WEP looks like one of those mysterious acronyms the kids use on social media, but it stands for Windfall Elimination Provision. And sadly, there's not much mystery about it. The WEP may impact your retirement income if you qualify for both a pension and Social Security benefits.
The WEP has been an ongoing source of debate among lawmakers. It was initially implemented to add fairness to the Social Security benefit calculation. But now lawmakers aren't so sure it's fair enough, and two competing bills are proposing changes to how the WEP works. Both bills defer implementation until 2022 -- so we're stuck with the current rules for now.
WEP can trim your benefits by up to half of your pension
The WEP comes into play when you've worked in "covered" jobs where you paid Social Security payroll taxes and "noncovered" jobs where you didn't pay Social Security payroll taxes, earning a pension instead. In certain situations, the WEP reduces your Social Security benefits by up to half of your pension. Simply put, if you qualify for a pension of $900 monthly, the WEP may cut your Social Security benefits by up to $450.
The concerning part is that any WEP adjustment won't be reflected on your Social Security statements. And that could leave you with a bad surprise when it's time to file for Social Security.
How Social Security benefits work
Your Social Security benefits are based on your income from your covered jobs. The standard benefits formula uses an average of your inflation-adjusted earnings in the 35 years during which you made the most money. That average is divided by 12 to get a monthly income figure, called your Average Indexed Monthly Earnings, or AIME.
Here's where the magic happens. A progressive scale of percentages is applied to your monthly earnings number to determine your monthly Social Security benefit. In 2019, your benefits would be the total of:
- 90% of the first $926 of your monthly earnings, plus
- 32% of any earnings over $926 but less than $5,583, plus
- 15% of any earnings over $5,583
You can see that a lower monthly earnings amount gets a higher percentage of benefits. If your monthly earning number is $900, your benefit is $810 or 90% of earnings. But if your monthly earnings number is $1,500, the benefit is 90% of $926 plus 32% of the remaining $574. That adds up to $1,017.08, which is only 68% of earnings.
The WEP affects the 90% value in that equation, which is intended to benefit lower-income individuals. But consider the person who had a lower-income, covered job for 10-plus years, followed by a very successful career in a noncovered, pension-earning job. Without the WEP, this individual would qualify for a high-percentage Social Security benefit as well as a good pension. That's considered double-dipping and that's what the WEP is intended to prevent.
If you paid Social Security taxes for more than 30 years...
The quickest way to understand if the WEP affects you is to look at how many years you paid Social Security taxes before you landed the pension-earning job. If you have 30 years or more of covered work under your belt, you're in the clear. Your Social Security benefits will be calculated under the standard formula.
If you paid Social Security taxes for 21 to 30 years...
The WEP becomes a factor when you worked in the private sector for fewer than 30 years before accepting the pension-earning job. Remember that 90%? That percentage gets adjusted down based on the number of years you paid Social Security payroll taxes. If you have 29 years of covered work on your resume, for example, your benefits assume 85% of monthly earnings in that first bracket. That percentage drops all the way down to 45% when you only have 21 years of covered work.
If you paid Social Security taxes for less than 21 years...
If you paid Social Security taxes for less than 21 years, you'll see the biggest impact to your Social Security benefits. The normal 90% drops down to 40%. Using the same monthly earnings of $1,500, the 40% equation translates to benefits of $554.08, or 40% of $926 plus 32% of $574.
That is a benefits reduction of $463 from the standard formula. Since the WEP cannot reduce your benefits by more than half of your pension payment, your WEP reduction may be less.
Steps to protect your Social Security
First, get a clear picture of how the WEP affects you by using the Social Security Administration's WEP calculator.
Then, think about adjusting the timing of your benefits. If you're locked into your pension-earning job, your best strategy for maximizing Social Security benefits is to wait until your 70th birthday to file. Or, if your career path is still open, you could also return to the covered workforce and start paying Social Security taxes again. You'll need at least 30 years of covered work to eliminate the WEP reduction entirely.