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Social Security: Brief History of Pension Offset and 'Windfall' Provisions




Social Security law prevents "dual entitlement"-or receipt of full Social Security and spousal benefits at the same time. In 1977, Congress began treating government pensions, such as those earned by educators, as Social Security benefits. The effect of this change was a dollar for dollar reduction in Social Security survivor benefits for anyone also earning a public pension. In 1983, Congress amended the law to a two-thirds offset.

The WEP was enacted in 1983 to prevent people with relatively high-compensated government service and relatively low-paying Social Security-covered employment from having their Social Security benefits determined under the more favorable formula used for retirees with the lowest Social Security earnings.

Government Pension Offset Enacted In 1977

The original Social Security system, established in 1935, excluded state and local government employees from coverage. In the 1960s, however, state and local employees were given the opportunity to elect to participate in the Social Security system. As a result, public sector employees in 36 states opted to enroll in Social Security in the 1960s and 1970s. The remaining 13 states and a number of local governments in two others chose instead to maintain and enhance their existing retirement systems.

The Social Security system prohibits "dual entitlement"-that is receipt of earned benefits plus full survivor benefits. The Government Pension Offset, enacted as part of the 1977 Social Security Amendments, treated public pensions as though they were Social Security benefits, thus instituting dual entitlement provisions. Spousal benefits were offset dollar for dollar beginning in December 1982. Women who were eligible for government pensions before December 1982 were exempt for a five-year transition period. Men who were eligible for government pensions before 1982, however, were exempt from the offset only if their spouses had provided one half of their support.

Criticism of the dollar for dollar reduction was strong, especially given the unfair distinction between public employees and private employees, who could collect both a private pension and Social Security benefits. In response, Congress amended the law in 1983, reducing the dollar for dollar reduction to a two-thirds offset. In 1986, a new Federal Employees Retirement System was enacted, with Social Security coverage as part of the plan. During an open season in the last six months of 1987, employees were given a chance to switch to the new system and thereafter be exempt from the offset. Many women were unaware of this exemption, however, and decided to stay with their original plan. As a result, they lost valuable future Social Security benefits.

'Windfall' Provision Replaces One Unintended Consequence With Another

The WEP was enacted in 1983. The purpose was to remove an unintended advantage that the regular Social Security benefit formula provided to persons who also had pensions from non-Social Security-covered employment. The regular formula was intended to help workers who spent their work careers in low paying jobs, by providing them with benefits that replace a higher proportion of their earnings than benefits provided for workers with high earnings.

However, the formula could not differentiate between those who worked in low-paid jobs throughout their careers and other workers who appeared to have been low paid because they worked many years in jobs not covered by Social Security. Thus, under the old law, workers who were employed for only a portion of their careers in jobs covered by Social Security-even highly paid ones-received the advantage of the "weighted" formula.

This is because their few years of covered earnings were averaged over their entire working career to determine the earnings on which their Social Security benefits were based. The WEP formula was intended to remove this advantage for these workers. Yet, instead of protecting retirees at the lowest level of Social Security earnings, the WEP has unfairly impacted federal retirees with only slightly higher earnings.