Forbes post, “Why Joe Biden Should Reform, Not Repeal, The Windfall Elimination Provision”

Originally published at Forbes.com on December 7, 2020.

 

Is Social Security a “pension benefit”? Not really. It’s a social insurance program, which means something entirely different. As I I explained last month, Social Security is meant to provide a baseline level of retirement provision for all American workers. We contribute for our entire working lives, but our contributions aren’t about directly “earning” benefits as with an employer pension, but supporting the entire system, which provides disproportionately-higher benefits for low earners, people with gaps and fewer years in their earnings history, married people with little or no working history, spouses and children of deceased workers, and so on.

In that sense, it’s never been appropriate to measure individual “return on investment” in the same way you would measure returns on a 401(k) account. And it’s never truly been appropriate for some workers to opt-out of the system, though that’s the reality of our system, for better or for worse. Who are these opt-outs? Public employees in 15 sates; clergy who choose this option, and federal government workers hired before 1984. As I’ve written in the past, workers in these categories who also work at “regular” Social Security-participating jobs in the private sector benefit unfairly from provisions meant to provide special assistance to low-income workers. (Don’t believe me? Check out what the center-left Brookings Institute wrote in September.)

And that’s where the Windfall Elimination Provision comes in. This reduction to Social Security benefits attempts to remove the “excess” benefits that are really meant to boost the benefits of low-income workers. But retirees who are affected look at their Social Security benefits as if the unadjusted formula is something that they have “earned” every bit as much as their employee pension, and, based on this perception, think these reductions are unjust — a complaint I hear frequently in reader comments and correspondence. The NEA, as the largest teachers’ union, has repeatedly called for the WEP to be eliminated, misleading their members by using this problematic rhetoric: “The WEP causes hard-working people to lose a significant portion of the benefits they earned themselves.” They urge their supporters to support the Social Security Fairness Act, which would completely repeal the WEP and the related GPO. So have other organizations, such as Illinois’ State Universities Annuitants Association. And incoming president Joe Biden has promised to do exactly that — for instance, in the “unity task force recommendations.”

But — again — this is not about remedying unfairness. It’s about giving teachers and other Social Security opt-outs extra benefits not really meant for them.

What’s more, to the extent that the WEP is too blunt a tool and penalizes some people too much, there are reform proposals that make a heck of a lot more sense.

Here are three.

First, that Brookings report I linked to above? The author points to the easiest possible reform: just move every worker into Social Security so that these consequences of opting out become a non-issue. To be sure, though, it’s still necessary to find fairer ways of dealing with benefit adjustments during the transition period.

Second, there are two pieces of legislation that directly target the WEP.

Sponsored by Democrats, H.R. 4540, the Public Servants Protection and Fairness Act, was introduced last year by Rep. Richard Neal (D-MA), Chairman of the House Committee on Ways and Means. It would make three changes: for future retirees, it would switch from the existing formula to a new one based on proration of lifetime earnings more in keeping with the fundamental premise of Social Security as a lifetime-earnings benefit; it would boost existing retirees’ benefits by up to $150 (or remove the existing reduction, if less than this); and it would reflect the WEP reductions in Social Security statements so that there are no surprises at retirement. Those future retirees for whom the new method would worsen, rather than improve, benefits, would keep the original reduction.

On the Republican side, H.R. 3934, the Equal Treatment of Public Servants Act, was introduced by Rep. Kevin Brady (R- TX) is nearly identical except with a $100 rather than $150 increase for current retirees, and with the restriction that the “greater of” benefit provision would not apply to those entering the workforce in the future, that is, those who become eligible for benefits after the year 2060.

Third, the Committee for a Responsible Federal Budget produced a set of ideas for economic growth-promoting Social Security reform in a report in 2019; one of their proposals was a “mini-PIA.” Their objective is not to address the WEP directly but to promote changes to Social Security that promote work (or at least don’t penalize it), and they address, in this proposal, the fact that workers don’t earn any extra benefits for working more than 35 years.

Here’s how it works:

At the moment, Social Security takes all years of covered earnings, indexes them (that is, adjusts them for increases in average wages since the particular years that pay was earned), takes the highest 35 years, sums these and divides by 35, to get the average indexed earnings to use to calculate Social Security benefits, or the PIA (Primary Insurance Amount, the basic Social Security benefit). For someone with more than 35 years of work history, the extra years are “lost” and don’t have any effect on benefits. In principle, working an “extra” year at a pay rate higher than one of the 35 will boost benefits by some amount, however small — but that part-time job in high school or college or at the end of your career, not so much. For someone with less than 35 years, years of zero earnings don’t reduce benefits in proportion to the number of years, because they reduce the average earnings, and the nature of the Social Security benefit structure is to provide relatively greater benefits as a percentage of pay for lower than higher earners. Both these elements of the formula benefit not just people with large gaps in their work history but also people with continuous work history but some of their working lifetime with employers who opt out of Social Security.

