Social Security: The Windfall Elimination
Provision (WEP)
Alison M. Shelton
Analyst in Income Security
January 18, 201130, 2012
The House Ways and Means Committee is making available this version of this Congressional Research
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works exclusively for
the United States Congress, providing policy and legal analysis to Committees and
Members of both the House
and Senate, regardless of party affiliation.
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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 or “windfall” these workers would otherwise receive as a result of the
interaction between the Social Security benefit formula and the workers’ relatively short careers
in Social Security-covered employment. 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
Who is Affected by the WEP? ......................................................................................................... 3
Legislative History and Rationale.................................................................................................... 5
Arguments for the Windfall Elimination Provision ................................................................... 6
Arguments Against the Windfall Elimination Provision ........................................................... 6
The WEP’s Impact on Low-Income Workers ............................................................................ 6
Tables
Table 1. Social Security Benefit Formula in 2011 2012........................................................................... 1
Table 2. Monthly PIA for a Worker With Average Indexed Monthly Earnings of $1,500
and Retiring in 20112012 ..................................................................................................................... 2
Table 3. WEP Reduction Falls with Years of Substantial Coverage ................................................ 3
Table 4. Number of Beneficiaries in Current Payment Status with Benefits Affected by
Windfall Elimination Provision (WEP), by State and Type of Benefit, December 20102011 ............ 4
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Social Security: The Windfall Elimination Provision (WEP)
Background
The Social Security benefit formula is designed so that workers with low average lifetime
earnings in Social Security-covered employment receive a benefit that is a larger proportion of
their earnings than do workers with high average lifetime earnings. The benefit formula does not
distinguish, however, between workers who have low average earnings because they worked for
many years at low wages in Social Security-covered employment and workers who have low
average earnings because they worked briefly in Social Security-covered employment. The
generous benefit that would be provided to workers with short careers in Social Security-covered
employment—in particular, workers who have split their careers between Social
Security-covered
and non-covered employment —is sometimes referred to as a “windfall” that
would exist in the
absence of the windfall elimination provision (WEP). The WEP reduces the
Social Security
benefits of workers who also have pension benefits from employment not covered
by Social
Security.
A worker is eligible for Social Security after he or she works in Social Security-covered
employment for 10 or more years (40 or more quarters). The worker’s earning history is indexed
to wage growth to bring earlier years of his or her earnings up to a comparable, current basis.
Average indexed earnings are found by totaling the highest 35 years of indexed wages and then
dividing by 35. Next, a monthly average, known as Average Indexed Monthly Earnings (AIME),
is found by dividing the annual average by 12.
The Social Security benefit formula is designed to provide a progressive benefit. The benefit
formula applies three progressive factors—90%, 32%, and 15%—to three different levels, or
brackets, of AIME.1 The result is known as the “primary insurance amount” (PIA) and is rounded
down to the nearest 10 cents. For persons who reach age the age of 62, die, or become disabled in
20112012, the PIA is determined in Table 1 as follows:
Table 1. Social Security Benefit Formula in 20112012
Factor
Average Indexed Monthly Earnings
90%
of the first $749767, plus
32%
of AIME over $749767 and through $4,517624 plus
15%
of AIME over $4,517624
The averaging provision in the benefit formula tends to cause workers with short careers in Social
Security-covered employment to have low AIMEs, similar to persons who worked for low wages
in covered employment throughout their careers. This is because years of zero covered earnings
are entered as zeros into the formula that averages the worker’s wage history over 35 years. For
example, a person with 10 years in Social Security-covered employment would have an AIME
that reflects 25 years of zero earnings.
Consequently, for a worker with a low AIME because she split her career between covered and
non-covered employment, the benefit formula replaces more of covered earnings at the 90% rate
than if this worker had spent his or her full 35-year career in covered employment at the same
1
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.
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Social Security: The Windfall Elimination Provision (WEP)
than if this worker had spent his or her full 35-year career in covered employment at the same
wage level. The higher replacement rate2 for workers who have split their careers between Social
Security-covered and non-covered jobs is sometimes referred to as a “windfall.”3
A different Social Security benefit formula, referred to as the “windfall elimination provision,”
applies to many workers who are entitled to Social Security as well as 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). 4 Under these rules, the 90% factor in the
first bracket of the formula is replaced by a factor of 40%. The effect is to lower the proportion of
earnings in the first bracket that are converted to benefits. Table 2 illustrates how the regular and
WEP provisions work in 20112012.
