Just before last Christmas, Martin O’Malley was sworn in as Commissioner of Social Security. His term will run through January 19, 2025, giving him two full years to wrestle with a lineup of troublesome matters facing this venerable program.
First, there’s the overarching and well-known issue of Social Security’s steadily evaporating trust fund reserves and the rapidly approaching point of insolvency, now less than a decade away. More recently there’s the public outcry over the Agency’s aggressive demands for repayment of benefits mistakenly paid out to millions of seniors. Customer service issues have also plagued Social Security for several years, some aggravated by the extended pandemic-induced field office closings.
Getting Congressional Attention
And if that’s not enough, the nagging movement to repeal two of the most unpopular parts of the Social Security rulebook—the Windfall Elimination Provision (WEP) and the Government Pension Offset (GPO) —is again drawing attention in Congress. These two provisions—sometimes referred to as Social Security’s “evil twins”—have been the subject of repeated Congressional Bills calling for their abolishment.
More than a dozen related proposals have been introduced in the last three Congressional sessions, none resulting in legislative change. Now, in the current Congressional session, H.R. 82—the Social Security Fairness Act of 2023—is gaining momentum as the latest incarnation of the campaign to eliminate WEP and GPO.
Despite having over 300 co-sponsors, H.R. 82 has made no progress in Congress since its introduction and referral to the House Ways and Means Committee last year. As a result, supporting organizations have mounted aggressive campaigns to enlist backing from sympathizers to help push for a floor vote on the Bill.
The National Active and Retired Federal Employees Association (NARFE), the National Education Association (NEA), and the American Federation of Teachers (AFT) are examples of substantial organizations putting their weight behind the push to repeal WEP and GPO. Fueling their opposition is the belief that retiree benefits are unfairly reduced via the way these provisions calculate benefits at retirement.
Fair or Unfair—You Decide
In the overall picture, the number of workers impacted by WEP and GPO is relatively small. Slightly over 2 million current Social Security beneficiaries are affected by WEP, while GPO affects roughly 735,000. With 67 million beneficiaries receiving Social Security benefits, one can quickly dismiss the issue as being insignificant—statistically, anyway. Rest assured, though, that the emotional impact is anything but insignificant to those affected.
Our AMAC Foundation Social Security Advisory Service is regularly contacted by new retirees shocked by the reduction in their anticipated monthly retirement benefit. Last year, our Advisory Service handled hundreds of calls from retirees outraged by what they see as an “unfair,” “unwarranted,” and “unjustified” penalty imposed on them.
We approach each of these situations with care, recognizing that the caller is most often angered by the unexpected impact on the retirement income they assumed in their financial plans. This is understandable. One of the first steps we take in response is to explain the reason why these provisions were enacted decades ago, followed by a recap of how they work.
After our discussions with callers, we often sense that understanding the “why” and “how” satisfies their curiosity, but not their anger. From our discussions, it seems that many were never told they would be affected, may not have understood the implications of the provisions, or may have forgotten something they were told about years ago. In any case, their arrival at the retirement gate presents a setback in their financial planning.
So, anger and disappointment aside, we offer here a summary–but heavily researched–analysis of WEP and GPO to help frame discussion on this volatile subject. The next few sections of this article will explore why these provisions emerged more than four decades ago and provide condensed analyses of the math that leads to the reduced benefits seen by those affected.
Why Was WEP Enacted?
To understand the reasoning behind these two provisions, it is first necessary to understand how benefits are calculated.
The Standard Formula for Calculating Benefits
Each year after a worker’s federal income tax return is filed, the IRS forwards earnings records to the Social Security Administration (SSA), where the information is stored in individual work records. Only the earnings on which payroll tax was assessed are recorded by SSA. If the worker had no such earnings, zeros would be entered for that year.
Social Security’s standard formula for computing benefits breaks the beneficiary’s average indexed monthly earnings[1] into three portions called “bend points,” multiplying each portion by a unique percentage and totaling them to arrive at the recipient’s Primary Insurance Amount (PIA). Most of the PIA comes from the first bend point, which is normally 90% of the first $1,174 of average monthly earnings for someone applying in 2024.[2]
In Social Security terminology, the PIA reflects the worker’s income replacement rate, or the amount of pre-retirement earnings replaced by Social Security. It’s a progressive formula designed to produce a higher replacement rate for workers with lower career-average earnings. The worker with the lower earnings history—the lower AIME—ends up with a higher income replacement rate than the worker with a higher AIME.
How WEP Changes the Formula
The WEP formula adjusts the percentage used in that first “bend point” to something less than 90%, depending on the number of years of Social Security-covered employment. If a recipient has 20 or fewer years of substantial[3] Social Security earnings, the percentage used in the first bend point will be 40%[4], rather than 90%.
