Social Security and Windfall Elimination

[Gumby]

I think the justification for the WEP is that if your social security paying job was only a minor part of your overall life income, when it comes time to collect, if there were no WEP, you would get treated as if you really were a low paid worker below the bend points and hence would get a higher return on your social security taxes paid in your second job. And that would defeat the progressive nature of the social security system. The WEP remedies that by gradually lowering the 90% bend point to 40%, so that you are treated as the more highly compensated worker that you really were. To that extent, I do not think it is unfair.

 

[Fermion]

I think the justification for the WEP is that if your social security paying job was only a minor part of your overall life income, when it comes time to collect, if there were no WEP, you would get treated as if you really were a low paid worker below the bend points and hence would get a higher return on your social security taxes paid in your second job. And that would defeat the progressive nature of the social security system. The WEP remedies that by gradually lowering the 90% bend point to 40%, so that you are treated as the more highly compensated worker that you really were. To that extent, I do not think it is unfair.

Thanks for that explanation. I ran some numbers on the social security website and see what you are talking about. If I put in just 15 years of reasonably high earnings into the site and then zeros for all other working years, I get an amazingly huge payout. It really is the bend points that are "unfair" if you think of the system as a "you get out what you paid in" but that isn't the way social security is designed.

I guess it is just one of those seemingly unfair tax things, like Prop 13, states that tax 401k but not pensions, spousal benefits, etc.

The best you can do is work the rules the best you can for your situation.

 

[RetiredHappy]

I think the justification for the WEP is that if your social security paying job was only a minor part of your overall life income, when it comes time to collect, if there were no WEP, you would get treated as if you really were a low paid worker below the bend points and hence would get a higher return on your social security taxes paid in your second job. And that would defeat the progressive nature of the social security system. The WEP remedies that by gradually lowering the 90% bend point to 40%, so that you are treated as the more highly compensated worker that you really were. To that extent, I do not think it is unfair.

+1. Well said!

 

[Chuckanut]

Are there any jobs which didn't pay into social security AND didn't have a pension though?

The pension is part of the social security, I think is the reasoning. This logic does fail somewhat if there are/were indeed jobs out there where you worked and didn't pay social security and were not offered a pension.

WEP does not apply if you don’t work for an employer who offers you a pension.

https://www.ssa.gov/policy/docs/program-explainers/windfall-elimination-provision.html

BACKGROUND: The Windfall Elimination Provision (WEP) is a formula used to adjust Social Security worker benefits for people who receive “non-covered pensions” and qualify for Social Security benefits based on other Social Security–covered earnings.  A non-covered pension is a pension paid by an employer that does not withhold Social Security taxes from your salary, typically, state and local governments or non-U.S. employers.

 

[Chuckanut]

WEP is like paying for a hamburger at McD's like the person before you and they serve you only 3/4 of it.
If you paid into it, you should get the full amount for the years you paid into it.

Example:
Joe and I work at a job for 20 year paying into SS , both at the same wage.
Joe goes to prison for 20 more years and doesn't pay into SS while in prison.
I travel to China and take an Job teaching English and don't pay into SS, but earn a pension of $600 in the 20 years I work there.
Joe and I both retire and collect SS
Joe gets his full 20 years of SS that he paid into.
I get my SS Wep'd and they take away $300 of SS.

I paid the same to SS as Joe, and just because I got some other Pension the Dear SS decides to cut my SS.

It simply is wrong as I paid into SS the same as Joe.

This affects me vs Joe even if we both worked and paid into SS while earning $15 per hour. Yes they will WEP a person's SS even if it's a meager amount.

The scenario does not take into account the bend points.

https://www.ssa.gov/policy/docs/program-explainers/windfall-elimination-provision.html

Congress passed the WEP to prevent workers who receive non-covered pensions from receiving higher Social Security benefits as if they were long-time, low-wage earners.  In 2020, the WEP applied to 3.0 percent of all beneficiaries (1.95 million beneficiaries out of 64.85 million total beneficiaries).

 

[Chuckanut]

I think the justification for the WEP is that if your social security paying job was only a minor part of your overall life income, when it comes time to collect, if there were no WEP, you would get treated as if you really were a low paid worker below the bend points and hence would get a higher return on your social security taxes paid in your second job. And that would defeat the progressive nature of the social security system. The WEP remedies that by gradually lowering the 90% bend point to 40%, so that you are treated as the more highly compensated worker that you really were. To that extent, I do not think it is unfair.

+1.

The critics of WEP often leave out the bend points that are used to make it more progressive. As Mr. Margenau says “It’s the social part of Social Security”.

