How WEP Effects Benefits
July 12, 2019 | by Chris Stein, CFP®, Finance Instructor at Colorado State University
How WEP Effects Benefits

I recently received an interesting question regarding how WEP effects Benefits:

“Twelve years ago, at age 50, I became a State of Ohio employee and have not paid into Social Security since then. Before that, I had 27 years of substantial earnings through 2007. Since I turn 62 in 2019, if I went back into employment covered by Social Security, could I pick up three more years of ‘substantial earnings’ to lower the effect of the WEP on my Social Security benefit? Your recent podcast on the PIA calculation led me to believe the answer to the question is ‘no’.”

Some WEP Basics

For context, certain employers (mostly government) can opt out of the Social Security system as long as they replace it with an approved alternative retirement plan as a non-Social Security pension. However, those same employees can also accumulate Social Security retirement benefits by participating in another job where they pay into Social Security.

Having retirement benefits coming from the two systems can trigger the Windfall Elimination Provision (WEP). Here’s why: when Social Security calculates retirement benefits, the formula is weighted to help lower wage earners more than higher wage earners. Someone who did not work their entire career within the Social Security system will benefit by appearing to have been a lower wage earner but will be receiving another pension from elsewhere.

WEP is a reduction designed to keep you from receiving benefits higher than you deserve. In 2019, the WEP reduction is $463 per month, even if you work just one day in a non-Social Security job. However, if your Social Security benefits are low, you are somewhat protected by the promise not to reduce those benefits by more than half of the pension you are receiving from your non-Social Security job.

‘Credits’ for Social Security Earnings

How WEP effects benefits is The WEP offset can also be reduced through credits for the number of years of ‘substantial earnings’ you have in the Social Security system. (In 2019, substantial earnings are defined as $24,675, a number that adjusts with inflation.)

If you have less than 20 years of credits, you will be fully impacted by WEP’s $463 per month in 2019. However, WEP phases out by equal amounts per year between 20 and 30 years. And at 30 or more years of credits, WEP goes away completely, even if you do have one of the non-covered pensions.

Fortunately, Social Security does not ignore your earnings after it defines the basis for your benefits at age 62, or your PIA. It reassesses the situation each January to make any appropriate adjustments. So, if you do not have 30 years of such credits at 62, but you work and earn substantial earnings in a Social Security environment, you can still bring yourself to 30 years, where WEP is entirely eliminated.

How This Applies to Benefits

Besides your State of Ohio employment, you also accumulated Social Security retirement benefits by participating in another job where you paid into Social Security for 27 years. Those years put you well on your way to avoiding WEP. In fact, the remaining monthly WEP offset is just $138.90.

Depending on your other circumstances, $138.90 per month may be important to you. If so, and if you can find a job that pays the substantial earnings minimum ($24,675 or more in 2019, with future increases for inflation), yes, you can still get to that magical 30-year mark. Then you will not be affected by WEP in any way, despite the Ohio State pension.

Just be sure to check how much time you are going to spend, if it is a job you want to do and if it is really going to make that much of a difference.

The other podcast (on PIA calculation) may have led you to believe your situation was determined permanently at age 62, with no chance to change the WEP offset. Now you know the calculation is adjusted annually to reflect additional earnings, and you can completely eliminate the WEP offset.

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