For retirees who have a pension from work outside of the Social Security system, the monthly benefit they earn is calculated using the Windfall Elimination Provision (WEP).

The reason for this special rule is that the Social Security formula is “progressive,” it pays a higher benefit of wage replacement to lower income workers.   Here is a snapshot of benefit levels of Americans who retired in 2021 at age 65.

INCOME CATEGORY ANNUAL WAGES ANNUAL SSA BENEFIT REPLACEMENT RATE
#1 Low $25,010 $12,835 51%
#2 Medium $55,758 $21,162 38%
#3 High $88,924 $28,009 31%
#4 Highest $136,710 $34,180 25%

Source: National Academy of Social Insurance (NASI), 2021

 

In this chart, we see the average inflation-adjusted lifetime wages of retirees broken down into four quartiles, lowest to highest. We then see each group’s annual Social Security benefit and the “replacement rate” (the percentage of their wages that is replaced by their monthly federal benefit). Note that as wages rise, Social Security benefits rise, but not proportionately. The replacement rate drops as income rises.

So, someone who had average earnings in the #3 high-quartile at $88,924 per year receives a Social Security benefit of $28,009 annually. This is $15,174 more than the average worker in #1 low-income category receiving $12,835 per year. But the higher paid worker is receiving only 31% of his wages returned to him or her in Social Security benefits. The lower-paid person’s replacement rate is 51%. And someone earning still less than the lowest wages shown would have an even higher replacement, maybe as high as 90%. In Social Security, the lower wage earner receives a proportionately higher benefit.

Your public pension does not work this way.  If a police retirement plan formula provides for 70% of pay after 30 years of service, that 70% is earned by all members—patrol officer, sergeant, lieutenant and chief. The patrol officer’s rate is not higher because he or she earns less than a lieutenant. But Social Security does take income into account; the lower paid worker’s benefit rate is higher.

To summarize:

Social Security pays a higher replacement rate to lower wage earners, a much higher replacement to the lowest earning workers, and a lower replacement rate to mid-level and high-income earners.

This progressive structure is the reason why public employees who are not in Social Security have a different formula.  Social Security doesn’t want a middle-income fire lieutenant or teacher or college professor to earn the very high replacement rate on their small amount of Social Security wages, as if they were a low-income American.

How Does the Windfall Elimination Provision Work?

You probably have a pretty good understanding of your police, fire, teacher or similar pension. Your benefit is calculated based on the salary at the end of your career, which is then multiplied by a percentage factor based on your years of work.  This percentage can be called the “replacement rate,” i.e., the portion of your salary that is replaced by your pension. For example, 70% of final pay for thirty years of service or 50% for disability reflect replacement rates of 70% or 50% respectively, multiplied by final pay.

Social Security uses the same concepts, with two fairly major deviations. One difference involves how the salary (wages) for the benefit computation is determined. The second is that varying replacement rates are used on different portions of your salary.

Salary Used for Social Security Calculation.  In public pension systems, the salary used for pension calculations might be the average of the last four years of pay, the last five years, or maybe even just the final year.

In contrast, Social Security uses the highest 35 years; almost the entire working life of a person. But, because some of those wages were earned so long ago, the Social Security formula adjusts (i.e., indexes) those wages for inflation. Thus, for a person who retired in 2023 who earned $10,000 back in 1987, Social Security indexes those 1987 wages forward to $34,600 when they calculate the person’s average indexed earnings over his or her 35-year total.

Importantly, calendar years with no SSA earnings count when calculating the average earnings. They go into the formula as zero dollars—$0—for the year.  Public sector workers often have a lot of “zeros” in their Social Security earnings record from years in which their career employment was outside of Social Security.  As a result, their average inflation adjusted earnings in Social Security can be quite low.

Wage Replacement Rates.  After the average salary is calculated (called “average indexed monthly earnings” or AIME), the Social Security system then uses different replacement rates for up to three separate brackets of an individual retiree’s inflation-indexed income. For persons attaining age 62 in 2024, those income brackets and replacement rates are:

 

First $1,174 in monthly earnings 90%
Next $5,904 in monthly earnings 32%
Over $7078 to taxable maximum 15%

 

As a result of these varying replacement rates, a worker with average monthly earnings of $1,450 would receive a Social Security payment of $1,145 (a replacement rate of 79%).  A retiree with average earnings of $8,000 a month gets a Social Security check of $3,084, but his replacement rate drops to 39%.

The Windfall Elimination Formula.  For public employees with pensions from non-covered work, there is a modified formula.  The first increment of wages ($1,174) is replaced at 40%, not 90%.  All of the other rates and wage thresholds remain the same.  Using this formula, average Social Security earnings of $1,450 produces a monthly benefit of $558 and a replacement rate of 39%.  This payment is $587 less than if the WEP formula was not applied, but the replacement rate is the same as the higher wage earner who took home $8,000 monthly while working.

