This article was originally published on 10/17/2008. It has some good general information so we are re-posting it. It is interesting to note that not much has happened on this issue since 2008.
The Social Security Administration has put out another update to the Windfall Elimination Provision.
Most Americans pay into the Social Security system by having the Federal Insurance Contribution Act (FICA) tax deducted from their paychecks. Currently, the FICA tax of 6.2 percent is applied to an employee’s wages. During 2008, FICA tax is withheld on the first$102,000 of an employee’s wages.
Firefighters and police employed in the State of Washington are normally members of some type of public retirement system. Many of these public employees do not contribute to Social Security.
In spite of their not contributing to the Social Security system many fire and police individuals have at some time during their working careers been able to earn the required minimum 40 “quarters of coverage” or credits to qualify for Social Security retirement payments.
Before 1983, these workers were able to receive the maximum benefits from both Social Security and their public pensions. Congress, however, in 1983 passed the “Windfall Elimination Provision” (WEP) in order to eliminate this advantage. In particular, if an individual is covered by a public pension plan, such as the Law Enforcement Officers and Fire Fighters (LEOFF) system, and having less than 30 years of “substantial” Social Security covered earnings while working in the private sector, the amount of Social Security benefits they receive will be reduced. The Social Security benefits are reduced for affected individuals who:
- reached age 62 after December 31, 1985;
- became disabled after December 31, 1985; or
- became eligible for a monthly pension after December 31, 1985 based on non-covered Social Security employment.
Why did Congress create the WEP in 1983?
Congress was motivated to create the WEP to remove any possible inequalities of Social Security benefits of employees not paying into Social Security but paying into a government retirement plan. These employees would earn their 40 credits outside of federal service and subsequently earn Social Security benefits that are as relatively high as those benefits earned by employees who paid into Social Security their entire working careers. The “inequality” problem occurs because the threshold for coverage of Social Security retirement benefits is rather low and monthly retirement benefits accrue rather quickly at the lower end of the earnings scale.
For 2008, full retirement benefits accrue at 90 percent of the first $711 of an individual’s average indexed monthly earnings (AIME) and then accrue at a lesser rate of 32 percent, finally reaching an accrual rate of 15 percent. The most important thing for public employees to understand is that the WEP will reduce, but will not eliminate, an individual’s Social Security benefit by as much as 55 percent.
Which public workers are affected by the WEP and how do they determine how the WEP affects their Social Security benefits?
The Social Security Administration (SSA) has a publication, SSA Publication No. 05-10045 which explains the WEP. Perhaps the most important portion in the SSA publication is the table that shows the effect of the WEP on an affected annuitant’s Social Security benefits.
To calculate the potential reduction of the WEP on an affected individual’s Social Security retirement benefit, it is necessary to reference two tables on the SSA Web site at www.ssa.gov and follow these three steps.
Determine the number of years of “substantial” earnings. An individual needs to look at his or her Social Security statement and determine how many years of “substantial” Social Security wages are accumulated. The table listing “substantial” earnings per year since 1937 can be found on the SSA Web site at www.ssa.gov/pubs/10045.html. For example, “substantial earnings” during 2005 was $16,725.
Once the number of years of substantial earnings has been established, the reduction in benefits is found by referring to the WEP chart on the SSA Web site at www.ssa.gov/retire2/wep-chart.htm. For example, suppose a 62 year CSRS annuitant (age 62 is the “eligibility year” or ELY) with 15 years of “substantial earnings” begins to receive Social Security during 2008. On the chart under “20 or less years” of substantial earnings, this individual’s Social Security would be reduced by $355.50. For example, if the individual was to receive a monthly benefit of $600, then the actual benefit due to the WEP reduction would be $600 less $355.50, or $244.50 per month.
There is a limit on the WEP reduction equal to 50 percent of the non-Social Security pension (LEOFF). For example, if the LEOFF annuitant above receives a LEOFF allowance pension of $300 a month, the WEP reduction would be limited to $150.
Some other considerations about the WEP:
The WEP does not affect an individual who continues to work and is drawing Social Security benefits. For example, a public employee who has reached full retirement age continues to work for a government employer and is drawing his or her own Social Security retirement benefits. Those benefits will not be affected by the WEP. The WEP takes effect once the individual retires from public service.
If a public annuitant affected by the WEP is married, then his or her spouse (or former spouse) is eligible for half of the annuitant’s Social Security retirement benefits (“spousal/former spousal” benefits). This assumes that the spouse’s or the former spouse’s own Social Security benefits are less than half of the annuitant’s Social Security benefits. However, spousal/formal spousal Social Security benefits are also affected by the WEP. If the annuitant dies and the spouse/former spouse is entitled to the deceased’s Social Security (“survivor” benefit), then the WEP no longer applies. In other words, the spouse/former is entitled to the deceased federal annuitant’s full Social Security benefit without a reduction for the WEP.
Because the effect of the WEP is not included on an individual’s Social Security annual reporting statement, many public employees are shocked when they start receiving their Social Security retirement or disability benefits. As a result of Congressional hearings that provided woeful tales of individuals who expected Social Security payments based on the information provided by the SSA but ended up with much less, Congress passed the Social Security Protection Act of 2004. This law requires better disclosure of payment adjustments due to the WEP.
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