Mark – Calif.: What was the rationale behind the Windfall Elimination Provision that reduces Social Security pension amounts if one is receiving other public pensions? I’m a school teacher, have worked for a railroad and have enough quarters for Social Security. I worked for all those pensions, yet my Social Security and the railroad pensions are being reduced. My teacher pension isn’t. The total of all these pensions amounts to about half of my full-time pay. I’m grateful I’m getting an income for retirement, yet I don’t believe I’m getting all the benefits that I have earned.
Phil Moeller: No one likes the Windfall Elimination Provision, or WEP. But there is a rationale for it. Here is an abbreviated explanation (a fuller take can be found in our Social Security book, “Get What’s Yours”).
Social Security is, in economic terms, a very progressive program. This means its benefits are skewed to be very generous to low-earning folks. They get a much higher percentage of their wages back in benefits than do people who make more money.
This form of income redistribution is a fundamental part of Social Security. It is accomplished by splitting up a person’s earnings record into three tiers. People get 90 percent of the first tier in their Social Security payment and smaller percentages – 32 percent and 15 percent, respectively — in the second and third tiers. People with low earnings don’t make enough to reach the second or third tier.
The thinking was that a person with a public pension who has paid some Social Security taxes could be quite well positioned for retirement, but would be seen as a low-wage earner in terms of Social Security’s records. When they applied for Social Security, therefore, they’d get 90 percent of their earnings back in the form of Social Security payments. A person whose entire lifetime wages had been subject to Social Security payroll taxes might also be entitled to a private pension, but their Social Security payments would be fair and fully supported by the payroll taxes they had put into the system.
To deal with this, the WEP takes that 90 percent first-tier benefit calculation and reduces it to 40 percent for people with public pensions that are not tied to Social Security payroll taxes. This penalty begins disappearing when a person has been paying payroll taxes for 30 years and totally disappears at 40 years.
Whether you think it’s fair or foul, that’s the rationale.