Q & A: Social Security's Windfall Elimination Provision (for members in jobs not covered by Social Security)
Q. What's the Windfall Elimination Provision (WEP)?
A. The WEP is a federal law that applies to individuals who receive a pension from a public-service job that is not covered by Social Security. If the public pensioner also worked in a Social Security-covered job for at least 10 years, the WEP creates a public pension offset that can greatly reduce that person's earned Social Security benefit. The maximum reduction is $380.50 a month (2010).
Q. How many people are affected by the WEP?
A. Nearly 900,000 retired federal, state and local government employees are currently affected by the WEP. That number grows by about 60,000 retirees each year.
Q. How does the WEP work?
A. For those public retirees who come under the WEP, there's a modified formula for determining the Social Security benefit. In the normal benefit formula, average monthly earnings are separated into three segments, each multiplied by a different percentage. For a worker turning 62 in 2010, the first $761 in covered monthly earnings is multiplied by 90%; the next segment of earnings, up to $4,586, is multiplied by 32%; and any additional monthly earnings are multiplied by 15%. In the modified formula under the WEP, the 90% multiplier on the first $761 of covered earnings is reduced to 40% for retirees who worked in Social Security-covered employment for less than 20 years. There's a sliding scale for those who worked longer in covered employment: the multiplier goes up from 40% at 20 years to the full 90% at 30 years or more.
Q. Why did Congress enact the WEP in the first place?
A. The WEP was created by Congress in 1983 so that Social Security could distinguish between two types of workers: 1) those who draw good pensions from primary jobsin non-covered employment, but whose low-wages or short work records insecondary jobs make them appear to be low-wage careerists to Social Security; and 2) workers who actually spent their entire work lives in low-wage jobs. Congress felt that the first group was unfairly benefiting from a Social Security formula that's designed to give low-wage workers an advantage. In order to give low-wage earners a decent Social Security benefit, the normal benefit formula is weighted so they get a higher replacement rate on their earnings than higher-wage workers receive. Low-wage workers receive nearly 60% of their previous earnings in Social Security retirement benefits; moderate-wage workers get about 42%; and high-wage workers get about 25%.
Because the public employee's primary earnings aren't covered by Social Security, the benefit formula is applied only to wages earned on the secondary job. As a result, the normal benefit formula would treat the public employee as a lower-income worker and would calculate benefits to achieve a 60% replacement rate. This could occur even though the public employee's total lifetime earnings -- including the earnings from a public-sector job -- actually would be much higher than the earnings of someone who has earned low-wages in covered employment throughout their work life.
Q. Was Congress right about the WEP?
A. No. The WEP's modified benefit formula is applied in an arbitrary fashion. Social Security has no idea how much a public employee has earned in total wages when he/she comes under the WEP. But the modified formula assumes all these public employees are higher-wage earners. In fact, public employees and retirees who take second jobs are most likely to do so because they've always been low-wage earners and receive low public pensions. Many of them are exactly like the people that thenormal benefit formula is designed to help.
The WEP compounds their misery. It's especially unfair when you consider that these workers pay the same percentage in payroll contributions (6.2%, which is matched by their employers) on their Social Security-covered earnings as all other workers, yet they're penalized. The WEP is truly an unfair pension offset.
Q. Can the WEP be reformed?
A. Yes. In the 111th Congress, Rep. Barney Frank (D-MA) introduced a bill that would reform the WEP and make it less onerous for public retirees. The legislation would exempt retirees whose combined Social Security earned benefits and public pension are less than $2,500 a month. The WEP would gradually phase in for those receiving combined benefits above that amount.
Q. Can the WEP be repealed?
A. Yes. In the 111th Congress, Sen. Dianne Feinstein (D-CA) and Rep. Howard Berman (D-CA) have re-introduced bills calling for total repeal of the WEP (along with repeal of the GPO - Government Pension Offset). AFSCME supports the repeal bills(S.484/H.R.235), as well as the Frank-style reform bill, and is lobbying hard to help members who are affected by the WEP.
*Important Note: The WEP affects only those public pensioners who were not covered by Social Security as public employees. In the federal sector, this includes current retirees and most employees hired before 1983, when all new hires were required to join Social Security. In state and local government, approximately 25% of employees and retirees (including teachers, police and fire employees, and general employees) are in non-Social Security jurisdictions, while 75% fully participate in the Social Security (they contribute to the system and their public employer matches their contributions) and, therefore, are not affected by the WEP.
