The Windfall Elimination Provision (WEP) has been around since the Regan Administration, but most people never learn about this provision until it is too late. The WEP is a provision in the Social Security law that serves to prevent retirees from getting a “windfall” of money from the federal government. I’ll get back to the term windfall in a moment. But first… how does this provision work?
The formula used to calculate a person’s social security benefit is based of several factors, but I’ll try to use a simplified scenario. If a person paid social security taxes for 25 years, then he may be eligible for 90% of his average monthly earning. However, if that person is subject to the WEP, he’d only be eligible for 40% of his benefits.
Who is Usually Affected by This Provision?
Generally, people who have made career changes will be affected… if that change involves moving from a social security covered position to a non social security covered position.
For example a teacher … public school teachers in many states contribute to a state or local government retirement system and are exempt from paying social security taxes. But if after 20 years (which is long enough to be eligible for the state or local government retirement benefit), our teacher may decide that he wants a career change.
He moves on to a position which is covered Social Security. If he stays in that position for about 10 years, then he is eligible for Social Security benefits.
Fast forward to our teacher’s 62nd birthday… he goes down to the Social Security office to apply for his Social Security benefits. The worker figures out his benefit and then informs him that that benefit is going to be reduced nearly 50% because he is already receiving a retirement pension from another government.
This reduction prevents our teacher from getting a “windfall” of money from the government. Windfall… I really have an issue with that term. So instead of him being about to buy 2 loaves of bread with his social security check, he can only buy 2 slices. **shaking my head**… Windfall?!? Give me a break!
I think this WEP is completely unfair. If a person has worked long and hard enough to be eligible for two government pensions… then why should he be punished? He earned the pension… so give it to him. Two government pension checks do not equate to a windfall… no matter how you add it up.
For those non-Social Security covered state and local government employees, the WEP acts an inhibitor… preventing them from moving into private sector jobs.
Well, I suppose it only inhibits those who are aware. Most people are not even aware that this provision exists. Many first learn about it when they apply for their Social Security benefits… which by this time is too late because they have not planned for this benefit reduction.
Just about every year, one or two bills are proposed to Congress that would repeal this WEP… but every year it is either not heard or voted down.
The WEP has been in law more than 20 years, so chances are it will not disappear. Therefore I thought it was important to alert my fellow financially conscious friends that this provision exists. Hopefully, you aren’t depending on Social Security to take care of you during retirement and have been saving enough for retirement on your own, but in case you are… plan ahead and beware of this provision. Wouldn’t it be great if you saved too much for retirement?
Author: Jeremy Vohwinkle
My name is Jeremy Vohwinkle, and I’ve spent a number of years working in the finance industry providing financial advice to regular investors and those participating in employer-sponsored retirement plans.