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7 Things You Need to Know About the Windfall Elimination Provision

The windfall elimination provision (WEP) slashes the Social Security retirement benefits of many retirees who collect public sector pensions from jobs that were not covered by the program. If you are a trustee or administrator for a state or local retirement system that is outside of Social Security, some of your members may be affected.

1. What is the windfall elimination provision? WEP is a federal law that reduces the Social Security retirement benefits that can be received by most retirees who are eligible for them in addition to pensions from jobs that were not covered by Social Security.

2. Will my members be affected? If they are covered by Social Security, no. If they are not covered by Social Security, then there is a good chance that some of them will be affected. With a few exceptions, any of your members who have also worked in jobs covered by Social Security long enough to be eligible for benefits (that is, for forty quarters) will have those benefits cut if they collect a pension from a non-covered job.

3. How much of an impact can WEP have? A big one. For a person who retires at 62 in 2004 and is not affected by WEP, Social Security benefits are computed by applying the following formula to average monthly earnings: 90 percent of the first $612 plus 32 percent of the next $3,077 plus 15 percent of the remainder. If a retiree is subject to WEP, however, only 40 percent (or $244.80) - instead of 90 percent (or $550.80) - of the first $612 is used to calculate benefits. This is a difference of $306 per month.

4. That seems overly simplistic. What if a person only gets a small pension from non-covered work? The law does include the following protection: the WEP reduction cannot be more than one-half of the non-covered pension.

5. Is there any way around WEP? Yes, but it's not an easy one. If a person receives "substantial earnings" for 30 years or more in a job covered by Social Security, he or she will be exempt from WEP. The provision actually begins to phase out at 21 years and is gone at 30.

6. What are the chances of Congress changing the law? Pretty slim, at least in the near future. The House Ways and Means Social Security Subcommittee on July 20 did hold a hearing on a bill (H.R. 4391) that would replace WEP with a formula that would more accurately reflect a person's level of participation in Social Security, but it is not expected to go far this year. Several other bills have been introduced that would reduce or eliminate WEP and one, H.R. 594 from Rep. Buck McKeon, R-Calif., has a majority of the House as cosponsors. Legislative leaders, though, tend to be scared off by the price tag - repealing WEP would cost about $29 billion over 10 years - and have refused to allow McKeon's bill to move. A "discharge petition" on H.R. 594 is circulating, however, and if 218 members - a majority of the House - sign it, House leaders will be forced to allow a vote on the bill. As of early August, the petition had 192 signatures.

7. What should I tell my members about WEP? Many people do not know about WEP and experience the unpleasant surprise of learning that their retirement income will be sharply reduced a time when it is too late to adjust for it. You can help your members by educating them about WEP and making sure they know long before they retire if and how it will affect them. As for legal requirements, public employers will be required to notify each new employee starting work on or after Jan. 1, 2005, about WEP and the government pension offset (GPO). The employers must obtain each new hire's signature on a document attesting to having been notified and forward a copy of the document to the public pension that will cover the worker.

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