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The Congressional Research Service (CRS) recently released a report on the Windfall Elimination Provision (WEP). The report reviews how the provision operates, its impact on low-income workers, arguments for and against the provision, and recent legislation that would repeal or modify the provision.
How does the WEP operate?
The Windfall Elimination Provision reduces the Social Security benefits of workers who also have pension benefits from employment not covered by Social Security. Its purpose is to remove an advantage these workers would otherwise receive because Social Security's benefit formula is weighted such that workers with low lifetime earnings receive a greater share of their covered earnings in benefits than workers with medium or high lifetime earnings. A monthly Social Security benefit is ordinarily determined by applying a formula to an average of a person's earnings from work subject to the Social Security payroll tax. The formula applies three progressive factors —90%, 32% and 15% —to three different levels, or brackets, of average indexed monthly earnings (AIME). These brackets are indexed to national wage growth, so that they increase over time. The resulting amount is the “primary insurance amount” or PIA.
So, for example, in 2009, for a given AIME, 90% of the first $744 plus 32% of earnings over $744 and through $4,483, plus 15% of earnings over $4,483 become the PIA. However, under the WEP, the first factor of the formula, 90%, is replaced with a factor of 40%. The remaining two factors do not change. To protect individuals with low pensions, the reduction cannot exceed more than half of the pension based on noncovered work. For workers with more than zero but less than 30 years of covered employment, the 90% factor is reduced by 5% for each year below 30 years of covered employment. There are other exceptions as well.
Current legislation
Because the formula is regressive in that it has a greater impact on individuals with lower average lifetime earnings, some people have argued for its repeal. In the 111th Congress, two bills relating to the WEP have been introduced thus far. H.R. 235, the Social Security Fairness Act of 2009 (S. 484 in the Senate) would repeal the WEP starting in 2010. The SSA estimates that this repeal would increase the long-range deficit of the Social Security Trust Fund by 3%. Another measure, H.R. 1221, the Public Servant Retirement Protection Act of 2009 (S. 490 in the Senate) would replace the current formula with a new one that would compute a PIA based on both covered and non-covered employment. The SSA estimates that this measure would increase the long-range deficit of the trust fund by 0.5%.