Thursday, August 22, 2013

Social Security - The Windfall Elimination Provision

It seems like many of you have questions about Social Security. Lately, I've been getting several questions from people with government pensions who didn't have Social Security taxes withheld. I asked Tiya Lim, who wrote the section on Social Security in our book The Only Guide You'll Ever Need for the Right Financial Plan, to weigh in on the topic. Here's what she had to say:

There are two provisions that could reduce or eliminate your Social Security benefits if you're also eligible to receive a government pension:

The windfall elimination provision (WEP)
The government pension offset provision (GPO)

Today, we'll talk about the WEP. If you receive a pension from a federal, state or local government based on work where you didn't pay Social Security taxes, part of your Social Security benefit may be reduced (but not eliminated) by the WEP. If any family members are eligible for benefits based on your work record, their benefits may also be reduced.

Why the Reduction? The Social Security system is progressive, meaning lower-paid workers get a higher percentage of their pre-retirement earnings than high-wage earners. According to the Social Security Administration, lower-paid workers could get a Social Security benefit equal to about 55 percent of their pre-retirement earnings, while highly paid workers may receive about 25 percent.

Without the WEP in place, people who primarily worked in a job not covered by Social Security would have their benefits calculated as if they were long-term, low-wage workers. Thus, they would not only receive their pension, but also receive Social Security benefits that represented a higher percentage of their earnings.

How Much Is the Reduction? Your benefits are calculated based on your highest 35 years of earnings, adjusted for wage inflation and weighted according to a formula from the SSA. The WEP uses a modified formula to calculate a reduced benefit amount.

The maximum reduction possible is based on ... Read the entire article.

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