Social Security and Government Pensions: The Windfall Elimination Provision
If you receive a pension from a job not covered by social security and you are eligible for social security benefits from another job, your social security payments may be reduced under the Windfall Elimination Provision (WEP). In order to plan effectively for retirement, it’s important to understand how this rule may affect your social security benefits.
You may be subject to the WEP rule if, over the course of your career, you worked as a federal, state, or local government employee as well as in the private sector. The rule affects former police officers, firefighters, teachers, and certain nonprofit employees, as well as other types of government workers.
How does it work?
The formula is a bit complicated and depends on the number of years you made substantial earnings under social security, in addition to your eligibility year (i.e., the year you turn age 62 or became totally disabled, if earlier). The maximum reduction is limited to half the amount of your noncovered pension in the first month of entitlement. In general, based on the formula used to calculate the reduction, the WEP has a greater impact on lower-wage workers.
Example: If you turn 62 in 2018 and have 20 years of substantial earnings that were subject to social security withholding, the WEP could reduce your monthly social security benefit by up to $447.50. Your reduction might be lower if you take benefits earlier than your full retirement age (FRA)—or older if you delay benefits beyond your FRA. Note that the WEP reduction cannot take your social security benefit down to $0, and it doesn’t apply if you have 30 or more years of substantial earnings under social security.
What about children and spouses?
The WEP also affects social security benefits for children and spouses (but not survivors), as it reduces the worker’s benefit that provides the basis for the dependents’ benefits. When the worker dies, the WEP reduction is removed, and the surviving spouse’s benefit is refigured using the regular benefit formula.
WEP is often confused with another provision known as the Government Pension Offset (GPO). Although similar, the GPO affects only spousal and survivor benefits; the WEP offsets the earner’s own benefit as well as the dependent benefits derived from it.
A helpful calculator for estimating your social security benefits is available on the Social Security Administration’s website.
This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Although we go to great lengths to make sure our information is accurate and useful, we recommend you consult a tax preparer, professional tax advisor, or lawyer.
© 2018 Commonwealth Financial Network®