Social Security: The Windfall Elimination Provision (WEP)

Social Security:
The Windfall Elimination Provision (WEP)
Laura Haltzel
Domestic Social Policy Division
The windfall elimination provision (WEP) reduces the Social Security benefits of
workers who also have pension benefits from employment not covered by Social
Security. Its purpose is to remove an advantage these workers would otherwise receive
because of Social Security’s benefit formula that favors workers with smaller amounts
of Social Security-covered career earnings. Opponents contend that the provision isth
basically imprecise and often unfair. In the 110 Congress, five bills (H.R. 82, H.R.
726, H.R. 2772, S. 206, and S. 1647) have been introduced to modify or repeal the
WEP. This report will be updated annually or upon legislative activity.
Social Security monthly benefits are computed by applying a formula to an average
of a person’s earnings from work subject to the Social Security tax. The formula applies
three progressive factors — 90%, 32%, and 15% — to three different levels, or brackets,
of average monthly covered earnings (these earnings brackets change each year to reflect
changes in national wage levels). The result is known as the “primary insurance amount,”
or PIA, and is rounded down to the nearest 10 cents. The formula is designed so that
workers with low average career earnings receive a PIA that is a larger proportion of their
earnings than do workers with high average earnings. For persons who reach age 62, die
or become disabled in 2008, the PIA is determined thus:
FactorAverage Career Monthly Earnings
90%first $711, plus
32%$711 through $4,288, plus

15%over $4,288

A different Social Security benefit formula, referred to as the “windfall elimination
provision” (WEP), applies to many workers who also are entitled to a pension from work
not covered by Social Security (e.g., work under the Federal Civil Service Retirement
System).1 Under these rules, the 90% factor in the first band of the formula is replaced
by a factor of 40%. The effect is to lower the proportion of their earnings in the first
bracket that are converted to benefits. The following table illustrates how the provision
works in 2008.
Table 1. Monthly PIA for a Worker With Average
Monthly Earnings of $1,000
Regular FormulaWindfall Elimination Formula
90% of first $711$639.9040% of first $711$284.40
32% of $711 through $4,28892.4832% of $711 through $4,28892.48
15% over $4,28800.0015% over $4,28800.00
T otal 732.38 T otal 376.88
Thus, under the windfall elimination formula the benefit for the worker is $355.50
($732.38 - $376.88) less per month than under the regular formula. Note that once
average monthly earnings exceed the first level in the formula of $711, the amount of the
reduction remains at $355.50 per month because the lower replacement factor of the first
level no longer applies. For example, if the worker had $2,000 of average monthly
earnings instead of $1,000, the windfall reduction still would be $355.50 per month.
However, because the dollar reduction is limited to the first bracket of the PIA formula,
the percent reduction in benefits relative to the regular PIA formula varies by AIME. For
example, if we applied the WEP formula to a worker with an AIME of $4,000, this
worker would still see a dollar reduction of $355.50 per month. However, this worker
would experience a 21% reduction in benefits under the WEP compared to the regular
PIA formula, while the worker with a $1,000 AIME would experience a 49% reduction
in benefits under the WEP compared to the regular PIA formula.
The provision includes a guarantee (designed to help protect workers with low
pensions) that the reduction in benefits caused by the windfall elimination formula can
never exceed more than one-half of the pension based on noncovered work. The
provision also exempts workers who have 30 or more years of “substantial” employment
covered under Social Security (i.e., having earned at least one-quarter of the “old law”2
Social Security maximum taxable wage base for each year in question). Also, lesser

1 Social Security Act §215(a)(7).
2 For determining years of coverage after 1978 for individuals with pensions from noncovered
employment, the amount is 25% of what the contribution and benefit base otherwise would have
been if the 1977 Social Security Amendments had not been enacted. In 2008, the “old-law”
taxable wage base is equal to $75,900, and, thus, to earn credit for one year of “substantial”
employment under the WEP, a worker would have to earn at least $18,975 in Social Security

reductions apply to workers with 21 through 29 years of substantial covered employment,
as follows:
Years of Social Security Coverage
20 21 22 23 24 25 26 27 28 29 30
First factor in40%45%50%55%60%65%70%75%80%85%90%
The provision does not apply (1) to employees of governments or nonprofit
organizations who were mandatorily covered by Social Security on January 1, 1984,
because of the 1983 amendments (e.g., the President, Members of Congress); (2) to
workers who reached age 62, became disabled, or were first eligible for a pension from
noncovered employment, before 1986; (3) in computing survivor benefits; (4) to benefits
from foreign Social Security systems that are based on a “totalization” agreement with the
United States; and (5) to people whose only noncovered employment that resulted in a
pension was in military service before 1957 or is based on railroad employment.
According to the Social Security Administration (SSA), as of December 2007, about

1 million recipients were affected by the WEP. Of these, approximately 65% were men.

