There are proposals to replace the current formula by which the Social Security windfall elimination provision (WEP) is determined to one that is proportional. The Congressional Research Service (CRS) has issued a study that compares such a formula to the way it is currently determined.
In “The Windfall Elimination Provision (WEP) in Social Security: Proposals for a New Proportional Formula” the CRS starts by noting that the current formula by which Social Security benefits are determined cannot distinguish between workers who have low career-average earnings because they worked for many years at low earnings in covered employment and those who appear to have low career-average earnings because they worked for many years in jobs not covered by Social Security.
As a result, says the report, a worker who worked in jobs both covered and not covered by Social Security might receive a higher replacement rate of career-average earnings than a worker with the same earnings who spent an entire career in covered employment. The WEP is intended to remove an unintended advantage, or windfall, for certain beneficiaries with earnings not covered by Social Security.
The Current WEP Formula
The current Social Security benefit formula applies three factors—90%, 32% and 15%—to three different brackets of a worker’s average indexed monthly earnings (AIME). The result is the primary insurance amount (PIA), which is the worker’s basic monthly benefit at full retirement age before any adjustments.
Under current law, says the CRS, the WEP reduction is based on years of coverage (YOCs). For people with 20 or fewer YOCs, the WEP reduces the first factor from 90% to 40%. For each year of substantial covered earnings after 20 YOCs, the first factor increases by 5%. The WEP factor reaches 90% for those with 30 or more YOCs, and at that point it is phased out.
And, the CRS adds, the WEP reduction: (1) cannot exceed one-half of the pension benefit based on the worker’s noncovered employment; and (2) does not apply to those who do not receive such a pension.
The Proportional Formula
In 1983, just before the WEP was put in place, the bipartisan National Commission on Social Security Reform described two ways to eliminate the windfall benefits: (1) the current-approach; and (2) a proportional formula.
The proportional formula for WEP purposes would apply the regular Social Security benefit formula to all past earnings from both covered and noncovered employment. The resulting benefit would then be multiplied by the ratio of career-average earnings (AIME) from covered employment only to career-average earnings (AIME) from both covered and noncovered employment.
This formula, says the CRS, better reflects the Commission’s recommendation for people with some earnings from noncovered employment to receive the same replacement rate as those workers who spent their entire careers in covered employment.
Current Formula vs. Proportional Formula
The Social Security Administration’s Office of the Chief Actuary (OCACT) estimates that if the proportional formula had applied to current beneficiaries in 2018, approximately 1.1 million beneficiaries affected by the current WEP would have received a higher benefit and about 500,000 would have received a lower benefit. In addition, says the CRS, 13.5 million beneficiaries with some noncovered earnings who were not affected by the current WEP would have received a lower benefit.
Based on such a result, says the CRS, an additional effect of having a proportional formula in place and applied to new beneficiaries would be to save the Social Security system money.
Current Legislation
The report notes that two bills were introduced in 2021 that would replace the current approach to the WEP with a proportional formula for certain individuals who would become eligible for Social Security benefits in 2023 or later:
- H.R. 2337 https://www.congress.gov/bill/117th-congress/house-bill/2337 (the Public Servants Protection and Fairness Act), introduced by Rep. Richard E. Neal (D-MA); and
- H.R. 5834 https://www.congress.gov/bill/117th-congress/house-bill/5834 (the Equal Treatment of Public Servants Act), introduced by Rep. Kevin Brady (R-TX).
Both bills are before the House Ways and Means Committee.
The CRS notes that both measures include a protection provision calling for individuals to receive a benefit based on the higher of the current WEP formula or the proportional formula. These provisions are intended to prevent the proportional formula from reducing Social Security benefits for some future beneficiaries with noncovered employment.
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