Are the WEP and GPO “Fair”?

Like many teachers, the first time I heard about the Windfall Elimination Provision (WEP) and Government Pension Offset (GPO), my first response was, “That’s not fair!” Why should my Social Security benefit (by WEP) or Social Security Survivor’s Benefit (by GPO) be reduced simply because I worked as a public employee and earned a pension benefit? As with many things, once I learned a bit more I realized that the issue was a bit more complicated and nuanced than I first thought. The following are some brief thoughts about the WEP and GPO (but please realize these are complicated topics and this will not be a thorough exploration of either of them).

First, a reminder. When Social Security was created (in 1935), it was designed to be part of a “three-legged stool” to provide “economic security” to folks when they could no longer work. Those three legs were a company-provided pension plan (still relatively new at that point but very popular, even though many folks didn’t have one), Social Security (Title II portion), and the person’s own savings. It was never designed to be perfect, or to provide for a “comfortable” retirement as we think of it these days, but to alleviate poverty and suffering in old age.

“Security was attained in the earlier days through the interdependence of members of families upon each other and of the families within a small community upon each other. The complexities of great communities and of organized industry make less real these simple means of security. Therefore, we are compelled to employ the active interest of the Nation as a whole through government in order to encourage a greater security for each individual who composes it . . . This seeking for a greater measure of welfare and happiness does not indicate a change in values. It is rather a return to values lost in the course of our economic development and expansion . . .”

Franklin D. Roosevelt: Message of the President to Congress, June 8, 1934.

The Windfall Elimination Provision (WEP) is a provision of the Social Security rules that can reduce (but not eliminate) your Social Security benefit if you are eligible for a pension and did not pay into Social Security during the time you were earning that pension. This most often affects public employees (like teachers) in states where the pension plan is designed as a Social Security replacement plan. This is true of Colorado PERA and many other state plans, but not all state plans – some teachers pay into both their pension plan and Social Security simultaneously. For states where teachers pay into both, their pensions are typically much lower because they are designed to supplement Social Security (and the contributions they and their employers make to the plan are typically much lower). In states like Colorado where the pension is a replacement plan, the pension benefits are larger (as are the contributions), because the assumption is that you will not be receiving any Social Security, so therefore your pension – along with your savings – must be enough to live on in retirement.

Similarly, the Government Pension Offset (GPO) can reduce or eliminate Social Security Survivor’s Benefits. Some folks are eligible for Social Security benefits earned by their spouse if their spouse dies first, but if your pension (again, only if you also didn’t pay into Social Security simultaneously) is large enough, it can reduce or even completely eliminate those survivor benefits.

On first blush, this seems to be very unfair. Many teachers (and other public employees) work enough (typically forty quarters = 10 years of wages) under Social Security covered employment while in high school, college, and before, during and after their teaching careers to earn a Social Security benefit. If we pay into the system just like everyone else, why should our benefits be reduced simply because for some part of our career we also paid into another system? As it turns out, there is actually some really good logic behind this (although not everyone will agree), so let’s briefly take a look.

The first thing to keep in mind is that as long as you qualify for a Social Security benefit, WEP can reduce but not eliminate it. The maximum your benefit can be reduced by WEP is $480 per month (in 2020) and the reduction cannot exceed 50% of your pension benefit. Second, if you have 30 or more years of substantial Social Security covered earnings, WEP won’t affect your benefit at all. (If you have less than 30 years, the more years you have, the lower the WEP reduction is.) You can use this calculator (you have to enter in your yearly Social Security earnings) to estimate your benefit, or visit Open Social Security (where you enter in your PIA as calculated by Social Security).

So why does this provision exist? It’s because Social Security does not pay the same percentage of replacement income to everyone. Because it is designed as “social insurance” and to alleviate “poverty and suffering” in old age, it pays a higher percentage of one’s career average indexed earnings if you make less money, and a lower percentage if you make more. You can download the latest report (pdf) from Social Security, but the replacement percentage can be as high as 78% (for very low earners) to as low as (27% of the maximum Social Security covered wage, currently $142,800) for very high earners, with most folks earning in the 35-45% range.

Because of the way the formula is constructed, many folks who receive a public pension get treated like a very low wage earner and therefore get a higher benefit, even though they were not a very low wage earner. For example, let’s say you have eleven years of Social Security covered earnings and therefore qualify for a Social Security benefit. But those eleven years were mostly low-wage years, years you worked part-time in high school and college, and maybe summer jobs as a teacher. The Social Security formula then takes those eleven years of low earnings and adds in another twenty-four years of $0 earnings, as your benefit is based on your average indexed monthly earnings over the highest 35 years of earnings. To the formula, you look like someone who has made poverty level wages your entire life and, as a result, the formula will spit out a very high replacement percentage of those artificially low earnings.

The WEP formula simply tries to adjust that so that you earn a fair replacement percentage based on the wages you actually earned under Social Security. So while it feels like you are getting “penalized” for being a public employee and earning a pension, what’s really happening is that the WEP is trying to “adjust” for you getting a larger Social Security benefit than was designed.

GPO works the same way, except applied to your possible survivor benefit (survivor’s benefits were added in 1939, they were not part of the original Social Security Act) from your spouse. Survivor’s benefits were designed for families where only one spouse worked (paid work), or one spouse earns vastly more than the other. If the high earner dies first, the survivor’s benefit is designed to support the spouse who didn’t work for pay or worked for low wages. (Back in the day, this was often the stay-at-home Mom who worked very hard at home raising the family and running the household, but didn’t get paid to do that work. That still applies some today, but also includes stay-at-home Dads as well as folks who earn a lot less than their spouse or perhaps stay home for a few years.) Again, the formula for the survivor’s benefit incorrectly sees you as a low wage earner and spits out a higher benefit than intended, so the GPO tries to adjust for that.

There has often been legislation proposed to repeal the WEP and/or GPO, but it typically doesn’t get very far, both because of the faulty formula it is trying to adjust for and because of the impact on the federal budget. Right now there is legislation (pdf) before Congress that attempts to modify the WEP formula as there are cases where it adjusts incorrectly, and that has a much greater likelihood of passing (it also has a hold-harmless clause so that they use whichever formula – old or new – gives you the higher benefit).

While not everyone will agree, I generally think the WEP and GPO are fair to public employees in the context of how Social Security was designed and is implemented (especially if the formulas are adjusted by legislation to fix any incorrect adjustments). It’s a separate discussion whether pension plans as well as Social Security, Medicare and other safety-net programs are adequate in the first place.

Update 4-4-22: Here’s a great explanatory video about the WEP.

Update 9-9-22: I wrote a bit more about the nuances of the WEP and GPO, including a bit more about how to calculate them.