Table 2. Monthly PIA for a Worker With Average Indexed Monthly
Earnings of $1,500 and Retiring in 20112012
Regular Formula
Windfall Elimination Formula
90% of first $749
$674.10767
$690.30
40% of first $749
$299.60767
$306.80
32% of earnings over $749767 and
through $4,517
$240.30624
$234.56
32% of earnings over $749767 and
through $4,517
$240.30624
$234.56
15% over $4,517624
Total
0.00
$914.40924.86
15% over $4,517624
Total
0.00
$539.90541.36
Under the WEP formula, the benefit for the worker is reduced by $374383.50 ($914.40 - $539.90924.86 - $541.36) per
month relative to the regular benefit formula. Note that the WEP reduction is limited to the first
bracket in the AIME formula (90% vs. 40% formula rates), while the 32% and 15% factors for
the second and third brackets are the same as in the regular benefit formula. As a result, for AIME
amounts that exceed the first threshold of $749767, the amount of the WEP reduction remains a flat
$374383.50 per month. For example, if the worker had an AIME of $23,000 instead of $1,500, the
WEP reduction would againstill be $374383.50 per month.
A “guarantee” in the WEP provision ensures that a worker’s WEP reduction cannot exceed more
than one half of the government pension based on the worker’s non-covered work. This
“guarantee” is designed to help protect workers with low non-covered pensions and also ensures
that the WEP can never completely eliminate a worker’s Social Security benefit. The WEP also
exempts workers who have 30 or more years of “substantial” employment covered under Social
Security, with lesser reductions for workers with 21 through 29 years of substantial covered
employment, as shown in Table 3.5
2
A worker’s replacement rate is the ratio of his or her Social Security benefit to pre-retirement income.
The WEP is sometimes confused with the Government Pension Offset (GPO), which reduces Social Security spousal
benefits of a worker who also has a government pension based on work that was not covered by Social Security. For
more information on the GPO, please refer to CRS Report RL32453, Social Security: The Government Pension Offset
(GPO), by Alison M. Shelton.
4
Social Security Act §215(a)(7). Federal service where Social Security taxes are withheld (Federal Employees’
Retirement System or CSRS Offset) is not affected by the WEP.
5
For determining years of coverage after 1978 for individuals with pensions from non-covered employment,
“substantial coverage” is defined as 25% of the “old law” (i.e., if the 1977 Social Security Amendments had not been
(continued...)enacted) Social Security maximum taxable wage base for each year in question. In 2012, the “old-law” taxable wage
base is equal to $81,900, therefore to earn credit for one year of “substantial” employment under the WEP a worker
would have to earn at least $20,475 in Social Security-covered employment.
3
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Social Security: The Windfall Elimination Provision (WEP)
Table 3. WEP Reduction Falls with Years of Substantial Coverage
Years of Social Security Coverage
First factor in
formula
Maximum
dollar
amount of
monthly
WEP
reduction in
2010a2012a
20
21
22
23
24
25
26
27
28
29
30
40%
45%
50%
55%
60%
65%
70%
75%
80%
85%
90%
$380.5
$342.5
$304.4
$266.4
$228.3
$190.3
$152.2
$114.2
$76.1
$38.1383.5
$345.2
$306.8
$268.5
$230.1
$191.8
$153.4
$115.1
$76.7
$38.4
$0
Source: Social Security Administration, How the Windfall Elimination Provision Can Affect Your Social Security Benefit,
Washington, DC, http://www.socialsecurity.gov/retire2/wep-chart.htm.
a.
WEP reduction may be lower than the amount shown because the reduction is limited to one-half of the
worker’s pension from non-covered employment.
The WEP 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
the age of 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.
Who is Affected by the WEP?
According to the Social Security Administration (SSA), as of December 20102011, about 1.34 million
Social Security beneficiaries were affected by the WEP, as shown in Table 4. About 1.23 million
persons affected by the WEP were retired workers (about 3.4% of retired workers). Of retired
workers affected by the WEP, approximately 63% were men. 6
(...continued)
enacted) Social Security maximum taxable wage base for each year in question. In 2011, the “old-law” taxable wage
base is equal to $79,200, therefore 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.
6people (91.9% ) affected by the WEP were retired workers. About 2.5% of all Social Security
beneficiaries (including disabled and spouse beneficiaries), and about 3.5% of all retired worker
beneficiaries, were affected by the WEP in December 2011.6 Of retired workers affected by the
WEP, approximately 62.7% were men.7
6
Social Security data on the Social Security beneficiary and retired worker populations are available from the Monthly
Statistical Snapshot, December 2011, at http://www.ssa.gov/policy/docs/quickfacts/stat_snapshot/index.html.
