Gone With the Windfall

By Tammy Flanagan

September 1, 2006

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:

If you're still reading this, my bet is that you're affected by the WEP. And it's likely you're thinking one of the following: What It Means

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:

If Bob's Social Security benefits at his full retirement age were computed using the standard formula, his benefits (in 2006 dollars) would be $504 per month or $6,048 per year. (For full details of such computations, see this Social Security fact sheet.)

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:

Finally, one last thing. The WEP isn't the only provision affecting the Social Security benefits of CSRS retirees. Another important provision involves the Government Pension Offset. To learn more about it, see my June 9 column.

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.

By Tammy Flanagan

September 1, 2006