 

[Sunset]

I think the justification for the WEP is that if your social security paying job was only a minor part of your overall life income, when it comes time to collect, if there were no WEP, you would get treated as if you really were a low paid worker below the bend points and hence would get a higher return on your social security taxes paid in your second job. And that would defeat the progressive nature of the social security system. The WEP remedies that by gradually lowering the 90% bend point to 40%, so that you are treated as the more highly compensated worker that you really were. To that extent, I do not think it is unfair.

Thanks for that explanation. I ran some numbers on the social security website and see what you are talking about. If I put in just 15 years of reasonably high earnings into the site and then zeros for all other working years, I get an amazingly huge payout. It really is the bend points that are "unfair" if you think of the system as a "you get out what you paid in" but that isn't the way social security is designed.

I guess it is just one of those seemingly unfair tax things, like Prop 13, states that tax 401k but not pensions, spousal benefits, etc.

The best you can do is work the rules the best you can for your situation.

Social Security certainly has a Social income redistribution effect in it's design.

A person that works 20 years or less at a high income (without another job or pension) does not get WEP'd. So they get the high SS, relative to a low wage person.

There are in the scheme of things many things that seem pretty unfair, and a person is best served by doing whatever they can to minimize the bad effects.

For Future Readers:
As a person affected by WEP, which I only learned about on this site, I claimed my "other" pension early at a reduced payout as then I get some $$ out of it while not claiming SS until age 70. It pays for our groceries.

Once I claim SS, my SS will be cut by 50% of my "other pension". This cut meant there is no benefit to waiting for my "other pension" to grow as it just means a larger cut.

A side benefit to WEP for the Social Security system, is that since it reduces the payout of SS, it extends the lifetime of SS. Meaning if we encouraged middle aged educated folks from other Countries to come to USA and work, SS would be improved as they would get a smaller share or even nothing.

 

[Gumby]

Social Security certainly has a Social income redistribution effect in it's design.

A person that works 20 years or less at a high income (without another job or pension) does not get WEP'd. So they get the high SS, relative to a low wage person.

There are in the scheme of things many things that seem pretty unfair, and a person is best served by doing whatever they can to minimize the bad effects.

For Future Readers:
As a person affected by WEP, which I only learned about on this site, I claimed my "other" pension early at a reduced payout as then I get some $$ out of it while not claiming SS until age 70. It pays for our groceries.

Once I claim SS, my SS will be cut by 50% of my "other pension". This cut meant there is no benefit to waiting for my "other pension" to grow as it just means a larger cut.

A side benefit to WEP for the Social Security system, is that since it reduces the payout of SS, it extends the lifetime of SS. Meaning if we encouraged middle aged educated folks from other Countries to come to USA and work, SS would be improved as they would get a smaller share or even nothing.

A) WEP cannot eliminate your social security entirely. At most, it can only reduce it by 50% of the amount under the first bend point (so, in 2024, by 50% of $1174 = $587 per month).

B) I think your bolded assertion is also incorrect. People who make a higher income absolutely, in all cases, get a lower return on their social security taxes than a low income worker who worked for the same length of time. That is true whether you work 10 years or 35 years. That's what the bend points do. I'm happy to explain further if you don't understand the calculation, but that is the result - always.

 

[Sunset]

The scenario does not take into account the bend points.

...

Congress passed the WEP to prevent workers who receive non-covered pensions from receiving higher Social Security benefits as if they were long-time, low-wage earners. b In 2020, the WEP applied to 3.0 percent of all beneficiaries (1.95 million beneficiaries out of 64.85 million total beneficiaries).

Well Congress failed, because like many rules it works by blindly applying to all that fall into the range of the club.

Low wage worker in Canada earning $10 per hour works 15 years. Then moves to the USA and becomes a Citizen and works in a restaurant as cook making $20 per hour for 20 years..

This low wage worker will be WEP'd and have their SS reduced ..

 

[Sunset]

WEP cannot eliminate your social security entirely. At most, it can only reduce it by 50% of the amount under the first bend point (so, in 2024, by 50% of $1174 = $587 per month).

https://www.ssa.gov/policy/docs/program-explainers/windfall-elimination-provision.html

I read it as they scale the first bend point to 40% (from 90%) so more than 50%

There is a "safety" factor fudge of:
"However, the difference between the regular PIA and the WEP PIA cannot exceed one-half of the monthly non-covered pension. This provision is known as the WEP guarantee and results in a smaller WEP reduction to the Social Security benefit than otherwise would have applied.


For some folks (not me) if a non-covered pension is high and a person only worked for a short time in SS covered job, then their SS is totally eliminated.

 

[Fermion]

Well Congress failed, because like many rules it works by blindly applying to all that fall into the range of the club.

Low wage worker in Canada earning $10 per hour works 15 years. Then moves to the USA and becomes a Citizen and works in a restaurant as cook making $20 per hour for 20 years..

This low wage worker will be WEP'd and have their SS reduced ..

