I despise the Windfall Elimination Provision (WEP)

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robjer
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I despise the Windfall Elimination Provision (WEP)

Post by robjer » Tue Mar 12, 2013 5:42 am

Wife taught school( not paying Social Security taxes) for long enough to draw a nice retirement check and also worked before and afterwards for Social Security wages. Now in December 2013 we are looking at her drawing early age 62 SS benfits. Unfortunately those monthly benefits will be reduced by 76% because of WEP. This provision is applied so randomly across the board as Railroad Retirement beneficiaries even though they are covered outside of SS still can draw SS checks unaffected by WEP. Same holds true for State University employees. Best I can tell about the only occupations affected by WEP are teachers, policemen, and firemen, and if that doesn't say way too much about us. . .

There are always bills introduced in Congress to make it more fair, but they never go anywhere.

Other Bogleheaders affected by this? What are your thoughts?
Last edited by robjer on Tue Mar 12, 2013 7:34 am, edited 1 time in total.

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nirvines88
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Re: I despise the Windfall Elimination Provision (WEP)

Post by nirvines88 » Tue Mar 12, 2013 6:32 am

Assuming SS will still be around in some facet, I will be affected by the WEP in the future. I started working at age 16, contributing toward SS since then (age 24 now). I currently teach at a school where I do contribute to SS, and I will likely keep this job for another year or two. After this, I plan on teaching at a public school, where I will contribute 10%+ of my salary to a pension plan (not SS). Pension benefits come after 30 years of service. Under the WEP, it looks like pension benefits will likely wipe out most SS benefits, similar to your wife's situation.
"Beware of little expenses, a small leak will sink a great ship" - Poor Richard

Iorek
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Re: I despise the Windfall Elimination Provision (WEP)

Post by Iorek » Tue Mar 12, 2013 7:20 am

robjer wrote: This provision is applied so randomly across the board as Railroad Retirement beneficiaries even though they are covered outside of SS still can draw SS checks unaffected by WEP. Same holds true for State University employees.
I know it doesn't apply to RR employees, as they always have special rules, but I have never heard of the idea that state university employees are not subject to it. Do you have a source for that?

I think it's called windfall elimination for a reason but then I used to have to explain to "notch babies" why they didn't deserve higher SS payments either.

robjer
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Re: I despise the Windfall Elimination Provision (WEP)

Post by robjer » Tue Mar 12, 2013 7:34 am

Iorek,

1. You say you pay SS at your public school, which is correct. But I have a feeling it is just a smaller ding for Medicare (used to be 4%) and will not equate to SS benefits. Things might have changed, but you should ask more about what your SS deduction is for.

2. Wife's roommate worked for the University of Missouri--State Job but not on faculty. She is receiving University defined benefits following retirement and does not face WEP when she decides to draw SS.

Not an expert, obviously--just no what our disappointing situation is.

Calm Man
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Re: I despise the Windfall Elimination Provision (WEP)

Post by Calm Man » Tue Mar 12, 2013 7:38 am

I indeed sympathize. All of us have faced a major loss of retirement benefits in one way or another, especially in the private sector where things have been discontinued and frozen. With loss of WEP, is your total ever less than it would have been if you only had SS or the other pension?

ohiost90
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Re: I despise the Windfall Elimination Provision (WEP)

Post by ohiost90 » Tue Mar 12, 2013 7:45 am

Iorek wrote:
robjer wrote: This provision is applied so randomly across the board as Railroad Retirement beneficiaries even though they are covered outside of SS still can draw SS checks unaffected by WEP. Same holds true for State University employees.
I know it doesn't apply to RR employees, as they always have special rules, but I have never heard of the idea that state university employees are not subject to it. Do you have a source for that?

I think it's called windfall elimination for a reason but then I used to have to explain to "notch babies" why they didn't deserve higher SS payments either.
It also effects state and local Govt workers, amongst others. Here is a good of explanation as any. You may agree or disagree. My guess the level agreement will depend of the amount of $ one is effected by the WEP.
To fully understand the reason, you need to know that a Social Security benefit replaces a percentage of your pre-retirement earnings. The benefit is weighted toward lower-paid workers. The SSA uses a formula for computing the primary insurance amount (the "PIA," roughly speaking, is someone's Social Security benefit). The formula provides individuals with low average lifetime wages a proportionally higher rate of return on their contributions to Social Security than individuals with relatively high average lifetime wages. As a result, if you are a lower-paid worker, you will receive a Social Security benefit equal to about 60 percent of your pre-retirement earnings. By contrast, if you are a higher-paid individual, your average replacement rate is about 25 percent.