In the proposed “mini-PIA” approach, each year of pay would be treated separately — indexed to adjust the wages up to current-year levels, then used to calculate a single-year partial benefit or “mini-PIA.” All these “mini-PIAs” would be added together, for as many years as a person had work history. For someone who worked more than 35 years, benefits would increase for every extra year they worked. (Don’t worry, a later part of the report addresses solvency issues.) For someone who had “real” gaps in work history that are not smoothed out by the year-by-year calculation, the proposal also promotes a new “poverty protection benefit.”

What’s it matter?

Of course, the WEP matters a great deal for those affected by it. But these proposals are also representative of a larger issue: does Congress work for a solution which is a fair and reasonable solution to the problem, or do politicians become trapped by promising interest groups their complete demands will be met? It is worth recognizing here that the NEA, though it opposes the WEP in its entirety, provides links and forms for its membership to e-mail their Congressmen to urge either the full repeal or the proration reform (or both, apparently).

And here’s the perspective of the “Mass Retirees” advocacy group, in calling for the legislation to be attached to an upcoming federal appropriation or budget bill:

“[I]t is highly unlikely that legislation fully repealing the WEP and GPO laws will pass the House – never mind the US Senate, where a 60 vote majority is needed to pass legislation. As has been the case throughout the 37 year history of reform efforts, full repeal legislation is unlikely to pass Congress.

For this reason, Mass Retirees is focused on passing WEP reform and then working to improve the benefit from there. As I have said in the past, we cannot allow another generation of public retirees to suffer while we await the perfect solution. After 37 years of waiting, the time to act is now.”

Advocating for sensible and reasonable solutions, rather than trying to grab the maximum possible, is something we sorely need now.

Update: unfortunately, the calls for reform were outmatched by calls for complete elimination of the WEP, which will push benefits up significantly (and undeservedly).

December 2024 Author’s note: the terms of my affiliation with Forbes enable me to republish materials on other sites, so I am updating my personal website by duplicating a selected portion of my Forbes writing here.

Forbes post, “Biden And Warren Want To Eliminate The Windfall Elimination Provision. Here’s Why They’re Wrong.”

Originally published at Forbes.com on February 13, 2020.

 

Here’s what Elizabeth Warren promises, if elected president, with respect to public sector workers whose employers have opted out of Social Security:

“if you work in state or local government and earn a pension, two provisions called the Windfall Elimination Provision and Government Pension Offset can reduce your Social Security benefits. WEP slashes Social Security benefits for nearly 1.9 million former public-sector workers and their families, while GPO reduces –– and in most cases, eliminates –– spousal and survivor Social Security benefits for 700,000 people, 83% of whom are women.

“My plan repeals these two provisions, immediately increasing benefits for more than two million former public-sector workers and their families, and ensuring that every current state and local government employee will get the full Social Security benefits they’ve earned.” 

Here’s Joe Biden:

“Current rules penalize teachers and other public sector workers who either switch jobs or who have earned retirement benefits from various sources. The Biden Plan would eliminate these penalties by ensuring that teachers not eligible for Social Security will begin receiving benefits sooner – rather than the current ten-year period for many teachers. The Biden Plan will also get rid of the benefit cuts for workers and surviving beneficiaries who happen to be covered by both Social Security and another pension. These workers deserve the benefits they earned.”

To start with an incidental observation, the Biden promise to get rid of the 10 year delay is poorly worded but appears to be a promise to restrict public plans’ ability to use long vesting schedules as a way of reducing benefits for short-service workers in favor of full-career employees, and has nothing in particular to do with federal Social Security rules.

But both of these candidates promise to get rid of the Windfall Elimination Provision (WEP) and the Government Pension Offset — in Warren’s case, characterizing these as unfairly “slashing” benefits.

Yet these provisions are entirely fair, and intended to ensure that these workers don’t double-dip and take advantage of provisions that were intended to help the poor, rather than middle-class workers.

Consider the structure of the Social Security benefit formula: regardless of how many years one has worked, Social Security averages only the highest 35 years (after wage indexation). Then the benefit formula sums up the total of

 

  • 90% of the first $960 in average indexed monthly earnings (AIME), plus
  • 32% of the AIME between $960 and $5,785, and
  • 15% of the AIME over $5,785.

 

(See the Social Security site for more details.)

These two design element are meant to help the poor. The limit of 35 years in the averaging period, even though one might work considerably longer — as many as 47 years, that is, from age 18 to 65 — is not meant as a signal that 35 years of work are sufficient to have “earned” the full benefit rate; Social Security is meant to be accrued over one’s entire working lifetime. Rather, the shorter averaging period benefits those who have spells of unemployment, time spent caregiving or in school, etc. And the 90% benefit level for the lowest income tranche boosts benefits to a relatively higher percent of pay, for those otherwise at risk of below poverty benefits — whether their AIME is low because of many zeros in their work history or a lifetime of low-income work.

