Social Security: The Windfall Elimination
Provision (WEP)
Gary Sidor
Information Research Specialist
April 16, 2014
The House Ways and Means Committee is making available this version of this Congressional Research Service
(CRS) report, with the cover date shown, for inclusion in its 2014 Green Book website. CRS 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.
Congressional Research Service
98-35
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 small portion
of their careers in Social Security-covered employment. Opponents contend the provision is
basically imprecise and can be unfair.
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 2014........................................................................... 1
Table 2. Monthly PIA for a Worker With Average Indexed Monthly Earnings of $1,500
and Retiring in 2014 ..................................................................................................................... 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 2013 ............ 4
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 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 (more specifically, 40 or more quarters for which the worker
has covered earnings). 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
2014 Provision (WEP)
June 30, 2015
(98-35)
Jump to Main Text of Report
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 small portion of their careers in Social Security-covered employment. Opponents contend the provision is imprecise and can be unfair.
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. (In covered employment, earnings are subject to the Social Security payroll tax; Social Security benefits are based on covered 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 appear to have low average earnings because they worked in Social Security-covered employment for only part of their career. 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 have pension benefits from employment not covered by Social Security.
A worker qualifies for Social Security by working in Social Security-covered employment for 10 or more years (more specifically, by earning 40 or more "quarters of coverage"). The worker's earnings 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 people who reach age the age of 62, die, or become disabled in 2015, the PIA is determined in Table 1 as follows:
Table 1. Social Security Benefit Formula in
2014
Factor
Average Indexed Monthly Earnings
90%
of the first $816, plus
32%
of AIME over $816 and through $4,917, plus
15%
of AIME over $4,917
2015
Factor
|
Average Indexed Monthly Earnings
|
90%
|
of the first $826, plus
|
32%
|
of AIME over $826 and through $4,980, plus
|
15%
|
of AIME over $4,980
|
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
personspeople 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.
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 approximately the same proportion of wages for each generation.
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Social Security: The Windfall Elimination Provision (WEP)
Consequently, for a worker with a low AIME because he or she split their career between covered
that reflects 25 years of zero earnings.
Consequently, for a worker whose AIME is low because a career was split 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 hera full 35-year career in covered employment at the same
wage level. The higher replacement
rate2rate2 for workers who have split their careers between Social
Security-covered and non-covered jobs is sometimes referred to as a
“"windfall.
”3
"3
How the Windfall Elimination Provision Works
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 or federal workers covered by the Federal Civil Service Retirement System [CSRS]).
44 Under these rules, the 90% factor
in the first bracket of the formula is
replaced by a factor ofreduced to as low as 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 2014.
benefit formula and the WEP work in 2015 for someone with a 40% factor.
Table 2. Monthly PIA for a Worker
Withwith Average Indexed Monthly
Earnings of $1,500
and Retiring in 2014
Regular Formula
Windfall Elimination Formula
90% of first $816
$734.40
40% of first $816
$326.40
32% of earnings over $816 and
through $4,917
$218.88
32% of earnings over $816 and
through $4,917
$218.88
15% over $4,917
Total
0.00
$953.28
15% over $4,917
Total
0.00
$545.28
Source: Calculations were made by the Congressional Research Service (CRS).
Note: To simplify the example, rounding conventions that would normally apply are not used here.
Under the WEP formula, the monthly benefit for the worker is reduced by $408.00 ($953.28 $545.28) relative to the regular benefit formula. Note that the WEP reduction is limited to the first
bracket in the AIME formula (90% vs. 40% 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 formula threshold of $816, the amount of the WEP reduction remains a flat
$408 per month. For example, if the worker had an AIME of $4,000 instead of $1,500, the WEP
reduction would still be $408 per month. The WEP therefore causes a proportionally larger
reduction in benefits for workers with lower AIMEs and monthly benefit amounts.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 Christine Scott.
