Will my Social Security Benefits be Reduced?

I would like to know more about the Social Security Windfall Elimination Provision. Can you explain how it is calculated? - D.B., Monterey

March 9, 2012 - Answered by Al

Al's Answer:

The Social Security Windfall Elimination Provision (WEP) is just one example of how financial planning for a public sector worker can differ from his or her private sector counterpart.
The WEP effectively reduces your Social Security benefits if you worked for an employer who didn’t withhold Social Security taxes, such as some state and local government systems, and you receive a pension based on that work.
It’s critical to understand and plan for the WEP if you’re impacted by it. Otherwise you may overestimate your retirement income and be in for a nasty surprise. And that can be easy to do because your Social Security Statement, which is mailed to you annually, does not reflect any WEP reductions.
How exactly does the WEP reduce benefits? By modifying the formula used to figure your Social Security benefit amount. Your Average Indexed Monthly Earnings (or AIME in Social Security speak) is used to calculate your benefit amount. AIME is the monthly average of your 35 highest years of earnings on which you paid Social Security taxes indexed for inflation. Benefits are accrued at three percentage levels — 90 percent, 32 percent and 15 percent — in order to provide a disproportionately higher benefit to lower income workers. For 2010, the total monthly benefit is the sum of three amounts:
  • 90 percent of the first $761 of AIME, plus
  • 32 percent of any AIME from $762 to $4,586, plus
  • 15 percent of any AIME above $4,586.
Under the WEP, the 90 percent multiplier is reduced to as low as 40 percent (the 32 percent and 15 percent benefit percentages are not impacted).
For example, the table below compares how your monthly Social Security benefit would be calculated, assuming you had accumulated $2,000 in AIME, if you are not subject to the WEP versus if you are subject to it. If you are, your monthly benefit could be reduced by as much as $381 per month, from $1,081 to $700.  
AIME Social Security Benefit without WEP Social Security Benefit Reduced by WEP
Up to $761 $685 (90% of $761) $304 (40% of $761)
$762 - $4,586 + $396 (32% of $1,239*) + $396 (32% of $1,239*)
$4,586+ n/a n/a
Mthly. Soc. Sec. Benefit = $1,081 = $700
Because the 32 percent and 15 percent multipliers are not impacted by WEP, $381 is actually the maximum possible WEP reduction ($380.50, which is 50 percent of $761, to be exact).
There are exceptions to the above calculations which can lessen the impact of WEP. For example:
  • The WEP provision is reduced or even eliminated depending on the amount of any “substantial earnings” you received that were covered by Social Security.
  • The WEP reduction cannot be more than one-half of the amount of your pension that is based on earnings on which you do not pay Social Security taxes. So if you get a relatively low pension, WEP may not affect you.
The best WEP resources are on the Web site of the Social Security Administration (SSA). In particular, check out:
Since the WEP was introduced in 1983, there have been multiple bills introduced in Congress to repeal or alter it but none have passed. And given current budget deficit concerns, the chance of one passing may be slimmer than in previous years.
As always, you should speak with a qualified financial and/or tax professional before making any major decisions that could affect your current or future finances.
Note: There’s another way Social Security benefits can be reduced, too. The “government pension offset” applies to spouses or widow(er)s who receive a government pension and are eligible for Social Security benefits.

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