Why would they have their SS reduced if they get nothing from Canada?

 

[Sunset]

Why would they have their SS reduced if they get nothing from Canada?

Because they would qualify for a CPP (Canada Pension Plan), it would be very low but exist, I would guess in the amount of $200.

So they "qualify" for being WEP'd.

 

[Gumby]

For ordinary people, the average indexed monthly earnings (AIME) is used to calculate the Primary Insurance Amount (PIA) for your social security benefit. The calculation is as follows

90% of the first $1174
+ 32% of the amount between $1174 and $7708
+ 10% of the amount over $7708

If you retire at your full retirement age, that's what you get.

So, you can see that lower earning people, who have a lower AIME, always recover a greater percentage relative to the social security contributions they paid in, since everyone pays the same percentage in.

The WEP:

If a person has a pension from a non-social security job, the PIA is changed by modifying the percentage recovery below the first bend point ($1174) depending on how many years of "substantial earnings" you had at a job where you did pay social security. If you had less than 20 years of substantial earnings, the percentage for the first of the above brackets is 40%. Each year of substantial earnings above 20 yrs, increases that percentage by 5% until it gets to 90% like everyone else.

So, if I worked in a different profession and paid into SS for 20 years, and then I went into teaching (here in CT where teachers don't pay social security), my PIA would be

40% of the AIME under $1174
+32% of the amount between $1174 and $7708
+ 10% of the amount over $7708.

That's the worst case. A reduction of 50% of the amount under $1174 or $587. There is also a "WEP guarantee" - they won't decrease your PIA by more than 1/2 of your non-social security pension. BUT, it is crucial to note that this reduction is the lesser of these two limits. So, if my non-SS pension pays me $1000 per month, my PIA is only reduced by $500 per month. If my non SS pension pays $800 per month, the reduction is only $400 month. But if my non-SS pension pays me $2000 per month, the maximum reduction is still only $587 per month (50% of the amount under $1174) NOT $1000 per month.

So, as you can see, WEP can never eliminate your social security benefit entirely.

References:
https://www.ssa.gov/policy/docs/pro...between the,than otherwise would have applied.
https://www.ssa.gov/pubs/EN-05-10045.pdf

 

[Sunset]

.......

So, as you can see, WEP can never eliminate your social security benefit entirely.

References:
https://www.ssa.gov/policy/docs/pro...between the,than otherwise would have applied.
https://www.ssa.gov/pubs/EN-05-10045.pdf

Thanks....

I now see what you are saying, it cannot fully eliminate the SS payment completely.

 

[Tadpole]

This short pdf has a good explanation for having a WEP type reduction of SS for workers with non-SS contributing years. Peter Diamond and Peter Orszag authored this brief article about WEP and suggested modernization of the determination of fair treatment which would require non-SS paying jobs report the income of their employees not paying into the system. That would provide the data to level the playing field for those affected.
Reforming the GPO and WEP
In Social Security
By Peter A. Diamond and Peter R. Orszag

 

[Irishgirlyc58]

I think the justification for the WEP is that if your social security paying job was only a minor part of your overall life income,

That's a big "if" and the WEP reduction is based on the year you were born and then can be reduced by 5% for each year after 20 years of substantial earnings working in an SS participation organization.
Once you reach the substantial earnings point the other amount doesn't increase the reduction-for that year over the 20 year mark.

I have no problem with SS skewing to help those with less income but my strong cynical side tells me this is just the political talking points and there were other more nefarious reasons it was implemented.
If we were really concerned about benefits for the less well off why is there an income limit to the FICA tax? I found out about this when I changed jobs and started paying into SS. I thought payroll had made a mistake on my check! It's another rule that makes no sense to me.

 

[Fermion]

Because they would qualify for a CPP (Canada Pension Plan), it would be very low but exist, I would guess in the amount of $200.

So they "qualify" for being WEP'd.

So they would get $200 from Canada and get $200 knocked off their SS check? Net result they have the same income in retirement as a person who worked in the USA at a similar job?

 

[Gumby]

So they would get $200 from Canada and get $200 knocked off their SS check? Net result they have the same income in retirement as a person who worked in the USA at a similar job?

No, they would get, at most, $100 knocked off their PIA. (if they took SS at 62, that would be a $70 cut of their actual SS check).

That's a big "if" and the WEP reduction is based on the year you were born and then can be reduced by 5% for each year after 20 years of substantial earnings working in an SS participation organization.
Once you reach the substantial earnings point the other amount doesn't increase the reduction-for that year over the 20 year mark.

I have no problem with SS skewing to help those with less income but my strong cynical side tells me this is just the political talking points and there were other more nefarious reasons it was implemented.
If we were really concerned about benefits for the less well off why is there an income limit to the FICA tax? I found out about this when I changed jobs and started paying into SS. I thought payroll had made a mistake on my check! It's another rule that makes no sense to me.

