Gone With the Windfall
The ins and outs of one of everybody’s favorite restrictions on benefits: the windfall elimination provision.
Getting a windfall is usually a good thing. But if you think it's going to come in the form of a government benefit, don't count on it.
Specifically, when it comes to Social Security, what's known as the windfall elimination provision, or WEP, applies to many people who are qualified for Social Security retirement benefits but also have a government pension from work that wasn't covered by Social Security. That includes most employees and many retirees covered under the Civil Service Retirement System, CSRS-Offset and those who transferred to the Federal Employees Retirement System when it was created.
Of course, there are exceptions to every rule. You are exempt from the WEP if:
- You were eligible to retire before 1986.
- You were 62 years old before 1986.
- You will have more than 30 years (not credits) or more of substantial Social Security covered earnings. (To find out what's "substantial," click here.) With more than 20 years of substantial earnings, you are partially exempt.
- You were hired after 1983 and always have been covered by the Federal Employees Retirement System.
- What windfall? I earned this money!
- Why am I being singled out just because I am a government employee?
- Why don't our elected representatives change this unfair law?
- Will I be eligible for any of my Social Security benefit if I am affected by the WEP?
Let's start with exactly what the WEP is. Social Security benefits are computed to provide a larger replacement of pre-retirement income for people who have had low wages during their career. The theory is that high wage earners can save more for retirement and low wage earners may not have enough left over for saving after paying for basic food and housing needs. In this way, Social Security is a form of social insurance.
Many federal retirees who have not paid Social Security taxes during their federal career appear for benefits computation purposes to have had a career of low wages. This is because the wages used to determine Social Security benefits may consist of a few years of entry-level employment prior to a federal career or post-retirement work at relatively low wages. Under Social Security formulas, the level of benefits based on these wages could be very generous.
Take the case of Bob, who had the following Social Security-covered earnings in his career:
- 1973: Fast food restaurant in high school ($1,645)
- 1974: Temporary appointment with a federal agency, covered by FICA, not CSRS ($3,192)
- 1975: Another temporary federal appointment covered by FICA, not CSRS ($2,965)
- 1976-77: Army service, covered by FICA ($10,117)
- 1978-2005: Work as a federal employee, under CSRS, exempt from FICA taxes ($0)
- 2006-2012: Part-time job as a tour guide after CSRS retirement at $20,000 per year ($140,000)
To give you an idea how generous this is, Bob would only receive $4,050 per year if these same 12 years of wages were computed using the CSRS retirement benefit formula.
If the WEP formula is used to compute Bob's Social Security benefit, his benefits are reduced to $201 per month or $2,412 per year. This is close to what he would have received if he had spent those 12 years covered under FERS. Crossing the Threshold
Suppose you had a more substantial second career outside government than Bob's. Then you would benefit from having a higher total average wage as well as getting past the threshold of the Social Security formula where the WEP is applied. Under the 2006 Social Security formula, the maximum reduction to retirement benefits because of the WEP is $328 per month.
For example, suppose Judy spent 20 years of her career in the military (covered by Social Security) and also is receiving a military retirement. After leaving the military, Judy spent the next 25 years working as a federal employee (covered by CSRS, and exempt from Social Security). Even though she doesn't have enough substantial wages to be exempt from the WEP, she will not lose more than $328 a month from her benefit. So, if Social Security computes her benefit to be $950 per month, after the WEP is applied, she will be entitled to $622 a month. For more info, see this Social Security fact sheet on the WEP.
Stamping It Out
It seems like ever since the windfall elimination provision was enacted more than 20 years ago, people have been fighting to change or eliminate it. One group that has been diligently active is the National Active and Retired Federal Employees Association. Here are the latest legislative efforts to overhaul the provision:
A bill to amend Title II of the Social Security Act to repeal the windfall elimination provision and protect the retirement of public servants.
To amend Title II of the Social Security Act to repeal the government pension offset and windfall elimination provisions.
To amend Title II of the Social Security Act to restrict the application of the windfall elimination provision to individuals whose combined monthly income from benefits under such title and other monthly periodic payments exceeds a minimum COLA-adjusted amount of $2,500 and to provide for a graduated implementation of such provision on amounts above such minimum amount.
Tammy Flanagan is the senior benefits director for the National Institute of Transition Planning Inc., which conducts federal retirement planning workshops and seminars. She has spent 25 years helping federal employees take charge of their retirement by understanding their benefits.