Formula helps lower-paid workers

Retiring federal employees not covered by the Federal Employees Retirement System (FERS) in most cases lose some Social Security benefits as a result of the pension they receive for their federal service. One method by which the government reduces these Social Security benefits is called the windfall elimination provision (WEP), a concept some readers have asked me to clarify.

This provision affects how Social Security retirement or disability benefits are calculated for people who earned a pension by working for the federal government but also worked at other jobs in which Social Security taxes were withheld from their wages.

This issue has special significance because federal employees who switch from the Civil Service Retirement System to FERS during the upcoming open season still will be subject to the WEP for five years.

The WEP reduces the excessive benefits that traditionally are paid to federal employees who receive pensions based on non-government work. The government uses a modified formula to compute the reduced Social Security benefits for these employees.

The modified formula applies to those who reached age 62 or became disabled after 1985 and who first became eligible after 1985 for a monthly pension based on federal work that was not covered by Social Security. It also applies to those who receive a Social Security retirement pension, even if they continue to work. (Keep in mind that federal employees who are in FERS are covered by Social Security.)

The formula is used beginning with the first month someone gets both a Social Security benefit and a federal retirement benefit.

I am frequently asked why the government uses this formula, and it is a question underlined by the common misconception that the formula is intended to penalize federal employees.

To answer that question, one must put it in context. The formula that is used to compute benefits includes factors that ensure that lower-paid workers get a higher return than highly paid ones. For example, lower-paid workers can get a Social Security benefit that equals about 60 percent of their pre-retirement earnings. The average replacement rate for highly paid workers is about 25 percent.

Before 1983, Social Security benefits for federal and state government employees who also held nongovernment jobs were computed as though the recipients were long-term, low-wage workers. Their earnings record looked like that of a lower-paid worker because their earnings merely supplemented their full-time work.

Nevertheless, they received the advantage of the higher-percentage Social Security benefit computation along with their federal pension.

The modified formula eliminates this windfall. It does not penalize federal employees; it simply prevents them from receiving more than they should.

Social Security benefits are based on the worker's average monthly earnings adjusted for inflation. When Social

Security figures benefits, it separates a worker's average earnings into three amounts and multiplies the amounts using three different factors.

For example, for a worker who turns 62 this year, the first $477 of her average monthly earnings is multiplied by 90 percent; the next $2,398 is multiplied by 32 percent; and the remainder is multiplied by 15 percent.

In this example, note that the first $477 is multiplied by 90 percent. So if a worker had average monthly earnings of $477, her Social Security benefit would be 90 percent of her pre-retirement income.

The 90 percent factor is reduced in the modified formula and phased in for workers who reached age 62 or became disabled between 1986 and 1989. For those who reach 62 or were disabled in 1990 or later, the 90 percent factor is reduced to 40 percent.

There are some exceptions to this rule. For example, the 90 percent factor is not reduced if a worker has 30 or more years of substantial earnings in a job in which he paid Social Security taxes. And if a worker has 21 to 29 years of substantial earnings, the 90 percent factor is reduced to somewhere between 45 percent and 85 percent.

The FCW World Wide Web site (www.fcw.com) includes a table that lists the amount of earnings that the Social Security Administration considers "substantial" for each year. It includes a second table that shows the percentage used by SSA to calculate benefits in accordance with the number of years of substantial earnings. The system does protect workers with relatively low pensions. The reduction in the Social Security benefits under the modified formula cannot equal more than half of that part of the pension attributable to earnings after 1956 not covered by Social Security.

-- Bureaucratus is a retired federal employee who contributes regularly to Federal Computer Week.

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