How Can the Windfall Elimination Provision Effect My Social Security Benefits?

Introduced by Congress in 1983, the Windfall Elimination Provision (WEP) is designed to prevent workers who also collect a “non-covered’ pension, such as California Public Employees’ Retirement System (CalPERS), from “double-dipping” Social Security benefits. Nearly 2 million Social Security beneficiaries, including public safety officers, are affected by the provision.

 

The bottom line is the WEP can reduce your Social Security benefits if you are eligible to collect them. But, as with any government program, it can be difficult to understand.

Here’s some general information to note.

How Does the WEP Work?

At its simplest, the WEP is an adjustment to your Social Security benefits if you’ve had “substantial” earnings from “covered” work in which you paid Social Security taxes. For example, if you retire from your public safety job and go to work in private security you begin to pay Social Security taxes. If you work 20 years or less in a “covered” job and are eligible for both a pension and Social Security benefits, your Social Security benefits could be reduced by $463 based on a formula (for 2019). However, the WEP cannot reduce your Social Security benefit by more than half the amount of your monthly pension, and it cannot zero out your retirement benefit.

After 20 years of working in a covered job and paying Social Security taxes, the WEP reduction begins to decline, until it completely disappears after 30 years. So, if you have substantial earnings from a private sector job for at least 30 years, the WEP would not likely apply to you.

What if You File Early or Delay Filing?

If you file for Social Security benefits before or after your Full Retirement Age (FRA), the WEP reduction is applied before your benefit is reduced or increased due to early retirement or delayed retirement credits.

For example, let’s say you retire at your FRA of 66 with a Social Security benefit of $1,463. The maximum WEP that can be applied is $463, giving you a WEP-reduced benefit of $1,000 (1,463 – 463).

If instead, you file for benefits at age 62, your Social Security benefit would be $750 ($1,000 WEP-reduced benefit less 25% reduction for filing early).

If you delay filing for benefits until at 70, your benefit would be $1,320 ($1,000 WEP-reduced benefit plus 32% for delayed filing).

WEP does not Apply to Survivor Benefits

The good news is the WEP reduction is not applied to survivor benefits. So, if you die before your spouse, he or she will receive your full Social Security benefit as a survivor’s benefit.

Here are some key takeaways for CalPERS members:

  • If you have substantial earnings from work that is covered by Social Security, the WEP may reduce your Social Security benefits.
  • The WEP reduction affects your Social Security benefits, not your CalPERS pension.
  • The maximum WEP only applies if you have less than 20 years of substantial earnings on which you paid Social Security taxes. The WEP reduction declines annually after 20 years of work and is eliminated completely after 30 years.
  • If you request a lump sum refund of your retirement contributions to CalPERS, Social Security will still apply the WEP reduction as if you were receiving monthly benefits.

This would also be a good opportunity to meet with a financial professional from Capital Edge Financial. We work almost exclusively with members of public safety organizations throughout the state of California. We are familiar with how the Windfall Elimination Provision works and can help you look for planning opportunities to optimize your benefits.

This article is general and for educational purposes only. The content has been gathered from sources believed to be reliable and represents our general understanding of how WEP can work and not a comprehensive assessment. It is not intended to provide any specific tax nor legal advice. Nor any specific advice on social security or pension benefits. Please consult with an individual tax or legal adviser, as applicable, to assess how the information provided in this article can affect your specific situation.

SMRU #1833943

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