Order Code 98-35 EPW
Updated January 9, 2004
CRS Report for Congress
Received through the CRS Web
Updated March 8, 2007
Social Security:
The Windfall BenefitElimination Provision (WEP)
Laura Haltzel
Domestic Social Policy Division
Summary
The windfall elimination provision (WEP) reduces the Social Security benefits of workers
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
basically inaccurate and often unfair. In both the 107th and 108th Congresses, five bills have been
introduced that would modify or repeal the provisionthe 110th Congress, three bills (H.R. 82, H.R.
726 and S. 206) have been introduced to modify or repeal the WEP. In the 109th
Congress, five bills (H.R. 147, H.R. 1690, H.R. 1714, S. 619, and S. 866) were
introduced that would have modified or repealed the WEP. 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 20042007, the PIA is determined thus:
1
Factor
Average career monthly earningsCareer Monthly Earnings
90%
first $612680, plus
32%
$612680 through $3,689, plus
15%
over $3,689
This report by written by former CRS analyst Geoffrey Kollmann.
Congressional Research Service ˜ The Library of Congress4,100, plus
15%
over $4,100
CRS-2
A different Social Security benefit formula —, referred to as the “windfall
elimination provision” — elimination
provision” (WEP), applies to many workers who also are entitled to a pension from
work work
not covered by Social Security (e.g., work under the Federal Civil Service
Retirement Retirement
System).1 Under these rules, the 90% factor in the first band of the formula is
replaced replaced
by a factor of 40%. The effect is to lower the proportion of their earnings in the
first first
bracket that are converted to benefits. The following table illustrates how the
provision provision
works in 20042007.
Table 1. Monthly PIA for a Worker With Average
Monthly Earnings of $1,000
Regular formula
“Windfall elimination
formula”
$550.80
Formula
90% of first $612680
32% of $612 through $3,689
124.16
15% over $3,689
00.00
Total
674.96
$244.80
40% of first $612
32% of $612 through $3,689
124.16
15% over $3,689
00.00
Total
368.96680 through $4,100
15% over $4,100
Total
Windfall Elimination Formula
$612
102.40
00.00
714.40
40% of first $680
32% of $680 through $4,100
15% over $4,100
Total
$272
102.40
00.00
374.40
Thus, under the windfall elimination formula the benefit for the worker is $306.00
($674.96-$368.96340
($714.40-$374.40) less per month than under the regular formula. Note that once average
monthly earnings exceed the first level in the formula of $612680, the amount of the
reduction remains at $306.00340 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 $306.00 per month340 per month.
However, because the dollar reduction is limited to the first bracket of the PIA formula,
the percent reduction in benefits relative to the regular PIA formula varies by AIME. For
example, if we applied the WEP formula to a worker with an AIME of $4,000, this
worker would still see a dollar reduction of $340 per month. However, this worker would
experience a 20% reduction in benefits under the WEP compared to the regular PIA
formula, while the worker with a $1,000 AIME would experience a 48% reduction in
benefits under the WEP compared to the regular PIA formula.
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
“old law”
Social Security maximum taxable wage base for each year in question).2 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
2
Social Security Act §215(a)(7).
For determining years of coverage after 1978 for individuals with pensions from noncovered
employment, the amount is 25% of what the contribution and benefit base otherwise would have
been if the 1977 Social Security Amendments had not been enacted. In 2007, the “old-law”
taxable wage base is equal to $72,600, and, thus, to earn credit for one year of “substantial”
employment under the WEP, a worker would have to earn at least $18,150 in Social Security
covered-employment.
CRS-3
reductions apply to workers with 21 through 30 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
29
30
40%
45%
50%
55%
60%
65%
70%
75%
80%
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 that 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.
According to the Social Security Administration (SSA), as of December, 2002,
635,000 recipients were affected by the WEP. Of these 66% were men. SSA estimates
that in 1993, 32000, 3.5% of recipients affected by the WEP had incomes below the poverty line.
For comparison purposes, at that time 158.5% of all Social Security beneficiaries age 65 and
older had incomes below the poverty line and 11.3% of the general population had
incomes below
the poverty line.3
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
3
Poverty rates were calculated by David Weaver of the Social Security Administration’s Office
of Retirement Policy using the March 2001 Current Population Survey (CPS). Poverty status is
taken directly from the CPS and is thus subject to errors in the reporting of income. The sample
for the WEP poverty rate only includes persons for whom SSA administrative records could be
matched. The sample size for the WEP poverty rate is relatively small (230 cases). The poverty
rates for the Social Security beneficiary population age 65 and over and for the general
population do not require matched data and are based completely on CPS data.
CRS-4
which their Social Security benefits were based. The new formula is intended to remove
this advantage for these workers.
Arguments for the windfall elimination provisionWindfall 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
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 provisionAgainst 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
CRS-4
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
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 five 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 yearsIn the 110th Congress, three bills have been introduced to repeal or alter the WEP.
H.R. 82, was introduced by Representative Berman, and S. 206, the companion bill to
H.R. 82 in the Senate, was introduced by Senator Feinstein. Under this bill, all Social
Security benefits paid after December 2007 would no longer be reduced by the WEP. The
Congressional Budget Office has estimated that full repeal of the WEP would cost
approximately $32.7 billion between 2006 and 2015. 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%).4
H.R. 726, introduced by Representative Barney Frank, would eliminate the WEP for
those whose combined monthly income from Social Security and the noncovered pension
was less than $2,500 in 2007 and indexed annually to the national average wage. The bill
would gradually phase in the provision for those who have a combined monthly income
between $2,500 and $3,334. For those with combined monthly incomes exceeding
$3,335, the WEP would remain fully applicable.
In the 109th Congress, five bills were introduced that would have altered the windfall
provision. H.R. 147, introduced by Representative McKeon, and S. 619, introduced by
Senator Feinstein, would have repealed the windfall elimination provision for Social
Security benefits payable after December 2005. H.R. 1690, introduced by Representative
Barney Frank, was identical to H.R. 726 introduced in the 110th Congress.
4
This estimate is based on the intermediate assumptions of the 2003 Social Security Trustees
Report. More recent estimates are unavailable. However, the Social Security Office of the Chief
Actuary does not believe that the results would be significantly different using the 2006 Trustees
Report.
CRS-5
Representative Kevin Brady introduced H.R. 1714, the Public Servant Retirement
Protection Act (PSRPA) of 2005.5 Senator Kay Bailey Hutchison introduced a
companion bill, S. 866, in the Senate. The PSRPA would eliminate the current-law WEP
for those first entering non-Social Security covered employment one year after the bill’s
enactment. Those workers who have worked in noncovered employment prior to this date
would still be covered by the current-law WEP unless the PSRPA WEP provided them
with a higher benefit. The PSRPA would substitute a new WEP formula that would
provide a Social Security benefit in rough proportion to the percentage of earnings worked
in Social Security covered employment.
5
With the exception of some administrative provisions, this bill is identical in effect to that
introduced as H.R. 4391 in the 108th Congress. For additional information on the PSRPA, please
refer to CRS Report RL32477, Social Security: The Public Servant Retirement Protection Act
(H.R. 4391/S. 2455), by Laura Haltzel.