Introduction

Social Security provides insured workers and their eligible family members with a measure of protection against the loss of income due to the worker's retirement, disability, or death. The amount of the monthly benefit payable to workers and their family members is based on the worker's career-average earnings from jobs covered by Social Security (i.e., jobs in which the worker's earnings were subject to the Social Security payroll tax).¹ The Social Security benefit formula is weighted to replace a greater share of career-average earnings for low-paid workers than for high-paid workers. This means that low-paid workers receive relatively high benefits in relation to their payroll tax contributions, although the dollar amount of their benefits is lower than that provided to high-paid workers.

The benefit formula, however, cannot distinguish between workers who have low career-average earnings because they worked for many years at low earnings in Social Security–covered employment and workers who appear to have low career-average earnings because they worked for many years in jobs not covered by Social Security. (Those years show up as zeros in their Social Security earnings records, which, when averaged, lower their career earnings from covered work.) Consequently, workers who split their careers between covered and noncovered employment—even highly paid ones—may also receive the advantage of the weighted formula.

The windfall elimination provision (WEP) is a modified benefit formula designed to remove the unintended advantage, or "windfall," of the regular benefit formula for certain retired or disabled workers who spent less than full careers in covered employment and who are also entitled to pension benefits based on earnings from jobs not covered by Social Security. The reduction in initial benefits caused by the WEP is designed to place affected workers in approximately the same position they would have been in had all their earnings been covered by Social Security.

Background on the Social Security Benefit Formula

Workers qualify for Social Security benefits if they worked and paid Social Security payroll taxes for a sufficient amount of time in covered employment.² Retired workers need at least 40 earnings credits (or about 10 years of covered work), whereas disabled workers generally need fewer earnings credits.³ Initial benefits are based on a worker's career-average earnings from jobs covered by Social Security. In computing the initial benefit amount, a worker's annual taxable earnings are indexed (i.e., adjusted) to average wage growth in the national economy.⁴ This is done to bring earlier years of earnings up to a comparable, current basis. Next, a summarized measure of a worker's career-average earnings is found by totaling the highest 35 years of covered earnings and then dividing by 35.⁵ After that, a monthly average, known as average indexed monthly earnings (AIME), is found by dividing the annual average by 12.

Once the worker's AIME has been derived, it is then entered into the Social Security benefit formula to produce the worker's initial benefit amount. The benefit formula is progressive, replacing a greater share of career-average earnings for low-paid workers than for high-paid workers. The benefit formula applies three factors—90%, 32%, and 15%—to three different levels, or brackets, of AIME. The result is known as the primary insurance amount (PIA) and is rounded down to the nearest 10 cents. The PIA is the worker's basic benefit before any adjustments are applied.⁶ The benefit formula applicable to a given worker is based on the individual's earliest eligibility year (ELY), that is, the year in which the worker first attains age 62, becomes disabled, or dies.⁷ For workers whose ELY is 2024, the PIA is determined as follows in Table 1.

The averaging provision in the benefit formula tends to cause workers with short careers in Social Security–covered employment to have low AIMEs, even if they had high earnings in their noncovered career. This results in these workers having AIMEs that are similar to those of people who worked for low earnings in covered employment throughout their careers. This is because years of zero covered earnings are entered as zeros into the formula that averages the worker's earnings history over 35 years. For example, a person with 10 years in Social Security–covered employment would have an AIME that reflects 25 years of zero earnings, even if that person worked for 25 years in a high-paying, noncovered career.

