Chris Stein, CFP®
How the Windfall Elimination Provision (WEP) is Affected When Combining Retirement Benefits
A Missouri reader wonders about the Windfall Elimination Provision (WEP) if he combines non-Social Security and Social Security retirement benefits.
“Could you discuss the Windfall Elimination Provision (WEP)? My wife is employed by a school district and will have a pension through a state retirement system. I am employed by a city police department that has a pension system. We both do not contribute to Social Security. We are both 44 with 22 years of service. We plan on retiring in 6 years when we will be around 50 years of age. I plan on working another job when I am done as a police officer. I am certain to be paying into Social Security and accruing Social Security credits in my retirement job. How will the WEP affect any Social Security benefits from the retirement job?”
The Windfall Elimination Provision essentially affects people like you who have worked at a job that does not participate in Social Security. Instead, you have an alternative program, called a non-participating pension, which means the pension does not participate in Social Security.
If that’s the only job you have, you’re not going to receive Social Security at all, so it’s not a question. However, when you work another job before, during or after that does pay into Social Security, you will establish a benefit as long as you meet the requirement of 40 quarters of credits, plus all the other general rules.
But let’s assume you will work enough to generate a Social Security retirement benefit. Windfall Elimination Provision (WEP) changes the formula used to calculate your benefit. The standard formula for calculating Social Security benefits pays out a more significant proportion of low incomes than of high incomes. They do that because it is the lower-income workers who most need the financial support in retirement.
In your case, your qualifying amount, or Primary Insurance Amount (PIA), will be low not because you had a low income but because much of your earnings were outside of the Social Security system. So WEP is essentially used to adjust for that fact.
Now, the maximum WEP “offset,” as they call it, changes yearly because it’s tied to the “bend points,” which are income brackets in the algorithm used to calculate Social Security benefits. The maximum offset in 2021 is $498, which means that the WEP will reduce someone’s PIA by a maximum of $498 each month during that year.
However, unlike the Government Pension Offset (GPO), which you did not ask about, but that could completely wipe out a potential spousal, ex-spousal or survivor Social Security benefit, the WEP will never do that. If your pension benefit is low enough, it will be reduced essentially in half because the WEP offset is also capped to be no more than one-half of your non-participating pension.
My guess is that your police pension is a lot more than $1,000 a month, so you’re not going to be protected from that. But if, for example, you generate a Social Security benefit that is only $300, they’re not going to offset it by $498 to make it zero. They’re going to make it $150 because that’s how the formula works.
So, in short, WEP could hurt you if you have a Social Security benefit in addition to a pension that did not participate in Social Security, but the impact will be capped at $498. It is an annoyance. There is always talk about repealing or changing WEP in Washington, so maybe it will have happened by the time you claim your Social Security benefits. I don’t know if it will, but that’s how WEP works.