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 the worker shown in Table 2, with an AIME of $1,500 and a monthly benefit of $953.28 under the regular benefit
formula in 2014, the WEP reduction of $408.00 represents a cut of approximately 43% to the regular formula monthly
benefit amount. By comparison, a worker with an AIME of $4,000 would be entitled to a PIA of $1,753.28 under the
2014 regular benefit formula, and the same WEP reduction of $408 per month would represent a 23% reduction in this
worker’s monthly benefit amount (CRS calculations).
3
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Social Security: The Windfall Elimination Provision (WEP)
A “guarantee” in the WEP provision ensures that a worker’s WEP reduction cannot exceed 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 does not apply to workers who
have 30 or more years of “substantial” employment covered under Social Security, with an
adjusted formula for workers with 21 through 29 years of substantial covered employment, as
shown in Table 3.6
Table 3. WEP Reduction Falls with Years of Substantial Coverage
Years of Social Security Coverage
20
21
22
23
24
25
26
27
28
29
30+
45%
50%
55%
60%
65%
70%
75%
80%
85%
90%
$204.00
$163.20
$122.40
$81.60
$40.80
First factor in formula:
40%
Maximum dollar amount of monthly WEP reduction in 2014:a
$408.00
$367.20
$326.40
$285.60
$244.80
$0.00
Source:, Retiring in 2015 with 20 or Fewer Years of Covered Employment
Regular Formula
|
Windfall Elimination Formula
|
90% of first $826
|
40% of first $826
|
32% of earnings over $826and through $4,980
32% of earnings over $826and through $4,980
15% over $4,980
|
15% over $4,980
|
Total
|
Total
|
Source: Congressional Research Service (CRS).
Note: To simplify the example, rounding conventions that would normally apply are not used here.
Under the WEP formula, the monthly benefit is $413.00 ($959.08-$546.08) lower than under the regular benefit formula. Note that the WEP reduction is limited to the first bracket in the AIME formula (90% vs. 40% rates), while the 32% and 15% factors for the second and third brackets are unchanged. As a result, for AIME amounts that exceed the first formula threshold of $826, the WEP reduction remains a flat $413 per month. For example, if the worker had an AIME of $4,000 instead of $1,500, the WEP reduction would still be $413 per month. The WEP therefore causes a proportionally larger reduction in benefits for workers with lower AIMEs and monthly benefit amounts.5
A "guarantee" in the WEP ensures that the WEP reduction cannot exceed half of the government pension based on the worker's non-covered work. This guarantee is designed to help protect workers with low pensions from non-covered work and also ensures that the WEP can never eliminate a worker's Social Security benefit. The WEP does not apply to workers who have 30 or more years of "substantial" employment covered under Social Security, with an adjusted formula for workers with 21 through 29 years of substantial covered employment, as shown in Table 3.6
Table 3. WEP Reduction Falls with Years of Substantial Coverage
Years of Social Security Coverage
|
20
|
21
|
22
|
23
|
24
|
25
|
26
|
27
|
28
|
29
|
30+
|
First factor in formula:
|
40%
|
45%
|
50%
|
55%
|
60%
|
65%
|
70%
|
75%
|
80%
|
85%
|
90%
|
Maximum dollar amount of monthly WEP reduction in 2015:a
$413.00
|
$371.70
|
$330.40
|
$289.10
|
$247.80
|
$206.50
|
$165.20
|
$123.90
|
$82.60
|
$41.30
|
$0.00
|
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.
.
a.
WEP reduction may be lower than the amount shown because the reduction is limited to one-half of the
worker’ worker's pension from non-covered employment. Also, the reduction is greatest when the AIME is equal to
or exceeds the first bend point in the computation formula. When the AIME is less than the first bend
point, the effect of the WEP formula is reduced.
The WEP applies to retired and disabled worker beneficiaries and to dependent beneficiaries of affected worker beneficiaries. It does not apply to benefits for survivors.
