Get to know the authorAs an expat, the US Social Security benefits you’ll be eligible for at retirement may be lower than the standard benefits an average American will receive for a variety of reasons.
And when you throw foreign pensions and foreign social security programs and their implications for your US benefit into the mix, it can be challenging to understand what you’re entitled to.
In this article, we’ll focus on the impacts of the Windfall Elimination Provision (WEP) – especially what expats need to know.
What is the Windfall Elimination Provision (WEP)?
According to the Social Security Administration, the Windfall Elimination Provision is a formula used to recalculate Social Security benefits for Americans who receive “non-covered pensions” and qualify for Social Security benefits based on other Social Security-covered earnings1.
Pro tip:
Non-covered pensions refer to retirement benefits received after working a job where Social Security taxes were not withheld from wages.
Employees most likely to have a non-covered pension include:
- Governmental workers
- Employees of some nonprofit organizations
- US expats working for non-US employers
Before the enactment of the windfall provision, employees with both a non-covered pension and Social Security-covered work would receive a disproportionately high Social Security benefit due to how benefits are calculated.
That’s because Social Security benefits are progressive. They provide a higher wage replacement for low-income workers with limited retirement funds.
So if the employee spent a large portion of their career in governmental work or working for a non-US employer, the Social Security Administration may conclude they were a low-wage earner because there would be many years with no Social Security earnings reported and they would calculate a higher disproportionate benefit.
And the WEP came along to balance things out. It aims to distribute Social Security benefits equitably by adjusting benefit amounts for those with alternative (non-covered) pensions.
How the Windfall Elimination Provision affects US expats
The Windfall Elimination Provision impacts US expats because most don’t pay into Social Security during their pre-retirement income-producing years.
For example, if you’re living in Germany and working for a German company, you’re likely paying into the German Gesetzliche Rentenversicherung (GRV) program, not the US Social Security program.
Generally, let’s look at the Social Security Benefit Formula for workers, including American expats, who’ll first become eligible for Social Security benefits in 2023 with 20 years of work paying into the Social Security system with an average monthly earning of $1,8002.
Social Security Benefit Amount
| Average Indexed Monthly Earnings (AIME) | Regular Factor | Regular Formula | WEP Factor | WEP Formula |
|---|---|---|---|---|
| The first $1,115 | 90% | $1,003.50 | 40% | $446.00 |
| Between $1,115 and $6,721 | 32% | $219.20 | 32% | $219.20 |
| over $6,721 | 15% | – | 15% | – |
| Total Benefit | $1,222.70 | $665.20 |
The amount of the WEP reduction is based on the number of years you worked and paid into the Social Security program.
For workers eligible to collect Social Security retirement benefits in 2023, the maximum WEP reduction is shown in the table below:
Maximum WEP Reduction for Workers Who Become Eligible in 2023 by Year of Substantial Service
| Years of Social Security Coverage | Factor in WEP Formula | Maximum Dollar Amount WEP Reduction |
|---|---|---|
| 20 or fewer | 40% | $557.50 |
| 21 | 45% | $501.80 |
| 22 | 50% | $446.00 |
| 23 | 55% | $390.30 |
| 24 | 60% | $334.50 |
| 25 | 65% | $278.80 |
| 26 | 70% | $223.00 |
| 27 | 75% | $167.30 |
| 28 | 80% | $111.50 |
| 29 | 85% | $55.80 |
| 30+ | 90% | $0.00 |
Therefore, someone who worked for 29 years in a Social Security-covered job will receive 85% of the first $1,115 of Average Indexed Monthly Earnings — and not 90% as per the regular formula.
💡 Major caveat
The WEP guarantees that the WEP reduction can’t exceed half of the non-covered pension.
How does the WEP affect foreign pensions?
Hooray! Some good news.
The WEP doesn’t affect all US expats with foreign pensions.
Whether US expats are subjected to the WEP depends on whether the US and the foreign country have a Totalization Agreement.
Among other things, Totalization Agreements aim to eliminate dual taxation of wages for social security insurance.
Without these agreements, workers may have to pay social security taxes to their home county and the foreign country, like an expat working abroad for a US company.
The United States has Totalization Agreements with 30 countries3. These include the two countries most US citizens abroad live in – Canada and the United Kingdom.
How to estimate the effect the WEP will have on your Social Security benefit: an expat example
Henry is an American expat based in Buenos Aires, retiring in September 2023 after 25 years of work. Let’s also assume:
- Worked in the US with a Social Security-covered job for 15 years
- Average monthly US wages were $5,000
- Worked in Buenos Aires for an Argentine company for 10 years
- Argentine pension is $1,000 per month
Since Argentina and the US don’t have a Totalization Agreement in place in 2023, we’ll need to calculate Henry’s WEP reduction.
Step 1: Calculate Henry’s preliminary Social Security benefit amount and the WEP reduction
Social Security Benefit Amount
| Average Indexed Monthly Earnings (AIME) | Regular Factor | Regular Formula | WEP Factor (15 Years of Coverage) | WEP Formula | Difference |
|---|---|---|---|---|---|
| The first $1,115 | 90% | $1,003.50 | 40% | $446.00 | |
| Between $1,115 and $6,721 | 32% | $1,242.88 | 32% | $1,242.88 | |
| over $6,721 | 15% | – | 15% | – | |
| Total Benefit | $2,246.38 | $1,688.88 | $557.50 |
Step 2: Consider the foreign pension amount
Henry is getting $1,000 a month from the Argentine government. Remember our important caveat from above:
Pro tip:
The WEP guarantees that the WEP reduction can’t exceed half of the non-covered pension.
So the maximum reduction in Henry’s Social Security benefit is $500 ($1,000 x 50%).
Step 3: Calculate Henry’s final Social Security benefit
Since Henry’s Social Security benefit can’t be reduced by more than $500, we’ll use this instead of the calculated $557.50 WEP reduction.
Henry’s tentative monthly Social Security benefit will be $1,746.38 ($2,246.38 – $500).
How does the WEP affect foreign spouses?
The WEP primarily impacts the Social Security benefits of the US expat with a foreign pension.
But the WEP can impact a foreign spouse if the expat’s benefits are reduced because of the WEP.
Generally, the spousal benefit is typically 50% of the primary worker’s benefit amount. And if the primary worker has a reduced benefit amount because of the WEP, the foreign spouse will indirectly have reduced benefits.
The WEP doesn’t directly affect the foreign spouse’s own benefits if they worked and contributed to the US Social Security program. If the spouse also has a foreign pension, the WEP may impact their own Social Security benefits.
Exceptions and exemptions to the WEP
The WEP will not apply in the following circumstances.
- Railroad workers whose only non-covered pension is based on earnings from employment
- Workers whose only non-covered pension is based on earnings from employment before 1957
- Workers who receive foreign pension payments after 1994 that are based on a totalization agreement with the United States
- Workers who attained age 62, became disabled, or were first eligible for a noncovered pension before 1986
And, of course, the WEP doesn’t apply to workers with 30 years of Social Security-covered employment.
If you think you qualify for an exemption, it’s best to contact your nearest Social Security office4.
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