If you work for an employer who does not withhold Social Security taxes from your wages the pension you receive based on that work may reduce your Social Security benefit. In this case you are entitled to a pension from work not covered by Social Security and you will be subject to the windfall elimination provision of the Social Security act. These include but are not limited to Civil Service Pensions, Public Employees Retirement Systems, some teachers, police and firemen/women.
If you have wages where you contribute to a pension other than Social Security you may see a reduction in the amount of benefits payable to you each month. The Windfall Elimination Provision affects how the amount of your retirement or disability benefit is calculated. A modified formula is used to calculate your benefit amount, resulting in a lower Social Security -benefit than you otherwise would receive.
Why does the Social Security Administration use a different formula to compute your monthly benefit? Social Security benefits are intended to replace only a percentage of your pre-retirement earnings. The way Social Security benefit amounts are figured, lower-paid workers get a higher return than highly paid workers. For example, 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 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.
Refer back to the chapter on benefit calculations. We discussed how Social Security benefits are based on your highest 35 years of wages after your earnings are indexed or adjusted for inflation. Social Security then uses three brackets (bend points) to determine your monthly benefit payment. Once the SSA determines your averaged indexed monthly wage, your benefit is determined by multiplying 90% times the first bracket, 32% times the second bracket and 15% times the third bracket.
Within the Windfall Elimination Provision, the 90% factor is reduced by using a modified benefits formula. With certain exceptions, the 90% factor is reduced to 40%.
One of these exceptions occurs if you have 30 or more years of “substantial” earnings in a job that Social Security taxes. In these cases the 90% factor is not reduced. See the chart below.
Exceptions are also made if you have “substantial” earnings in 21 to 29 years. After you determine the number of years of substantial earnings you have (as outlined above) you can determine the percentage used in the first bend point. The 90% factor is reduced as outlined below.
If you get a low pension you are protected. The reduction to your Social Security benefit cannot be more than half of the amount of your pension that is based on earnings after 1956 on which you did not pay Social Security taxes. While your pension can be reduced by as much as $463.00 per month, it is never taken down to $0.00. You will receive some type of monthly payment.
The windfall provision does not apply to survivors’ benefits. If you arrange for your surviving spouse to receive your pension based on work not covered by Social Security, they will still be eligible for their full Social Security benefit based on their own work record.