The Congressional Research Service (CRS) has updated information concerning the Windfall Elimination Provision (WEP) and the Government Pension Offset (GPO), both benefit formulas that reduce Social Security benefits for workers and their eligible family members if the worker receives (or is entitled to) a pension based on earnings from employment not covered by Social Security. And the threshold for the WEP has been set for 2021.
The Windfall Elimination Provision
The WEP was enacted in 1983 as part of major amendments designed to shore up the financing of Social Security. It is a modified benefit formula that reduces the Social Security benefits of certain retired or disabled workers who are also entitled to pension benefits based on earnings from jobs that were not covered by Social Security—and thus not subject to the Social Security payroll tax.
The purpose of the WEP is to remove an unintended advantage or “windfall” that these workers would otherwise receive as a result of the interaction between the regular Social Security benefit formula and the workers’ relatively short careers in Social Security-covered employment.
The WEP applies to most people who receive both a pension from noncovered work (including certain foreign pensions) and Social Security benefits based on fewer than 30 years of substantial earnings in covered employment or self-employment. The WEP affects retired- or disabled-worker beneficiaries and their eligible dependents. However, it does not affect survivor beneficiaries.
In December 2020, about 1.9 million people—approximately 3% of all Social Security beneficiaries—were affected by the WEP. Those workers mainly include state and local government employees covered by alternative staff-retirement systems as well as most permanent civilian federal employees hired before Jan. 1, 1984, who are covered by the Civil Service Retirement System.
2021 Levels. For purposes of the WEP, the amount of substantial earnings in covered employment or self-employment needed for a year of coverage (YOC) is adjusted annually by the growth in average earnings in the economy, provided a cost-of-living adjustment is payable. In 2021, the amount of substantial earnings in covered employment or self-employment needed for a YOC is $26,550.
For people with 20 or fewer YOCs who become eligible for benefits in 2021, the WEP reduces the first factor from 90% to 40%, resulting in a maximum reduction of $498 (90% of $996 minus 40% of $996). For each year of substantial earnings in covered employment or self-employment in excess of 20 years, the first factor increases by 5%. For example, the first factor is 45% for those with 21 YOCs. The WEP factor reaches 90% for those with 30 or more YOCs and at that point is phased out.
Controversy. There is some disagreement about the WEP. Its supporters argue that the formula is a reasonable means to prevent overgenerous payments and unintended benefits to people who have earnings not covered by Social Security and receive pensions from noncovered work. Opponents counter that the provision substantially reduces a benefit that workers may have included in their retirement plans, and cuts benefits disproportionately for lower-earning households; others hold that the current WEP formula is an imprecise way to determine the actual windfall when applied to individual cases.
The Government Pension Offset
The GPO is intended to replicate the dual entitlement rule for spouses and widow(er)s who receive pensions based on noncovered employment.
The GPO reduces the Social Security spouse’s or widow(er)’s benefits of most people who also receive a pension based on federal, state, or local government employment not covered by Social Security. It provides benefits to the spouses and widow(er)s of insured workers, because immediate family members are presumed to be dependent on a worker for their financial support and thus are presumed to be in need of such benefits when the family experiences a loss of income due to the worker’s retirement, disability, or death. In general, a spouse receives up to 50% of the worker’s PIA, and a widow(er) receives up to 100%.
In December 2020, The GPO reduced benefits for 716,662 Social Security beneficiaries—approximately 1% of all beneficiaries. Of those directly affected by the GPO, 53% were spouses and 47% were widow(er)s. The GPO affected 16% of all spouse beneficiaries and 9% of all widow(er) beneficiaries. The GPO fully offset benefits for about 71% of all GPO-affected beneficiaries, and partially offset benefits for approximately 29% of them.
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