The WEP 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
the age of 62, became disabled, or were first eligible for a pension from non-covered employment
before 1986; (
4) 3) benefits from foreign Social Security systems that are based on a
“totalization”
"totalization" agreement with the United States; and (
54) 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
20132014, about 1.
56 million
Social Security beneficiaries were affected by the WEP, as shown in Table 4
. More than. About 1.4 million
people (
92.593%) affected by the WEP were retired workers. About
2.73% of all Social Security
beneficiaries (including disabled and spouse beneficiaries) and about
3.8% of all retired worker
6
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
enacted) Social Security maximum taxable wage base for each year in question. In 2014, the “old-law” taxable wage
base is equal to $87,000, therefore to earn credit for one year of “substantial” employment under the WEP a worker
would have to earn at least $21,750 in Social Security-covered employment.
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Social Security: The Windfall Elimination Provision (WEP)
4% of all retired worker beneficiaries were affected by the WEP in December
2013.72014.7 Of retired workers affected by the
WEP, approximately 61% were men.
8
8
Table 4. Number of Beneficiaries in Current Payment Status with
Benefits Affected by
Windfall Elimination Provision (WEP),
by State and Type of Benefit, December 2013
Type of Benefit
State
Total
Total
1,549,544
Alabama
Retired
Workers
1,433,475
Disabled
Workers
17,561
Spouses and
Children
98,508
18,077
16,426
322
1,329
Alaska
8,523
8,043
107
373
Arizona
28,603
26,603
304
1,696
Arkansas
10,178
9,496
190
492
California
208,941
194,557
2,100
12,284
Colorado
48,596
45,636
683
2,277
Connecticut
15,784
15,033
150
601
3,595
3,395
39
161
Delaware
District of Columbia
7,747
7,403
117
227
Florida
85,783
79,527
884
5,372
Georgia
45,048
42,475
548
2,025
Hawaii
9,463
8,742
76
645
Idaho
6,661
6,145
75
441
Illinois
81,684
77,571
614
3,499
Indiana
15,009
14,023
202
784
Iowa
7,789
7,334
61
394
Kansas
8,595
8,039
118
438
Kentucky
20,168
18,820
323
1,025
Louisiana
33,094
30,200
691
2,203
Maine
14,708
13,895
145
668
Maryland
44,218
41,591
484
2,143
Massachusetts
57,930
55,072
687
2,171
Michigan
19,157
17,678
274
1,205
Minnesota
16,166
15,248
162
756
Mississippi
9,169
8,464
149
556
Missouri
33,033
31,436
385
1,212
Montana
5,525
5,133
53
339
Nebraska
5,038
4,762
45
231
24,289
23,110
240
939
Nevada
7
Social Security data on the total Social Security beneficiary and retired worker populations used in calculations are
available from the Monthly Statistical Snapshot, December 2013, at http://www.socialsecurity.gov/policy/docs/
quickfacts/stat_snapshot/2013-12.html.
8
Social Security Administration, Office of Research, Evaluation and Statistics, January 2014, unpublished table W01.
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Social Security: The Windfall Elimination Provision (WEP)
Type of Benefit
6,887
Retired
Workers
6,471
New Jersey
21,518
19,882
337
1,299
New Mexico
12,357
11,246
170
941
New York
30,194
27,802
423
1,969
North Carolina
27,168
25,466
305
1,397
North Dakota
2,249
2,113
12
124
State
New Hampshire
Ohio
Total
Disabled
Workers
115
Spouses and
Children
301
114,396
107,466
1,287
5,643
Oklahoma
16,883
15,521
283
1,079
Oregon
15,025
13,982
129
914
Pennsylvania
34,129
31,595
525
2,009
Rhode Island
4,995
4,722
68
205
South Carolina
16,685
15,514
216
955
South Dakota
3,663
3,466
34
163
18,684
17,362
221
1,101
Texas
140,144
130,435
1,507
8,202
Utah
12,483
11,374
137
972
Tennessee
Vermont
2,445
2,280
21
144
Virginia
45,905
42,547
390
2,968
Washington
28,803
26,329
281
2,193
5,943
5,363
120
460
11,482
10,793
95
594
West Virginia
Wisconsin
Wyoming
Outlying areas and
foreign countries
2,248
2,111
24
113
82,687
63,778
633
18,276
Source: Social Security Administration, Office of Research, Evaluation and Statistics, January 2014, 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.9
The purpose of the 1983 provision 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, to the present
9
Conference Report to Accompany H.R. 1900, 98th Cong., March 24, 1983 (Washington: GPO, 1983), p. 120.
