If you have a pension from a job where you did not pay Social Security taxes, your benefit may be reduced by the Windfall Elimination Provision (WEP). How do you know if you’ll be impacted? Don’t expect it to be on your Social Security benefits statement. This may surprise you but your Social Security statement does not reflect any reduction in benefits due to this provision. The Social Security Administration will wait until you file to tell you how much the reduction is if you qualify for both Social Security and a non covered pension.
Understanding if a reduction in benefits will apply to you, and how much that will be, does not have to wait until you file for Social Security. You can find out today. It starts by understanding the mechanics of the Windfall Elimination Provision.
The Social Security Amendments of 1983 introduced the Windfall Elimination Provision (WEP) as part of an effort to keep individuals from “double dipping.” This was defined as receiving both a pension from a job where they did not pay Social Security taxes and a Social Security benefit.
This new provision began to reduce Social Security benefits for those who worked in a job in which:
1) They did not pay Social Security taxes
2) Qualified for a pension from that job.
Teachers are one of the most common groups to be impacted by this rule but it often includes other public sector workers like firefighters, police officers and numerous other state, county and local employees.
Non Covered Employment
In the beginning, Social Security didn’t cover any public sector employees. However, over the years, many states dropped their own pension plans and adopted coverage agreements with the Social Security Administration. However, there are still several states who do not participate in Social Security. Instead, they have their own state run pension plan. For workers in these states, the rules for collecting a non covered government pension and Social Security can be confusing and maddening.
That’s especially true if you’ve paid into the Social Security system for enough quarters to qualify for a benefit. It’s quiet common too. Many individuals find themself in this situation for a variety of reasons. For example, Firefighters often work second jobs where they pay social security tax. Police Officers will often retire at an early age and move on to another “covered” job. Many teachers came to education as a second career, after they’ve spent years working in a job where Social Security taxes were withheld.
Windfall Elimination Provision Mechanics
The Windfall Elimination Provision (WEP) is simply a recalculation of your Social Security benefit if you also have a pension from “non-covered” work (no Social Security taxes paid). The normal Social Security calculation formula is substituted with a new calculation that results in a lower benefit amount.
Covering the topic exhaustively would require a multipage essay, but the necessary components of the WEP can be distilled to a few simple points:
- The maximum Social Security reduction will never be greater than one half of your pension amount. This is capped at a monthly reduction of $413 (for 2015).
- If you have more than 20 years of substantial covered earnings (where you paid Social Security tax), the impact of the WEP begins to diminish. At 30 years of substantial covered earnings, the WEP does not apply.
Source: Devin Carroll, Data: Social Security Administration
This phase-out of the WEP reduction offers an incredible planning opportunity if you have worked at a job where you paid Social Security tax. For example, if you worked as an engineer for 20 years before you began teaching, you may be able to do enough part time work between now and when you retire to completely eliminate the monthly WEP reduction. This phase-out of the WEP reduction offers a great planning opportunity if you have worked at a job where you paid Social Security tax.
Would it be worth it? If you consider how much more in benefits you could receive over your retirement lifetime, it could be worth $100,000 in extra income over a 20-year retirement. Obviously, not everyone has the option of accumulating enough years to wipe out the big monthly WEP reduction. But for those who do, or can get close, it’s worth taking a closer look.
For more information, see the Social Security Administration’s WEP Benefit Calculator.
I’d love to hear your thoughts.
How does this rule surprise you?
In what way is it more or less complicated than you have previously thought?