By Jenny Kiffmeyer, J.D – The Retirement Learning Center
Railroad Retirement System Benefits
ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare. We bring Case of the Week to you to highlight the most relevant topics affecting your business.
A recent call with a financial advisor from Nebraska is representative of a common inquiry regarding Social Security Benefits. The advisor asked: My client has worked both in a job covered by the Railroad Retirement System, and in jobs covered under Social Security. I’ve heard that there is something called the “Windfall Elimination Provision” (WEP) that may reduce the amount a person may receive under Social Security if they also had earnings under a job that didn’t withhold for Social Security, such as railroad employment. Could you explain more about how this provision works?
Highlights of Discussion
Absolutely! The Windfall Elimination Provision (WEP) generally applies to people who receive both a pension from noncovered work (including Railroad Retirement Benefits) and Social Security benefits based on fewer than 30 years of substantial earnings in covered employment (more details on what constitutes substantial earnings to follow).
To understand the purpose of the Windfall Elimination Provision, it is necessary to understand the Social Security benefit formula is intended to replace a greater share of career-average earnings for lower-paid workers than for higher-paid workers. This is illustrated by the Social Security Benefit formula for 2024 shown in the table below:
Social Security Benefit Formula for Workers Who Attain Age 62, Become Disabled, or Die in 2024
| Factor | Average Indexed Monthly Earnings (AIME) |
|---|---|
| 90% | of the first $1,174 of AIME, plus |
| 32% | of AIME over $1,174 and through $7,078, plus |
| 15% | of AIME over $7,078 |
Source: Congressional Research Service, based on Social Security Administration, Benefit Formula Bend Points
The basic benefit formula serves its intended purpose of providing a higher benefit compared to earnings for lower paid workers, but only as long as a worker is engaged solely in Social Security covered employment.
If a worker has been engaged in noncovered employment, the years worked in noncovered employment show up as zeros on their Social Security earnings report, which makes them appear to be lower paid workers than they are when calculating their Social Security average earnings.
By not considering their earnings in noncovered employment, these workers receive a “windfall” because a higher percentage of their earnings remains in the brackets that provide the largest benefit. The purpose of the WEP is to address that issue by lowering the percentage paid on the first bracket of earnings based on the number of years the employee had substantial earnings in covered employment. (The following link provides the annual amount of earnings necessary to constitute substantial earnings going back to 1937 Windfall Elimination Provision).
The formula under the WEP for reducing the first bracket is as follows:
- For workers with 20 years or fewer of covered employment, the WEP reduces the first benefit factor from 90% to 40%, resulting in maximum benefit for this bracket of $469.60, rather than $1,056,60 for 2024, or put another way, a $587 reduction in benefits.
- For each additional year of substantial earnings in covered employment above 20 years, the first factor increases by 5% (e.g., 45% at 21 years, 50% at 22 years, etc.)
- For workers with 30 years or more of covered employment, the WEP reduction no longer applies, and the 90% factor applies to the first bracket calculation, as usual.
Conclusion
If a client has worked for the railroad and in employment covered by Social Security, it’s important to keep in mind the WEP, and that special rules may apply to calculating the maximum benefit under each program; however, not all people affected by the WEP are railroad workers. As of 2023, about 2.1 million people (or about 3% of all Social Security beneficiaries) were affected by the WEP. Nearly 2.0 million of those affected were retired worker beneficiaries, which was about 4% of the entire retired-worker beneficiary population. The remainder were disabled worker beneficiaries and eligible family members of retired or disabled worker beneficiaries.
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Any information provided is for informational purposes only. It cannot be used for the purpose of avoiding penalties and taxes. Consumers should consult with their tax advisor or attorney regarding their specific situation.
