Chris Stein, CFP®
Proposed Changes to the Windfall Elimination Provision (WEP)
A few proposals for changes to Social Security seem to be gaining momentum. One of these is to change the Windfall Elimination Provision (WEP), which affects people who have worked both in jobs participating in Social Security and in jobs outside of SS, like a government job that has a pension substitute to SS. There have even been calls for elimination of the WEP, but today I am going to focus on a proposed change that is getting a fair amount of attention. First of all, if you are unfamiliar with WEP you should review our primer on WEP.
2016 Maximum WEP SS Reduction
Updated for 2016, the maximum SS reduction for WEP is $428, or 50% of your non-covered (government) pension amount. Since your current SS payment is only based on your years working inside the SS system, your SS benefit is reduced since the years working in the government job do not count. Additionally, WEP can reduce this already lower amount by up to $428 per month. The post I reference above describes the rationale behind this provision.
How WEP Works
To keep things simple, let’s assume we have a person who made the equivalent of $50,000 per year every year for their entire working life. However, half of their 35 year career was in the private sector paying into Social Security, and half was teaching in the public sector outside the Social Security system. Under current rules their PIA would be $1,163 per month using the 17.5 years they contributed to SS for their earnings record. They would then have a reduction of $428 per month due to WEP for a net total benefit from SS of $735. This would be in addition to the pension they earned working as a teacher.
The proposal I want to discuss today is one where instead of WEP a person’s SS benefit will be calculated proportionally based on how much of their career was inside the SS system, versus outside. While the exact details of the change are not yet fully clear, let me describe the change in an example using the information as it is known today. Under the proposed change, the $428 reduction would be eliminated and instead replaced with the following method. First, the worker’s PIA would be calculated based on their ENTIRE working career, even though for half of it they did not pay into SS. This would mean that their PIA would be based on all 35 years of earnings instead of 17.5. Their new PIA would be $1,830, but then would be reduced proportionally by how much of their career was actually spent inside the SS system. In this case 50%, so their benefit would be 50% of $1,830, or $915 per month. Of course these numbers will change a lot depending on how much time/earnings were inside/outside the SS system, but the flat $428 penalty will now go away. In the proposed case the worker will get “credit” for all earnings on their SS earnings record, even for years they were not contributing to SS, but their adjustment or offset would be proportional as described. As with most changes like this, some people will come out ahead and others will lose. The proponents of this change are mostly claiming their method is more fair. Whether or not you agree will probably depend on if you are one of the winners or losers.
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