By Scott Whyte, AAMS®, Financial Advisor, Bloom Asset Management

Scott JpegWhen I hold a seminar on Social Security, I try to cover topics that would impact a broad audience.  That’s why I generally don’t spend time discussing the Windfall Elimination Provision because it is primarily a consideration for those who have worked in a federal, state or local government agency, a nonprofit organization or in another country.. However, a blog seems like an excellent way to touch on this topic.

The Windfall Elimination Provision (WEP) is a federal law that affects how your retirement or disability benefit will be calculated if you receive a pension from work where Social Security taxes were NOT taken out of your pay.  You will be affected primarily if you earned a pension in any job where you did not pay Social Security taxes AND you also worked in other jobs long enough to quality for a Social Security retirement or disability benefit.  The idea is to not allow workers to double dip and receive both a government pension and Social Security benefits unless they have a high number of years of work where Social Security taxes were being paid into the system just like other non-governmental workers.

The Windfall Elimination Provision may apply if:

  • You reached age 62 after 1985; 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.

If you have paid Social Security tax on 30 years of “substantial earnings” you are not affected by the Windfall Elimination Provision. The definition of substantial earnings has varied and increases every year, however, that number for 2014 was $21,750.  Essentially what the government is saying is that if you’ve paid enough Social Security taxes over the years while also earning a government pension, then you are allowed to receive both benefits non-reduced.  If you have fewer than 30 years of substantial earnings where you were paying Social Security tax, then you use the chart below to calculate how much your Social Security benefit would be reduced.

What you do is look at the Eligibility Year (ELY) column to find the year you reach age 62 or became disabled.  Then go to the column that shows the number of years you paid Social Security tax on substantial earnings.  The amount shown in the table is the maximum your benefit can be reduced in your Eligibility Year because of WEP.

It is important to note that if your retirement benefit starts after full retirement age, or your non-covered pension starts later than your eligibility year, the WEP reduction may be greater than the maximum shown in the chart.  When in doubt, you should loop in with your local Social Security office to determine the appropriate reduction amount.

As an example, let’s assume that you had 20 years of substantial earnings and you turned 62 in 2014.  WEP would reduce your monthly benefit by $408 per month. Keep in mind that your full retirement age is 66.  If your full retirement age benefit were $1,408, your Eligibility Year benefit after the WEP reduction would be $1,000.  However, if you started drawing Social Security at age 62 (early), then your monthly benefit is reduced to 75% of your Full Retirement Benefit because you took it early.  Your age 62 benefit would be $750 ($1,000 x 75%) per month.  If your full retirement benefit had not been reduced by WEP, your age 62 retirement benefit would have been $1,056.  Early retirement decreased the reduction for WEP from $408 ($1,408-$1,000) to $306 ($1,056-$750).  The inverse occurs when you delay taking Social Security benefits past full retirement age.  In other words, delaying Social Security benefits after your full retirement age (generally 66) increases the reduction for WEP.

As with anything related to Social Security, there are always exceptions:

The Windfall Elimination Provision does not apply if:

•             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;

•             The only work you did where you did not pay Social Security taxes on was before 1957; or

•             You have 30 or more years of substantial earnings under Social Security.

If you need more clarification regarding WEP, email me at scott@bloomassetmanagement.com.

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