A CalSTRS member who worked in Social Security covered employment may have their Social Security benefit
reduced by the Windfall Elimination Provision.
The WEP is a provision under the Social Security Act under which an alternative formula is used to determine
an individual's Social Security benefit. It results in a lower Social Security benefit for retirees who earned
a pension from work in employment not covered by Social Security and who held other jobs where they paid Social
Security taxes long enough to become eligible for a Social Security benefit.
Social Security benefits were intended to replace only a percentage of a worker's pre-retirement earnings.
The way Social Security benefit amounts are computed, lower-paid workers get a Social Security benefit that
equals about 55 percent of their pre-retirement earnings. The average replacement rate for highly paid workers
is about 25 percent.
Before 1983, people who worked in jobs not covered by Social Security, such as CalSTRS members, received
benefits that were computed as if they were long-term, low-wage workers. They received a higher percentage
of Social Security benefits in addition to their pension allowance. Congress passed the WEP in 1983 to
eliminate this perceived advantage.
The WEP uses a modified benefit formula when computing a retired or disabled worker's own benefit if that
worker receives a pension from employment where Social Security taxes were not taken out of his/her pay,
such as the CalSTRS-covered employment. The formula used to compute a member's benefit amount is modified,
providing a lower Social Security benefit.
A CalSTRS benefit is not used to calculate the WEP, however, if the CalSTRS benefit is relatively low,
it may be used to determine the maximum WEP reduction.
The WEP applies if a CalSTRS member is entitled to a pension or disability benefit and is
entitled to a Social Security benefit under the following circumstances:
- The member reached 62 after 1985; or
- The member became disabled after 1985; or
- The member either turned age 50 with 30 years of service or age 55 with 5 years of service
after 1985, even if the member was still working.
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To understand how WEP is calculated, we must first understand how Social Security calculates a
monthly benefit. A disability or retirement benefit is calculated based on the Primary Insurance
Amount which uses the Average Indexed Monthly and the PIA "bend" points. The AIME is the average
annual earnings adjusted for inflation over 35 years (except in disability cases) and divided by 12
to determine the monthly amount. That monthly amount is then broken into three amounts (also known
as the PIA bend points) and percentages are applied to each of those amounts, specifically 90 percent
for the first bend, 32 percent for the second, and 15 percent for the third.
See the Benefit Formula Bend Points chart.
When the WEP reduction is applied, the first bend is 40 percent (rather than 90 percent) if a CalSTRS
member has 20 or less years of substantial Social Security covered employment. For a member with more than
20 years of substantial Social Security covered employment, there is an increase of 5 percent per year up
to the 90 percent. Thus a CalSTRS member who has 30 or more years of Social Security covered employment
will have no WEP reduction. For a definition of "substantial Social Security covered employment" see the
publication "Windfall Elimination Provision".. Note: Full retirement is between the ages of 65 and 67,
depending on year of birth. Benefits are further reduced if an early retirement is taken, or increased
if a later retirement is taken up to age 70. For further information, see the
retirement chart.
If a CalSTRS member receives a relatively small pension, the member is protected. The reduction in a
Social Security benefit cannot be more than one-half of that part of the pension based on that member's
earnings after 1956 from which Social Security taxes were not deducted.
The following examples illustrate the potential impact of WEP on a CalSTRS member:
Example 1 - Barry
Barry elects to retire at age 64 and 0 months in 2005; his work history includes:
1962 - 1974 (No Social Security)
- Traveled the world working odd jobs.
1975 - 1980 (No Social Security)
- Taught full time in non-Social Security service; CalSTRS member.
1981 - 2005 (24 years Social Security)
- Taught full time at a California State University campus in Social Security service; California
Public Employees' Retirement System (CalPERS) Member Final Compensation for CalSTRS and CalPERS = $5,000.
Barry opts to retire concurrently as follows:
- Takes a monthly retirement benefit from CalSTRS - his benefit formula is 2% at 60. His age factor for
age 64 is 2.4%. The calculation is 2.4% x 5 years x $5,000 average 3 year final compensation = $600.00 per month;
and
- Takes a monthly retirement benefit from CalPERS - his benefit formula is 2% at 55. His age factor
for age 64 is 2.5%. The calculation is 2.5% x 24 years x $5,000 (less $133.33) = $2,920.00.
