Social Security is cutting your benefit. Why?
- You won the lottery, and you don’t really need the Social Security.
- Your wife’s uncle Charley died, leaving her a fortune.
- They found out you are getting another pension where they did not withhold for Social Security.
- The other side in your lawsuit finally settled, for $1.7 million.
Yes, for a system that is not supposed to be means-based, all the above appear ridiculous. However, one of them is real. Did you guess the third one? You are right. In the Reagan era, the Windfall Elimination Provision (WEP) became law. Simply put, it says if you are getting a Social Security benefit, and they find out you are also getting a pension where you did not pay into Social Security, they reduce your SS benefit.
Critics of WEP say it unfair because:
- it is, essentially, a means test, and means testing is not supposed to be part of Social Security old age benefits.
- Since the other pension is earned from a government entity (state, city, whatever) with different funding and other requirements having nothing to do with Social Security, it should not be the Government’s business, or concern.
- Finally, the WEP is regressive, say the opponents, because it impacts lower earning retirees more than it impacts higher earning retirees.
The usual calculation. To figure your full retirement benefit, Social Security uses a three-tier method. Basically, they divide your AIME (average indexed monthly earnings) into three tiers, or parts. For the first, lowest tier they calculate 90% of the AIME for your “replacement income”; then for the second tier you get 32%; and for the third, highest tier it is just 15%. These three, when added together, are your full retirement benefit, or PIA (primary insurance amount).
The effect of having three percentages that become lower as the AIME increases is to weight the replacement income in favor of low earners. Low earners get a higher percentage of their contributions. Most of us think this is good policy. However…
The WEP way. If the recipient is also receiving a pension where Social Security contributions were not deducted, the WEP kicks in. WEP changes the above formula. It substitutes 40% for 90% in the first tier. Three examples of WEP outcomes:
|Full benefit||Cut due to WEP||Reduced benefit||Percent cut in full benefit|
(In 2014, the first tier is $816. The maximum PIA is $2,642.60)
Note how placement of the dollar penalty in the first, lowest tier results in a progressively smaller percent cut as the full benefit increases. This appears to be a reversal of the bias in the full (non-WEP) benefit calculation. In other words, the “normal” calculation favors the poor, while the WEP version of the normal calculation favors the rich.
It does not seem fair and equitable, does it? Why does the WEP law operate this way? As Social Security explains it:
Social Security benefits are intended to replace only a percentage of a worker’s pre-retirement earnings. The way Social Security benefit amounts are figured, lower-paid workers get a higher return than highly paid workers. For example, lower-paid workers could get a Social Security benefit that equals about 55 percent of their pre-retirement earnings. The average replacement rate for highly paid workers is about 25 percent.
Before 1983, people who worked mainly in a job not covered by Social Security had their Social Security benefits calculated as if they were long-term, low-wage workers. They had the advantage of receiving a Social Security benefit representing a higher percentage of their earnings, plus a pension from a job where they did not pay Social Security taxes. Reference
What do you think? Does the above convince you?
Even before the U.S. fiscal crisis exacerbated, there was no realistic chance the WEP would be abolished. Now it is even less likely. However…
There has been much discussion in the media to the effect that the middle class is being hurt disproportionately by some government policies, or lack of policies. In fact, the White House has, I believe, appointed an advocate to speak for the middle class.
With the above in mind, would it be possible to reverse the bias of the numbers in the WEP formula, so, while remaining revenue neutral, it “hits” the rich harder, thus relieving, to some extent, the pressure on the middle and lower classes? This would make the WEP enhanced formula consistent with the non-WEP formula, i.e., they would both favor lower earners.
I’m betting an awful lot of hard-working citizens would like to see this happen. (A software calculator for the WEP is here, number 8 on the menu.)