The Windfall Elimination Provision and Government Pension Offset

Many state and local government jobs are not covered by Social Security: workers neither pay Social Security taxes on those earnings nor receive credit for that work when the Social Security Administration calculates their benefits. Instead, these jobs come with a pension designed to replace Social Security old-age benefits.

But Social Security’s standard benefit structure was not designed for these workers, many of whom split their careers between covered and non-covered employment. Specifically, the program’s progressive benefit formula replaces roughly the first $430,000 (in 2022 dollars) of a beneficiary’s lifetime covered earnings—the equivalent of around $12,000 per year—at a much higher rate than covered earnings above that level. Thus, for workers who spend part of their careers in non-covered employment, the standard benefit structure would replace a greater proportion of their covered earnings at the higher rate—even if their total (covered and non-covered) career earnings are near the top of the earnings distribution.

What is the Windfall Elimination Provision?

The standard Social Security formula relies on average indexed monthly earnings (AIME), which SSA calculates by averaging a worker’s highest (wage-growth-adjusted) 35 years of covered earnings. To determine a beneficiary’s primary insurance amount (PIA)—the monthly benefit that a worker receives if they elect to start receiving benefits at their full retirement age—SSA applies a progressive benefit formula to a beneficiary’s AIME. This formula includes two “bend points” at which the marginal replacement rate for earnings (also known as the PIA factor) changes.

In 2023, the bend points are $1,115 and $6,721, with the PIA replacing:

• 90% of AIME up to $1,115;
• 32% of AIME between $1,115 and $6,721; and
• 15% of AIME above $6,721.

To prevent inequitably generous benefits from going towards workers who spent part of their career in non-covered employment, Congress enacted the Windfall Elimination Provision (WEP) in 1983. The WEP reduces the 90% replacement rate (for the first $1,115 of AIME) based on an affected worker’s years of covered employment, as prescribed in Table 1. This reduction can amount to, at most, one-half of the value of the beneficiary’s pension from non-covered work.

Table 1: The First PIA Factor After WEP Adjustment

Source: Social Security Administration. Note: The WEP applies only to beneficiaries with non-covered pensions. Those without non-covered pensions—even if they have fewer than 30 years of covered employment—receive benefits calculated by the standard formula.

The total amount of the WEP reduction, however, cannot be more than half of the pension that a worker receives from their non-covered employer, ensuring that individuals with only a few years of non-covered employment (and thus little or no pension) do not receive a significant cut. In 2020, it was estimated that the WEP affects approximately 3% of Social Security beneficiaries (around 1.95 million people).

What Is the Government Pension Offset?

The Government Pension Offset (GPO) serves a similar purpose as the WEP for those receiving dependent Social Security benefits along with a non-covered pension. In general, a spouse receives up to 50% of the covered worker’s Social Security benefits, and a widow(er) receives up to 100%. Under the GPO, SSA reduces these benefits by two-thirds of the non-covered pension. For example, if a person receives a non-covered monthly pension of $900, SSA reduces by $600 any spousal or survivor benefit they are due. The GPO mirrors the dual-entitlement rules, which aim to prevent individuals entitled to multiple Social Security benefits (such as retired-worker benefits and spousal benefits) from receiving a benefit amount that exceeds the highest single benefit to which they are entitled. The GPO affects around 717,000 beneficiaries.

What’s Wrong with the WEP and GPO?

When Congress enacted the WEP and GPO, comprehensive data on earnings from non-covered employment did not exist, necessitating an imprecise approach to adjusting Social Security benefits. Because of that limitation, both provisions in their current forms often under- or over-adjust benefits—most WEP- or GPO-adjusted beneficiaries receive Social Security benefits that replace either a higher or lower share of their covered earnings than would be the case for a comparable earner who spent their entire career in covered employment. Consider two workers, both of whom had 35-year careers earning $40,000 each year (in constant, wage-indexed dollars). Worker 1 spent all 35 years in covered employment, while Worker 2 spent 20 years in covered employment and 15 years in a non-covered local government job . As Table 2 shows, without accounting for Worker 2’s non-covered employment, Social Security benefits replace far more of Worker 2’s covered earnings than those of Worker 1; imposing the WEP causes the opposite problem.

Table 2: Social Security Earnings Replacement, With and Without WEP

* With annual earnings of $40,000 in constant, wage-indexed dollars. Note: This table assumes the WEP reduction is no more than half the value of Worker 2’s pension from non-covered work.

Figures 1 and 2 show that this effect persists across earnings levels and years of covered employment.

Figure 1: Replacement Rates on Covered Earnings for Beneficiary Who Made $40,000 Annually (in Constant Dollars) Throughout 35-Year Career

Note: This figure assumes the WEP reduction is no more than half the value of the beneficiary’s pension from non-covered work.

