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Congressional Research Service
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November 8, 2019
The Windfall Elimination Provision (WEP) in Social Security:
Proposals for a New Proportional Formula
Background
Social Security is a work-based federal insurance program
that provides income support to workers and their eligible
family members in the event of a worker's retirement,
disability, or death. Although participation in Social
Security is compulsory for most workers, about 6% of
workers in paid employment or self-employment are not
covered by Social Security in 2019 (i.e., earnings are not
taxable or creditable for program purposes).
The regular Social Security benefit formula is progressive,
replacing a greater share of career-average earnings for
low-paid workers than for high-paid workers. Career-
average earnings in Social Security are calculated as
average indexed monthly earnings (AIME), which is the
monthly average of the highest 35 years of covered
earnings after indexing for wage growth. If a person has
earnings not covered by Social Security, those noncovered
earnings are shown as zeros in their Social Security
earnings records. As a result, the regular formula cannot
distinguish workers who have low career-average earnings
because they worked for many years at low earnings in
covered employment from workers who appear to have low
career-average earnings because they worked for many
years in jobs not covered by Social Security. Therefore,
based on the regular formula, a worker who worked in both
covered and noncovered employment 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 (see Table 1, column [1]). The
windfall elimination provision (WEP) is designed to
remove such an unintended advantage, or windfall, for
certain beneficiaries with earnings not covered by Social
Security.
The Current WEP Formula
The regular Social Security benefit formula applies three
factors-90%, 32%, and 15%-to three different brackets
of a worker's AIME. The result is the primary insurance
amount (PIA), which is the worker's basic monthly benefit
at the full retirement age before any adjustments. Under
current law, the WEP reduction is based on years of
coverage (YOCs). The amount of substantial covered
earnings needed for a YOC is $24,675 in 2019. For people
with 20 or fewer YOCs, the WEP reduces the first factor
from 90% to 40%. For each year of substantial covered
earnings in excess of 20, 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. In addition, the
WEP reduction cannot exceed one-half of the pension
benefit based on the worker's noncovered employment, and
it does not apply to those who do not receive such a
pension.
The Proportional Formula
Shortly before the WEP was enacted in 1983 (P.L. 98-21),
the bipartisan National Commission on Social Security
Reform (the Greenspan Commission) described two
different methods of eliminating the windfall benefits: (1)
the current-law method of adjusting the first replacement
factor (90%) as discussed above; 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.
The proportional formula better reflects the Greenspan
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 (see Table 1, column [3]),
whereas the current-law WEP can only approximately
achieve that goal (see Table 1, column [2]). However, in
1983, the Social Security Administration (SSA) lacked the
data on noncovered earnings needed to make the benefit
adjustment under the proportional formula, so Congress
adopted the current WEP formula instead. As of 2017, SSA
has 35 years of data on earnings from both covered and
noncovered employment. This data's availability means
that the proportional formula is now an option for Congress
to consider.
Table I. Illustrative Examples: Replacement Rates
(Benefits as a Share of AIME) Under Alternative
Formulas
Regular Curre Propor-
Formula nt-law tional
(w/o WEP) WEP Formula
Employment (I) (2) (3)
Covered: 35 years; 46% 46% 46%
Noncovered: 0 years
Covered: 15 years; 65% 37% 46%
Noncovered: 20 years
Source: Congressional Research Service.
Notes: The worker is assumed to earn $45,000 (indexed by average
wage growth) per year, and become eligible for benefits in 2019.
Comparing the Current WEP and the
Proportional Formula
If the proportional formula had applied to current
beneficiaries in 2018, SSA's Office of the Chief Actuary
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