If the recipient has more than 20 years of Social Security-covered earnings, the first bend point percentage increases by 5% for each year over 20. Since 90% is the normal first bend point computation, if the recipient has 30 or more years of substantial Social Security earnings, WEP doesn’t apply. As somewhat of a “cushioning” effect, the WEP formula ensures that the reduction cannot exceed half of the pension earned through non-covered employment.
Why Adjust the Formula?
As the Congressional Research Service notes in their analysis of WEP[5], the formula used to calculate PIA, and therefore the income replacement rate, “cannot distinguish between workers who have low career-average earnings because they worked for many years at low earnings in Social Security-covered employment and workers who appear to have low career-average earnings because they worked for many years in jobs not covered by Social Security.”
Consequently, the benefit calculation prior to WEP provided an unintended replacement rate advantage for workers with less than full careers in employment covered by Social Security, while simultaneously their non-covered employment provided a benefit designed to replace Social Security. In effect, without the WEP adjustment, the income replacement rate attributable to non-covered employment would be higher than the replacement rate earned by a worker paying into Social Security during their entire employment.
What About GPO?
The Government Pension Offset provision does not affect worker retirement benefits; rather, it is focused on spousal and survivor benefits and, specifically, on the benefits available to individuals receiving their own Social Security benefits or retirement benefits earned via non-covered employment. The GPO stipulates that anyone who becomes entitled to Social Security spousal or survivor benefits and who also receives a pension earned without contributing to Social Security will have their Social Security benefit offset by their non-covered pension.
GPO was enacted as a refinement to Social Security’s dual entitlement rule. Under dual entitlement, a dependent spouse would be eligible, at FRA, for 50 percent of the higher-earning spouse’s FRA benefit while both partners are living and 100 percent of the higher-earning spouse’s benefit as a widow(er).
GPO results in two-thirds[6] of any non-covered retirement benefit being excluded from the Social Security benefit available to the spouse, in effect limiting the benefit paid to a spouse who also qualified for benefits from non-covered employment. Without the GPO refinement, the spousal benefit would not consider the simple fact that the spouse’s benefit is higher because of earnings from non-covered employment.
It is interesting to note that the spouse’s or survivor’s GPO benefit reduction is less than the reduction imposed by the standard dual entitlement rule affecting all other recipients. Making spousal and survivor benefits more reflective of the way they’ve been earned (covered employment vs. non-covered employment) is the key point in the GPO’s design.
Arguing the Pros and Cons
The WEP Argument
Since it was enacted decades ago, many have argued the WEP’s design premise of adjusting benefits to level the playing field between workers with noncovered earnings and those with full working careers in covered employment. Provision supporters maintain that WEP removes the unintended advantage of a higher first bend point in the benefit calculation and recognizes that those affected by the provision enjoy a pension earned through non-covered employment. `
Philosophically, WEP ensures that Social Security’s primary purpose – to reduce poverty risk for aging Americans—remains intact by helping keep benefits better aligned with contributions to the program. Also, for those in career non-covered employment, WEP includes a method of systematically mitigating the benefit reduction.
The counter position on WEP, and the one that we hear most frequently at the AMAC Foundation Advisory Service, is that it results in a substantial—and unexpected—loss of income included in retirement plans. Further, opponents argue that the 40 percent starting point for the reduction is subjective and considered somewhat imprecise in measuring the actual “windfall.”
The GPO Argument
Much of the GPO opposition relates to the belief that its impact on Social Security benefits is not clearly understood by many affected by it and, as a result, retirement plans made by these folks are unprepared for the reduction. Conventional reasoning, though, is that since GPO has been in effect since 1977, retirement planning has had sufficient time to plan for the reduction.
GPO advocates also are quick to point out that the benefit reduction formula is less punitive than the reductions experienced by those affected by the “dual entitlement” rule for Social Security beneficiaries.
For both WEP and GPO, it’s important to note that the annual statements issued to beneficiaries by the Social Security Administration contain advice that “participation in a retirement plan or receipt of a pension based on earnings for which he or she did not pay Social Security payroll taxes could result in lower Social Security benefits” along with a link to additional information on the SSA website explaining WEP and GPO.
Wrapping Up
Our objective with this research paper is to provide a measure of objectivity to the concerns raised on many fronts regarding the perceived fairness or unfairness of WEP and GPO. As noted in the paper, the first step that anyone wishing to weigh in on the arguments—for or against—should take is to review and understand the mathematical process for the determination of benefits, and to understand the progressive nature of Social Security as a societal program. Without understanding those fundamentals, taking a position on the matter becomes somewhat of an exercise in futility.