7
Social Security Administration, Office of Research, Evaluation and Statistics, January 201027, 2012, unpublished table
W01.
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Social Security: The Windfall Elimination Provision (WEP)
Table 4. Number of Beneficiaries in Current Payment Status with
Benefits Affected by Windfall Elimination Provision (WEP),
by State and Type of Benefit, December 20102011
Type of Benefit
State
Total
Total
Retired
Workersworkers
Disabled
Workersworkers
Spouses and
Children
1,282,786
1,174,743
17,136
90,907
16,228
14,549
331
1,348
Alaska
6,735
6,344
90
301
Arizona
23,694
21,873
299
1,522
Arkansas
9,342
8,577
213
552
California
167,438
154,652
2,009
10,777
Colorado
38,430
35,814
510
2,106
Connecticut
12,513
11,815
180
518
Delaware
2,943
2,739
44
160
District of Columbia
7,104
6,721
132
251
Florida
73,098
67,214
851
5,033
Georgia
36,913
34,485
480
1,948
Hawaii
8,018
7,342
80
596
Idaho
5,625
5,153
75
397
Illinois
65,927
62,098
579
3,250
Indiana
12,850
11,829
235
786
Iowa
6,942
6,446
80
416
Kansas
7,466
6,949
103
414
Kentucky
16,600
15,279
328
993
Louisiana
25,322
22,764
565
1,993
Maine
11,739
10,984
156
599
Maryland
38,518
35,924
504
2,090
Massachusetts
45,128
42,572
658
1,898
Michigan
16,076
14,683
269
1,124
Minnesota
14,536
13,579
159
798
Mississippi
8,134
7,392
161
581
Missouri
27,099
25,478
394
1,227
Montana
4,731
4,343
67
321
Nebraska
4,556
4,254
43
259
18,408
17,378
228
802
5,810
5,395
122
293
New Jersey
18,639
17,095
344
1,200
New Mexico
10,817
9,661
187
969
New York
26,596
24,300
454
1,842children
1,370,688
1,259,310
17,958
93,420
16,905
15,219
346
1,340
Alaska
7,361
6,915
106
340
Arizona
25,357
23,483
295
1,579
Arkansas
9,685
8,943
213
529
California
181,048
167,675
2,125
11,248
Colorado
41,714
38,952
593
2,169
Connecticut
13,507
12,796
175
536
Delaware
3,110
2,912
48
150
District of Columbia
7,360
6,968
131
261
Florida
77,311
71,317
877
5,117
Georgia
39,401
36,901
525
1,975
Hawaii
8,494
7,787
77
630
Idaho
5,948
5,472
76
400
Illinois
70,984
67,044
601
3,339
Indiana
13,534
12,544
226
764
Iowa
7,251
6,766
78
407
Kansas
7,898
7,334
128
436
Kentucky
17,725
16,376
345
1,004
Louisiana
27,755
25,053
628
2,074
Maine
12,697
11,899
176
622
Maryland
40,393
37,768
511
2,114
Massachusetts
49,106
46,490
692
1,924
Michigan
17,121
15,682
290
1,149
Minnesota
15,137
14,190
151
796
Mississippi
8,423
7,715
164
544
Missouri
29,024
27,359
423
1,242
Montana
5,008
4,619
66
323
Nebraska
4,728
4,441
37
250
20,324
19,244
232
848
6,143
5,734
109
300
New Jersey
19,651
18,041
362
1,248
New Mexico
11,378
10,215
178
985
Alabama
Nevada
New Hampshire
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Social Security: The Windfall Elimination Provision (WEP)
Type of Benefit
State
Total
Retired
Workersworkers
Disabled
Workers
Spouses and
Children
North Carolina
23,222
21,517
331
1,374
North Dakota
2,140
1,974
18
148
Ohio
92,301
85,858
1,069
5,374
Oklahoma
15,114
13,695
309
1,110
Oregon
12,672
11,729
164
779
Pennsylvania
29,641
27,124
531
1,986
Rhode Island
4,086
3,807
79
200
South Carolina
14,457
13,272
222
963
South Dakota
3,275
3,060
37
178
16,183
14,806
239
1,138
Texas
110,408
101,641
1,435
7,332
Utah
10,897
9,806
136
955
Vermont
2,148
1,988
22
138
Virginia.
