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November 8, 2019
The Windfall Elimination Provision (WEP) in Social Security:
Proposals for a New Proportional Formula
Background
The Proportional Formula
Social Security is a work-based federal insurance program
Shortly before the WEP was enacted in 1983 (P.L. 98-21),
that provides income support to workers and their eligible
the bipartisan National Commission on Social Security
family members in the event of a worker’s retirement,
Reform (the Greenspan Commission) described two
disability, or death. Although participation in Social
different methods of eliminating the windfall benefits: (1)
Security is compulsory for most workers, about 6% of
the current-law method of adjusting the first replacement
workers in paid employment or self-employment are not
factor (90%) as discussed above; and (2) a proportional
covered by Social Security in 2019 (i.e., earnings are not
formula. The proportional formula for WEP purposes
taxable or creditable for program purposes).
would apply the regular Social Security benefit formula to
all past earnings from both covered and noncovered
The regular Social Security benefit formula is progressive,
employment. The resulting benefit would then be multiplied
replacing a greater share of career-average earnings for
by the ratio of career-average earnings (AIME) from
low-paid workers than for high-paid workers. Career-
covered employment only to career-average earnings
average earnings in Social Security are calculated as
(AIME) from both covered and noncovered employment.
average indexed monthly earnings (AIME), which is the
monthly average of the highest 35 years of covered
The proportional formula better reflects the Greenspan
earnings after indexing for wage growth. If a person has
Commission’s recommendation for people with some
earnings not covered by Social Security, those noncovered
earnings from noncovered employment to receive the same
earnings are shown as zeros in their Social Security
replacement rate as those workers who spent their entire
earnings records. As a result, the regular formula cannot
careers in covered employment (see Table 1, column [3]),
distinguish workers who have low career-average earnings
whereas the current-law WEP can only approximately
because they worked for many years at low earnings in
achieve that goal (see Table 1, column [2]). However, in
covered employment from workers who appear to have low
1983, the Social Security Administration (SSA) lacked the
career-average earnings because they worked for many
data on noncovered earnings needed to make the benefit
years in jobs not covered by Social Security. Therefore,
adjustment under the proportional formula, so Congress
based on the regular formula, a worker who worked in both
adopted the current WEP formula instead. As of 2017, SSA
covered and noncovered employment might receive a
has 35 years of data on earnings from both covered and
higher replacement rate of career-average earnings than a
noncovered employment. This data’s availability means
worker with the same earnings who spent an entire career in
that the proportional formula is now an option for Congress
covered employment (see Table 1, column [1]). The
to consider.
windfall elimination provision (WEP) is designed to
remove such an unintended advantage, or windfall, for
Table 1. Illustrative Examples: Replacement Rates
certain beneficiaries with earnings not covered by Social
(Benefits as a Share of AIME) Under Alternative
Security.
Formulas
The Current WEP Formula
Regular
Curre
Propor-
The regular Social Security benefit formula applies three
Formula
nt-law
tional
factors—90%, 32%, and 15%—to three different brackets
(w/o WEP)
WEP
Formula
of a worker’s AIME. The result is the primary insurance
Employment
(1)
(2)
(3)
amount (PIA), which is the worker’s basic monthly benefit
Covered: 35 years;
at the full retirement age before any adjustments. Under
46%
46%
46%
Noncovered: 0 years
current law, the WEP reduction is based on years of
coverage (YOCs). The amount of substantial covered
Covered: 15 years;
65%
37%
46%
earnings needed for a YOC is $24,675 in 2019. For people
Noncovered: 20 years
with 20 or fewer YOCs, the WEP reduces the first factor
Source: Congressional Research Service.
from 90% to 40%. For each year of substantial covered
Notes: The worker is assumed to earn $45,000 (indexed by average
earnings in excess of 20, the first factor increases by 5%.
wage growth) per year, and become eligible for benefits in 2019.
The WEP factor reaches 90% for those with 30 or more
YOCs, and at that point it is phased out. In addition, the
Comparing the Current WEP and the
WEP reduction cannot exceed one-half of the pension
Proportional Formula
benefit based on the worker’s noncovered employment, and
If the proportional formula had applied to current
it does not apply to those who do not receive such a
beneficiaries in 2018, SSA’s Office of the Chief Actuary
pension.
https://crsreports.congress.gov
The Windfall Elimination Provision (WEP) in Social Security: Proposals for a New Proportional Formula
(OCACT) estimates that about 1.1 million beneficiaries
Additional Monthly Payments to Current
affected by the current WEP (or 69%) would have received
Beneficiaries
a higher benefit and about 0.5 million (or 31%) would have
As discussed earlier, the proportional formula could provide
received a lower benefit. In addition, 13.5 million
a higher benefit to certain beneficiaries compared to current
beneficiaries with some noncovered earnings who are not
law, so both bills would provide additional monthly
affected by the current WEP would have received a lower
payments to current WEP-affected beneficiaries who are
benefit. Therefore, if the proportional formula were applied
first eligible for benefits before 2022. The additional
to new beneficiaries, it would generate program savings.
