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Social Security Strategies: Government Pensions and the Windfall Elimination Provision

It seems like many of you have questions about Social Security. Lately, I've been getting several questions from people with government pensions who didn't have Social Security taxes withheld. I asked Tiya Lim, who wrote the section on Social Security in our book The Only Guide You'll Ever Need for the Right Financial Plan, to weigh in on the topic. Here's what she had to say:

There are two provisions that could reduce or eliminate your Social Security benefits if you're also eligible to receive a government pension:

  • The windfall elimination provision (WEP)
  • The government pension offset provision (GPO)
Today, we'll talk about the WEP. If you receive a pension from a federal, state or local government based on work where you didn't pay Social Security taxes, part of your Social Security benefit may be reduced (but not eliminated) by the WEP. If any family members are eligible for benefits based on your work record, their benefits may also be reduced.

Why the Reduction? The Social Security system is progressive, meaning lower-paid workers get a higher percentage of their pre-retirement earnings than high-wage earners. According to the Social Security Administration, lower-paid workers could get a Social Security benefit equal to about 55 percent of their pre-retirement earnings, while highly paid workers may receive about 25 percent.

Without the WEP in place, people who primarily worked in a job not covered by Social Security would have their benefits calculated as if they were long-term, low-wage workers. Thus, they would not only receive their pension, but also receive Social Security benefits that represented a higher percentage of their earnings.

How Much Is the Reduction? Your benefits are calculated based on your highest 35 years of earnings, adjusted for wage inflation and weighted according to a formula from the SSA. The WEP uses a modified formula to calculate a reduced benefit amount.

The maximum reduction possible is based on the number of years you contributed to Social Security and the age at which you become eligible for benefits. The SSA provides a WEP chart and calculator to help you determine your reduced benefit.

The following are examples from Social Security that should help illustrate how the WEP can reduce benefits. Janice never married and is claiming her Social Security benefits at full retirement age. She has 42 years where she earned money covered by Social Security, as well as 38 years of local government employment not covered by Social Security. (Obviously, some of those years overlap. For example, she may have had a part-time job [covered by Social Security] while working her local government job [not covered by Social Security].)

She currently collects $4,246 a month from her government pension, triggering the WEP. Without the WEP, Social Security would have paid her $1,615 per month on top of her monthly pension. The WEP reduces that amount to $202 per month.

Frank, on the other hand, is married. He has 18 years of earnings covered by Social Security and 15 years of earnings not covered by Social Security. His monthly government pension is $1,227. Without the WEP, his benefit would have been $973 per month, with his wife getting a spousal benefit of $486.50 per month. The WEP would reduce that to $156 per month for Frank, with a similar reduction for his wife down to $76.50.

However, when Frank dies, the WEP reduction disappears and the surviving spouse and eligible family members will have their benefits paid based on the regular benefit formula. In Frank's case, his wife could receive a full survivor benefit of $973 per month.

For further reading on Social Security, see the following posts:

Hear Larry Swedroe discuss current investment trends and topics every Sunday at noon on 550 AM KTRS in St. Louis or streaming via the KTRS Web site. Can't catch the show? Download the podcast via or through the Buckingham Asset Management podcast page on iTunes.
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