Consequently, for a worker whose AIME is low because his or her career was split between covered and noncovered employment, the benefit formula replaces more of covered earnings at the 90% rate than if the worker had spent a full 35-year career in covered employment at the same earnings level. The higher replacement rate⁸ for workers who have split their careers between Social Security–covered and noncovered jobs is sometimes referred to as a "windfall."⁹

How the Windfall Elimination Provision Works

A different Social Security benefit formula, known informally as the windfall elimination provision, applies to certain workers who are entitled to Social Security benefits as well as to pension benefits from employment not covered by Social Security.¹⁰ Under the WEP, the 90% factor in the first bracket of the formula is reduced to as low as 40%. The effect is to lower the proportion of earnings in the first bracket that are converted to benefits. Table 2 illustrates how the regular benefit formula and the WEP work in 2024 for someone with a 40% factor.

In this scenario, the monthly benefit is $587 lower under the WEP than under the regular benefit formula ($1,480.90 minus $893.90). Note that the WEP reduction is limited to the first bracket in the AIME formula (90% vs. 40%), while the 32% and 15% factors for the second and third brackets are unchanged. As a result, for AIME amounts that exceed the first formula threshold of $1,174, the WEP reduction remains a flat $587 per month. For example, if the worker had an AIME of $4,000 instead of $2,500, the WEP reduction would still be $587 per month. The WEP therefore causes a proportionally larger reduction in benefits for workers with lower AIMEs and monthly benefit amounts.¹¹

A guarantee in the WEP ensures that the WEP reduction cannot exceed half of the noncovered pension based on the worker's noncovered work. This guarantee is designed to help protect workers with low pensions from noncovered work. The WEP does not apply to workers who have 30 or more years of substantial employment covered under Social Security, with an adjusted formula for workers with 21 to 29 years of substantial covered employment, as shown in Table 3.¹²

Types of Workers Affected by the WEP

The WEP applies to benefits payable to retired or disabled workers who meet the criteria above and to their eligible dependents; however, it does not apply to benefits payable to survivors of deceased insured workers. Groups of workers likely to be affected by the WEP include certain state and local government employees who are covered by alternative pension plans through their employers¹³ and most permanent civilian federal employees hired before January 1, 1984, who are covered by the Civil Service Retirement System (CSRS).¹⁴ The WEP does not apply to

• federal employees performing service on January 1, 1984, to which coverage was extended on that date by reason of the Social Security Amendments of 1983 (P.L. 98-21);
• employees of a nonprofit organization who were exempt from Social Security coverage on December 31, 1983, and who became covered for the first time on January 1, 1984, under P.L. 98-21;
• workers who attained age 62, became disabled, or were first eligible for a pension from noncovered employment before 1986;
• workers who receive foreign pension payments after 1994 that are based on a totalization agreement with the United States;¹⁵
• workers whose only noncovered pension is based on earnings from noncovered domestic or foreign employment before 1957;¹⁶ and
• railroad workers whose only noncovered pension is based on earnings from employment covered by the Railroad Retirement Act.¹⁷

The Number of People Affected by the WEP

According to the Social Security Administration (SSA), as of December 2023, about 2.1 million Social Security beneficiaries were affected by the WEP (Table 4). The overwhelming majority of those affected (about 95%) were retired workers. Approximately 3% of all Social Security beneficiaries (including disabled workers and dependent beneficiaries) and 4% of all retired-worker beneficiaries were affected by the WEP in December 2023.¹⁸ Of retired workers affected by the WEP, approximately 53% were men (Table 5).

For data on the share of Social Security beneficiaries affected by the WEP in December 2022, by state, see Table A-1 and Table A-2 in the Appendix.

Legislative History and Rationale

The WEP was enacted in 1983 as part of major amendments (P.L. 98-21) designed to shore up the financing of the Social Security program. The 40% WEP formula factor was the result of a compromise between a House bill that would have substituted a 61% factor for the regular 90% factor and a Senate proposal that would have substituted a 32% factor.¹⁹

