70 Pages Posted: 8 Nov 2013 Last revised: 26 Nov 2013
Date Written: November 6, 2013
Certain federal, state, and local government employees do not pay into the Social Security system, but rather pay into alternative government pension plans. For purposes of the Social Security Act, where a worker pays into an alternative government pension plan, the worker’s employment constitutes noncovered employment. Even if a worker’s employment record reflects significant periods of noncovered employment, the worker may still qualify for Social Security coverage because she satisfies the minimum requirement of 10 years (40 quarters) of earnings in Social Security covered employment. However, an employment record which reflects both covered and noncovered employment presents a challenge to equitable application of the Social Security Act. To determine the benefits to which a worker is entitled, the Social Security Act first employs an averaging provision that considers 35 years of covered employment. Where an individual’s employment record does not reflect 35 years of covered employment, the averaging provision compresses the worker’s average earnings. Effectively, a life-time high-income worker who held both covered and noncovered employment appears to be a life-time low-income worker by operation of the averaging provision. The second step in determining a worker’s Social Security benefits entails application of a progressive benefits formula to the workers average earnings. By operation of the averaging provision and the progressive benefit formula, a high-income worker who held both covered and non covered employment received a higher than statutorily intended replacement rate (the ratio of benefits to average earnings) prior to 1983. In an effort to downward-adjust Social Security benefits for worker who held both covered and noncovered employment, Congress enacted the Windfall Elimination Provision in 1983. This article presents and examines the Windfall Elimination Provision highlighting inherent problems in its design, which include structural and administrative issues that disproportionately impact low-income workers. The article also describes and examines public misperception and resentment of the Windfall Elimination Provision, and deficiencies in the Social Security Administration’s communication efforts. The article also describes considerable legislative efforts since its enactment to modify, replace, or repeal the Windfall Elimination Provision, providing an explanation and analysis of each bill. Finally, the article presents an alternative approach to eliminating the ‘windfall’ benefits that accrue to noncovered workers. The alternative approach balances the fundamental tenants of the Social Security system – a progressive benefits structure and the earned right nature of benefits. As such, the proposed legislative amendment (included in the appendix of the article) ensures equitable benefits to noncovered workers.
Keywords: Social Security, social insurance, Windfall Elimination Provision, retirement income, Social Security benefits formula, non-covered earnings
JEL Classification: K34, D63, H21, H22, J14, J26, H24, H55, I31, I38
Suggested Citation: Suggested Citation
Lipman, Francine J. and Smith, Alan, The Social Security Benefits Formula and the Windfall Elimination Provision: An Equitable Approach to Addressing 'Windfall' Benefits (November 6, 2013). Journal of Legislation, Vol. 39, No. 2, 2012-2013. Available at SSRN: https://ssrn.com/abstract=2351006