I will not speculate on the reasons why the law was passed, but I do know how it works. More highly paid people get less, as a percentage of contributions, than those who are paid less. I don't know why there is an upper income limit on FICA contributions. Presumably, it was felt that taking $62,000 per year from a guy making $1 million per year (the 6.2% tax) and paying him $168,312 per year in social security (the annual PIA on that AIME) would not be politically palatable, but I don't know for sure.

 

[NXR7]

My wife had 17 years in SS and also gets a governmental disability pension from her work as a firefighter. A year ago she began collecting SS and it was cut to $310 a month due to WEP when it would have been over $700 without WEP.

As for "unfair", well, I collect income from two pension plans and two 401(k)'s without any reduction. I earned all of it so why can she not collect her full SS for her 17 years? (rhetorical question). Her SS was not a "windfall" because she earned it. She barely made the years for a firefighter pension due to an on-the-job injury.

 

[Sunset]

So they would get $200 from Canada and get $200 knocked off their SS check? Net result they have the same income in retirement as a person who worked in the USA at a similar job?

Except the person worked for the same time and income in the USA + Worked in Canada.

So SS would reduced their SS by $100.

Had the person not worked extra years in Canada , they would get full SS.

 

[Sunset]

My wife had 17 years in SS and also gets a governmental disability pension from her work as a firefighter. A year ago she began collecting SS and it was cut to $310 a month due to WEP when it would have been over $700 without WEP.

As for "unfair", well, I collect income from two pension plans and two 401(k)'s without any reduction. I earned all of it so why can she not collect her full SS for her 17 years? (rhetorical question). Her SS was not a "windfall" because she earned it. She barely made the years for a firefighter pension due to an on-the-job injury.

Ouch.... So they cut her SS by over 55%

 

[Sunset]

.....

I will not speculate on the reasons why the law was passed, but I do know how it works. More highly paid people get less, as a percentage of contributions, than those who are paid less. I don't know why there is an upper income limit on FICA contributions. Presumably, it was felt that taking $62,000 per year from a guy making $1 million per year (the 6.2% tax) and paying him $168,312 per year in social security (the annual PIA on that AIME) would not be politically palatable, but I don't know for sure.

Not sure why they didn't remove the FICA limit and just continue to have the maximum SS limit remain.

Let the Rich guy pay for SS that he won't collect seems to me, no worse than letting other people pay into SS and not let them collect the full amount because they also worked somewhere unrelated.

 

[CRLLS]

Let's not forget that over a person's working life from age 20 to 67, he/she pays into SS for 12 years that they get no benefit from. SS is based on the adjusted average of their highest 35 years, not the full 47 that they worked and paid into the system. SS was never meant to be a flat dollar for dollar system. WEP and GPO are fair to those people IMO.

 

[Chuckanut]

Not sure why they didn't remove the FICA limit and just continue to have the maximum SS limit remain.

Let the Rich guy pay for SS that he won't collect seems to me, no worse than letting other people pay into SS and not let them collect the full amount because they also worked somewhere unrelated.

I suspect because that makes SS look a lot like most welfare programs.

The idea behind it is most of us pay into it, and then get payments from it. It’s supposed to look more like a pension typical pension plan. Besides the break points already provide a way to funnel SS dollars from the wealthier participants to the lower income participants.

What they should do is raise the income level to tax SS and index it to inflation. All things being equal, It is scooping in more lower income people every year.

 

[ChrisC]

My wife had 17 years in SS and also gets a governmental disability pension from her work as a firefighter. A year ago she began collecting SS and it was cut to $310 a month due to WEP when it would have been over $700 without WEP.

As for "unfair", well, I collect income from two pension plans and two 401(k)'s without any reduction. I earned all of it so why can she not collect her full SS for her 17 years? (rhetorical question). Her SS was not a "windfall" because she earned it. She barely made the years for a firefighter pension due to an on-the-job injury.

I'm ok with WEP. My WEP reduced payment is $350 per month, and I crawled over 10 years in SS credits. And my wife got half of my WEP reduced payment when she was able to file a restrictive application and spousal benefits on my account, when previously allowed several years ago under the old rules. When she reached 70, a few years ago, she received her own SS benefits on her PIA -- and I couldn't receive any spousal benefits on her account because of GPO -- that was fair to me.

I collect an oversized pension from the Federal government (with a 10% reduction for spousal annuity coverage) and 401K, TSP and Roth IRA -- without any reductions. And wife has SS and a Roth IRA without any reductions. We feel blessed to have all this going for us.

I don't feel I'm deserving to be treated as a low income wage earner for SS purposes and WEP strikes the right balance for me.