This paper summarizes material related to the Windfall Elimination Provision and the Government Pension Offset, but we know there is quite a bit of conversation necessary to arriving at a conclusion regarding their place in the world of Social Security; accordingly, a more detailed forum will be presented for public participation. This forum, which will be presented in webinar format, has been scheduled for March 13, 2024, and details for accessing the program will be posted on the AMAC Foundation’s Events page.
[1] “AIME” is average inflation-adjust earnings from the highest-earning 35 years of one’s working life.
[2] Bend points change annually. The first bend point for one’s Eligibility Year (62) is used for WEP.
[3] Social Security’s definition of “substantial” varies by year; the historical annual “substantial” earnings can be found at https://www.ssa.gov/pubs/EN-05-10045.pdf
[4] Using 40% as the starting point represents a compromise between the House (which recommended 61%) and the Senate (which recommended 32%.
[6] The two-thirds factor was a compromise between the original 1977 law (which called for a 100% offset) and a one-third reduction as recommended by Congress in 1983. The two-thirds factor was judged equivalent to the benefit a spouse would have earned in employment covered by Social Security.
I’m one whose income was just slashed! I was told by 3 different SS reps that I would not be impacted by WEP. My story is a long one. But, consequently, I am now getting 50% less money and having to pay back almost $5000 in overpayment due to their workers’ imcompetency. They had to look for my letter I submitted in a timely manner. I did so with the hopes that if the reps were incorrect, it would be identified and I would not find myself in this situation. Yet, here I am. This is unfair, inhuman, and should be unlawful! Decades have passed these two “evil twins” should be abolished. They have ruined enough senior golden years! Shame on America. Do this to our congress, senate, etc. The change would come!
Sandra:
Thank you for your comments on our “WEP and GPO: To Repeal or Not?” article. We are well aware of the argument against these two Social Security provisions, and specifically the ongoing debate concerning the their fairness or unfairness. We are also aware that there are situations in which Social Security Administration (SSA) representatives provide incorrect information to callers, and that many of these situations lead to demands for repayment of benefits awarded incorrectly. These points are being discussed in Congress, as noted in a recent post on our Social Security Report website (see: https://socialsecurityreport.org/clawback-matter-rises-on-congressional-priority-list). As noted in this post, SSA is holding regular investigative sessions to address the matter.
As part of the AMAC Foundation’s Social Security Advisory Service, we respond frequently to individuals in situations like yours. When we receive these inquiries, we take the time to explain the reasons why these provisions were enacted and, specifically regarding WEP, we carefully explain how the provisions adjust benefits. We know that while our explanations might satisfy curiosity, they usually do not relieve the anger that those adjustments have created. For this reason, and to hopefully broaden the public’s knowledge about the origin of WEP and GPO, we will be conducting an online seminar providing extensive background on the provisions and why they were enacted many years ago. I encourage you to view this program, scheduled as a webinar on March 13, 2024—details on registering for the event can be found here: https://amacfoundation.org/event/wep-gpo-repeal-or-not-you-decide.
We take no side in the ongoing argument on WEP-GPO fairness; rather, our intent with this educational program is to explain how why they affect certain retirees. We hope you will join us on March 13.
Gerry Hafer, Social Security Advisor
AMAC Foundation
888-750-2622
http://www.AmacFoundation.org
CONFIDENTIALITY NOTICE: The contents of this message, including any attachments, are confidential and are intended solely for the use of the person or entity to whom the message was addressed. If you are not the intended recipient of this message, please be advised that any dissemination, distribution, forwarding, printing, copying, or use of the contents of this message, and any attached documentation, is strictly prohibited. If you received this message in error, please notify the sender. Please also permanently delete all copies of the original message and any attached documentation. The opinions and interpretations expressed in this message are the viewpoints of the message’s author, a trained advisor accredited under the National Social Security Advisors program of the National Social Security Association, LLC (NSSA). The author, the NSSA, and the AMAC Foundation are not affiliated with or endorsed by the United States Government, the Social Security Administration, or any other state government.
The impact of WEP is greater than SSA would have you believe. WEP is calculated at age 62, then increased each year with COLA adjustments. SSA charts indicate a retiree born in 1957 would supposedly face a maximum $463 WEP reduction. Yet, when the retiree applies for SSA benefits at FRA he learns that the WEP reduction is actually $563 after applying all COLAs. If SSA is not going to repeal WEP, it needs to update its information so people can have a better understanding on what their retirement benefits will be.
Jerry:
Thanks for you comment on the WEP issue. Social Security doesn’t determine the WEP reduction at age 62. Until benefits are applied for, Social Security has no knowledge of the person’s “non-covered” pension. SS only becomes aware that a non-covered pension exists, and therefore that WEP applies, when the application for benefits is submitted. At that time, the following happens:
1. Social Security reviews the person’s lifetime record of SS-covered earnings and adjusts the earnings for all years (up to age 60) for annual inflation; that inflation adjustment is unique for each year. Earnings in years after age 60 are not adjusted for inflation (inflation adjustments to post-age-60 years comes later). From this analysis, the person’s “Average Indexed Monthly Earnings” is determined – that is, their average inflation-adjusted monthly SS covered earnings over their lifetime.
