Social Security Beneficiaries Affected by the Windfall Elimination Provision in 2006

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Summary

The Windfall Elimination Provision (WEP) is an alternative method of computing benefits for some workers who receive a pension based on work not covered by Social Security. The WEP computation results in a lower benefit than the worker would receive under the regular computation method. This article provides a brief legislative history, describes the WEP computation and applicability, and presents statistical data about beneficiaries affected by the WEP.

The statistical data show that, as of the end of December 2006:

* About 970,000 beneficiaries, mainly retired workers, were affected by the WEP, and the WEP affected the benefits of almost 3 percent of all retired workers.

* Almost half of the retired workers affected by the WEP received a federal pension, and another 36 percent received either a state or local pension.

* Sixty-five percent of both retired and disabled workers affected by the WEP were men.

History of the Windfall Elimination Provision (WEP)

The regular Social Security benefit computation formula is weighted to provide a higher replacement of earnings for workers with low earnings. Most employment and self-employment in the United States is covered by Social Security. Workers and their employers pay taxes up to an annual maximum amount, and the earnings are creditable for Social Security purposes.

Before the WEP was enacted, individuals who had worked mainly in employment not covered by Social Security had their benefits computed as if they were long term low-wage earners. The WEP prevents this unintended windfall for workers who receive a pension from a job where they did not pay Social Security taxes, but who benefited from provisions aimed at low lifetime earners. Examples of pensions from noncovered employment are Civil Service Retirement pensions payable to federal employees hired before 1984, state and local government pensions based on noncovered earnings, and certain pensions from earnings in foreign countries.

The Windfall Elimination Provision was one of the many legislative changes included in the Social Security Amendments of 1983 (Public Law 98-21). Major provisions of this legislation included gradually raising the retirement age and making a portion of Social Security benefits received by higher income beneficiaries subject to income taxes. The amendments also provided for mandatory Social Security coverage of newly hired federal employees and current and future employees of nonprofit organizations (Svahn and Ross 1983, 24-27).

Prior to Congressional action, the issue of windfall benefits payable to persons with noncovered employment was considered in two bipartisan national Social Security study commissions. The National Commission on Social Security issued its report on March 12, 1981. One of its recommendations was that "the windfall portion of benefits arising from periods of noncovered government employment in the future (due to the weighted benefit formula) should be eliminated" (National Commission on Social Security 1981, 26).

The WEP was also on the agenda of the later National Commission on Social Security Reform (NCSSR). The commission's report, released in January 1983, recommended "that the method of computing benefits should be revised for persons who first become eligible for pensions from non-covered employment, after 1983, so as to eliminate 'windfall' benefits." The report included two methods of modifying the windfall. One method would make the percentage related to the second bendpoint of the primary insurance amount (PIA) formula applicable to the first bendpoint (32 percent instead of 90 percent) for workers with noncovered pensions. The reduction in benefits would not be larger than the pension from noncovered employment. The second method would apply the current benefit formula to a record that combines both covered and noncovered earnings to determine a replacement rate, which would then be applied to the average earnings based solely on covered employment (NCSSR 1983, 2-9-2-10). …