# Ask the Experts – April 24

The professionals at Advanced Underwriting Consultants (AUC) answer the tax and technical questions posed by producers.  Here’s the question of the day.

Question: Can you explain what the Social Security Windfall Elimination Provision is?

Answer: The Windfall Elimination Provision (WEP) typically applies to an individual who is entitled to Social Security benefits in addition to a pension from employment in which he was not required to pay Social Security taxes (e.g., many governmental jobs). If the WEP applies, the individual’s retirement benefits are reduced.

The WEP was enacted because lower income workers see a greater return on the amount they put into Social Security. Governmental employees who don’t pay Social Security taxes show up in the Social Security system as lower-paid workers. This is a product of how the SSA calculates an individual’s primary insurance amount (PIA), the amount an individual would receive in retirement benefits at full retirement age.

An individual’s PIA is calculated first by averaging an individual’s 35 highest earning years (up to the yearly taxable wage base, \$117,000 in 2014), indexed for inflation, to figure out his average indexed monthly earnings. Next the SSA splits these earnings into three portions and reduces each portion. The first \$816 is reduced to 90%; the next \$4,101 is reduced to 32%; and the excess is reduced to 15%. The sum of these reductions is the individual’s PIA.

For example, if Frank averages \$5,500 per month for his highest 35 years of employment, his PIA is \$2,119.10 (i.e. 90% of \$816, plus 32% of \$4,101, plus 15% of \$483). In other words, Frank’s PIA is about 38.5% of his average indexed monthly earnings.

If the WEP applies, the first \$816 of earnings is reduced to 40% instead of the usual 90%. This brings the individual’s return on the amount he pays into Social Security back to the levels of others like him.

For example, let’s say Martha has the same average monthly income as Frank, but she works for a school that pays her \$4,500 per month in which she doesn’t pay Social Security taxes, in addition to a part-time job as a tutor earning \$1,000 per month. For Social Security purposes, Martha’s average indexed monthly earnings is \$1,000 since this is all she contributed to Social Security. Therefore, her PIA is \$793.20 (i.e. 90% of \$816 plus 32% of \$184), or 79.3% of her average indexed monthly earnings.

If Martha isn’t entitled to a pension from her employment as a teacher, then she will be entitled to her full \$793.20 benefits. However, if she does earn a pension, the WEP applies and lowers her benefits. Therefore, instead of reducing her first \$816 to 90%, it’s reduced to 40%, and her PIA is now \$385.20 (i.e. 40% of \$816, plus 32% of \$184). This way, Martha’s PIA is about 38.5% of her average indexed monthly earnings—the same as Frank’s.

The WEP doesn’t apply to survivor benefits, though. Additionally, there are a few exceptions to the WEP. It also doesn’t apply if:

• The employee is a federal worker hired after December 31, 1983;
• The employee was employed on December 31, 1983, by a nonprofit organization that did not withhold Social Security taxes from the employee’s pay at first, but then began withholding Social Security taxes later;
• The employee’s only pension is based on railroad employment;
• The only work the employee did where he didn’t pay Social Security taxes was before 1957; or
• The employee has 30 or more years of substantial earnings under Social Security.

Additionally, if a worker has 30 or more years of “substantial” earnings in which he paid Social Security taxes, the 90% factor is not reduced. If a worker has between 21 and 29 years of substantial earnings, the 90% factor is reduced to between 45% and 85%.

Have a question for the professionals at AUC?  Feel welcome to submit it by email.  We may post your question and the answer as the question of the day.