Windfall Elimination Provision for Social Security

windfall by Kam's WorldIf you have worked in a job where your pay was subject to Social Security tax withholding, and also have worked in a job where Social Security tax is not  withheld, such as for a government agency or an employer in another country, the pension you receive from the non-Social Security taxed job may cause a reduction in your Social Security benefits.  This reduction is known as the Windfall Elimination Provision (WEP) – and it’s named such since it was enacted to eliminate the “windfall” that would otherwise be received by a worker who fit into this description.  Without the WEP, the worker would effectively be double-dipping by receiving full benefits from both plans. This provision primarily affects Social Security benefits when you have earned a pension in any job where you did not pay Social Security tax and you also worked in other jobs long enough to qualify for Social Security benefits.    However, federal service where Social Security taxes are withheld (Federal Employees’ Retirement System) will not reduce your Social Security benefits.  The WEP may apply if:
  • you reached age 62 after 1984; or
  • you became disabled after 1985; and
  • you first became eligible for a monthly pension based on work where you did not pay Social Security taxes after 1985, even if you are still working.

Here’s How It Works

True to form, the Social Security Administration doesn’t make it easy to figure all this out… You start out by understanding your Primary Insurance Amount, which begins with your Average Indexed Monthly Earnings (AIME), and then take the Bend Points for the current year into account.  For 2010, the first Bend Point is $761 and the second Bend Point is $4,586.  As we discussed in the article on Primary Insurance Amount (PIA), the amount of your AIME that makes up the first Bend Point is multiplied by 90%; the amount from the first Bend Point to the second Bend Point is multiplied by 32%; and finally everything over the second Bend Point is multiplied by 15%.  These three figures are added up to create your PIA. However – if the WEP applies to your situation and you reached age 62 after 1989, the 90% factor (applied to the first Bend Point) is reduced to 40%.  Effectively, this reduces the PIA for most folks by $380.50 per month (for 2010).  The reduction factor is phased in if you reached age 62 between 1986 and 1989.

Exceptions

Again true to form, the SSA has exceptions to the rule.  If it turns out that your service in the Social Security taxed job was for 30 years or more and you earned “substantial” wages (substantial is defined as $19,800 for 2010 and has been indexed over the years), then your 90% factor is not reduced at all.  If you had “substantial” earnings for at least 21 years but less than 30 years, the 90% factor is reduced by 5% each year less than 30 years that you had “substantial” earnings in the Social Security-taxed job, with the lowest factor being 40%. Additionally, the WEP doesn’t apply to Survivor’s benefits (but the Government Pension Offset does).  Other exceptions include the following:
  • You are a federal worker first hired after December 31, 1983;
  • You were employed on December 31, 1983 by a nonprofit organization that did not withhold Social Security taxes from your pay at first, but then began withholding Social Security taxes from your pay;
  • Your only pension is based on railroad employment; or
  • The only work you did where you did not pay social Security taxes was before 1957.

Parting Shots

There is a limit to the amount that your Social Security benefit can be reduced: no matter what your factor has been reduced to (from the original 90%), the resulting reduction cannot be more than 50% of your pension based on earnings after 1956 on which you did not pay Social Security taxes. And lastly, the WEP also applies to Disability benefits from Social Security, using the same factors. As always, if you have questions, leave a comment below (or use one of the other contact methods to the right!).
Photo by Kam's World
IRS CIRCULAR 230 NOTICE: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication (or in any attachment) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed in this communication (or in any attachment).

About the author

Jim Blankenship, CFP®, EA

Jim Blankenship is the founder and principal of Blankenship Financial Planning, Ltd., a financial planning firm providing hourly, as-needed financial planning and advice. A financial services professional for over 25 years, Jim is a CFP professional and has earned the Enrolled Agent designation, a designation that qualifies him as enrolled to practice before the IRS. Jim is also a NAPFA-registered financial advisor, which designates him as a Fee-Only Financial Advisor.

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21 Comments

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  • I need to know everything about this dual status exemption for the WEP. Please provide me with anything that can help me. Thank you!

  • my us employer voluntarily paid us social security for me for my earnings in canada, and i also paid canadian pension. after aug 1984 they were not able to pay us social security because of the new treaty. thus for 3/4 of the time, I was paying us social security on the canadian earnings. It seems that 1/4 of the canadian pension would be subject to the 50% rule. Is this more or less correct?

  • Hello, Rainbow –

    Without having access to your earnings history and all the details around your potential survivor benefit I can’t say for sure.

    You indicate that you did not pay into FICA, I assume you mean OASDI (Social Security). Are you receiving another pension from the job where you didn’t pay into SS? If so, you would be impacted by GPO, rather than WEP. As far as I know, WEP doesn’t apply to survivor’s benefits.

    Hope this helps –

    jb

  • Hi Jim,

    My survivor benefit as a divorced person was flatly denied. My 14 year old was granted a benefit when her father died August 2011. I did not pay into FICA so they say I do not qualify for a benefit payment due to “WEP”. I am under 60, and they tell me when I attain 60, I still will not qualify for a benefit.

    My child is disabled (CP) child. I workded for 25 years for May, 1977 to 2003.

    It sounds like I can get something based on the years I worked in the “exception” area of your write up.

    What say you?

    Thanks for a great info page!

  • Unfortunately, James, if the income for a particular year doesn’t meet the “substantial” test, it can’t be added to another year to make that year “substantial”. Either the income for the year is substantial (according to the table) or it is not.

    jb

  • Raymond –

    First of all, I need to make this clear: I am only a humble financial planner, I have no sway with the Social Security Administration. I can offer you advice and guidance, and commiserate with you, but I can’t fix a problem with the system.

