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April 30, 2014 | by Jim Saulnier, CFP®
You May Weep Because of WEP

When you're done reading, be sure to listen to our audio blog below!

Little known to most people, a number of American workers don’t pay into the Social Security system.  Instead, these workers, who are mostly employed by government entities and agencies, pay in to a government pension plan. Upon their retirement they will receive pension benefits paid by the employing government and not retirement benefits paid from the Social Security program.

Low Income Earners?

However, these workers oftentimes amass retirement benefits under Social Security as well by working a second job in the private industry that does pay into the Social Security program.  These secondary careers offer wages that pale in comparison to the higher wages earned and paid into their government pension plans. This disconnect creates a unique situation for these workers when they retire.  On paper they look like low income earners because their years of government service were never subjected to Social Security taxation or reported to the Social Security Administration (SSA).  However, the economic reality of the situation is these workers receive a very generous government pension benefit.

Many readers may be saying so what’s the big deal Jim, they did okay for themselves! Well yes, I agree, they did. Unfortunately a group of men and women known collectively as “Congress” didn’t look as favorably on this situation and in 1983 they passed legislation known as the Windfall Elimination Provision (WEP) to limit the amount of Social Security retirement benefits these government workers were entitled to. To understand why Congress did this, one must first understand Social Security’s primary intent.  At its core, Social Security retirement benefits were designed to replace a greater percentage of a lower wage earner’s salary and a lesser amount of a middle class or higher earner’s salary.

Substantial Earnings

Under WEP, Congress created a new category of wages called “substantial earnings” and a new set of rules that apply only to government workers eligible for pension benefits based on wages that were not subject Social Security taxes.   If that worker amassed 30 years or more of “substantial earnings” WEP would not apply. However, if a pension eligible government worker fails to amass 30 or more years of “substantial earnings” in the private sector then any Social Security benefits they may be eligible to receive will be reduced by WEP.  Spousal and family benefits can also be reduced by WEP but not survivor benefits. (To see what the SSA considers “substantial earnings”, please see our table in the Resources section of this blog.)

There is much more to WEP and how it works, for a more detailed explanation please use the play button below to listen to our audio blog.

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