monthly payments would be provided as long as the eligible
individual is receiving Social Security benefits, and would
Below are two examples in which beneficiaries affected by
increase with cost-of-living adjustments. H.R. 3934 would
the current WEP would receive lower benefits under the
provide an additional monthly payment of $100 to workers
proportional formula:
and $50 to dependents, starting in 2020. H.R. 4540 would
provide worker beneficiaries (but not dependents) an
Beneficiaries with YOCs near 30. Certain beneficiaries
additional monthly payment equal to the lesser of $150 or
with YOCs near 30 would have a relatively high
the current WEP reduction amount, starting nine months
replacement factor (e.g., 85% for 29 YOCs) under
after enactment. The additional monthly payment under
current law. Therefore, those beneficiaries’ benefit
H.R. 4540 would be excluded in determining eligibility and
reduction under the current WEP might be smaller than
the benefit amount under the Supplemental Security Income
under the proportional formula.
(SSI) program.
Cost Estimates and Funding Rules
Beneficiaries with relatively high career-average
The OCACT estimates that H.R. 3934 would cost about
earnings. Since the current WEP reduction is limited to
$23.1 billion from 2020 through 2029, including $1.5
the first bracket in the PIA formula, it might underadjust
billion for the new proportional formula and $21.6 billion
the benefit for some high earners with noncovered
for the additional monthly payments. Over the 75-year
employment, resulting in a smaller benefit reduction
projection period, future savings from the proportional
under current law than under the proportional formula.
formula would offset the cost of the additional monthly
payments and the protection provision during the
Current beneficiaries who had noncovered earnings and are
transitional period, so the bill would have no significant
exempt from the current-law WEP but would receive a
effect on Social Security’s long-term financial outlook.
lower benefit using the proportional formula might include
(1) beneficiaries with 30 or more years of substantial
The OCACT estimates that H.R. 4540 would cost about
covered earning; (2) beneficiaries who do not receive a
$34.3 billion from 2020 through 2029, including $1.5
pension based on noncovered work; and (3) beneficiaries
billion for the new proportional formula and $32.8 billion
who fit both categories.
for the additional monthly payments. Over the 75-year
projection period, the present value of the overall cost
Legislation in 116th Congress
would be about $94.5 billion. The bill would provide
Two bills introduced in 2019 would replace the current-law
transfers from the General Fund of the Treasury to the
WEP approach with a proportional formula for certain
Social Security trust funds in amounts needed to fully offset
individuals who would become eligible for Social Security
the bill’s costs, so it would have no effect on Social
benefits in 2022 or later: (1) H.R. 3934 (the Equal
Security’s long-term financial outlook.
Treatment of Public Servants Act), introduced by
Other Provisions
Representative Kevin Brady, and (2) H.R. 4540 (the Public
Servants Protection and Fairness Act), introduced by
The annual Social Security statements that SSA makes
Representative Richard E. Neal.
available to all eligible workers provide benefit estimates
based only on covered employment, with no estimates of
No Benefit Cuts Relative to Current Law
the WEP adjustment. Because of this limitation,
Because the proportional formula could reduce Social
beneficiaries have argued that they were not given
Security benefits for some future beneficiaries with
sufficient notice of how much their benefits would be
noncovered employment compared to current law, both
reduced by the WEP. To address this issue, both bills would
bills provide a protection provision, wherein individuals
require SSA to show noncovered as well as covered
would receive a benefit based on the higher of the the
earnings records on the statements. Moreover, H.R. 4540
current WEP formula or the proportional formula. H.R.
would require the statements to include projected benefits
3934 would apply the protection provision during the
using the proportional formula for those workers who
transitional period for new beneficiaries who become
would likely be subject to the WEP.
eligible for benefits during 2022 through 2060. For those
In addition, both bills would require studies on ways to
who become eligible in 2061 and later, benefits would be
facilitate data exchanges between SSA and state and local
based solely on the proportional formula. In contrast, H.R.
governments for purposes of improving WEP
4540 would apply the protection provision to all future
administration.
beneficiaries, and as with current law, the proportional
formula would not apply to workers who do not receive a
noncovered pension or who have 30 or more years of
substantial covered earnings.
Zhe Li, Analyst in Social Policy
IF11355
https://crsreports.congress.gov
The Windfall Elimination Provision (WEP) in Social Security: Proposals for a New Proportional Formula
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https://crsreports.congress.gov | IF11355 · VERSION 1 · NEW