Understanding the Windfall Elimination Provision for Public Employees: When Does it Apply and How Does it Affect Social Security Benefits?

Summary: Discover how the Windfall Elimination Provision affects public employees' Social Security benefits and learn retirement planning strategies in this article.

I recently had a client, a public school teacher in Massachusetts who was still working, tell me that she would begin taking her Social Security. That doesn’t sound like a big deal; after all, people start taking Social Security all the time. She was also at her full retirement age, so no penalty or extra taxes would apply.

What made it interesting was that she is one of the approximately two million state and local government employees whom Social Security does not cover in their current jobs. Like many of the two million, she qualified for Social Security in a different position.

The Windfall Elimination Provision

Because Massachusetts is one of the states where public employees do not contribute to Social Security, she is subject to the Windfall Elimination Provision. This provision is a 1983 law implemented to keep certain public employees from receiving a higher replacement percentage of their Social Security wages than others.

Social Security has three income buckets: It replaces 75% for very low earners, 40% for medium earners, and 27% for maximum earners. When the program looks at the Social Security wages for many of those two million public employees, the system thinks they are low earners because much of those wages is from part-time or seasonal work. However, if one looks at their income derived from public employment, most are at least medium earners. To address this discrepancy, most of those two million public employees, if eligible for Social Security, have their benefits cut by around half.

When Does the Windfall Apply?

I mentioned to my client that I had been unable to ascertain if the Windfall applied if one is just eligible for a government pension or only after one begins actually receiving one. I recommended that she let the person at the Social Security Administration know that she is eligible for a state pension.

After that, I met with my client, who told the SSA everything. They told her that she would receive her full Social Security until she began receiving her pension.

Still unsure, I began Googling to try to confirm. I could not find anything, so I emailed an expert on public employee pensions, who referred me to a report from the United States General Accounting Office (GAO) containing this information:

“In addition, staff are supposed to ask applicants whether they are receiving or will in the future receive a pension (either periodic payments or a lump sum Page 4 GAO/HEHS-98-76 Benefit Reduction Provisions B-276209 payment) from noncovered employment. For those who respond that they are receiving such a pension, SSA makes the appropriate benefit reduction. For those who say that they will receive such a pension in the future, SSA enters in its records the date when the pension is expected to begin. SSA staff are supposed to contact the beneficiaries in these cases to determine whether an expected pension has begun and to take any actions needed to adjust benefit payment amounts.”

Retirement Planning Ideas

After many years of trying, I finally got the answer: The Windfall Elimination Provision applies when people begin receiving their pensions. Public employees still working can receive their full Social Security payments until such time as they retire from public employment. This additional income could allow them to maximize their retirement savings by using Social Security to offset the reductions in income from contributions to a 403(b) or 457(b). Public school employees are eligible for both, including catchups, so in 2024, some can contribute $30,500 to each. Or, if they started public employment as a second career, they may have built up a good-sized Social Security benefit that they may want to take while still working.

One caveat is that your Social Security benefit is reduced if you take it before your full retirement age. Also, if you take it at full retirement age, you lose out on the annual 8% increase in benefits from waiting to take it at age 70. However, if the public employee is subject to the Windfall at that time, the enhanced benefit will also be reduced.

These are the opinions of Financial Advisor Tim Hayes and not necessarily those of Cambridge Investment Research. They are for informational purposes only and should not be construed or acted upon as individualized investment advice. Content provided via links to third party sites should not be considered an endorsement of content, which we cannot verify completeness or accuracy of.

Please share

Financial Advisor Tim Hayes

I’ve held an industry securities registration for 30+ years and am subject to SEC and FINRA oversight.

Most clients pay fee-only or an hourly rate. The size and complexity of the client’s wealth management and financial and retirement planning determine that fee.

Some clients pay a commission, mainly those with smaller accounts, i.e., Roth IRAs, some public-school teachers with 403b retirement accounts, or parents or grandparents who set up a 529 college savings plan.

The first introductory and fact-finding appointment can be in-person or by phone. The next meeting where I provide my recommendations should be in-person. (For the time being, telephone, Zoom, and email are replacing some in-person meetings.)

Subsequent meetings during which we monitor your progress and investments can be done in-person or by phone, email, Zoom, or Skype – or, more likely, a combination of these meeting types.

Contact Tim

Tim has offices in Boston and South Dartmouth, Massachusetts. He’s licensed to handle securities in 8 states: Massachusetts, Rhode Island, New Hampshire, New York, New Jersey, Connecticut, Maine, and Florida.

Book a Phone or In-Person Meeting

Scroll to Top