The Windfall Elimination Provision (WEP) in Social Security: Proposals for a New Proportional Formula

The Windfall Elimination Provision (WEP) in Social Security: Proposals for a New Proportional Formula

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Updated September 19, 2023
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 monthly cash benefits to workers and their
the bipartisan National Commission on Social Security
eligible family members in the event of a worker’s
Reform (the Greenspan Commission) described two
retirement, disability, or death. Although participation in
different methods of eliminating the windfall benefits: (1)
Social Security is compulsory for most workers, about 6%
the current-law method of adjusting the first replacement
of workers in paid employment or self-employment are not
factor (90%) as discussed above; and (2) a proportional
covered by Social Security (i.e., earnings are not taxable or
formula. The proportional formula for WEP purposes
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
Table 1. Illustrative Examples: Replacement Rates
remove such an unintended advantage, or windfall, for
(Benefits as a Share of AIME) Under Alternative
certain beneficiaries with earnings not covered by Social
Formulas
Security.
Regular
Current-
Propor-
The Current WEP Formula
Formula
Law
tional
The regular Social Security benefit formula applies three
(w/o WEP)
WEP
Formula
factors—90%, 32%, and 15%—to three different brackets
Employment
(1)
(2)
(3)
of a worker’s AIME. The result is the primary insurance
amount (PIA), which is the worker’s basic monthly benefit
Covered: 35 years;
49%
49%
49%
at the full retirement age before any adjustments. Under
Noncovered: 0 years
current law, the WEP reduction is based on years of
Covered: 15 years;
coverage (YOCs). The amount of substantial covered
Noncovered: 20
72%
38%
49%
earnings needed for a YOC is $29,700 in 2023. For people
years
with 20 or fewer YOCs, the WEP reduces the first factor
from 90% to 40%. For each year of substantial covered
Source: Congressional Research Service.
earnings in excess of 20, the first factor increases by 5%.
Notes: The worker is assumed to earn $45,000 (indexed by average
The WEP factor reaches 90% for those with 30 or more
wage growth) per year and becomes eligible for benefits in 2023.
YOCs, and at that point it is phased out. In addition, the
WEP reduction cannot exceed one-half of the pension
Comparing the Current WEP and the
benefit based on the worker’s noncovered employment, and
Proportional Formula
it does not apply to those who do not receive such a
If the proportional formula had applied to current
pension.
beneficiaries in 2018, SSA’s Office of the Chief Actuary
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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 were 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 2025. H.R. 4260 would
to new beneficiaries, it would generate program savings.
provide worker beneficiaries (but not dependents) an
additional monthly payment equal to the lesser of $150 or
Below are two examples in which beneficiaries affected by
the current WEP reduction amount. H.R. 5342 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. The additional monthly payments
•
would begin nine months after enactment of the respective
Beneficiaries with YOCs near 30. Certain beneficiaries
bill, would increase with cost-of-living adjustments, and
with YOCs near 30 would have a relatively high
would be exempt from most benefit adjustments under
replacement factor (e.g., 85% for 29 YOCs) under
Social Security. The additional monthly payment under
current law. Therefore, those beneficiaries’ benefit
H.R. 4260 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.
program.
• Beneficiaries with relatively high career-average
Cost Estimates and Funding Rules
earnings. Since the current WEP reduction is limited to
The OCACT estimates that H.R. 4260 would cost about
the first bracket in the PIA formula, it might under-
$30.1 billion from 2023 through 2032, net of additional
adjust the benefit for some high earners with
revenue from income taxation, including $1.5 billion for the
noncovered employment, resulting in a smaller benefit
new proportional formula and $28.7 billion for the
reduction under current law than under the proportional
additional monthly payments. Over the 75-year projection
formula.
period, the present value of the overall net cost would be
Current beneficiaries who had noncovered earnings and are
about $110.1 billion. The bill would provide transfers from
exempt from the current-law WEP but would receive a
the General Fund of the Treasury to the Social Security
lower benefit using the proportional formula might include
trust funds in amounts needed to fully offset the bill’s costs,
(1) beneficiaries with 30 or more years of substantial
so it would have no effect on Social Security’s long-term
covered earning; (2) beneficiaries who do not receive a
financial outlook.
pension based on noncovered work; and (3) beneficiaries
The OCACT estimates that H.R. 5342 would cost about
who fit both categories.
$23.9 billion from 2023 through 2032, net of additional
Legislation in 118th Congress
revenue from income taxation, including $1.5 billion for the
new proportional formula and $22.4 billion for the
Two bills introduced in 2023 would replace the current-law
additional monthly payments. Over the 75-year projection
WEP approach with a proportional formula for certain
period, future savings from the proportional formula would
individuals who would become eligible for Social Security
offset the cost of the additional monthly payments and the
benefits in 2025 or later: (1) H.R. 4260 (the Public Servants
protection provision during the transitional period, so the
Protection and Fairness Act of 2023), introduced by
bill would have no significant effect on Social Security’s
Representative Richard E. Neal; and (2) H.R. 5342 (the
long-term financial outlook.
Equal Treatment of Public Servants Act of 2023),
introduced by Representative Jodey Arrington.
Other Provisions
The annual Social Security statements that SSA makes
No Benefit Cuts Relative to Current Law
available to all eligible workers provide benefit estimates
Because the proportional formula could reduce Social
based only on covered employment, with no estimates of
Security benefits for some future beneficiaries with
the WEP adjustment. Because of this limitation,
noncovered employment compared to current law, both
beneficiaries have argued that they were not given
bills provide a protection provision, wherein individuals
sufficient notice of how much their benefits would be
would receive a benefit based on the higher of the current
reduced by the WEP. To address this issue, both bills would
WEP formula or the proportional formula. H.R. 4260 would
require SSA to show noncovered as well as covered
apply the protection provision to all future beneficiaries,
earnings records on the statements. Moreover, H.R. 4260
and as with current law, the proportional formula would not
would require the statements to include projected benefits
apply to workers who do not receive a noncovered pension
using the proportional formula for those workers who
or who have 30 or more years of substantial covered
would likely be subject to the WEP.
earnings. In contrast, H.R. 5342 would apply the protection
In addition, both bills would require studies on ways to
provision during the transitional period for new
facilitate data exchanges between SSA and state and local
beneficiaries who become eligible for benefits during 2025
governments for purposes of improving WEP
through 2067. For those who become eligible in 2068 and
administration.
later, benefits would be based solely on the proportional
formula.
Zhe Li, Analyst in Social Policy
IF11355
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The Windfall Elimination Provision (WEP) in Social Security: Proposals for a New Proportional Formula

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https://crsreports.congress.gov | IF11355 · VERSION 3 · UPDATED