The purpose of the 1983 provision was to remove an unintended advantage that the regular Social Security benefit formula provided to certain retired or disabled worker-beneficiaries who were also entitled to pension benefits based on earnings from jobs not subject to the Social Security payroll tax. The regular formula was intended to help workers who spent their lifetimes in low-paying jobs, by providing them with a benefit that replaces a higher proportion of their career-average earnings than the benefit provided to workers with high career-average earnings. However, the formula does not differentiate between those who worked in low-paid jobs throughout their careers and other workers who appear to have been low paid because they worked many years in jobs not covered by Social Security and few years in covered jobs. Under the old law, workers who were employed for only a portion of their careers in jobs covered by Social Security—even highly paid ones—also received the advantage of the weighted formula, because their few years of covered earnings were averaged over their entire working career to determine the average covered earnings on which their Social Security benefits were based. The WEP is intended to place affected workers in approximately the same position they would have been in had all their earnings been covered by Social Security.

Arguments for the WEP

Proponents of the measure say that it is a reasonable means to prevent payment of overgenerous and unintended benefits to certain workers who otherwise would profit from happenstance (i.e., the mechanics of the Social Security benefit formula). Furthermore, they maintain that the provision rarely causes hardship because by and large the people affected are reasonably well off because by definition they also receive pensions from noncovered work. The guarantee provision ensures that the reduction in Social Security benefits cannot exceed half of the pension from noncovered work, which protects people with small pensions from noncovered work. In addition, the impact of the WEP is reduced for workers who spend 21 to 29 years in Social Security–covered work and is eliminated for people who spend 30 years or more in Social Security–covered work.

Arguments Against the WEP

Some opponents of the WEP believe the provision is unfair because it substantially reduces a benefit that certain workers may have included in their retirement plans. Others criticize how the provision works. They say the arbitrary 40% factor in the windfall elimination formula is an imprecise way to determine the actual windfall when applied to individual cases.²⁰

The WEP's Impact on Low-Income Workers

The impact of the WEP on low-income workers has been the subject of debate. Jeffrey Brown and Scott Weisbenner (hereinafter "Brown and Weisbenner") point out two reasons why the WEP can be regressive.²¹ First, because the WEP adjustment is confined to the first bracket of career-average earnings in the benefit formula ($1,174 in 2024), it causes a proportionally larger reduction in benefits for workers with lower AIMEs and benefit amounts than for others. Second, a high earner is more likely than a low earner to cross the "substantial work" threshold for accumulating years of covered earnings (in 2024 this threshold is $31,275 in Social Security–covered earnings); therefore, high earners are more likely to benefit from the provision that phases out the WEP for people with between 21 and 29 years of covered employment.

Brown and Weisbenner found that the WEP does reduce benefits disproportionately for lower-earning households.²² For some high-income households, applying the WEP to covered earnings even provides a higher replacement rate than if the WEP were applied proportionately to all earnings, covered and noncovered. Brown and Weisbenner found that the WEP can also lead to large changes in Social Security replacement rates based on small changes in covered earnings, particularly when a small increase in covered earnings carries a person over the threshold for an additional year of substantial covered earnings, leading to an adjustment in the WEP formula applied to the AIME.

Noncovered Pensions for Beneficiaries Affected by the WEP

The WEP applies to Social Security beneficiaries who are entitled to (i.e., receiving) a pension based on earnings that were not covered by Social Security. SSA periodically provides data on those noncovered pension amounts for Social Security beneficiaries affected by the WEP. Figure 1 shows the distribution of Social Security WEP-affected beneficiaries who first became eligible for benefits in 2020, by noncovered pension amount and gender. As of December 2023, about 22% of those beneficiaries received a noncovered pension amount of less than $1,000 per month, approximately 46% received a monthly amount between $1,000 and $3,999, and 31% received a monthly amount of $4,000 or more. Among those WEP-affected beneficiaries, women tended to have a lower noncovered pension amount than men on average.

