Chris Stein, CFP®
Additional Side Effects of WEP
We have spoken several times about the Windfall Elimination Provision (WEP) of Social Security. Regular visitors to the blog will understand how it affects the monthly benefit owed by Social Security to people who also participated in a non-covered pension at work. Non-covered pensions are those that are legally allowed to take the place of Social Security so participants do not pay into the Social Security system. These are almost solely the realm of public sector (government) employers. For those affected, the WEP changes the PIA calculation, which changes the worker’s retirement benefit amount. This revised formula can have the effect in 2015 of reducing the worker’s PIA by as much as $413 per month.
The less known side effect is that since the WEP changes the worker’s PIA, it also changes any auxiliary benefits that are based on their PIA. This will include spousal benefits owed to the worker’s spouse as well as any other dependents owed a benefit based on the worker’s PIA.
For example, let’s assume a worker retiring at age 66 in 2015 has generated an unadjusted PIA of $1413 per month so if they were not subject to WEP they would be owed a retirement benefit of $1413 per month at their full retirement age, and their spouse would be owed $707 per month (rounded) at their full retirement age, simply based on the worker’s record. Now let’s assume the worker participated in a non-covered pension for a number of years when they worked as a teacher in their second career and earned a $1,000 per month pension from that job. The worker would now be subject to the full WEP reduction in their Social Security benefit of $413 per month. In addition, their spouse would also be affected since their benefit is based on the worker’s PIA. Now with a PIA of $1000 instead of $413, the spouse would receive only $500 per month rather than $707.
This shows how WEP can be even more negatively impactful on a family’s monthly benefit than many people understand. In this case the couple gained $1,000 per month in a teacher’s pension benefit, but lost $620 per month ($413 from worker and $207 from spouse) in Social Security benefits. This is a simplified example and the numbers will not work this way in every instance, but a situation where there is one main bread-winner and a spouse with none of their own benefit is actually quite common. This type of example should show why there are efforts in Congress, like H.R.711 – Equal Treatment of Public Servants Act of 2015, to change or abolish the WEP rule. WEP was intended to level the playing field, but for many people it appears to be unjustly punitive. One piece of “good news”, if you die the effects of WEP go away as WEP does not apply to survivor benefits. Glass half full…?
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