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Have You Met WEP Yet?

The writer recently attended the annual ALLAMO conference in Sada, Spain.  ALLAMO stands for the Alliance of American Organizations and each year it plans and hosts a gathering for American expatriates in which speakers are invited to share information on matters affecting attendees.  This year’s roster of speakers included Lucy Laederich, US Liaison for the Federation of American Women’s Clubs Overseas, assessing the impact of Overseas American Week in Washington; Andy Sunberg, founding director of American Citizens Abroad, explaining the importance of overseas Americans lobbying for a delegate in the US House of Representatives; Richard Groccia, senior Federal Benefits Officer, describing how new Social Security provisions may affect American expatriates; and Barron Harper, US international tax consultant, delineating the filing requirements of Americans invested in foreign corporations.

Attention was riveted on Mr Groccia as he explained that Social Security currently enjoys a $2t excess for meeting pension benefits.  Nevertheless the fund is in crisis as the number of workers to retiree drops from 3.3 to 2.2 over the next 40 years.  This decline is of course due to the post World War II baby boomer generation coming into retirement age.  If nothing is done to shore up Social Security, the government will be forced to support pension payments as the fund begins to run a deficit in 2017.  By 2040 pension benefits for new retirees could be cut by 26%.

Besides reducing benefits, another solution to the Social Security crisis would be to further delay the retirement age.  But practically speaking, increasing payroll tax contributions by 1% now would avert the pension shortfall.  The Comptroller General of the United States and the Chairman of the Federal Reserve Board have said:  ‘The sooner we address the problem, the smaller and less abrupt the changes will be.’ 

An adjustment to Social Security was the 2005 Windfall Elimination Provision (WEP).  The provision states:  ‘If you work . . . in another country, you may be eligible for a pension based on earnings not covered by Social Security.  A pension based on earnings not covered by Social Security can affect the amount of your Social Security benefit.’ 

The amount of pension reduction depends on the number of years of substantial earnings stateside.  These earnings increase annually from, for example, $2,250 in 1972 to $17,475 in 2006, and represent the minimum a US worker must have earned in each year represented.  Suppose you turned 62 in 2004 and have 20 years of substantial earnings.  WEP can reduce your monthly benefit by $306.  If full retirement benefit is $1,306, your monthly benefit after applying WEP is $1,000.  If you start receiving Social Security benefits at 62 and not at 66, the benefit due to early retirement is $758 ($1,000 x 75.8%).  If your full retirement benefit had not been reduced by WEP, your age 62 retirement benefit would have been $989 ($1,306 x 75.8%).  Early retirement changed the reduction for WEP from $306 to $231 ($989 - $758).

Mr Groccia justified WEP’s reduction in benefits when he explained that Social Security was never intended to replace a worker’s pre-retirement earnings.  Rather it was meant to prevent privation from encroaching.  Further if you are entitled to a foreign pension, Social Security will not over-compensate you.  This is why WEP applies.  Still WEP appears to assume that a foreign pension is automatically payable where one’s substantial earnings are under 30 years.  This appears to be a real glitch in the system.