Social Security Fairness Act Could Cause New Problems

The $24,000-per-year worker is mistakenly viewed by Social Security as a lower-wage, $10,000-per-year worker, and the non-WEP-adjusted monthly benefit amount would be $772.

While this benefit amount is nominally less than the $1,321 that the $24,000-per-year worker with a full career of covered employment received, their benefit now replaces 90% of their covered earnings — as opposed to the intended 66% replacement rate received by the worker with only covered earnings.

For the $100,000-per-year worker, the replacement rate jumps to 51% as opposed to 38%. In other words, this worker now receives a “windfall” in the form of a benefit that replaces a much higher proportion of covered earnings than it would otherwise.

To correct for this potential “windfall,” the WEP adjusts the benefit formula. The first benefit bend point is reduced from 90% income replacement to as little as 40%.

So, Why Repeal the WEP?

As Fichtner testified, this seems like sound policy, and the theory behind it is solid. But there are also some big issues with its implementation in practice — starting with the fact that the WEP formula itself is complicated and hard to explain to beneficiaries.

Further, the current Social Security statement provides estimated monthly benefit amounts that are not adjusted for the WEP. While the statement does include a note to all recipients that they could be subject to the WEP and that their benefits may be reduced if they have earnings from work not covered by Social Security, the complexity of the program and the benefit formula result in beneficiaries likely learning about the WEP only when they first receive a WEP-reduced Social Security benefit check.

For people relying on the Social Security statement as a retirement planning tool, the current non-WEP-adjusted information in the statement could cause people to overestimate their financial readiness for retirement.

But from a pure policy perspective, Fichtner said, the bigger problem is essentially a data issue.

When the current formula for the WEP was established as part of the 1983 amendments to the Social Security Act, the Social Security Administration lacked the administrative records to accurately capture non-covered employment history. Hence, a proportional or prorated WEP was not possible, so a proxy formula had to be tabulated and adopted based on the government’s “best guess.”

In practice, that has meant that the application of the WEP has actually tended to overcorrect benefits — particularly for low-earning government workers and public servants. Add this overcorrection problem to the aforementioned communication issues and the result is a disruptive and damaging experience for many of the approximately 2 million beneficiaries who are currently subject to WEP reductions.

A Better Way?

Fichtner said he feels compassion for retirees who are blindsided by cuts to their hard-earned Social Security benefits, but he also has consistently argued against simply repealing WEP without introducing a more accurate and effective benefit parity framework.

“Given modern data collection practices, SSA now has 35 years of employment history including both covered and non-covered employment,” he observed. “Thus, we now have the information necessary to reform the WEP and move to a prorated formula.”

Fichtner’s personal recommendation to Congress is the creation of a “new WEP” that uses workers’ real average indexed monthly earnings across both covered and non-covered work to enable a truly “proportional” or prorated benefit formula.

Under the proposed new formula, the AIME is computed as it is currently but for all earnings, covered and non-covered combined. The combined-earnings primary insurance amount is then determined, which provides the replacement rate (PIA divided by AIME).

Next, an AIME is computed for covered earnings only. Finally, the combined-earnings replacement rate is applied to the covered-earnings AIME, resulting in the final PIA.

“For workers whose entire careers are in covered earnings, the resulting PIA is the same,” Fichtner explained. “However, for those with non-covered earnings, their PIA replaces the same proportion of their covered earnings as those with the same level of total earnings whose entire careers were spent in covered employment.”

In other words, the replacement rate on covered earnings would be the same and treat both workers with identical lifetime earnings history equally, thus restoring some fairness to the system while still maintaining the original intent of the WEP to avoid a “windfall” to those with non-covered earnings.

“The simplicity and fairness of the proposed new formula is that it would apply to all workers — those with both covered earnings only and those with both covered and non-covered earnings — making it easy for SSA to administer and for beneficiaries to better plan for retirement,” Fichtner concluded. “Additionally, under the proposed formula, the Social Security Statement could provide accurate monthly benefit projections to better enable people to plan for their financial security in retirement.”