Understanding Social Security and the Windfall Elimination Provision

Hi everyone! Welcome back to Melissa Making Cents!

Being a CERTIFIED FINANCIAL PLANNER, I have become familiar with a lot of strange little loopholes that can change a comprehensive financial plan for retirement. People are not always aware of these everyday loopholes.  Some of these loopholes are great and do a lot to help people out of sticky situations. I also find little tricks and pitfalls that commonly affect people, which are a lot less pleasant. 

Today I’d like to talk about something that many people are entirely unfamiliar with until it’s too late, the Windfall Elimination Provision (or WEP). This article is for you if you’re nearing retirement age; the Windfall Elimination affects people’s social security and pensions. If you’ve never heard of the Windfall Elimination, don’t worry, we’re going to cover everything you need to know!

What is the Windfall Elimination ?

The Windfall Elimination is a provision that reduces social security if you worked a job (and receive a pension from that job) that didn’t pay into social security taxes. The kicker is if you’re counting on social security, the Windfall Elimination may reduce it by up to sixty-six percent. The WEP surprises many people who believe that they’re going to “stack” their pension and social security and draw full amounts from both only to realize their social security is only going to pay them half of what they expected. 

Who Does Windfall Elimination Provision Affect? 

The Windfall Elimination Provision affects retirees who’ve worked/changed between jobs that do and do not contribute to social security via taxes. If you have less than thirty years of “substantial earnings” in the social security system and a pension, Windfall could affect you by reducing your social security payout. Windfall will not directly affect your spouse, ex-spouse, or children. It could, however, indirectly affect them if your expected income amount after retirement is reduced. Working with a Certified Financial Planner or Financial Advisor will help you plan accordingly for retirement and help you make sure all of your ducks are in a row. 

The Windfall Elimination Provision most commonly affects:

• Public Service Employees (State, County, or Federal Employees)
• Teachers
• Police
• Firefighters

According to USA Today, the number of retirees affected by the Windfall Elimination Provision had risen by over 14% by the end of 2018, bringing the total number of affected individuals to almost two million. 

More specifically, Windfall will affect you if your retirement if you worked a job and draw a pension from somewhere that didn’t withhold Federal Insurance Contribution Act or FICA payroll-tax (often called non-covered employees). This could involve many people who don’t expect it, like teachers or people who work for local government. If you’re a teacher and you’re gearing up for retirement, please read my blog post, How New 403(B) Laws Will Effect Texas Teachers, and Why Every Teacher Needs a 403(B). In that post, I talked briefly about Windfall, but mostly about The Teacher Retirement System, Social Security, and 403(b) plans. Too often, teachers get the short end of the stick, especially when it comes to pay and retirement. If you’re a teacher and want to talk about getting the most out of your retirement, please feel free to contact me. 

How does the Windfall Elimination Provision Work?

Windfall is essentially a (complex) sliding scale. Suppose you have a pension from a job that didn’t have FICA social security withholding, and you have less than thirty years of “substantial income” in the social security system. In that case, your social security payout is going to be diminished. How much depends on a variety of factors like how many substantial earning years you had, your age at retirement, how much your non-covered pension is worth, etc. 

Another critical thing to note about the Windfall Elimination Provision is that it is not enacted until you begin drawing from your pension. That means that you can retire and draw your full social security benefits as long as you’re not receiving benefits from your non-covered pension. Once you begin to draw from your pension, however, you’re responsible for notifying social security so they can re-adjust your social security disbursements. As a side note here for employees that have not paid into the social security for the "qualifying 30 years", the social security benefit is small compared to the pension benefits they would receive. 

Before you rush to open your annual Social Security Statement, it's important to know that your statement will not disclose if the Windfall Elimination Provision affects you! There is one line on the annual statement that should stand out to you. “Benefit estimates may not be accurate if the individual has worked in a position in which Social Security taxes were not paid.”

If you think you may be affected by the Windfall Elimination Provision, or if you’re unsure, one thing you can do is to visit the Social Security website’s Windfall Elimination Provision (WEP) Online Calculator.  While this calculator is extensive and can take a bit of time to complete if you do so accurately, it should give you a good idea of where you’re going to land when it comes to WEP. You can also see if you’re going to be affected by the Windfall Elimination Provision is to visit/talk to a CERTIFIED FINANCIAL PLANNER™ or financial advisor representative. We’re here to help, and knowing how much you’re going to be able to draw from social security in retirement each month is high stakes. It will affect you, your family, and your financial future. 

Why is the Windfall Elimination Provision in Place?

While it’s easy to feel like the Windfall Elimination Provision is just in place to pick on us, there is a historically good reason it was put into place. The idea of putting the Windfall Elimination into place was to put a stop to an exploitation of the system that allowed some workers to work short periods of time in the social security system and receive the full benefits of it. In other words, it aimed to put a stop from "double dipping". Because the system was set up to give relief to low-paid workers, this meant that someone who was only in the social security system for a short period could meet the minimum eligibility requirements and then go work for a job offering a non-covered pension. The Windfall Elimination Provision was passed by congress in 1983 to put a stop to exploiting those loopholes. 

A CERTIFIED FINANCIAL PLANNER™ Can Help You Create Comprehensive Plan for Retirement

If you have questions or concerns, please give me a call. As a CERTIFIED FINANCIAL PLANNER™, I work with people to help create custom financial plans to meet their personal needs and family’s circumstances. I can work with you to help you understand WEP and how it will affect you. Visit our Client Service Experience Page to see how we can help!

Until next time, this is Melissa Making Cents.

Melissa Anne Cox CERTIFIED FINANCIAL PLANNER™ is also a College Planning and Student Loan Advisor, and a Financial Coach in Dallas, Texas.