or nonprofit
organizations who were mandatorily covered by Social Security on January 1, 1984,
because of the 1983 amendments (e.g., the President, Members of Congress); (2) to
workers who reached age 62, became disabled, or were first eligible for a pension from
noncovered employment, before 1986; (3) in computing survivor benefits; (4) to benefits
from foreign Social Security systems with which the United States has “totalization”
agreementsthat are based on a “totalization” agreement with the
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United States; and (5) to people whose only noncovered employment that resulted in a
pension was in military service before 1957 or is based on railroad employment.
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According to the Social Security Administration (SSA), as of December, 2001,
562,3622002,
635,000 recipients were affected by the WEP. Of these 6766% were men. SSA estimates
that in 1993, 3% of recipients affected by the WEP had incomes blowbelow the poverty line.
For comparison purposes, at that time 15% of the general population had incomes below
the poverty line.
Legislative History and Rationale
This provision was enacted in 1983 as part of major amendments designed to shore
up the financing of the Social Security program. Its purpose was to remove an unintended
advantage that the regular Social Security benefit formula provided to persons who also
had pensions from non Social Security-covered employment. The regular formula was
intended to help workers who spent their work careers in low paying jobs, by providing
them with a benefit that replaces a higher proportion of their earnings than the benefit that
is provided for workers with high earnings. However, the formula could not differentiate
between those who worked in low-paid jobs throughout their careers and other workers
who appeared to have been low paid because they worked many years in jobs not covered
by Social Security (these years are shown as zeros for Social Security benefit purposes).
Thus, under the old law, workers who were employed for only a portion of their careers
in jobs covered by Social Security — even highly paid ones — also received the
advantage of the “weighted” formula, because their few years of covered earnings were
averaged over their entire working career to determine the average covered earnings on
which their Social Security benefits were based. The new formula is intended to remove
this advantage for these workers.
Arguments for the windfall elimination provision. Proponents of the
measure say that it is a reasonable means to prevent payment of overgenerous and
unintended benefits to certain workers who otherwise would profit from happenstance,
i.e., the mechanics of the Social Security benefit formula. Furthermore, they maintain that
the provision rarely causes hardship because by and large the people affected are
reasonably well off as most of them also receive government pensions.
Arguments against the windfall elimination provision. Some opponents
believe the provision is unfair because it substantially reduces a benefit that workers had
included in their retirement plans. Others criticize how the provision works. They say
the arbitrary 40% factor in the windfall elimination formula is an inaccurate way to
determine the actual windfall when applied to individual cases. For example, they say it
over-penalizes lower paid workers with short careers, or with full careers that are fairly
evenly split. They also say it is regressive, because the reduction is confined to the first
bracket of the benefit formula and causes a relatively larger reduction in benefits for lowpaid workers.
Recent Legislation
Five bills were introduced in the 107th Congress that would have affected the
windfall elimination provision. H.R. 848, by Representative Sandlin, H.R. 2638, by
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Representative McKeon, and S. 1523, by Senator Feinstein, would have eliminated the
provision entirely, effective in 2002. H.R. 1073, by Representative Frank, and S. 2521,
by Senator Kerry, would have eliminated the application of the provision to those whose
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monthly combination of Social Security worker benefits and non Social Security-covered
pension is $2,000 or less, effective upon enactment. For those whose monthly
combination of Social Security worker benefits and other government benefits is more
than $3,000, the provision would remain fully applicable. For those whose monthly
combination of Social Security worker benefits and other government benefits is between
$2,000 and $3,000, the provision would be phased in, according to the following
schedule:
Table 2. Percentage of Windfall Elimination Provision Applicable
Combined Monthly Benefit
Percentage
$2,000.01 to $2,250
20%
$2,250.01 to $2,500
40%
$2,500.01 to $2,750
60%
$2,750.01 to $3,000
80%
More than $3,000
100%
The SSA estimated that H.R. 1073 would increase benefit outlays by $6.9 billion
over 5five years and 18.9 billion over 10 years.
In the 108th Congress, H.R. 594, introduced by Representative McKeon, and S. 349,
introduced by Senator Feinstein, would repeal the provision entirely, effective in 2004.
According to the Office of the Actuary of the SSA, elimination of the WEP would cost
0.06% of taxable payroll (causing an increase in Social Security’s long-range deficit of
about 3%). Representative Frank and Senator Kerry also introduced H.R. 2011 and S.
1011, which are essentially the same as H.R. 1073 and S. 2521 in the 107th Congress(i.e.,
they would eliminate the application of the provision to those whose monthly combination
of Social Security worker benefits and non Social Security-covered pension is $2,000 or
less). H.R. 2611, introduced by Representative Michaud, would exempt from the
provision retired members of the military who have at least 20 years of service.
On May 1, 2003, the Social Security Subcommittee of the House Committee on
Ways and Means held a hearing on the WEP, in which Members and witnesses discussed
approaches to modifying the provision. The SSA testified that if any action were taken
affecting the WEP, it should be done in the context of overall reform of the Social
Security system. The General Accounting Office testified that eliminating the WEP
would cost $19 billion over 10 years.