The Windfall Elimination Program Repeal

Social Security Retirement Benefits

Most working Americans have been paying into the Social Security system for many years. There are at least two aspects of Social Security benefits that will directly affect most taxpayers in their retirement years. First, an individual, after proper application, will receive monthly benefits starting at age 62 or later. Selecting an entry date is the most impactful election in the process. Second, the benefits may be partially taxable, based on the taxpayer’s other retirement income.

To do effective planning for a client’s retirement years, a tax advisor should have at least a basic understanding of the benefits available under Title II of the Social Security Act. Old-age, survivors, or disability insurance benefits are the benefits paid to workers, their spouses, children and parents, as well as to widows, widowers, and divorced persons.

The following discussion explores how the right to coverage is determined for an individual that has worked for 10 to 40 years, and how the amount of Social Security benefits is determined when the individual reaches full retirement age.

Determination of Coverage

A worker’s right to coverage depends upon the number of “quarters of coverage” acquired. Quarters of coverage are generally earned by performing work that produces taxable wages or self-employment income under the Social Security Act (SSA). The specific minimum requirements for a quarter of coverage depend on the date the work was performed [SSA § 213(a)].

For years before 1978, a quarter of coverage was earned for any calendar quarter in which the individual earned taxable wages of $50 or more or self-employment income of $100 or more. The amount is $100 for agricultural labor after 1954. The worker must also have self-employment income of $400 for a taxable year for years after 1950.

For 1978, a worker is given credit for one quarter for each $250 of taxable wages earned in that year, with a maximum of four quarters. Beginning in that year, taxable wages and self-employment income are added together, and credit is given based on the sum. A worker must have at least $400 of self-employment income before any quarters of credit are given for self-employment income.

For years after 1978, the minimum amount of combined taxable wages and self-employment income increases each year to reflect the increase in average wages. Self-employed individuals must still have at least $400 of self-employment income in a taxable year.

The law specifies that the quarter of coverage (QC) amount for the current year is equal to the 1978 amount of $250 multiplied by the ratio of the national average wage index for two years prior to the current year to the national average wage index for 1976, or, if larger, the prior year amount. If the amount so determined is not a multiple of $10, it is rounded to the nearest multiple of $10. These amounts range from $260 in 1979 to $1,730 in 2024 (SSA.gov, “Quarter of Coverage,” February 2004, https://tinyurl.com/vrvdns4a).

For most benefits, the worker must be “fully insured” by having credit for enough quarters of coverage based on age or date of death. A worker with forty quarters of coverage is fully insured for life. [SSA § 214(a)].

Amount of Benefits—Primary Insurance Amount

In general, an individual’s Social Security benefit is based on the worker’s earnings averaged over the worker’s working lifetime.

Spouse’s Benefits

The spouse of a worker entitled to benefits is also entitled to benefits if the spouse has filed an application, is at least age 62 (or is caring for a child eligible for benefits), and whose own primary insurance amount is less than one-half of the worker’s primary insurance amount. The spouse’s full monthly benefit at full retirement age would be equal to half of the worker’s primary insurance amount. Spouse’s benefits are generally reduced if payments begin before full retirement age. This reduction is .69% for each month prior to full retirement, up to a maximum reduction of 25%. There is no reduction if the spouse is caring for a covered child. Benefits may also be reduced if either spouse has excess earnings [Darlene Pulliam Smith, Dale Pulliam, and Holland Toles; Advising the 60+ Investor: Tax and Financial Planning, Wiley, 1999; SSA § 215(a),(d),(f)].

The Windfall Elimination Program

The Windfall Elimination Program (WEP) was added to Social Security law in the 1980s. It applied to workers that were eligible for a pension from employment not covered by Social Security as well as other employment subject to Social Security. Social Security benefits are reduced based on the number of years of coverage. Using the first line of the Primary Insurance Amount formula above, PIA is reduced by using a percentage smaller than the 90% factor. The percentage to be used is determined based on how many years the employee had substantial earnings, illustrated in Exhibit 1. The percentage to be used for an employee with 30 or more years of substantial earnings continues to be 90%, with no reduction in the PIA. If the years of substantial earnings are between 21 and 29 years, the factor replacing 90% is between 45% and 85%. If it is 20 years or less, the factor is 40%, as illustrated in Exhibit 2.

Exceptions

The WEP does not apply under the following conditions:

• The individuals is a federal worker first hired after December 31, 1983, as they are automatically covered by Social Security under the Federal Employees Retirement System (FERS).
• The individual is an employee of a non-profit organization which was exempt from Social Security coverage on December 31,1983. This does not apply if the non-profit organization waived exemption and did pay Social Security taxes, but then the waiver was terminated prior to December 31, 1983.
• The individual’s only pension is for railroad employment.
• The only work the individual performed for which they didn’t pay Social Security taxes was before 1957.
• The individuals has 30 or more years of substantial earnings under Social Security.

The government pension offset provision works in a similar manner.

Example

Mr. and Ms. Allen (both born in late 1957) married after completing college at age 22. Ms. Allen stayed at home with their children for several years, but then she finished her PhD and became an accounting professor at age 36. She has been a professor for 30 years at a Texas A&M University, paying in to both the Teacher Retirement System of Texas (TRS) and Social Security.

Mr. Allen was a head coach and history teacher at a West Texas independent school district for 30 years, paying into TRS but not Social Security. He decided he needed to do something to pay into Social Security and worked as a football coach/instructor at a Texas A&M University for 14 years, paying into both TRS and Social Security. Both retired after the spring semester of 2024 when they were 66 years and 6 months old—their full retirement age. Under the Social Security formula, they are both fully insured for retirement benefits at this age. Mr. Allen’s Average Adjusted Monthly Earnings (the computation of which is outside the scope of this article) is $12,000.

Without the WEP limitation, Mr. Allen’s PIA would be calculated as follows:

• 90% of the first $1,174   $1,056
• 32% of $7,078 – 1,174   1,889
• 15% of $12,000 – 7,078   738
• Primary Insurance Amount   $3,683

Using Formula 2 above and inserting 40% from Table 2, Mr. Allen’s SS benefits will be:

• 40% of the first $1,174   $470
• 32% of $7,078 – 1,174   1,889
• 15% of $12,000 – 7,078   738
• Primary Insurance Amount   $3,097

Mr. Allen has been suffering a monthly Social Security reduction of $1,056 – 470 = $586. Mr. Allen should receive a refund for the sum of 12 months’ limitation in 2025.

Improving Retirement Outlooks

The Social Security Fairness Act of 2023’s repeal of the WEP and government pension offset provision will most certainly become a major planning issue resulting in a positive reworking of retirement calculations for taxpayers around the nation.