Is Social Security “Windfall” Penalty Fair to Labor?

The Texas American Federation of Teachers (AFT) cites the case of a widowed public school teacher that retired with a $900 monthly pension. She would have been eligible to receive $600 survivor benefits based on her husband’s Social Security contribution, but the windfall elimination provision (WEP) eliminated all of her survivor benefits. What is WEP?

The Reagan administration believed that reducing taxes would boost the economy. According to this “supply side” economic theory, less tax meant more profits, which would be plowed back into in to the private sector creating jobs and goods. The theory didn’t work and the deficit soared.

The administration looked for “revenue enhancements” that wouldn’t look like taxes (at least not taxes on business) to buy time for its theory to work. Social Security became a target of this quest. Especially, Social Security benefits received by public employees.

Most public employees are exempt from a Social Security tax in their government jobs since they contribute to a government pension. They often pay in to Social Security through second jobs, previous work experience or by contributions made by a spouse.

According to the Reagan administration, public employees receiving both a public pension and Social Security benefits were profiting from a “windfall.” The Reagan administration together with a Democratic congress enacted the Windfall Elimination Provision.

Part of the rational for WEP is that Social Security benefits are progressive. Lower-paid workers receive benefits equal to about 55% of their pre-retirement earning while higher paid worker receive about 25%. There are several problems with this “logic”.

WEP only applies to public pensions. It does not apply to private pensions or annuities. Often WEP is applied to low-paid government workers that need to work a second job to make ends meet. WEP is also applied to survivor benefits.

All Social Security benefits are taxed as regular income. This applies equally to recipients of private as well as public pensions. Since income tax is progressive it is fair to both public and private pensions.

Taxing Social Security benefits is also a legacy of the Reagan administration. Social Security was always taxed in. Now it is the only US pension system taxed both in and out.

According to the American Federation of State, County and Municipal Employees (AFSCME), 900,000 retired employees are impacted by WEP and this number grows about 60,000 a year. Opponents of WEP have friends in congress and the current administration.

Rep. Barney Frank (D-MA) and Senator Dianne Feinstein intend to introduce a bill to eliminating WEP. Barack Obama and Joe Biden both opposed WEP as senators. You can go online and sigh a petition to eliminate WEP by clicking here.

Have a great Labor Day.  

Photo Credit: US Gov. Social Security Administration