Figure 1. Distribution of WEP-Affected Social Security Beneficiaries by Monthly Noncovered Pension Amount and Gender, December 2023 Among Social Security beneficiaries with first eligibility in 2020

Source: CRS, based on unpublished data from SSA's ORES, Table W12, February 2024. Notes: Data reflects beneficiaries for whom noncovered pension amounts are available. The monthly pension amount represents the noncovered government pension amount at the time of initial filing for Social Security benefits. The sum of components may not equal to 100% due to rounding.

A worker who split his or her career between Social Security–covered and noncovered jobs may receive both Social Security retired-worker benefits (subject to the WEP) and a noncovered pension. In December 2023, among all Social Security worker beneficiaries who were affected by the WEP, about 82% had 20 or fewer YOCs (substantial covered earnings under Social Security).²³ Usually, the longer the individual worked in noncovered employment, the shorter the employment in covered jobs (provided that the number of working years a person can work is relatively stable). In this case, the worker would be likely to receive a relatively larger noncovered pension amount and a smaller Social Security benefit. In December 2023, among WEP-affected beneficiaries who first became eligible for Social Security in 2020, about 30% of them received a monthly noncovered pension amount of $2,000 or more and a monthly Social Security benefit below $600 after the effect of the WEP (see Figure 2).

However, some workers may work a relatively short career or at relatively low earnings in both Social Security–covered and noncovered jobs, thus resulting in relatively low combined Social Security and noncovered pension benefits. In December 2023, among WEP-affected beneficiaries who became eligible for Social Security in 2020, about 9% of those beneficiaries received less than $1,000 per month in noncovered pensions and less than $900 per month in Social Security benefits (for a combined total below $1,900 per month). Another 6% received between $1,000-1,999 per month in noncovered pensions and less than $600 per month in Social Security (for a combined total greater than $1,000 and below $2,599 per month). This monthly benefit amount does not include retirement income received from other sources (such as need-based benefits and other government transfers, earnings, retirement savings, and asset income).

Figure 2. Distribution of WEP-Affected Social Security Beneficiaries by Monthly Noncovered Pension Amount and Monthly Social Security Benefits, December 2023 Among Social Security beneficiaries with first eligibility in 2020

Source: CRS, based on unpublished data from SSA's ORES, Table W16, February 2024. Notes: Data reflects beneficiaries for whom noncovered pension amounts are available. The monthly pension amount represents the noncovered government pension amount at the time of initial filing. Social Security benefits are measured by the primary insurance amount after the effect of the WEP.

Legislative Activity on the WEP in the 118^th Congress²⁴

In the 118^h Congress, several proposals were introduced that would repeal or amend the WEP. These proposals are briefly described below.

The Social Security Fairness Act of 2023 was introduced by Representative Garret Graves on January 9, 2023 (H.R. 82), and the Social Security Fairness Act was introduced by Senator Sherrod Brown on March 1, 2023 (S. 597). The legislation would repeal the WEP and the government pension offset (GPO), which reduces the Social Security benefits paid to spouses and widow(er)s of insured workers if the spouse or widow(er) also receives a pension based on government employment not covered by Social Security.²⁵ The elimination of the WEP and GPO would apply to benefits payable for months after December 2023. In 2022, the Congressional Budget Office projected that eliminating only the WEP would have cost $88 billion over the period 2022-2032 and that eliminating both the WEP and the GPO would have cost $183 billion over the period 2022-2032.²⁶ In the same year, SSA's Office of the Chief Actuary (OCACT) projected that eliminating both the WEP and the GPO would have reduced the long-range actuarial balance (i.e., would have increased the net long-term cost) of the combined Social Security trust funds by 0.12% of taxable payroll.²⁷

The bills titled Social Security 2100 Act were introduced by Senator Richard Blumenthal (S. 2280) on July 12, 2023 and Representative John B. Larson (H.R. 4583) on July 14, 2023, respectively. Among other provisions, the bills would temporarily repeal the WEP and the GPO for benefits payable during 2025 through 2034. OCACT estimated that enactment of this provision alone would increase the net long-term cost by 0.02% of taxable payroll.²⁸

