The windfall elimination provision (WEP) reduces Social Security benefits for people who also receive funds from non-covered pensions. You have to meet certain requirements for it to apply, and the number of years you contributed to Social Security can affect how much your benefits are reduced.
How the windfall elimination provision works
The WEP keeps the Social Security Administration (SSA) from overpaying people with non-covered pensions. A non-covered pension doesn’t withhold taxes for Social Security. So people with these plans haven’t contributed to Social Security for that portion of their income.
When the SSA calculates how much someone should be paid in Social Security retirement or disability benefits, it uses income that had Social Security taxes deducted. Because non-covered pensions don’t have these taxes taken out, the SSA doesn’t use income from that job when determining how much a person earned throughout their lifetime. This can make someone look as if they qualify to receive more money than they should.
Exceptions to the windfall elimination provision
There are a few situations where you might not qualify for the WEP despite having a non-covered pension plan. According to SSA.gov, you will not be affected if you:
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Had substantial earnings with Social Security taxes deducted for at least 30 years.
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Were hired as a federal worker after Dec. 31, 1983.
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Have a non-covered pension only for work performed before 1957.
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Worked for a nonprofit organization that was exempt from deducting Social Security taxes.
Who is affected by the windfall elimination provision?
If you will receive Social Security benefits because you paid into the program and also will receive funds from a non-covered pension, the SSA is likely to apply the WEP to your benefits. However, one of the following must apply for it to take effect:
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You turned 62 after 1985.
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You met the SSA’s definition of disabled after 1985.
You also must have contributed to Social Security for fewer than 30 years to be affected. If you worked at least 30 years in a covered job, you aren’t penalized even if you have a non-covered pension.
How to calculate the windfall elimination provision
How much you receive from Social Security is based on how much you earned before retiring — in simple terms, your monthly benefit is a percentage of your pre-retirement income. The WEP reduces the percentage that a person can collect if they also have a non-covered pension.
That standard formula to calculate a person’s Social Security monthly benefit is to break up their pre-retirement monthly income into three ranges. These ranges are defined by dollar amounts, also known as bend points, and they can change every year. Each range has a percentage taken out of it, and these amounts are added together.
For example, let’s say you worked as an accountant for 35 years before retiring, 10 years in a non-covered job and 25 in a job where you contributed to Social Security. During this time, your average monthly income was $2,935. The SSA would calculate your monthly benefits by taking a percentage of each range of your income. The ranges depend on Social Security eligibility, meaning the year you turn 62 or the year in which you become disabled or die before reaching 62. The table below shows the math for if you were to turn 62 in 2023.
The first $1,115 of your average monthly income is multiplied by 90%, which equals $1,003.50. The remaining income up to $6,721 is multiplied by 32% and equals $582.40. Because you don’t have any income over $6,722 per month, you don’t need the calculation for the last range.
These amounts are added together to determine your monthly Social Security benefit: $1,003.50 + $582.40 = $1,585.90.
However, because you worked 10 years for a company that didn’t deduct Social Security taxes and offered a non-covered pension, your monthly benefit needs to be reduced.
To do this, the SSA reduces 90% to a lower percentage when calculating the first range of income. The percentage is based on how many years of substantial earnings you have under Social Security. In the example above, you have 25 years of substantial earnings, which reduces the 90% to 65%. So the first range would equal $724.75 instead of $1,003.50 ($1,115 x 0.65 = $724.75). This would make your total monthly benefit $1,307.15 ($724.75 + $582.40 = $1,307.15) — $287.75 less than if you hadn’t had a non-covered pension.
How much can the windfall elimination provision reduce benefits?
The WEP affects only Social Security benefits, not a person’s pension. There are limitations on how much the WEP can reduce your benefits. The SSA can’t:
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Cut your retirement benefit to $0.
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Decrease your Social Security benefits by more than half of your monthly pension payment.
The most that your Social Security retirement benefits can be reduced in 2023 is $557.50, no matter how many years of contributions you’ve made to the program.
🤓Nerdy Tip
When calculating how much the WEP might affect your benefits, apply it before any standard adjustments such as penalties for early retirement or cost-of-living adjustments.
Tips for managing the WEP
If you will be hit by the WEP, there are a few things you can do to minimize its impact on your retirement finances.
Find work that contributes to Social Security. By increasing the number of years you’ve contributed to Social Security, you lessen the impact of the WEP on your retirement benefits. Every year you add to your contribution record over 20 years reduces the impact by 5%.
Increase your savings. By saving more now, you can help offset the reduction in your Social Security benefits. Calculate your estimated reduction to see how much you’ll need to supplement each month during retirement.
Are there any exceptions to the windfall elimination provision?
How much will my pension be reduced by the windfall elimination provision?
Can the windfall elimination provision reduce my Social Security benefits to $0?
Whitney Vandiver
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