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Social Security: The Windfall Elimination Provision (WEP)
day the formula does not differentiate between those who worked in low-paid jobs throughout
their careers and other workers who appear 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 intends 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.10 First, because the WEP adjustment is confined to the first
bracket of the benefit formula ($816 in 2014), it causes a proportionally larger reduction in
benefits for workers with lower AIMEs and benefit amounts. Second, a high earner is more likely
than a low earner to cross the “substantial work” threshold for accumulating years of covered
earnings (in 2014 this threshold is $21,750 in 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. 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 found that the WEP can also lead to
10
Jeffrey R. Brown and Scott Weisbenner, The Distributional Effects of the Social Security Windfall Elimination
Provision, Journal of Pension Economics and Finance, Volume 12, Issue 04, October 2013, pp. 415-434.
http://business.illinois.edu/weisbenn/RESEARCH/PAPERS/JPEF_Brown_Weisbenner.pdf.
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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 an adjustment in the WEP formula
applied to the AIME.
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.11 This comparison implies 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.
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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WEP, by State and Type of Benefit, December 2014
State
|
Total
|
Type of Benefit
|
Retired Workers
Disabled Workers
|
Spouses and Children
|
Total
|
1,623,795
|
1,506,792
|
16,613
|
100,390
|
Alabama
|
18,403
|
16,829
|
297
|
1,277
|
Alaska
|
9,027
|
8,544
|
100
|
383
|
Arizona
|
30,055
|
28,013
|
279
|
1,763
|
Arkansas
|
10,349
|
9,699
|
170
|
480
|
California
|
220,783
|
206,125
|
2,022
|
12,636
|
Colorado
|
51,459
|
48,447
|
728
|
2,284
|
Connecticut
|
16,667
|
15,927
|
139
|
601
|
Delaware
|
3,798
|
3,598
|
41
|
159
|
District of Columbia
|
7,853
|
7,526
|
106
|
221
|
Florida
|
90,015
|
83,719
|
819
|
5,477
|
Georgia
|
47,217
|
44,637
|
530
|
2,050
|
Hawaii
|
9,952
|
9,201
|
66
|
685
|
Idaho
|
6,875
|
6,377
|
73
|
425
|
Illinois
|
85,723
|
81,593
|
550
|
3,580
|
Indiana
|
15,642
|
14,656
|
190
|
796
|
Iowa
|
7,970
|
7,527
|
65
|
378
|
Kansas
|
8,879
|
8,328
|
110
|
441
|
Kentucky
|
21,279
|
19,963
|
276
|
1,040
|
Louisiana
|
35,555
|
32,660
|
688
|
2,207
|
Maine
|
15,501
|
14,714
|
133
|
654
|
Maryland
|
45,630
|
43,023
|
464
|
2,143
|
Massachusetts
|
62,035
|
59,068
|
653
|
2,314
|
Michigan
|
19,905
|
18,421
|
259
|
1,225
|
Minnesota
|
16,499
|
15,622
|
136
|
741
|
Mississippi
|
9,348
|
8,662
|
144
|
542
|
Missouri
|
34,584
|
33,002
|
366
|
1,216
|
Montana
|
5,731
|
5,338
|
46
|
347
|
Nebraska
|
5,136
|
4,856
|
50
|
230
|
Nevada
|
26,043
|
24,838
|
225
|
980
|
New Hampshire
|
7,235
|
6,813
|
107
|
315
|
New Jersey
|
21,997
|
20,359
|
311
|
1,327
|
New Mexico
|
12,652
|
11,559
|
164
|
929
|
New York
|
30,960
|
28,589
|
369
|
2,002
|
North Carolina
|
28,158
|
26,459
|
282
|
1,417
|
North Dakota
|
2,274
|
2,139
|
16
|
119
|
Ohio
|
120,859
|
113,918
|
1,294
|
5,647
|
Oklahoma
|
17,171
