Order Code 98-35
Updated January 14, 2008
Social Security:
The Windfall Elimination Provision (WEP)
Laura Haltzel
Domestic Social Policy DivisionSocial Security: The Windfall Elimination
Provision (WEP)
Alison M. Shelton
Analyst in Income Security
May 11, 2009
Congressional Research Service
7-5700
www.crs.gov
98-35
CRS Report for Congress
Prepared for Members and Committees of Congress
Social Security: The Windfall Elimination Provision (WEP)
Summary
The windfall elimination provision (WEP) 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 because Social Security’s benefit formula that favors workers with smaller amounts
of Social Security-covered career earnings. Opponents contend that the provision is
basically imprecise and often unfair. In the 110th Congress, five bills (H.R. 82, H.R.
726, H.R. 2772, S. 206, and S. 1647) have been introduced to modify or repeal the
WEP. This report will be updated annually or upon legislative activity.
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 2008, the PIA is determined thus:
Factor
Average Career Monthly Earnings
90%
first $711, plus
32%
$711 through $4,288, plus
15%
over $4,288
CRS-2
A different Social Security benefit formula, referred to as the “windfall elimination
provision” (WEP), applies to many workers who also are entitled to a pension from work
not covered by Social Security (e.g., work under the Federal Civil Service Retirement
System).1 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 2008.
Table 1. Monthly PIA for a Worker With Average
Monthly Earnings of $1,000
Regular Formula
90% of first $711
Windfall Elimination Formula
$639.90
40% of first $711
$284.40
32% of $711 through $4,288
92.48
32% of $711 through $4,288
92.48
15% over $4,288
00.00
15% over $4,288
00.00
Total
732.38
Total
376.88
Thus, under the windfall elimination formula the benefit for the worker is $355.50
($732.38 - $376.88) less per month than under the regular formula. Note that once
average monthly earnings exceed the first level in the formula of $711, the amount of the
reduction remains at $355.50 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 $355.50 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 $355.50 per month. However, this worker
would experience a 21% reduction in benefits under the WEP compared to the regular
PIA formula, while the worker with a $1,000 AIME would experience a 49% 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 “old law”
Social Security maximum taxable wage base for each year in question).2 Also, lesser
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 2008, the “old-law”
taxable wage base is equal to $75,900, and, thus, to earn credit for one year of “substantial”
employment under the WEP, a worker would have to earn at least $18,975 in Social Security
(continued...)
CRS-3
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
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
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 2007, about
1 million recipients were affected by the WEP. Of these, approximately 65% were men.
SSA estimates that in 2000, 3.5% of recipients affected by the WEP had incomes below
the poverty line. For comparison purposes, at that time 8.5% 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).
2
(...continued)
covered-employment.
3
These are the most recent estimates available. 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
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 imprecise 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
In the 110th Congress, five 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 H.R. 82 and S. 206,
Social Security benefits paid after December 2007 would no longer be reduced by the
WEP. The Social Security Administration’s Office of the Actuary has estimated that full
repeal of the WEP would cost approximately $40.1 billion between 2008 and 2017. In
the long run, they estimate that elimination of the WEP would cost 0.05% of taxable
payroll (causing an increase in Social Security’s long-range deficit of about 3%).
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 (indexed annually to the national average wage). The bill
would gradually phase in the provision for those who have a combined monthly income
of $2,500 through $3,334. For those with combined monthly incomes exceeding $3,334,
the WEP would remain fully applicable. SSA’s Office of the Actuary estimates that this
bill would cost $19 billion between 2008 and 2017 and in the long run would cost 0.02%
of taxable payroll (causing an increase in Social Security’s long-range deficit of about
1%).
CRS-5
Representative Kevin Brady introduced H.R. 2772, the Public Servant Retirement
Protection Act (PSRPA) of 2007.4 Senator Kay Bailey Hutchison introduced a
companion bill, S. 1647, 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. SSA’s Office of the Actuary estimates that this
bill would cost $4.6 billion from 2008-2017 and in the long run would cost 0.01% of
taxable payroll (causing an increase in Social Security’s long-term deficit of about 0.5%).
4
For additional information on the PSRPA, please refer to CRS Report RL32477, Social
Security: The Public Servant Retirement Protection Act (H.R. 2772/S. 1647), by Laura Haltzel.
formula is weighted such that workers with low lifetime earnings receive a greater share of their
covered earnings in benefits than workers with medium or high lifetime earnings. Opponents
contend that the provision is basically imprecise and can be unfair. This report will be updated
annually or upon legislative activity.
