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Throughout your career, it is likely that a portion of your income will be spent on Social Security benefits with each pay period. The goal? When it comes time to retire, you can receive monthly benefits from this program. This gives you additional income on top of your personal retirement savings. If your work over the years has enabled you to receive a pension, these payments may reduce the Social Security benefits to which you would otherwise be entitled. This reduction is called the windfall elimination provision, or WEP.
Consider working with a financial advisor when making financial plans for your retirement.
What is the deal elimination provision?
The Windfall Elimination Provision (WEP) is a formula that effectively reduces Social Security and disability benefits for some retirees who receive a pension during retirement, in addition to their Social Security payments.
WEP applies to social security beneficiaries whose pension comes from an uncovered job or who has not contributed to the FCIA. If you hadn’t withheld Social Security contributions from your paychecks and then received a pension from that job, you can probably expect your Social Security benefits in retirement to be reduced.
The windfall profit elimination provision was introduced in 1983 as a benefit guarantee. It prevents some workers from receiving full Social Security benefits in addition to a pension, without having contributed to Social Security for a sufficient period of their career.
The WEP formula takes into account the number of years during which you have had social security contributions deducted. It then uses a sliding scale to determine your benefits for the year of eligibility (ELY).
How WEP is applied
The exceptional elimination provision affects both social security and disability benefits. It calculates a fair benefit that is proportional to the number of years you have had substantial income from a qualifying job (the one that withheld FICA). WEP discounts are applied on a sliding scale. If you are 30 or older with substantial income from a job eligible for social security, for example, you can receive 90% of your social security benefits even if you are also receiving a pension from an uncovered job.
If you have worked for less than 20 years in a qualifying job with substantial income, and you receive a pension from an uncovered career, you can only receive up to 40% of your social security benefits.
The WEP calculation is applied before other benefit adjustment calculations, such as early retirement reductions, deferred retirement credits, and COLA.
Supply limits
If you are receiving Social Security benefits while receiving a pension from an uncovered job, WEP most likely applies. Indeed, in December 2020, over 1.9 million Americans were affected by WEP. According to the Federation of American Scientists, most of them were former state and federal employees.
However, there are limits to how much this provision can reduce your Social Security payments. This is especially true if you are receiving a smaller pension.
WEP has a maximum reduction equal to 50% of retirement or retirement benefits from any employment not covered. This means that no matter how many years you have spent (or have not spent) earning substantial income from a covered job, your Social Security benefits will not be reduced by more than half of your income. pension payment.
Who is exempt from WEP?
If you are receiving a pension from uncovered employment, your benefits will not automatically be subject to the windfall elimination provision. There are a few important exceptions.
You are 30 years or older of eligibility earnings. If you have worked 30 years or more in another job with substantial income, which has withheld Social Security, you are exempt from WEP. Substantial gains are defined as $ 26,550 or more for the year 2021. This exemption generally applies to retirees who have started a second career after their first retirement. It can also benefit those who have changed jobs in the middle of their careers.
You were eligible for pension payments before 1986. If you became eligible to accept pension payments from your non-eligible job prior to the year 1986, you are not subject to a WEP adjustment on your Social Security benefits.
You are a federal employee whose social security service and coverage began on January 1, 1984. The mandatory WEP coverage provision means that federal employees who were on duty in early 1984 are exempt.
You receive a railway pension. If your only pension comes from a job on the railroad, it is WEP exempt.
The bottom line
The WEP aims to prevent retirees from enjoying the unfair advantage of receiving full Social Security benefits if they also receive a pension from a job that has not contributed to Social Security. WEP can reduce eligible social security benefits by up to 60%. It has a maximum deduction equal to half of your pension payment. To avoid WEP, you will need to work for at least 30 years in an eligible position (eligible for Social Security) with substantial income (for 2021, it’s $ 26,500 or more). Other WEP exemptions include railroad pensions, survivors’ benefits, pensions that began before 1986, and federal employees whose Social Security coverage began on January 1, 1984.
Social security advice
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If you don’t know how to best prepare for retirement, consider working with a financial advisor who can build a portfolio based on your needs, time horizon, and financial situation. Finding an advisor doesn’t have to be difficult. SmartAsset can connect you with up to three advisors in your area in as little as five minutes. If you’re ready to find one, get started now.
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If you’d rather go it alone, use SmartAsset’s asset allocation calculator to figure out how best to allocate your money between stocks, bonds, and cash. The calculator bases its recommendation on your risk profile and provides a breakdown of each asset class.
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Do you think you are affected by WEP? It is therefore important to take this reduction in benefits into account when planning your retirement savings strategy. In some cases, you may need to save more for a successful funded retirement. Or you may have to delay retirement to reach the 30-year exemption threshold.
Photo credit: © iStock.com / zimmytws, © iStock.com / RichVintage, © iStock.com / Thurtell
The social security windfall elimination provision first appeared on the SmartAsset blog.
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