Washington, DC - Dear Rusty:  During my first career, which lasted about 25 years, I worked for companies that withheld Social Security FICA taxes from my income.  In my new second career my employer doesn't take Social Security from my wages, but I'll still be eligible for a company pension after 15 or so years of service.   From my co-workers I've heard about something called "WEP" which could affect my Social Security benefits, but when they try to explain it I get totally confused.  Can you clarify?  Signed:  Changed Careers

Dear Changed:  If you work in your second career long enough to earn a pension, "WEP" will, indeed, affect your future Social Security benefit.  WEP, the Windfall Elimination Provision, applies to those who are entitled to a "non-covered" pension from an employer who did not withhold FICA Social Security taxes from their earnings, and who is also entitled to Social Security benefits from other employment which did.  Since the Social Security benefit calculation is weighted to replace more income for lower-earning workers, dual-benefit recipients were getting proportionately higher income replacement than truly low-income workers, causing Congress to enact WEP in 1983.

Social Security's standard formula for computing your benefit includes segmenting your average indexed monthly earnings into 3 portions called "bend points", multiplying each portion by a percentage and totaling them.  A majority of your benefit amount comes from the first bend point, which is normally 90% of the first $885 of your average monthly earnings (for someone applyingin 2017).   The WEP reduction is computed by adjusting the percentage used in that first "bend point" to something less than 90%, depending upon the number of years of Social Security covered employment you had.   If you had 20 or fewer years of Social Security substantial earnings, the percentage used in the first bend point will be 40%, rather than 90%.  If you have 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 you have 30 or more years of substantial Social Security earnings, WEP doesn't apply.  In your case, since you have 25 years of Social Security employment, your first bend point percentage will be 65% rather than 90%, so your first bend point amount (using 2017 numbers) would go from $796.50 to $575.25, thus reducing your monthly Social Security benefit by about $221.25.  The reduction amount will become $214.00, which is the maximum WEP reduction for someone first applying for benefits in 2017 with 25 years of substantial Social Security earnings.

There are some other factors that come into play with WEP:

  • WEP reduction to the Social Security benefit cannot be more than ½ of the amount of your non-covered pension, or more than a maximum based on your years of covered substantial earnings
  • A WEP adjustment to a worker's Social Security benefit also affects (reduces) spousal and other dependent benefits, but does not affect survivor's benefits.
  • WEP will not affect Social Security benefits until the first month of entitlement to your non-covered pension.  For example, if you start Social Security benefits at age 62 and are not entitled to your non-covered pension until age 65, your Social Security benefit will not be reduced by WEP until you are 65. Conversely, if you take your non-covered pension and delay Social Security for some years beyond that, WEP won't apply until you start Social Security.
  • If you take your non-covered pension in a lump-sum, it will be prorated to determine an equivalent monthly amount for WEP purposes.  If you outlive the number of months used in the proration, WEP will cease to impact your Social Security benefit.     

So, if you remain in your second career long enough to earn a pension, then WEP will eventually affect the Social Security benefit earned from your first career.  Hopefully, knowing the above information gives you an opportunity to manage the level of impact.