Congressional Research Service
Social Security: The Windfall Elimination Provision (WEP)
Contents
Background ................................................................................................................................1
Legislative History and Rationale................................................................................................3
Arguments for the Windfall Elimination Provision ................................................................3
Arguments Against the Windfall Elimination Provision .........................................................3
Recent Legislation ......................................................................................................................4
Tables
Table 1. Monthly PIA for a Worker With Average Indexed Monthly Earnings of $1,000 ..............1
Contacts
Author Contact Information ........................................................................................................5
Congressional Research Service
Social Security: The Windfall Elimination Provision (WEP)
Background
The Social Security benefit formula is designed so that workers with low average lifetime
earnings receive a benefit that is a larger proportion of their earnings than do workers with high
average lifetime earnings. 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 payroll tax. The
formula applies three progressive factors—90%, 32%, and 15%—to three different levels, or
brackets, of average indexed monthly earnings. (Both the annual earnings amounts over the
worker’s lifetime, and the bracket amounts, are indexed to national wage growth so that the
Social Security benefit replaces the same proportion of wages for each generation.) The result is
known as the “primary insurance amount,” or PIA, and is rounded down to the nearest 10 cents.
For persons who reach age 62, die or become disabled in 2009, the PIA is determined thus:
Factor
Average Indexed Monthly Earnings
90%
first $744, plus
32%
earnings over $744 and through $4,483, plus
15%
over $4,483
A different Social Security benefit formula, referred to as the “windfall elimination provision”
(WEP), applies to many workers who also are entitled to a pension from work not covered by
Social Security (e.g., individuals who work for certain state and local governments, or under the
Federal Civil Service Retirement System). 1 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 regular
and WEP provisions work in 2009.
Table 1. Monthly PIA for a Worker With Average Indexed Monthly
Earnings of $1,000
Regular Formula
Windfall Elimination Formula
90% of first $744
$669.60
40% of first $744
$297.60
32% of earnings over $744 and
through $4,483
81.92
32% of earnings over $744 and
through $4,483
81.92
15% over $4,483
00.00
15% over $4,483
00.00
Total
751.52
Total
379.52
Thus, under the windfall elimination formula the benefit for the worker is $372.00
($751.52-$379.52) less per month than under the regular formula. Note that once average indexed
monthly earnings exceed the first level in the formula of $744, the amount of the reduction
remains at a constant $372.00 per month because the 32% and 15% factors for the second and
third levels are the same as in the regular formula. For example, if the worker had $2,000 of
average indexed monthly earnings instead of $1,000, the windfall reduction still would be
$372.00 per month. However, the constant benefit reduction amount of $372.00 represents a
1
Social Security Act §215(a)(7). Federal service where Social Security taxes are withheld (Federal Employees’
Retirement System or CSRS Offset) are not affected by the WEP.
Congressional Research Service
1
Social Security: The Windfall Elimination Provision (WEP)
smaller percentage when the dollar amounts of benefits is higher, so the percent reduction in
benefits relative to the regular PIA formula varies with average indexed monthly earnings. For
example, if we applied the WEP formula to a worker with an average indexed monthly earnings
of $4,000, this worker would still see a dollar reduction of $372.00 per month. However, this
worker would experience a 22% reduction in benefits under the WEP compared to the regular
PIA formula, while the worker with a $1,000 in average indexed monthly earnings would
experience a 49% 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 half
of the pension based on non-covered work. The provision also exempts workers who have 30 or
more years of “substantial” employment covered under Social Security.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
29
30
40%
45%
50%
55%
60%
65%
70%
75%
80%
85%
90%
The provision also does not apply to: (1) an individual who on January 1, 1984 was an employee
of a government or nonprofit organization and to whom Social Security coverage was
mandatorily extended by the 1983 amendments to the Social Security Act (e.g., the President,
Members of Congress in office on December 31, 1983); (2) benefits for survivors; (3) workers
who reached age 62, became disabled, or were first eligible for a pension from non-covered
employment, before 1986; (4) benefits from foreign Social Security systems that are based on a
“totalization” agreement with the United States; and (5) people whose only non-covered
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 2008 about 1 million
recipients were affected by the WEP (about 3.2% of retired workers). Of these, approximately
64% were men.
The impact of the WEP on low-income workers has been the subject of debate. SSA estimates
that in 2000, 3.5% of recipients affected by the WEP had incomes below the poverty line. For
comparison purposes, at that time 8.5% 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
2
For determining years of coverage after 1978 for individuals with pensions from non-covered employment, the
amount is 25% of the “old law” (i.e., if the 1977 Social Security Amendments had not been enacted) Social Security
maximum taxable wage base for each year in question. In 2009, the “old-law” taxable wage base is equal to $79,200,
and, thus, to earn credit for one year of “substantial” employment under the WEP, a worker would have to earn at least
$19,800 in Social Security-covered employment.
3
These are the most recent estimates available. 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 size for the WEP
poverty rate is relatively small (230 cases) and only includes persons for whom SSA administrative records could be
matched.