If you have spent most of your career in non-SS-covered employment with a SLG and a minimal amount of time in SS-covered employment, you will appear to the SSA as a lower-paid worker. Congress enacted the WEP in the belief that you should not receive a Social Security benefit as though you are a low-paid worker, plus receive a government pension from non-SS-covered employment.
I agree with the intent of the provisions, but I think it could be tweaked. For example there are reductions in the offset for those working in SS jobs (with “substantial” earnings) for more than 21 years. At 30 there is no reduction. “Substantial” earnings would be > $21,075 in 20I3. I would like to see the reductions in the offset extend down further than 21yrs. Of course, I feel this way since I have only 16yrs of SS substantial contributions!

My guess is that the vast majority of America workers would trade their 401k + SS for an offset SS wage and the guaranteed pensions of the workers that are effected by this. Contributing 10% of salary is only a few % points above the SS contributions most workers are forced to make now that the "holiday" is over for a vastly superior benefit.

robjer
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Re: I despise the Windfall Elimination Provision (WEP)

Post by robjer » Tue Mar 12, 2013 8:05 am

WEP became law in 1983; I would venture to say that the definition of a Windfall has changed dramatically in the last 30 years.

Penalizing those like public school teachers who were forced by low wages to earn money through other jobs to support a family in minimum comfort was an error in the construction of the original bill and should be remedied as part of any future Social Security overhaul.

There is a way to tweak this--say only where the maxium SS offset is somewhere like 35%, which in our case of 76% offset would be a great improvement.

Somebody tell me how State University employees failed to get collected in this bill?

Random Poster
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Re: I despise the Windfall Elimination Provision (WEP)

Post by Random Poster » Tue Mar 12, 2013 8:24 am

robjer wrote:Other Bogleheaders affected by this? What are your thoughts?
My mother (also a teacher, who also worked in the private sector for many years) got hit by the WEP. What irked her was that she had absolutely no idea about the provision until she applied for SS. I get that ignorance of a law is her fault, but I do think that school districts could do a better job of informing their employees of the provision and its effect. As it is at her school district, essentially no one in HR had any idea of the provision either.

My wife used to be a teacher, and is just short of having 40 SS credits. We are trying to figure out what her job path should be, taking into consideration possible SS benefits and what her teacher pension may be. It isn't an easy process, and the "gotcha"-type nature of the WEP doesn't help with the calculations.

sscritic
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Re: I despise the Windfall Elimination Provision (WEP)

Post by sscritic » Tue Mar 12, 2013 8:29 am

$500
$500 x 0.9 = $450
$500 x 0.4 = $200

$200 / $450 = 44.44%

$200 x 0.75 = $150

$150 / $450 = 33.33%

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HueyLD
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Re: I despise the Windfall Elimination Provision (WEP)

Post by HueyLD » Tue Mar 12, 2013 8:37 am

sscritic wrote:$500
$500 x 0.9 = $450
$500 x 0.4 = $200

$200 / $450 = 44.44%

$200 x 0.75 = $150

$150 / $450 = 33.33%
Sorry, I am totally lost with the above numbers.

Can Siri please explain?

fisher_man89
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Re: I despise the Windfall Elimination Provision (WEP)

Post by fisher_man89 » Tue Mar 12, 2013 9:00 am

The max reduction under WEP is ~40%, which is less than 76%. Maybe the OP meant the reduced benefit is 76% of the unreduced total.

Also WEP does not apply to Railroad pensions (it must be something else):
The Windfall Elimination Provision does not apply if:
You are a federal worker first hired after December 31, 1983;
You were employed on December 31, 1983, by a nonprofit organization that did not withhold Social Security taxes from your pay at first, but then began withholding Social Security taxes from your pay;
Your only pension is based on railroad employment;
The only work you did where you did not pay Social Security taxes was before 1957; or
You have 30 or more years of substantial earnings under Social Security.
http://www.ssa.gov/pubs/10045.html#a0=4

Both of my parents are hit by the WEP, but the truth is, they didn't pay much in SS taxes:
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.
The maximum the monthly SS benefit can be reduced is $395.5, according to this chart: http://www.ssa.gov/retire2/wep-chart.htm
So it's not that bad and actually fair to some extent, since those getting pensions are not your typical low-income workers getting minimum SS benefit.
On the other hand the Government Pension Offset basically eliminates taking SS off a spouse's record in a lot of cases, which is harsh.

robjer
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Re: I despise the Windfall Elimination Provision (WEP)

Post by robjer » Tue Mar 12, 2013 9:32 am

I don't think WEP is fair to ANY EXTENT.

Wife paid into SS at full rates every month; get something way less out at retirement.

