Pensions And Social Security, Part 2 – WEP

Continuing the topic of how a pension might affect Social Security benefits, the general rule is that your company pension will not affect your Social Security benefits because most employment is covered by Social Security.

So what pensions can affect Social Security? The main pension involved is from government employment, not covered by Social Security. Key is that this government employment was not covered by Social Security, meaning you did not pay Social Security payroll tax on those earnings, you did not earn coverage for SSA benefits and those earnings do not appear on your SSA work record.

Relatively few people are in this situation, but it is important to those that are. Any government level can be involved, not just Federal or state. Local government employment, including school districts, may or may not be covered by Social Security. 

Since their government employment was not covered by Social Security, for those involved any eligibility to a Social Security monthly benefit would have been earned either from other work that the person had on their own or through someone else’s record, such as through a spouse. The government pension not covered by Social Security affects benefits differently depending on this.

Called the Windfall Elimination Provision (WEP), today’s topic is when the SSA benefit is from the person’s own work. SSA benefits through someone else’s record will be covered later.

Enacted in the Social Security Amendments of 1983, the Windfall Elimination Provision provides a different formula for calculating SSA amounts. While not a direct offset or reduction of the government pension against the persons own Social Security benefit, the formula used results in a lower Social Security ­amount than otherwise would be received.

Why is this? Social Security benefits replace a percentage of a worker’s pre-retirement earnings. By design, lower-paid workers get a larger percentage of pre-retirement earnings than higher paid workers. Work not covered by Social Security does not appear on the person’s SSA record. This incorrectly makes the person’s average earnings appear lower, leading to a larger percentage of pre-retirement earnings paid. The Windfall Elimination Provision formula adjusts for this. 

The WEP formula takes into account how many years of work you have under Social Security covered employment. Overall, the reduction in the Social Security benefit cannot be more than one-half of the amount of the pension from work not covered by Social Security taxes.

The Windfall Elimination Provision does not affect most people. More about it is in SSA publication 05-10045 – Windfall Elimination Provision.

Use the special WEP Online Calculator if the WEP involves you. The usual website calculators, including the Retirement Estimator and your Social Security Statement, will not provide an accurate estimate when the WEP is a factor.