Congressional Research Service
2
Social Security: The Windfall Elimination Provision (WEP)
Legislative History and Rationale
The Windfall Elimination 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 lifetimes in low paying jobs, by providing them with a
benefit that replaces a higher proportion of their earnings than the benefit that is provided to
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. (The benefit
formula is applied to Social Security-covered wages that are averaged over a 35 year career, and
non-covered years of work are entered as “zero” into this formula. As a result, a short career in
Social Security-covered work, when averaged over 35 years, appears to have artificially low
wages.) 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. The windfall elimination 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. The guarantee provision ensures that the
reduction in Social Security benefits cannot exceed half of the pension from non-covered work.
In addition, the impact of the WEP is reduced for workers who spend 21 to 29 years in Social
Security-covered work, and is eliminated for persons who spend 30 years or more in Social
Security-covered work.
Arguments Against the Windfall Elimination Provision
Some opponents believe the provision is unfair because it substantially reduces a benefit that
workers may have included in their retirement plans. Others criticize how the provision works.
They say the arbitrary 40% factor in the windfall elimination formula is an imprecise way to
determine the actual windfall when applied to individual cases. Analysts point out two reasons
why the WEP can be regressive. First, because the WEP adjustment is confined to the first bracket
of the benefit formula ($744 in 2009), it causes a proportionally larger reduction in benefits for
workers with lower AIME. Second, a high earner is more likely than a low earner to cross the
“substantial work” threshold for accumulating years of covered earnings (in 2009 this threshold is
$19,800 of Social-Security covered earnings); therefore, high earners are more likely to benefit
from the phase-out of the WEP for persons with between 20 and 30 years of covered
employment. 4
4
See, for example, Jeffrey R. Brown and Scott Weisbenner, The Distributional Effects of the Social Security Windfall
Elimination Provision, National Bureau of Economic Research, Boston, MA, September 2008.
Congressional Research Service
3
Social Security: The Windfall Elimination Provision (WEP)
Recent Legislation
In the 111th Congress, Representative Howard Berman has introduced H.R. 235, the Social
Security Fairness Act of 2009. S. 484, the companion bill to H.R. 235 in the Senate, was
introduced by Senator Dianne Feinstein. H.R. 235 and S. 484 would repeal the WEP starting in
January, 2010. The Social Security Administration (SSA), in an estimate from 2007, found that
full repeal of the WEP would cost approximately $40.1 billion between 2008 and 2017. In the
long run, SSA estimates that eliminating the WEP would cost 0.05% of taxable payroll (causing
an increase in Social Security’s long-range deficit of about 3%)
Representative Kevin Brady introduced H.R. 1221, the Public Servant Retirement Protection Act
(PSRPA) of 2009.5 Senator Kay Bailey Hutchison introduced a companion bill, S. 490, in the
Senate. The PSRPA would eliminate the current-law WEP and substitute a new formula for those
first entering non-Social Security-covered employment one year after the bill’s enactment.
Individuals who had worked in non-covered employment prior to this date would receive the
higher of: (a) the current law benefit including the WEP; or (b) the benefit calculated by the new
formula. Under the new formula, a PIA would be computed using both covered and non-covered
wages, and then multiplied by the ratio of earnings worked in Social Security-covered
employment to earnings in both covered and non-covered employment (where earnings are
expressed as average monthly earnings, indexed to wage inflation). SSA’s Office of the Actuary
estimated in 2007 that a similar proposal would have cost $4.6 billion from 2008-2017 and in the
long run would have cost 0.01% of taxable payroll (causing an increase in Social Security’s longterm deficit of about 0.5%).
Representative Frank introduced H.R. 2145, the “Windfall Elimination Provision Relief Act of
2009,” which would eliminate the WEP for persons whose combined monthly income from
Social Security and a pension from non-covered employment falls below $2,500 in 2009
(adjusted for the changes in the national average wage index). The bill would phase in the WEP
for those with combined monthly incomes of between $2,500 and $3,334. For those with
combined monthly incomes (Social Security plus pension from non-covered employment)
exceeding $3,334, the WEP would be fully applicable.
Representative Rohrabacher introduced H.R. 2286, the “Social Security Exemption Relief Act of
2009,” which would allow an employee in a position that is not currently covered by Social
Security to elect, irrevocably, to have his or her employment covered by Social Security and
subject to Social Security taxes.
5
For additional information on the PSRPA, please refer to CRS Report RL32477, Social Security: The Public Servant
Retirement Protection Act (H.R. 2772/S. 1647), by Laura Haltzel.
Congressional Research Service
4
Social Security: The Windfall Elimination Provision (WEP)
Author Contact Information
Alison M. Shelton
Analyst in Income Security
ashelton@crs.loc.gov, 7-9558
Congressional Research Service
5