|
15,874
|
260
|
1,037
|
Oregon
|
15,752
|
14,711
|
119
|
922
|
Pennsylvania
|
35,084
|
32,593
|
491
|
2,000
|
Rhode Island
|
5,138
|
4,871
|
63
|
204
|
South Carolina
|
17,348
|
16,202
|
183
|
963
|
South Dakota
|
3,741
|
3,558
|
31
|
152
|
Tennessee
|
19,383
|
18,078
|
212
|
1,093
|
Texas
|
148,925
|
139,073
|
1,421
|
8,431
|
Utah
|
12,887
|
11,795
|
134
|
958
|
Vermont
|
2,527
|
2,360
|
21
|
146
|
Virginia
|
47,349
|
43,977
|
340
|
3,032
|
Washington
|
29,949
|
27,511
|
246
|
2,192
|
West Virginia
|
6,064
|
5,497
|
111
|
456
|
Wisconsin
|
11,729
|
11,049
|
87
|
593
|
Wyoming
|
2,273
|
2,154
|
19
|
100
|
Outlying areas and foreign countries
|
86,427
|
66,740
|
607
|
19,080
|
Source: Social Security Administration, Office of Research, Evaluation and Statistics, January 2015, 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.9
The purpose of the 1983 provision was to remove an unintended advantage that the regular Social Security benefit formula provided to people 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 does not differentiate between those who worked in low-paid jobs throughout their careers and other workers who appear 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.
Arguments for the WEP
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 people with small pensions 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 people who spend 30 years or more in Social Security-covered work.
Arguments Against the WEP
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.
Current Legislation Affecting the WEP
Legislative proposals to alter the WEP have fallen into three general categories: (1) those that would entirely repeal the provision; (2) those that would phase in a WEP reduction only for beneficiaries whose income from a monthly Social Security benefit and a monthly pension from non-covered work total to a combined threshold amount, and (3) those that would replace the current WEP formula with an alternative computation.
As of June 15, 2015, two bills have been introduced in the 114th Congress, which would alter the WEP. H.R. 973, introduced by Representative Rodney Davis, would repeal the WEP. Repeal proposals have been repeatedly introduced over the past two decades but have not advanced. In 2008, SSA estimated that repealing the WEP would increase benefit outlays by around $20 billion over 5 years and $40 billion over 10 years.10
H.R. 711, introduced by Representative Kevin Brady, would replace the WEP with a new formula for those who become eligible for Social Security retirement or disability benefits after 2016. For such workers who had both covered and non-covered earnings, a new "proportional" computation would be used. First, the regular Social Security formula would be applied to all earnings, whether covered or non-covered. As a result, the progressivity of the benefit would be based on the worker's total lifetime earnings. Second, the resulting benefit would be multiplied by the share of the AIME that came from covered earnings, so that the benefit would be proportional to the amount of Social Security taxes paid.
This proposal is expected to yield a smaller reduction than occurs under the WEP for workers with lower average total career wages and a greater reduction for workers with higher average total career wages.