Barry - Application of WEP:
As a result of receiving a non-Social Security covered pension from CalSTRS, Barry is subject to the WEP.
Based on his work history and his age 62 "year of first eligibility," Social Security determines that
Barry's AIME on his Social Security covered service is $3,425. To visualize how Barry's Social Security
benefit amount is calculated, see the chart below:
Dollars are based on Barry's age 62 in 2003;
see chart
Each year, the bend points change. |
WITHOUT WEP |
WITH WEP |
| First Bend |
$ 606 x .90 = $ 545.40 |
First Bend |
$ 606 x .60**=$ 363.60 |
| Second Bend |
$2,819 x .32 = $ 902.10 |
Second Bend |
$2,819 x .32 = $ 902.10 |
| Third Bend |
$0 x .15 = $ 0 |
Third Bend |
$0 x .15 = $ 0 |
| TOTAL |
$1,447.50* |
TOTAL |
$1,265.70* |
| Benefit at full retirement age. Barry's date of
birth is 6/10/1941; thus, his full retirement age is 65 and 8 months. |
*To this amount, Social Security adds the cost-of-living increases for 2003 and 2004, then reduces
the amount based on the number of months between Barry's first month of entitlement to Social Security
and his full retirement age.
**Social Security modifies the first bend in the formula to determine Barry's reduced Social Security
benefit for early retirement. Because Barry had 24 years of Social Security covered employment, the
first bend point is multiplied by 60% instead of 90%. The first bend point could be as low as 40% for
a CalSTRS member with 20 or less years of Social Security covered service.
Because Barry is subject to the WEP, his benefit at 62 and 0 months (age first eligible) goes from
$1,447.50 to $1,265.70; however, because he is retiring at age 64 and 0 months, the $1,266 is increased
by the cost-of-living increases for 2003 and 2004 then reduced by 20 months (early retirement). His
actual early retirement benefit is $1,180.
The formula used by Social Security to calculate Barry's actual benefit is:
- WEP PIA + any Cost-Of-Living Adjustments = COLA Adjusted WEP PIA.
- Reduce for early retirement:
- Total the number of months less than full retirement x 5 = Early Retirement Adjustment;
- Divide Early Retirement Adjustment by nine or twelve as appropriate = Percentage Adjustment;
- Subtract Percentage Adjustment from 100% or Full Retirement Benefit = Actual Benefit Adjustment;
- Actual Benefit Adjustment x COLA Adjusted WEP PIA = the Final WEP Benefit.
Barry's example would include:
1,265.70 + 2.1 % (2003 COLA) = $1,292.30
1,292.30 + 2.7% (2004 COLA) = $1,327.20 (COLA Adjusted WEP PIA)
$1,327.20 x 88.89% (20 months early retirement x 5 divided by 9 = 11.11% - 100%
full retirement = 88.89%) = $1,180 (rounded)
Barry will receive the following total monthly benefits:
| CalSTRS |
600 |
| CalPERS |
2,920 |
| Social Security |
1,180 |
| Total |
$4,700 |
However, had Barry completed 30 years of Social Security covered service WEP would
not apply. Thus his final monthly benefit could have been:
| CalSTRS |
600 |
| CalPERS |
2,920 |
| Social Security |
1,350 |
| Total |
$4,870 |
Example 2 - Janice
Janice is currently 59 and is considering retiring at age 60. She receives an estimate from Social
Security for $750 per month; her work history includes:
1964 - 1974 (10 years Social Security)
- Worked in various Social Security covered employment
1975 - 1990 (No Social Security)
1991 - 2005 (No Social Security)
- Taught full time in non-Social Security service; CalSTRS member
Her CalSTRS benefit formula would be 2% at age 60. The calculation is 14 years x 2% x $4,100
final CalSTRS compensation = $1,148.
As a result of receiving a non-Social Security covered pension with CalSTRS, Janice is subject
to the WEP. The actual impact will not be determined until she actually applies for a retirement
benefit from Social Security. We know that because she has 20 or less years of Social Security
covered employment, her benefit reduction as a result of the WEP will be based on 40 percent of
the first bend point determined by Social Security in the year she retires.