Without an adjustment to their benefit, teachers unfairly benefit from these provisions. Teachers who spend part of their working lifetime teaching in a state which opts out of Social Security, and the remainder elsewhere, or working in the private sector during the summer, or moonlighting after-hours, or by working for part of their career in private-sector, Social Security-contributing jobs such as parochial school-teaching, appear “on paper” to have low wages and benefit from the imbalanced 90% tranche meant to aid the genuinely poor. In addition, they are “double-dipping” when they collect benefits from a system that’s designed for people paying into the Social Security system during one’s entire working lifetime, while simultaneously collecting additional benefits earned without paying into the system.

The WEP attempts to remedy this and remove the teachers’ unfair extra benefits. The method is rudimentary and simply says that if you have a pension benefit due to you due to participation in a public pension plan that opts out of Social Security, then you don’t get the benefit of that 90% factor on the first $960 in monthly earnings, because the Social Security benefit is treated as supplementary to the primary public plan benefit. The WEP is not applied if you have 30 or more years of “substantial earnings” (about $25,000 in 2020), which would mean that the income from which you paid Social Security contributions is your “primary” income and your public employment was secondary, and between 20 and 30 years there’s a gradual phase-out. The reduction of the WEP is also capped at half the level of the pension due to Social Security opt-out income (which, among other things, means that schoolteachers who were never vested, never have a WEP applied to them).

(See the Social Security Administration publication “Windfall Elimination Provision” for more information.)

Now, one can argue easily enough that this is not the right way to solve the problem, that this crude calculation doesn’t really work as it should. And indeed, the original formula was based purely on the ultimate Social Security opt-out pension benefit due to limitations in data availability at the time the law was implemented, and a proposed reform which would adjust benefits in proportion to private vs. public sector income, the “Equal Treatment of Public Servants Act of 2019” has been introduced repeatedly, most recently this past summer by Rep. Kevin Brady (R-Texas), with 44 cosponsors, all but 3 of them Republican.

Specifically, since data is now available on noncovered as well as covered wages, the Social Security Administration would calculate a new preliminary PIA (or baseline Social Security benefit) based on a workers’ total lifetime compensation. Then the ratio of the covered earnings to total earnings would be calculated, and this ratio would be applied to the preliminary Social Security PIA. This calculation would be called the PSF, or Public Servant Fairness formula. (See “Reforming the Social Security WEP Exposes Weaknesses in State and Local Pensions,” by Chantel Boyens, Erald Kolasi, and Jack Smalligen athe Urban Institute, for a comprehensive explanation.)

But here’s an interesting wrinkle to that proposal: it would help lower-income earners, by giving them more of the benefit of that initial 90% than they have at present. But there are other workers who would be disadvantaged by this change, because it reduces their Social Security benefits in proportion to their non-covered income without regard for whether that non-covered income actually produced the same level of benefits as Social Security.

And, yes, I yammer on incessantly about the Illinois Tier 2 teachers’ benefits, and the raw deal those teachers are getting. Teachers who leave without accruing 10 years of service will receive no benefit at all. (Yes, Social Security also requires 10 years of work history, but this can be from among multiple jobs.) Teachers who work moderately longer will receive a benefit that’s still lower than Social Security, not so much due to the benefit formula, as because the benefits are frozen at the time of termination, in contrast to Social Security’s indexation (adjusting for wage inflation) of each year’s earnings up to the time of the calculation at retirement.

In fact, as the Teacher Pensions Blog points out, Elizabeth Warren’s home state of Massachusetts is similarly egregious, with a 10 year vesting requirement and a benefit accural structure that means that a new 25-year-old teacher would have to teach for 22 consecutive years before their public pension plan benefits are as generous as Social Security — all to keep the cost of the system in check while keeping benefits (overly-)generous for full-career teachers.

Hence, the title of the Urban Institute report: this appealingly simple WEP reform exposes the weaknesses that these state and local pensions are a raw deal for short- and even medium-service workers.

But that doesn’t mean that the answer is to eliminate the WEP, as Warren and Biden promise. It’s to fix the inequities in the state and local systems or, better yet, to include all workers in Social Security, rather than permitting opt-outs in the first place. (And, incidentally, the GPO works similarly to prevent double-dipping, but the finer points of that program are a story for another day.) As it is, the call to eliminate the Windfall Elimination Provision sounds like a nice way to help teachers, but it’s nothing other than pandering.

And yes, as a final reminder, my “basic retirement income” Social Security plan eliminates these issues entirely.

 

December 2024 Author’s note: the terms of my affiliation with Forbes enable me to republish materials on other sites, so I am updating my personal website by duplicating a selected portion of my Forbes writing here.