Under H.R. 711, workers eligible for Social Security benefits in 2016 and earlier (including current beneficiaries) would be subject to the current WEP but would receive a rebate to offset the WEP formula's impact. The savings from the application of the new formula on future retirees addressed above, combined with WEP application to a larger pool of beneficiaries due to enhanced reporting accountability, would be redirected to current beneficiaries. The Office of the Chief Actuary at SSA has estimated that H.R. 5697, a proposal similar to H.R. 711 introduced by Representative Brady in the 113th Congress, would remain cost neutral by providing a 32% rebate to pre-2017 eligible workers. Thus, a beneficiary with a monthly benefit reduced by $413 per month by the current WEP formula would have the WEP reduction softened by $132 (32% of $413), lessening the WEP monthly impact to $281.11
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.12 First, because the WEP adjustment is confined to the first bracket of the benefit formula ($826 in 2015), it causes a proportionally larger reduction in benefits for workers with lower AIMEs and benefit amounts. Second, a high earner is more likely than a low earner to cross the "substantial work" threshold for accumulating years of covered earnings (in 2015 this threshold is $22,050 in Social Security-covered earnings); therefore, high earners are more likely to benefit from the provision that phases out of the WEP for people with between 21 and 30 years of covered employment.
Brown and Weisbenner found that the WEP does reduce benefits disproportionately for lower-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 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 an adjustment in the WEP formula applied to the AIME.
SSA estimated that in 2000, 3.5% of beneficiaries affected by the WEP had incomes below the poverty line. For comparison purposes, at that time 8.5% of 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.13 This comparison implies that people 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.
Author Contact Information
[author name scrubbed], Analyst in Income Security
([email address scrubbed], [phone number scrubbed])
Footnotes
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 approximately the same proportion of wages for each generation.
|
2.
|
The replacement rate is the ratio of a Social Security benefit to a worker's pre-retirement income.
|
3.
|
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 [author name scrubbed].
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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 the worker shown in Table 2, with an AIME of $1,500 and a monthly benefit of $959.08 under the regular benefit formula in 2015, the WEP reduction of $413.00 represents a cut of approximately 43% to the regular formula monthly benefit amount. By comparison, a worker with an AIME of $4,000 would be entitled to a PIA of $1,759.08 under the 2015 regular benefit formula, and the same WEP reduction of $413 per month would represent a 23% reduction in this worker's monthly benefit amount.
6.
|
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 enacted) Social Security maximum taxable wage base for each year in question. In 2015, the "old-law" taxable wage base is equal to $88,200, therefore to earn credit for one year of "substantial" employment under the WEP a worker would have to earn at least $22,050 in Social Security-covered employment. For the thresholds for previous years, see Social Security Administration, "Windfall Elimination Provision," 2015, http://www.ssa.gov/pubs/EN-05-10045.pdf.
|
7.
|
Social Security data on the total Social Security beneficiary and retired worker populations used in calculations are available from the "Monthly Statistical Snapshot, December 2014," at http://www.socialsecurity.gov/policy/docs/quickfacts/stat_snapshot/2014-12.html.
|
8.
|
Social Security Administration, Office of Research, Evaluation and Statistics, January 2015, unpublished table W01.
|
9.
|
Conference report to accompany H.R. 1900, 98th Cong., March 24, 1983 (Washington: GPO, 1983), p. 120.
|
10.
|
Testimony of David A. Rust, acting deputy commissioner for Disability and Income Security Programs to the U.S. House of Representatives' Committee on Ways and Means, Social Security Subcommittee, January 16, 2008, at http://www.socialsecurity.gov/legislation/testimony_011608.html. That estimate has not been updated.
|
11.
|
Actuarial memorandum to Rep. Kevin Brady on H.R. 5697 (114th Congress), U.S. Social Security Administration, Office of the Chief Actuary, November 13, 2014, at http://www.socialsecurity.gov/oact/solvency/index.html.
|
12.
|
Jeffrey R. Brown and Scott Weisbenner, "The Distributional Effects of the Social Security Windfall Elimination Provision," Journal of Pension Economics and Finance, vol. 12, iss. 04 (October 2013), pp. 415-434, at http://business.illinois.edu/weisbenn/RESEARCH/PAPERS/JPEF_Brown_Weisbenner.pdf.
|
13.
|
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 people for whom SSA administrative records could be matched.
|