To show the potential impact on Janice, let's assume she is ready to retire in 2006 at full
retirement age. Social Security has determined her AIME to be $1,265. The chart below portrays
Janice's potential retirement income as impacted by WEP.
| Janice Income Source |
Without WEP |
With WEP |
| CalSTRS |
$1,378 (unmodified) |
$1,378 (unmodified) |
| Social Security |
$756 |
$453 |
| Total Benefit |
$2,134 |
$1,831 |
Example 3 - Carrie
Carrie is 65; she worked putting herself through college at various jobs paying into Social
Security. She received an estimate from Social Security stating at 65 she could receive
$582 per month. Her work history includes:
1959 - 1977 (Social Security)
- Worked part time at various jobs and earned 38 quarters in Social Security.
1978 - 1991 (Social Security & Non-Social Security service)
- Worked in administration full time as a CalSTRS member.
- During the summer, occasionally worked in jobs paying Social Security. Earned an
additional 7 quarters of Social Security service.
1992 - 2005 (no Social Security)
- Worked full time as a nurse at her local high school as a CalSTRS member.
Because of her CalSTRS pension, Carrie is impacted by WEP. With less than 20 years of Social
Security covered service, her WEP formula is at 40%. Her final benefit is actually $286 instead
of the $582 on her estimate from Social Security. The chart below portrays Carrie's potential
retirement income as impacted by WEP.
| Carrie Income Source |
Without WEP |
With WEP |
| CalSTRS |
$1,650 (unmodified) |
$1,650 (unmodified) |
| Social Security |
$582 |
$286 |
| Total Benefit |
$2,232 |
$1,936 |
Example 4 - Karen
Karen is age 45 and has worked for many years teaching in Oklahoma; she moves to California.
1980 - 2004 (Social Security)
- Taught school as a member of the Oklahoma Public Employees Retirement System
2005
- Husband received job offer in California
Karen has worked 24 years paying into Social Security. If she chooses to continue working as a
teacher in CalSTRS, not paying Social Security, she could be impacted by WEP at a modified
formula if she were to work long enough to receive a retirement benefit from CalSTRS.
However, should she work paying Social Security for another 6 years, she would be exempt
from the WEP provision. The chart below is an example of what Karen's potential retirement
income could be and how it is impacted by WEP.
| Karen Potential Income Source |
Without WEP |
With WEP |
| OPERS |
$2,125 |
$2,125 |
| CalSTRS |
$1,025 (unmodified) |
$1,025 (unmodified) |
| Social Security |
$545 |
$363 |
| Total Benefit |
$3,695 |
$3,513 |
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Social Security's position is:
Under the Defined Benefit Program
- If a member takes a refund prior to age 50 with 30 years of CalSTRS service or age 55 with 5 years of service,
the answer is no.
Under the Defined Benefit Supplement Program
- If the benefit or refund is taken prior to age 50 with 30 years of CalSTRS service or age 55 with 5 years
of service, and there are no employer contributions in the member's DBS account,
then the answer is no.
- If the benefit or refund was taken prior to age 50 with 30 years of CalSTRS service or age 55 with
5 years of service, and there are employee and employer contributions plus interest in the member's
DBS account, then the answer is yes; however, WEP is not applied until the member receives a Social
Security benefit. The reduction is based on the potential monthly earnings as though that individual
had not taken a benefit or refund.
- If the benefit was taken after age 50 with 30 years of CalSTRS service or age 55 with 5 years of service;
then the answer is yes regardless of employer contributions.
Participant's within the Cash Balance Benefit Program
- Yes. The benefit includes employer and employee contributions and interest. Even if
the benefit is taken prior to eligibility to retire, it is still subject to the WEP. However,
WEP is not applied until the member receives a Social Security benefit. At that point the reduction
is based on the monthly earnings as though that individual had not taken a Termination Benefit.
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Dependents' Social Security benefits are affected by the WEP because they are derived from the worker's basic
benefit. When the worker dies, the WEP reduction is removed. The surviving spouse's benefit is recalculated
using the regular benefit formula
Example:
A worker and spouse both claim their benefits at full retirement age. Based on the worker's AIME of $2,100 and
because the worker receives a pension based on work not covered by Social Security, the benefit amount under
the WEP benefit formula is $696. After the WEP reduction is taken into account in computing the worker's benefit,
the spouse's benefit is $348 (one-half of the worker's WEP benefit amount). If the worker dies, however, the
surviving spousal benefit is based on the worker's benefit, without any adjustment for the WEP. If that full
worker's benefit is $1,023, then the surviving spouse's benefit is $1,023 (100 percent of the worker's benefit).
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