76% in our case is correct as she gets caught at the very most WEP reduction of $396.00+

Early retirement benefits of SS were only going to be $524 per month reduced to about $128.
I know the $524 is not life-changing but it was bought and paid for in full and for it to be reduced is wrong.

(There is a chance that the $396 offset will be reduced by 25% as her SS benefits are reduced by 25% by taking them at 62 instead of FRA. I can't get a handle on that for sure though)

Again a Windfall in 1983 is not the same as in 2013, and $524 per month is not a windfall, at all.

ohiost90
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Re: I despise the Windfall Elimination Provision (WEP)

Post by ohiost90 » Tue Mar 12, 2013 9:56 am

robjer wrote:I don't think WEP is fair to ANY EXTENT.

Wife paid into SS at full rates every month; get something way less out at retirement.
Curious, how many months did she contribute with "substantial" wages as defined by SSA?
robjer wrote: 76% in our case is correct as she gets caught at the very most WEP reduction of $396.00+
Early retirement benefits of SS were only going to be $524 per month reduced to about $128.
(There is a chance that the $396 offset will be reduced by 25% as her SS benefits are reduced by 25% by taking them at 62 instead of FRA. I can't get a handle on that for sure though)
Something is wrong here. The max is 44% as stated above. The SSA figures benifits on 90% of the first 791 salary for WEP 40%.
791 x .9 = 711.9
791 x .4 = 316.4
316.4 / 711.9 = .44%

I'm sure the offset will be reduced 25%. By doing so, it will align to the .44% above. If not, maybe you should elect to wait until later to take SS benifits.
robjer wrote: I know the $524 is not life-changing but it was bought and paid for in full and for it to be reduced is wrong.
You aren't seeing what the windfall is. See my post above on how SSA benifits are paid and favor those with lower lifetime earnings.

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dm200
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Re: I despise the Windfall Elimination Provision (WEP)

Post by dm200 » Tue Mar 12, 2013 10:25 am

robjer wrote:Wife taught school( not paying Social Security taxes) for long enough to draw a nice retirement check and also worked before and afterwards for Social Security wages. Now in December 2013 we are looking at her drawing early age 62 SS benfits. Unfortunately those monthly benefits will be reduced by 76% because of WEP. This provision is applied so randomly across the board as Railroad Retirement beneficiaries even though they are covered outside of SS still can draw SS checks unaffected by WEP. Same holds true for State University employees. Best I can tell about the only occupations affected by WEP are teachers, policemen, and firemen, and if that doesn't say way too much about us. . .

There are always bills introduced in Congress to make it more fair, but they never go anywhere.

Other Bogleheaders affected by this? What are your thoughts?
While I may disagree with the use of the term "Windfall", nonetheless I fully support this exclusion. I doubt it is applied "randomly", and the Railroad Retirement system (as best I understand) involves covered employees paying into that federal system.

Those ofus who pay,and have paid, into the SS retirement system are the ones who support, not only our own retirement, but disporportionally lower income folks who get a higher percentage of benefits for funds paid in. Your wife paid NONE of that. She is, almost certainly, in a retirement system that does not pay for the very low income folks. She, and you, if applicable, should not benefit from the SS retirement system for the long periods she did not pay in.

I believe this is applied to those in retirement systems where no SS is paid, whether that is university plans, other public plans or federal employees (or retirees) who are/wre under the old CSRS system. The people and organizations whjo are in these plans, where SS retirement is not paid, are VERY happy that they don;t pay into SS, yet still want (and moan about not getting)an unfair slice of the SS retirement system. These bills go nowhere because the current system is, generally speaking, very fair overall.

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magellan
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Re: I despise the Windfall Elimination Provision (WEP)

Post by magellan » Tue Mar 12, 2013 10:37 am

ohiost90 wrote:You aren't seeing what the windfall is. See my post above on how SSA benefits are paid and favor those with lower lifetime earnings.
In other words, for retirees that had very low income during their working years, SS is more of a welfare program than an insurance program. The benefit formulas are skewed so that workers with higher incomes subsidize workers with lower incomes. WEP tries to undo this low-income subsidy for folks that also had so-called 'non covered wages.' These workers were not really low income workers, so they aren't entitled to the low income subsidy that SS gives to low income workers.