Figure 2: Replacement Rate on Covered Earnings for Beneficiary Who Made $85,000 Annually (in Constant Dollars) Throughout 35-Year Career

Note: This figure assumes the WEP reduction is no more than half the value of the beneficiary’s pension from non-covered work.

Figures 1 and 2 also demonstrate why simply eliminating the WEP would not solve equity concerns—and would entail a significant cost. Without adjusting Social Security benefits for beneficiaries who spent large portions of their careers in non-covered employment, those retirees would always receive a higher replacement rate on their covered earnings than their counterparts who worked entirely in covered employment. Because of these increased outlays, repealing the WEP without replacing it would cost $88 billion over the first 10 years alone.

An additional drawback of the WEP and GPO is that affected workers can find it nearly impossible to accurately predict their Social Security benefits and, therefore, adequately prepare for retirement. This is because the Social Security Statement provides benefit estimates based only on covered employment. The hypothetical Worker 2 from Table 2, then, would receive a Statement estimating a monthly retirement benefit of $1,204, but would only ultimately receive a benefit of $692.

The GPO shares with the WEP similar concerns of complexity and fairness. Adding GPO repeal to WEP repeal without replacing the provisions would increase the total cost to $183 billion over 10 years and increase the long-range Social Security trust fund deficit by 4%.

An Alternative Adjustment: Proportional Benefits

The Bipartisan Policy Center’s Commission on Retirement Security and Personal Savings previously proposed addressing these issues by eliminating the WEP and GPO and instead prorating Social Security benefits based on the fraction of one’s lifetime earnings that were covered by Social Security.

Under BPC’s proposal, to determine the monthly benefit of someone subject to the WEP, SSA would first calculate their PIA as though their entire career was in covered employment and then multiply that by the fraction of their total earnings that came from covered employment. In practice, the proportional benefit method ensures that beneficiaries subject to the WEP and those not subject to it receive Social Security benefits that replace the same proportion of their covered earnings (i.e., the straight horizontal lines in Figures 1 and 2).

Table 3: Social Security Earnings Replacement, Proportional Benefit Calculation

*With annual earnings of $40,000 in constant, wage-indexed dollars. Note: This table assumes the WEP reduction is no more than half the value of Worker 2’s pension from non-covered work.

Replacing the WEP and GPO with a proportional benefits formula would:

• Increase equity in Social Security benefits. The WEP and GPO cause some affected beneficiaries to receive lower benefits than they would if they had spent their entire careers in covered employment and cause others to receive higher benefits. Conversely, not adjusting benefits at all would universally lead those with careers split between covered and non-covered employment to receive substantially higher benefits than is the intent of Social Security. Providing benefits proportional to one’s earnings in covered employment would ensure equity for those who spent large portions of their career in state or local government.
• Help workers prepare for retirement. Workers and retirees widely misunderstand the WEP and GPO. Social Security Statements, which present benefit estimates that fail to take the adjustments into account, make matters worse. Replacing the provisions with easier-to-understand proportional benefits—and ensuring Statements provide an accurate picture of workers’ expected benefits—would provide clarity to workers on the personal savings they will need to maintain their standard of living in retirement.
• Bolster the solvency of the Social Security trust funds. SSA’s Office of the Chief Actuary has estimated this reform would close around 2% of Social Security’s long-range shortfall.

Complementary Reform Options

• Transitioning to an “annual-PIA” benefit calculation. Currently, SSA averages earnings from a beneficiary’s 35 highest-earning years (with each year adjusted for wage growth) to calculate benefits. As this explainer describes, such a formula does not work well for beneficiaries who spent much of their careers in non-covered employment, because their AIME is not a full reflection of their career earnings. To address this and other flaws in the benefit calculation, SSA could calculate benefits by running each year’s covered earnings through the benefit formula separately and then averaging those annual PIAs. Such a reform would not only enhance equity in Social Security benefits and improve work incentives for aging Americans; it would also eliminate the need for the WEP or GPO by instituting a de facto proportional benefit calculation.

Replacing the WEP and GPO with a proportional benefit system would result in lower Social Security benefits for some beneficiaries than under current law, so care must be taken to ensure this reform does not adversely affect low earners. The following two reform options could help ensure that fewer workers—whether or not they dedicate parts of their careers to public service—spend their retirement in poverty.

• Establishing a new basic minimum benefit (BMB). Supplementing standard Social Security payments for low-income beneficiaries above the full retirement age with a BMB could help offset the WEP and GPO reform’s impact on beneficiaries with low and intermittent lifetime earnings. The specific BMB amount would be scaled so that those with the lowest Social Security benefits would receive the largest BMB add-on payments. Total benefits, however, would always increase with additional covered earnings, preserving the incentive for lower earners to continue working.
• Increasing the progressivity of the benefit formula. Although the current formula is progressive—with earnings at lower levels replaced at higher rates—increasing its progressivity would further shore up the ability of Social Security to provide vital support for the beneficiaries most in need.