40,334
37,030
436
2,868
Washington
24,358
22,030
301
2,027
5,328
4,719
132
477
Wisconsin
10,077
9,371
121
585
Wyoming
2,023
1,874
29
120
70,147
53,761
595
15,791
State
Tennessee
workers
Spouses and
children
New York
27,898
25,548
477
1,873
North Carolina
24,721
22,972
336
1,413
North Dakota
2,202
2,036
24
142
Ohio
99,306
92,739
1,153
5,414
Oklahoma
15,742
14,324
314
1,104
Oregon
13,472
12,514
158
800
Pennsylvania
31,228
28,708
545
1,975
Rhode Island
4,373
4,085
85
203
South Carolina
15,226
14,033
227
966
South Dakota
3,420
3,208
34
178
17,014
15,624
248
1,142
Texas
120,032
110,935
1,530
7,567
Utah
11,503
10,361
154
988
2,255
2,087
20
148
Virginia
42,245
38,909
449
2,887
Washington
25,938
23,529
318
2,091
5,548
4,952
126
470
Wisconsin
10,534
9,821
116
597
Wyoming
2,081
1,935
28
118
74,469
57,136
632
16,701
Tennessee
Vermont
West Virginia
Outlying areas and foreign countries
Source: Social Security Administration, Office of Research, Evaluation and Statistics, January 2010, unpublished
table27, 2012,
unpublished Table B.
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. The 40% WEP formula factor was the
result of a compromise between a House bill that would have substituted a 61% factor for the
regular 90% factor and a Senate proposal that would have substituted a 32% factor for the 90%
formula.78
The purpose of the 1983 law was to remove an unintended advantage that the regular Social
Security benefit formula provided to persons who also had pensions from non-Social Securitycovered 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
78
Conference Report to Accompany H.R. 1900, 98th Cong., March 24, 1983 (Washington: GPO, 1983), p. 120.
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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. 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
because by definition they also receive government pensions from non-covered work. The
guarantee provision ensures that the reduction in Social Security benefits cannot exceed half of
the pension from non-covered work, which protects persons with small pensions from noncovered 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.
The WEP’s Impact on Low-Income Workers
The impact of the WEP on low-income workers has been the subject of debate. Jeffrey Brown
and Scott Weisbenner (hereinafter referred to as “Brown and Weisbenner”) point out two reasons
why the WEP can be regressive. 89 First, because the WEP adjustment is confined to the first
bracket of the benefit formula ($749 in 2011767 in 2012), it causes a proportionally larger reduction in
benefits for workers with lower AIMEs and benefit amounts.910 Second, a high earner is more
likely than a low earner to cross the “substantial work” threshold for accumulating years of
covered earnings (in 20112012 this threshold is $19,80020,475 of Social Security-covered earnings);
therefore, high earners are more likely to benefit from the provision that phases out of the WEP
for persons with between 21 and 30 years of covered employment.
Brown and Weisbenner found that the WEP does reduce benefits disproportionately for lowerearning households than for higher-earning households. For some high-income households,
applying the WEP to covered earnings even provides a higher replacement rate than if the WEP
8
9
Jeffrey R. Brown and Scott Weisbenner, The Distributional Effects of the Social Security Windfall Elimination
Provision, NBER and the Social Security Administration, September 5, 2008, pp 8-13, http://www.nber.org/programs/
ag/rrc/books&papers.html.
910
For example, a worker with an AIME of $4,000 would be entitled to a PIA of $1,714.40 before a WEP reduction of
$374.50 per month, which would represent a reduction of 22% in this worker’s benefit. By contrast, the worker shown
in Table 2 with an AIME of $1,500 would be entitled to a benefit of $914.40 before the WEP reduction of $374.50,
representing a cut of 41% to this worker’s benefit (CRS calculations).
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Brown and Weisbenner found that the WEP does reduce benefits disproportionately for lowerearning households than for higher-earning households. For some high-income households,
applying the WEP to covered earnings even provides a higher replacement rate than if the WEP
were applied proportionately to all earnings, covered and non-covered. Brown and Weisbenner
also found that the WEP can also lead to large changes in Social Security replacement rates based
on small changes in covered earnings, particularly when a small increase in covered earnings
carries a person over the threshold for an additional year of substantial covered earnings, leading
to a modification in the WEP formula.
SSA estimated 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 aged
65 and older had incomes below the poverty line and 11.3% of the general population had
incomes below the poverty line. 1011 A potential conclusion is that persons who are subject to the
WEP, who by definition also have pensions from non-covered employment, face a somewhat
reduced risk of poverty compared with other Social Security beneficiaries.
10
11
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.
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