Here's a research paper that explains the rationale for WEP and talks about some of its practical implementation problems.
the paper's conclusion wrote:The Social Security benefit formula was designed to be non-linear in an attempt to redistribute benefits from higher earning workers to lower earning workers. It was not designed this way in order to transfer resources from workers who are full participants in the system to workers who are only partially covered. Yet the simple application of the standard benefit formula to partially uncovered workers would have exactly this effect. As such, some form of benefit adjustment for workers with uncovered earnings can be justified as being consistent with the goals of the benefit formula.
Nonetheless, the WEP has proved quite controversial. While many of the objections to the WEP appear to be ill-informed about the need for a benefit adjustment in the presence of a non-linear benefit formula, one objection that has support in the data is that the WEP hits lower earners disproportionately hard. Our research suggests that, among individuals subject to the WEP, those individuals with low lifetime earnings receive a lower ratio of benefits to covered earnings – and thus receive a lower “return” on their OASDI contributions– than do individuals with higher lifetime earnings.
Interestingly, the paper's recommendation is to change WEP so that higher income government workers (eg workers with substantial uncovered wages) get hit harder by WEP, so that lower income workers aren't hit as hard. Higher income folks eager to see the WEP formulas changed should probably be careful what they wish for.

Jim
Last edited by magellan on Tue Mar 12, 2013 11:06 am, edited 2 times in total.

fisher_man89
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Re: I despise the Windfall Elimination Provision (WEP)

Post by fisher_man89 » Tue Mar 12, 2013 10:44 am

robjer wrote: 76% in our case is correct as she gets caught at the very most WEP reduction of $396.00+
Are you sure?
It sounds like this note from the WEP chart I cited above might apply:
*Important: The maximum amount may be overstated. The WEP reduction is limited to one-half of your pension from non-covered employment.
So perhaps 50% is the absolute max, for those with a small pension?

SS is not about retirement benefits, per se, it is a welfare redistribution device favoring elderly who were low income earners.
The WEP re-enforces that purpose of SS.

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Re: I despise the Windfall Elimination Provision (WEP)

Post by Old Guy » Tue Mar 12, 2013 10:57 am

As a 30 year CSRS Federal employee, I am hit by WEP. SS is kind of gravy for me so I'm not complaining. My wife, also a Federal CSRS retiree, will not be hit by WEP if she keeps on working in her present SS covered position until December 31, 2014. When she left DC government, which was in the CSRS at the time, she entered into a pre-Thrift Federal retirement program called Set Aside. Part of her Federal retirement is based on contributions to SS and part to CSRS. So, with her pre-Federal employment, her contributions to SS during her Federal years, and her contributions to SS in her post-Federal years, she will have 30 years of significant contributions to SS by the end of 2014 and WEP will not be a factor. The 30 year thing is another way out of WEP. BTW, when she became eligible for SS when she hit 62 her Federal pension went down a significant amount.

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Re: I despise the Windfall Elimination Provision (WEP)

Post by ofckrupke » Tue Mar 12, 2013 12:28 pm

robjer wrote:Somebody tell me how State University employees failed to get collected in this bill?
The state DB pension of the ones who "failed to get collected" derived entirely from work whose pay was also subject to social security taxation.

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Flobes
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Re: I despise the Windfall Elimination Provision (WEP)

Post by Flobes » Tue Mar 12, 2013 2:19 pm

I'll be eliminating my WEP, based on info in this article:

How to Reduce or Eliminate Windfall Elimination Provision Impact to Your Social Security Benefit
Feb 15th, 2013 by Jim Blankenship.
http://financialducksinarow.com/6135/ho ... y-benefit/

Kudos to Mike Piper for including this link in a recent Oblivious Investor communique.

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Re: I despise the Windfall Elimination Provision (WEP)

Post by ohiost90 » Tue Mar 12, 2013 2:50 pm

Flobes wrote:I'll be eliminating my WEP, based on info in this article:

How to Reduce or Eliminate Windfall Elimination Provision Impact to Your Social Security Benefit
Feb 15th, 2013 by Jim Blankenship.
http://financialducksinarow.com/6135/ho ... y-benefit/

Kudos to Mike Piper for including this link in a recent Oblivious Investor communique.
Nice article. Curious, how are you going to eliminate the WEP?
I had thought taking a lump sum would help, but since one needs to take it before you are eligible to receive the pension, it will not. My system allows retirements at 55. Way to early for me to leave service.

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Flobes
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Re: I despise the Windfall Elimination Provision (WEP)

Post by Flobes » Tue Mar 12, 2013 3:13 pm

It think it works for my situation.

I stopped working at 58, after five years as a public employee, which vests me. I'm nearing 62. My plan's eligibility is at 65. So I'll have three years to get the lump sum out, and deposit it into my Rollover IRA.

I have 34 SS years, but only 27 are "substantial" years (It turns out that living frugally has unforeseen consequences). I'll start collecting Social Security at 70.

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Re: I despise the Windfall Elimination Provision (WEP)

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