SSA estimates that in 2000, 3.5% of recipients affected by the WEP had incomes below
the poverty line. For comparison purposes, at that time 8.5% of all Social Security
beneficiaries age 65 and older had incomes below the poverty line and 11.3% of the
general population had incomes below the poverty line.3
Legislative History and Rationale
This provision was enacted in 1983 as part of major amendments designed to shore
up the financing of the Social Security program. Its purpose was to remove an unintended
advantage that the regular Social Security benefit formula provided to persons who also
had pensions from non-Social Security-covered employment. The regular formula was
intended to help workers who spent their work careers in low paying jobs, by providing
them with a benefit that replaces a higher proportion of their earnings than the benefit that
is provided for workers with high earnings. However, the formula could not differentiate
between those who worked in low-paid jobs throughout their careers and other workers
who appeared to have been low paid because they worked many years in jobs not covered
by Social Security (these years are shown as zeros for Social Security benefit purposes).

2 (...continued)
cove red-employme nt.
3 These are the most recent estimates available. Poverty rates were calculated by David Weaver
of the Social Security Administration’s Office of Retirement Policy using the March 2001
Current Population Survey (CPS). Poverty status is taken directly from the CPS and is thus
subject to errors in the reporting of income. The sample for the WEP poverty rate only includes
persons for whom SSA administrative records could be matched. The sample size for the WEP
poverty rate is relatively small (230 cases). The poverty rates for the Social Security beneficiary
population age 65 and over and for the general population do not require matched data and are
based completely on CPS data.

Thus, under the old law, workers who were employed for only a portion of their careers
in jobs covered by Social Security — even highly paid ones — also received the
advantage of the “weighted” formula, because their few years of covered earnings were
averaged over their entire working career to determine the average covered earnings on
which their Social Security benefits were based. The new formula is intended to remove
this advantage for these workers.
Arguments for the Windfall Elimination Provision. Proponents of the
measure say that it is a reasonable means to prevent payment of overgenerous and
unintended benefits to certain workers who otherwise would profit from happenstance
(i.e., the mechanics of the Social Security benefit formula). Furthermore, they maintain
that the provision rarely causes hardship because by and large the people affected are
reasonably well off as most of them also receive government pensions.
Arguments Against the Windfall Elimination Provision. Some opponents
believe the provision is unfair because it substantially reduces a benefit that workers had
included in their retirement plans. Others criticize how the provision works. They say
the arbitrary 40% factor in the windfall elimination formula is an imprecise way to
determine the actual windfall when applied to individual cases. For example, they say it
over-penalizes lower paid workers with short careers, or with full careers that are fairly
evenly split. They also say it is regressive, because the reduction is confined to the first
bracket of the benefit formula and causes a relatively larger reduction in benefits for low-
paid workers.
Recent Legislation
In the 110th Congress, five bills have been introduced to repeal or alter the WEP.
H.R. 82, was introduced by Representative Berman, and S. 206, the companion bill to
H.R. 82 in the Senate, was introduced by Senator Feinstein. Under H.R. 82 and S. 206,
Social Security benefits paid after December 2007 would no longer be reduced by the
WEP. The Social Security Administration’s Office of the Actuary has estimated that full
repeal of the WEP would cost approximately $40.1 billion between 2008 and 2017. In
the long run, they estimate that elimination of the WEP would cost 0.05% of taxable
payroll (causing an increase in Social Security’s long-range deficit of about 3%).
H.R. 726, introduced by Representative Barney Frank, would eliminate the WEP for
those whose combined monthly income from Social Security and the noncovered pension
was less than $2,500 in 2007 (indexed annually to the national average wage). The bill
would gradually phase in the provision for those who have a combined monthly income
of $2,500 through $3,334. For those with combined monthly incomes exceeding $3,334,
the WEP would remain fully applicable. SSA’s Office of the Actuary estimates that this
bill would cost $19 billion between 2008 and 2017 and in the long run would cost 0.02%
of taxable payroll (causing an increase in Social Security’s long-range deficit of about


Representative Kevin Brady introduced H.R. 2772, the Public Servant Retirement
Protection Act (PSRPA) of 2007.4 Senator Kay Bailey Hutchison introduced a
companion bill, S. 1647, in the Senate. The PSRPA would eliminate the current-law
WEP for those first entering non-Social Security covered employment one year after the
bill’s enactment. Those workers who have worked in noncovered employment prior to
this date would still be covered by the current-law WEP unless the PSRPA WEP provided
them with a higher benefit. The PSRPA would substitute a new WEP formula that would
provide a Social Security benefit in rough proportion to the percentage of earnings worked
in Social Security covered employment. SSA’s Office of the Actuary estimates that this
bill would cost $4.6 billion from 2008-2017 and in the long run would cost 0.01% of
taxable payroll (causing an increase in Social Security’s long-term deficit of about 0.5%).

4 For additional information on the PSRPA, please refer to CRS Report RL32477, Social
Security: The Public Servant Retirement Protection Act (H.R. 2772/S. 1647), by Laura Haltzel.