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1 1 (February 4, 2021)

handle is hein.crs/govebre0001 and id is 1 raw text is: ~ressior~I ~e~ar~h Serv~,e 9 Updated February 4, 2021 Social Security: The Windfall Elimination Provision (WEP) and the Government Pension Offset (GPO) Background Social Security is a work-related, federalinsuranceprogram that provides income support to workers and their eligible family members in the event of the worker's retirement, dis ability, or death. A worker's employment or self- employment is considered covered by Social Security if the services performed in thatjob result in earnings that are taxable and creditable forprogrampurposes. Although participation in Social Security is compulsory for most workers, about6% of all workers in paid employment or self-employment are notcovered by Social Security. Noncovered workers include state and local government employees covered by alternative staff-retirement systems; most permanent civilian federal employees hired before January 1, 1984, who are coveredby theCivil Service Retirement Sys tem(CSRS) or other alternative retirement plan; employees coveredby theRailroad Retirement system; domestic, election, orfarmworkers with earnings below certain thresholds; people with low levels of net earnings froms elf-employment; and certain nonimmigrants. The Windfall Elimination Provision (WEP) and the Government PensionOffset (GPO) are two separate provisions that reduce regular Social Securitybenefits for workers and their eligible family members if the worker receives (or is entitled to) a pension basedon earnings from employment not coveredby Social Security. The Windfall Elimination Provision The WEP applies to most people who receive both a pens ion fromnoncovered work (including certain foreign pensions) and Social Security benefits based on fewer than 30 years of substantialearnings in covered employment or self-employment. In 2021, the amount of substantial earnings in covered employment or self-employment needed for a year of coverage (YOC) is $26,550. This amount is adjusted annually by the growth in average earnings in the economy, provided a cost-of-living adjustment (COLA) is payable. The WEP affects retired- or dis abled-worker beneficiaries and their eligible dependents. However, it does not affect survivorbeneficiaries. The Social Security benefit formula is progressive, replacing a greater share of career-average earnings for low-paid workers than forhigh-paid workers. Theregular benefit formula applies three factors-90%, 32%, and 15%-to three different brackets of a worker's average indexed monthly earnings (AIME), which is a meas ure of career-average earnings in covered employment or self- employment. The result is the primary insurance amount (PIA), which is the worker's basic benefit before any adjustments are made for factors such as COLAs, early retirement, or delayed retirement. For workers who become eligible forbenefits in 2021, the PIA is determined based on the formula in Table 1. The dollar amounts in the table, known as bendpoints, are adjusted annually for average earnings growth. Table 1. Social Security Benefit Formula for Workers Who Attain Age 62, Become Disabled, or Die in 202 I Factor Average Indexed Monthly Earnings (AIME) 90% of the first $996 of AIME, plus 32% of AIME over $996 and through $6,002, plus 15% of AIME over $6,002 Source: CRS, based on Social SecurityAdministration, Benefit Formula Bend Points. For people with 20 or fewer YOCs who become eligible for benefits in 2021, the WEP reduces the first factor from90% to 40%, resulting in a maximum reduction of $498 (90% of $996 minus 40% of $996). For each year of substantial earnmgs in covered employment or self-employment in excess of 20, 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 30or more YOCs and at that point is phased out. The WEP includes a guaranteethatthereductionin the benefit amount caused by the WEP formula can never exceed more than one-half of the noncovered pension. Thus, for workers who become eligible for benefits in 2021, the maximum reduction under the WEP may be less than $498. In addition, because the WEP reduces the initial benefit amount before it is reduced or increased due to early retirement, delayed retirement credits, COLAs, or other factors, the difference between the finalbenefit with the W EP and the finalbenefit without the WEP may be less than or greater than $498. However, the maximum WEP reductionis stilllimited to 50% of the noncoveredpension. How Many People Are Affected by the WEP? As ofDecember 2020, about 1.9 million people (or about 3% of all Social Security beneficiaries) were affected by the W EP. More than 1.8 million of those affected were retired- worker beneficiaries, which was about 4% of the entire retired-worker beneficiary population. The remaining affected individuals were disabled-worker beneficiaries and eligible family members of retired- or dis abled-worker beneficiaries. Legislative History and Rationale The WEP was enactedin 1983 as part of major amendments designed to shore up the financing of Social https://crsrepc

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