For more information on this subject see our seven page guide on “Windfall Elimination Provision.” It will give you a complete detail of how this provision affects you and the way Social Security figures your benefit amount – click here
Your Social Security retirement or disability benefit may be reduced
If you work for an employer who does not withhold Social Security taxes from your salary, such as a government agency or an employer in another country, the pension you receive based on that work could cause a reduction in your Social Security benefits.
The Windfall Elimination Provision affects how Social Security figures the amount of your retirement or disability benefit check if you receive a pension from work not covered by the Social Security program. They use a different formula to figure your benefit check amount, resulting in a lower Social Security benefit than you otherwise would receive.
To understand how the formula is different, you need to understand how Social Security figures your monthly benefit check. For a complete step-by-step guide on how Social Security figures your benefit amount, see our 15 page guide on “How Social Security Figures Your Benefit Amount” – click here.
They take your average monthly lifetime earnings and using percentages and bend points they convert those average monthly lifetime earnings to a primary insurance amount. The primary insurance amount is the amount you would receive, if you retired at your full retirement age or filed for a disability benefit check.
When your benefits may be affected
The Windfall Elimination Provision primarily affects your benefit check if you earned a pension in any job where you did not pay Social Security taxes and you qualify for a retirement or disability benefit from Social Security.
The Windfall Elimination Provision may apply if:
You reached 62 after 1985; or
You became disabled after 1985; and
You first became eligible for a monthly pension based on work where you did not pay Social Security taxes after 1985. This applies even if you are not yet receiving the pension.
Why a different formula is used
Social Security benefits only replace a percentage of your pre-retirement earnings. Due to the way Social Security figures your benefit amount, lower paid workers get a higher rate of return on their Social Security tax dollars than highly paid workers. 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. Congress passed the Windfall Elimination Provision to remove that advantage.
Below are a few exceptions to the Windfall Elimination Provision
The Windfall Elimination Provision does not apply to survivors benefits. It also does not apply if:
You are a federal worker first hired after December 31, 1983 or
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 or
Your only pension is based on railroad employment or
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.