    I posed your situation to a contact with the SSA and he indicated that your best bet might be to call the national toll-free number (800-772-1213) they should be able to give you a status on the appeal, and to communicate your concerns with the office that is working on your appeal.

    Best of luck to you –

    jb

  • I have 23 years of substancial income and 26 years of income that was under the substantial income amount. I am also drawing a civil serce pensiom. Is it possible that some of my nonsubstancial years of income be used to complete my 30 years of substancial income?

  • Jim

    My local SSA Filed Office could not or would not help me due to they only have three qualified individuals in the region, the field office supervisor was not familar with WEP. After surfing the SSA.Gov Website I located POMS Section: RS KC00605.383 Application of WEP to National Guard Tecnicians if you have the time read it no action will be taken. POMS Section: RS 00605.383KC is still in effect after the February 3, 2011 United States Court of Appeals for the Eighth Circuit. I have tried to locate an attorney who specializes in this area without any success. Thank you for hearing my complaint.

    rh

  • Raymond –

    No, I was not previously aware of the plight of the Dual Status Technician. I suggest that you go to your local SSA office and explain the situation. Ask for a supervisor or a public affairs specialist to help you if you’re not getting anywhere.

    If that doesn’t work, you might try to find an attorney who specializes in this area to help you devise a plan.

    jb

  • Jim, Are you aware of the Full-Time Dual-Status National Guard Technicians who were employeed,under USC Title 32? We are Civil Service employees who had to be members of the Army/Air National Guard as a condition of employment.
    Dual Status Technicians paid into the Civil Service Retirement System (CSRS) plus paid Social Security Tax on there National Guard Pay. As National Guard Technicians we were required to wear the Army/Air Force uniform and meet all military standards medical, physical, and educational. Failure to meet these standards was cause for termination. The Commissioner of Social Security disagrees with the fact that we should be exempt from the Windfall Elimination Provision. For the following reason: National Guard Technicians are not part of a Uniform Service, and does not meet the military exemption rule and should not be considered as substantial income. The commissioners lost this battle in the United States District Court forn the District of Nebraska and the United States Court of Appeals for the Eighth Circuit. I have been fighting with SSA since January 13, 2011 and not heard from them since filing for Reconsideration. Do you have any information that can help me fight SSA, they will not respond to any of my correspondence.

  • Thank you so much for yoru response. We will try to pursue our case next month at a eharing with a ADJ.
    I will let you know what the resolution will be.
    Best regards,
    Argentina

  • Argentina –

    Unfortunately, I don’t have an answer for you, or at least the answer you’re looking for. The WEP is designed to reduce SSA payouts to folks who are receiving pensions from non-SSA sources, and that’s how the pension your mother is receiving from Romania would be classified.

    I’m sorry to hear that it has caused such an impact for your mother – the only recourse you might have is to discuss it with the SSA.

    jb

  • My monther worked for 30 years in Romania (communist country until 1989)as a Romanian citizen at the time and she immigrated in USA in 1996. Since then she worked full time and contributed to SSA. When she applied for SSA benefits, her benefits where reduced in half because of her pension from Romania. How can SSA use the windfall formula for a pension she receives from a period she was not a US citizen and not in USA?
    She is currently 71 years old and forced to work full time so she can cover her medical expenses since her monthly benefits from SSA are after the WEP was applied are only 209 (including the cost of living)
    Was the Windafll Provision correctly appplied in her case?

  • Mark –

    It sounds like you have good grounds for an appeal. I can only suggest that you have your information together (the 401k plan balance and the IRS distribution table) and go to your local SSA office and plead your case. If that doesn’t bear any fruit, you might talk it over with an attorney who specializes in SS cases to see if your argument is correct – you might even want to do that first.

    Best of luck –

    jb

  • if my pension based on earnings after 1956 on which I did not pay Social Security taxes is a 401k, how is the 50% maximum reduction calculated? I used the 401k minimum distribution calculator but the IRS is calculating the monthly distribution based on 9.5 years, not my projected life span(i started drawing at 70.5). Thanks for your help Jim!

  • WEP is actually a reduction, Larry. In other words, WEP reduces Social Security payments to folks who otherwise have government pensions in addition to Social Security. Eliminating the WEP would increase costs in the federal budget.

  • What is the total payout for WEP each year.Or, how much
    would this save the US tax payer if this was eleminated from
    the federal budget.

  • Of course, the definitive answer will come from the Social Security Administration, but from what you’ve said, David, it looks to me as if the WEP will not apply to you. If your government jobs have each had Social Security (OASDI) withholding from the pay, then presumably any “windfall” has been factored in to any pension you would receive from that governmental entity.

    I’d run this past your local SSA office to be certain, though…

    Hope this helps –

    jb

  • Right now my county job that I’ve been with for 10 years takes out SS and also pays into a state retirement system. So, the state system didn’t supersede SS, it is going along with it.

    Before this, I worked in another government job for 5 years that I believe had the same set-up, and before that I worked private sector so only had SS taken out, though I didn’t make much income during that time.

    Will the windfall provision still apply to me, and if so, how can I figure out how much?

    Regards, David

  • That’s a great question Dean, and all I can tell you is that I believe it does apply to your situation. None of the information that I’ve found on the WEP says anything about actually receiving the federal pension – just that you are eligible for it by virtue of working in that job.

    I would check with your local Social Security office or call their hotline to find out for certain.

    Best wishes –

    jb

  • Does the WEP apply if you are still working in a federal government job and you are eligible for full SS retirement ?

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