Since 2004, introduced legislation has reflected a different approach that would replace the WEP formula under current law with a new proportional formula for new beneficiaries. Under this approach, the proportional formula would apply the regular Social Security benefit formula to all past earnings from covered and noncovered employment. The resulting benefit would then be reduced by the ratio of career-average earnings from covered employment to career-average earnings from both covered and noncovered employment (i.e., combined earnings). Based on the estimate from OCACT, among all current beneficiaries in 2018, about 69% of those affected by the WEP would receive an increase in Social Security benefits using the proportional formula, and the remaining 31% would receive a lower benefit. In addition, 13.5 million beneficiaries who are not affected by the current WEP would receive a lower benefit using the proportional formula.²⁹ Most workers who are not affected by the current WEP but would be affected by the proportional formula are those with noncovered employment who have 30 or more years of substantial covered earnings, or those with noncovered employment who are not receiving noncovered pension benefits; both groups are exempt from the WEP under current law. To protect future beneficiaries from further benefit reduction compared with the current law, the recent legislation based on the proportional formula would generally attempt to hold beneficiaries harmless to a certain degree by providing the higher benefit of the current-law WEP or the proportional formula. This approach was reflected in the Public Servants Protection and Fairness Act of 2023 (H.R. 4260) and the Equal Treatment of Public Servants Act of 2023 (H.R. 5342), as described below in this section.

The Public Servants Protection and Fairness Act of 2023 (H.R. 4260) was introduced by Representative Richard E. Neal on June 21, 2023. The legislation would replace the WEP with a new proportional formula for individuals who become eligible for Social Security benefits in 2025 or later. The bill includes a benefit guarantee provision that would allow individuals to receive the higher of their benefit under the current-law WEP or the proportional formula. The proposal would also provide a rebate payment starting nine months after enactment for retired-worker and disabled-worker beneficiaries affected by the current WEP (up to $150 per month); the rebate payments would increase with cost-of-living adjustments, be exempt from most benefit adjustments under Social Security, and be excluded in determining eligibility and the benefit amount under the Supplemental Security Income program. In 2023, OCACT estimated that the legislation would increase program expenditures by about $31.8 billion (mainly from the rebate) between 2023 and 2032. The change in net cash flow of $30.1 billion (net of the revenue from income taxation on benefits) would be reimbursed from the General Fund of the U.S. Treasury. In the long run (75 years), the projected program cost would increase by an amount equal to 0.02% of taxable payroll, and the projected program income would increase by the same amount with transfers from the General Fund, thus having no significant effect on the combined trust funds' actuarial balance.³⁰

The Equal Treatment of Public Servants Act of 2023 (H.R. 5342) was introduced by Representative Jodey C. Arrington on September 5, 2023. Similar to H.R. 4260, the legislation would replace the WEP with the new proportional formula for individuals who become eligible for Social Security benefits in 2025 or later. Individuals becoming eligible during the transitional period between 2025 and 2067 would receive the higher of their benefit under the current-law WEP or the proportional formula. For those who become eligible in 2068 and later, benefits would be based solely on the proportional formula. The proposal would also provide a rebate payment starting nine months after enactment for workers (up to $100 per month) and their dependents (up to $50 per month) affected by the current WEP. The rebate payments would increase with cost-of-living adjustments and be exempt from most benefit adjustments under Social Security. In 2023, OCACT estimated that the legislation would increase program costs by about $25.2 billion (or $23.9 billion net of the revenue from the income taxation on benefits) over the period 2023-2032. According to OCACT's estimates, over the 75-year projection period, future savings from the proportional formula would offset the cost of the monthly rebate payments and the protection provision during the transitional period, so the bill would result in a negligible (i.e., less than 0.005% of taxable payroll) increase in the combined trust funds' actuarial balance.³¹

Appendix. WEP-Affected Beneficiaries, by State