2. Since WEP applies for this applicant, SS will also determine how many years of “substantial SS-covered earnings” there are over the person’s lifetime. The definition of “substantial” varies each year, but it is the number of years of “substantial SS-covered earnings” which determines what the WEP reduction to the normal SS benefit will be. It is not a number taken from a Social Security table at age 62 and later adjusted for inflation.
3. Since there is a non-covered pension, the applicant will get a smaller “Primary Insurance Amount” or “PIA” (PIA is the amount received if benefits start exactly at full retirement age). The WEP-PIA will include a percentage of the first $XXX of AIME (based on the person’s earnings record when SS is claimed), said percentage smaller because WEP applies ($XXX is a number based on the year the applicant first became eligible for SS (62). This first part of AIME is called a “bend point” which is unique for each eligibility year. Example: The first “bend point” for someone born in 1957 who turned 62 in 2019 is $996.
4. Normally, the PIA is determined using 90% of the first bend point as the first of 3 values which comprise the total PIA. But when WEP applies, a smaller percentage of the first bend point is used. The percentage used when WEP applies is 40%, if less than 21 years of “substantial” SS-covered earnings, or 5% higher for each additional year of substantial SS covered earnings, up to 30 years. At 30 years of substantial SS-covered earnings, WEP no longer applies.
5. Thus, for someone who turned 62 in 2019 who had less than 21 years of substantial SS-covered earnings, the first bend point of their AIME would contribute 40% of $996 ($398.40) rather than the normal 90% ($896.40) – or a WEP-PIA $498 smaller than the normal PIA.
All COLA increases awarded since the recipient turned 60 are added to the WEP-PIA, and the amount of the WEP-PIA the applicant actually receives depends on the exact age at which their Social Security benefit starts.
So, the amount of reduction due to WEP isn’t determined from a SS table for age 62 and later adjusted for inflation. Rather, it is determined by calculating the WEP-PIA from the person’s inflation-adjusted AIME, using a percentage based on the number of years of “substantial” SS-covered earnings. All COLA increases awarded after age 60 are applied to the WEP-PIA. Social Security doesn’t know that a non-covered pension exists, or what it’s impact will be, until benefits are applied for and the applicant indicates they have (or will have) a “non-covered pension.” The applicant’s WEP-PIA (and their actual SS benefit entitlement) isn’t determined until the person claims Social Security.
Thanks again for the comment. The ongoing argument on WEP fairness is a complex issue, and our advisory Service has conducted a substantial amount of research on the subject. We will be conducting an online seminar providing extensive background on the provision and why it was enacted many years ago. I encourage you to view this program, scheduled as a webinar on March 13, 2024—details on registering for the event can be found here: https://amacfoundation.org/event/wep-gpo-repeal-or-not-you-decide.
Gerry Hafer, Social Security Advisor
AMAC Foundation
888-750-2622
http://www.AmacFoundation.org
CONFIDENTIALITY NOTICE: The contents of this message, including any attachments, are confidential and are intended solely for the use of the person or entity to whom the message was addressed. If you are not the intended recipient of this message, please be advised that any dissemination, distribution, forwarding, printing, copying, or use of the contents of this message, and any attached documentation, is strictly prohibited. If you received this message in error, please notify the sender. Please also permanently delete all copies of the original message and any attached documentation. The opinions and interpretations expressed in this message are the viewpoints of the message’s author, a trained advisor accredited under the National Social Security Advisors program of the National Social Security Association, LLC (NSSA). The author, the NSSA, and the AMAC Foundation are not affiliated with or endorsed by the United States Government, the Social Security Administration, or any other state government.
The only way there seems to be any fairness with WEP is if my Social Security contribution and that of my employer is prorated to allow for the reduction in benefits. It’s not exactly taxation without representation, but rather taxation without renumeration. If it is ever repealed, would those already receiving Social Security receive an immediate restoration of benefits going forward? (I know it would be never be retroactive in the sense of reparations, but would people at least see an adjustment?)
Glory
You are correct that there would be no retroactive payments, but should WEP ever be repealed, it would affect everyone subject to WEP, current and future recipients. The current beneficiaries would have their benefits recalculated without the WEP reduction going forward from the effective start date. There have been bills to repeal WEP presented to Congress since it was passed in 1983, but to date none of them have succeeded in passing.
Please contact us if you have further questions.
You may contact us by emailing [email protected] or calling (888)750-2622.
Sharon Kleczka, Social Security Advisor
AMAC Foundation