CRS Examines Social Security Windfall Elimination Provision

Background

Social Security monthly benefits are computed by applying a formula to an average of a person's earnings from work subject to the Social Security tax. The formula applies three progressive factors -- 90%, 32%, and 15% -- to three different levels, or brackets, of average monthly covered earnings (these earnings brackets change each year to reflect changes in national wage levels). The result is known as the "primary insurance amount," or PIA, and is rounded down to the nearest 10 cents. The formula is designed so that workers with low average career earnings receive a PIA that is a larger proportion of their earnings than do workers with high average earnings. For persons who reach age 62, die or become disabled in 2005, the PIA is determined thus:

 Factor      Average career monthly earnings

          Table 1. Monthly PIA for Worker With Average

The provision includes a guarantee (designed to help protect workers with low pensions) that the reduction in benefits caused by the windfall elimination formula can never exceed more than one-half of the pension based on non-covered work. The provision also exempts workers who have 30 or more years of "substantial" employment covered under Social Security (i.e., having earned at least one-quarter of the "old law" Social Security maximum taxable wage base for each year in question).² Also, lesser reductions apply to workers with 21 through 30 years of substantial covered employment, as follows:

               Years of Social Security coverage

According to the Social Security Administration (SSA), as of December 2002, 635,000 recipients were affected by the WEP. Of these 66% were men. SSA estimates that in 2000, 3.5% of recipients affected by the WEP had incomes below the poverty line. For comparison purposes, at that time 8.5% of all Social Security beneficiaries age 65 and over had incomes below the poverty line and 11.3% of the general population had incomes below the poverty line.³

Legislative History and Rationale

This provision was enacted in 1983 as part of major amendments designed to shore up the financing of the Social Security program. Its purpose was to remove an unintended advantage that the regular Social Security benefit formula provided to persons who also had pensions from non Social Security-covered employment. The regular formula was intended to help workers who spent their work careers in low paying jobs, by providing them with a benefit that replaces a higher proportion of their earnings than the benefit that is provided for workers with high earnings. However, the formula could not differentiate between those who worked in low-paid jobs throughout their careers and other workers who appeared to have been low paid because they worked many years in jobs not covered by Social Security (these years are shown as zeros for Social Security benefit purposes).

Thus, under the old law, workers who were employed for only a portion of their careers in jobs covered by Social Security -- even highly paid ones -- also received the advantage of the "weighted" formula, because their few years of covered earnings were averaged over their entire working career to determine the average covered earnings on which their Social Security benefits were based. The new formula is intended to remove this advantage for these workers.

Arguments for the Windfall Elimination Provision. Proponents of the measure say that it is a reasonable means to prevent payment of overgenerous and unintended benefits to certain workers who otherwise would profit from happenstance (i.e., the mechanics of the Social Security benefit formula). Furthermore, they maintain that the provision rarely causes hardship because by and large the people affected are reasonably well off as most of them also receive government pensions.

Arguments Against the Windfall Elimination Provision. Some opponents believe the provision is unfair because it substantially reduces a benefit that workers had included in their retirement plans. Others criticize how the provision works. They say the arbitrary 40% factor in the windfall elimination formula is an inaccurate way to determine the actual windfall when applied to individual cases. For example, they say it over-penalizes lower paid workers with short careers, or with full careers that are fairly evenly split. They also say it is regressive, because the reduction is confined to the first bracket of the benefit formula and causes a relatively larger reduction in benefits for lowpaid workers.

Recent Legislation

In the 109th Congress, four bills have been introduced that would alter the windfall provision. H.R. 147, introduced by Representative McKeon, and S. 619, introduced by Senator Feinstein would repeal the windfall elimination provision for Social Security benefits payable after December 2005. According to the Office of the Actuary of the SSA, elimination of the WEP would cost 0.06% of taxable payroll (causing an increase in Social Security's long-range deficit of about 3%). H.R. 1690, introduced by Representative Frank Barney, would eliminate the WEP for those whose combined monthly income from Social Security and the non-covered pension was less than $2500 in 2005 and indexed annually to the increase in the national average wage. The bill would gradually phase in the provision for those who have a combined monthly income between $2500 and $3334. For those whose combined monthly income is more than $3335, the provision would remain fully applicable.

Representative Kevin Brady introduced H.R. 1714, the Public Servant Retirement Protection Act (PSRPA) of 2005.⁴ The PSRPA would eliminate the current-law WEP for those first entering non-Social Security covered employment one year after the bill's enactment. Those workers who have worked in non-covered employment prior to this date would still be covered by the current-law WEP unless the PSRPA WEP provided them with a higher benefit. The PSRPA would substitute a new WEP formula that would provide a Social Security benefit in rough proportion to the percentage of earnings worked in Social Security covered employment.

² For determining years of coverage after 1978 for individuals with pensions from non-covered employment, the amount is 25% of what the contribution and benefit base otherwise would have been if the 1977 Social Security Amendments had not been enacted. In 2005, the "old-law" taxable wage base was equal to $66,900, and, thus, to earn credit for one year of "substantial" employment under the WEP, a worker would have to earn at least $16,725 in Social Security covered-employment.

³ Poverty rates were calculated by David Weaver of the Social Security Administration's Office of Retirement Policy using the March 2001 Current Population Survey (CPS). Poverty status is taken directly from the CPS and is thus subject to errors in the reporting of income. The sample for the WEP poverty rate only includes persons for whom SSA administrative records could be matched. The sample size for the WEP poverty rate is relatively small (230 cases). The poverty rates for the Social Security beneficiary population age 65 and over and for the general population do not require matched data and are based completely on CPS data.

⁴ With the exception of some administrative provisions, this bill is identical in effect to that introduced as H.R. 4391 in the 108th Congress. For additional information on the PSRPA, please refer to CRS Report RL32477, Social Security: The Public Servant Retirement Protection Act (H.R. 4391/S. 2455), by Laura Haltzel.