Things that Lessen the Impact of the WEP

To help ensure that application of the WEP is not unfair, the law provides a few generally well-thought-out provisions to lessen its impact.

Substantial earnings. If a person has thirty or more years of “substantial earnings” in Social Security, the WEP formula does not apply even if he or she qualifies for a pension from work outside of Social Security. Between twenty-one and twenty-nine years of SSA substantial earnings, the impact of the modified WEP formula is lessened proportionally. For example, if you have twenty-five years of substantial earnings, the first salary increment is replaced at 65% (not 40% or 90%, but 65%).

What is a year of substantial earnings? For 2023, if you made $29,700 or more, it was considered to be substantial Social Security earnings for this purpose. This amount is inflation-adjusted; it was lower in the past and will be higher in the future. Each year’s requirement is spelled out in Publication 05-10045, which is linked in the sidebar.

WEP does not apply to Survivor Benefits. Another concession is that the Windfall Elimination Provision doesn’t apply to Social Security Survivor’s Benefits. So if you earned a Social Security benefit under the WEP of $558 and die before your spouse, he or she would be eligible for survivor’s benefits of $1,145 (the amount of your benefit calculated using the standard non-WEP formula.)

WEP reduction is limited. Finally, the reduction under the WEP cannot be more than one-half of your public pension. This is a protection that is rarely invoked, but may help persons who have relatively low public service pensions.

What Will Your Benefit Be?

The best approach for estimating your benefit is to go to the ssa.gov website and register for an individual account. Once you have registered, you can examine your own record and use the data to run projections based on your status as a non-participating government employee outside of Social Security. This is done with the “Online Calculator (WEP Version).” Input your Social Security earnings from your ssa.gov account into the calculator and receive a pretty good estimate of your future benefits.

Your Social Security Statement Does Not Reflect the Impact of Your Government Pension.

This is important. The Social Security Statement that is mailed to you at certain ages or upon request does not reflect any possible changes in Social Security benefit due to your government pension from work outside of SSA. This is because at the time that estimates are made, Social Security knows only so much about your pension history. Accordingly, they issue the statements without any calculation changes, but with a general warning that a government pension may impact your estimate.

Is the Windfall Elimination Provision Fair?

A motel housekeeper gets a $1,100 payment from Social Security and the retired police officer gets $542 for the same SSA covered earnings.  The housekeeper is, in effect, receiving a bonus due to her near-poverty-level income.  The retired officer (or teacher or building inspector) is simply not in the same financial situation.  The WEP formula reflects this.

A good explanation of the WEP and its fairness can be found in Allison Shelton’s WEP and GPO papers for the Congressional Research Service (as summarized in Alicia Munnell’s book State and Local Pensions: What Now). This summary statement covers the Windfall Elimination Provision and additionally comments on the Government Pension Offset (which is covered in the next section of this website):

Since a worker’s monthly earnings for purposes of benefit calculation are averaged over a typical working lifetime rather than over the years actually spent in covered employment, a high earner with a short period of time in covered employment cannot be distinguished from an individual who worked a lifetime in covered employment at an exceptionally low wage. Thus, a worker who was entitled to a state and local pension (from outside SSA) and to Social Security could qualify for the subsidized benefits associated with the progressive benefit formula. Similarly, a spouse who had a full career in uncovered employment—and worked in covered employment for only a short time or not at all—would be eligible for the spouse’s and survivor’s benefits.

The WEP instituted a modified benefit formula for people who qualify for Social Security based on a brief work history and who have earned a pension in noncovered employment. The GPO reduces spouse’s benefits for those who have a government pension in noncovered employment. Although these provisions may not produce perfect adjustments for each individual, in the aggregate they have substantially solved the problem.

In other words, the WEP formula is not a punitive apparatus that unfairly reduces a teacher or other public servant’s Social Security benefit. The WEP formula is intended to equalize replacement rates among public and private workers who have the same total lifetime wages from all sources.

How to Plan

You can obtain excellent information on the Windfall Elimination Provision from Publication 05-10045.  It is only two pages and can be found at the link in the sidebar.

My book on the subject of Social Security and government pensions provides an expanded explanation, history, examples and Q&A.  It is available at Amazon.com. See link in the sidebar.

Again, if you are subject to the WEP provision, the best way to obtain a solid benefit estimate is to (a) register for an account at ssa.gov and then (b) use the Social Security Online Benefit Calculator WEP Version. Answer the questions and input your historical earnings information from your Social Security Statement or obtained from your account at ssa.gov.