Dear fellow practitioners, CPAs, attorneys, and other professionals. Welcome to the eighth edition of our “Dreidel” newsletter about planning and investment issues of US citizens living overseas.
This month Mike Reed focuses on the Social Security Windfall Elimination Provision, or WEP.
WEP is something that we are asked about often by people who are eligible for both Social Security and a pension from a job that did not pay into Social Security. Many are concerned that the WEP will wipe out all their Social Security benefits, and that they should forfeit any external pension so that they are better off. This is not the case; we submit that having both Social Security and an external pension is better.
First, let us discuss briefly how WEP works. WEP is designed to keep the system equitable, and to prevent a higher earner who did not pay much into Social Security, and who receives a pension from the non-covered job, from collecting an excess benefit.
The system is progressive, as low earners (up to $1,174 per month) receive a 90% payout on their Social Security earnings, which drops to 32% and then 15% on the additional amounts for higher earners. WEP reduces the percentage of the initial amount for high earners outside the system, to up to 50% of their external pension amount (see table below).
The social or progressive part of Social Security is that lower income workers are paid back much quicker for their contributions over the years they worked. The WEP is designed to help keep this part of the Social Security program in line.
For the WEP to take effect, the worker must have worked less than 30 years at a job that was covered by Social Security, and must also have worked at a job that did not pay into Social Security, but also provides a pension.
An example would be a worker who has 35 years of earnings; 25 years at a job that did pay into Social Security, and 10 years elsewhere where Social Security was not paid (for example, in another country).
Let us assume that his or her average monthly earnings over that period were $3,000. Normally the Social Security benefit at Full Retirement Age would be $1,174(.9) + $1,825(.32) = $1640.6 a month.
However, as can be seen in the table below, since he or she has only 25 years of paying in, Social Security will reduce the first part of the calculation from 90% to 65%. This makes the first part of the payment calculation only $763 ($1.174*.65) instead of $1,057 ($1,174 *.9).
The full deduction would only come into force if 50% of the external pension was more than the maximum WEP deduction.
| Years of Social Security Earnings | Adjusted Percentage Applied to Benefit |
| 30 or more | 90 |
| 29 | 85 |
| 28 | 80 |
| 27 | 75 |
| 26 | 70 |
| 25 | 65 |
| 24 | 60 |
| 23 | 55 |
| 22 | 50 |
| 21 | 45 |
| 20 or fewer | 40 |
Again, this is to make up for the fact that the worker did not pay into the Social Security system for 10 years but still received an external pension. However, since the WEP cannot reduce your Social Security benefit by more than 50% of your monthly pension, the worker is still better off collecting Social Security and his or her pension.
There are some ways to reduce the WEP if someone is subject to it, and the easiest way is to keep adding covered years to your calculation. Any years that get you closer to 30 covered years will help lower the offset. After your reach full retirement age, even part time work that is covered by Social Security and meets the “substantial earnings test” ($31,275 for 2024) will help lower the WEP, and Social Security will recalculate your benefits.
We are happy to discuss this in further detail, if you do have non-US clients who live outside the US with Social Security questions. Please contact us to discuss.
Disclaimer Nardis Advisors LLC (“Nardis”) is a Registered Investment Advisory Firm regulated by the U.S Securities and Exchange Commission in accordance and compliance with applicable securities laws and regulations. Registration does not imply a certain level of skill or training. Nardis does not render or offer to render personalized investment advice through this medium. The information provided herein is for informational purposes only and does not constitute financial, investment or legal advice. Investment advice can only be rendered after delivery of the Firm’s disclosure statement (Form ADV Part 2) and execution of an investment advisory agreement between the client and Nardis.
