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The distributional effects of the Social Security windfall elimination provision*

Published online by Cambridge University Press:  24 April 2013

JEFFREY R. BROWN  and
SCOTT J. WEISBENNER
JEFFREY R. BROWN
Affiliation:
University of Illinois and NBER (e-mail: brownjr@illinois.edu)
SCOTT J. WEISBENNER
Affiliation:
University of Illinois and NBER (e-mail: weisbenn@illinois.edu)
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Abstract

Over five million state and local government employees have lifetime earnings that are divided between employment that is covered by the Social Security system and employment that is not covered. As Social Security benefits are a nonlinear function of covered lifetime earnings, the simple application of the standard benefit formula to covered earnings only would provide a higher replacement rate on those earnings than is appropriate given the individuals' total (covered plus uncovered) lifetime earnings. The Windfall Elimination Provision (WEP), established in 1983, is intended to correct this situation by applying a modified benefit formula to earnings of individuals with non-covered employment. This paper analyzes the distributional implications of the WEP and finds that it reduces benefits disproportionately for individuals with lower lifetime covered earnings. It discusses an alternative method of calculating the WEP that comes closer to preserving the intended redistribution of the system. In recognition of historical data limitations that prevent the Social Security Administration (SSA) from being able to implement this alternative method at present, the paper also analyzes two alternative ways of calculating the WEP that use the same information as the current WEP, are budget neutral, and come closer to maintaining the individual-level, cross-sectional progressivity of Social Security than does the existing WEP formula.

Keywords

windfall elimination provisionWEPSocial Securityretirementstate and local public pensions
Type
Issues and Policy
Information
Journal of Pension Economics & Finance , Volume 12 , Issue 4 , October 2013 , pp. 415 - 434
Copyright
Copyright © Cambridge University Press 2013 

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Footnotes

*

This research was supported by the U.S. Social Security Administration through grant no. 10-P-98363-1-05 to the National Bureau of Economic Research as part of the SSA Retirement Research Consortium. The findings and conclusions expressed are solely those of the author(s) and do not represent the views of SSA, any agency of the Federal Government, or the NBER. We are grateful to Steve Goss, Bert Kestenbaum, and Alice Wade of the Social Security Administration for providing us with data and for helpful discussions. We are grateful to Courtney Coile, Alan Gustman, Olivia Mitchell, Josh Rauh and two anonymous referees for helpful comments. We thank Chichun Fang for excellent research assistance.

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