Does the Windfall Elimination Provision Apply to Foreign Pensions?

The Windfall Elimination Provision (WEP) has been a significant concern for many individuals with both U.S. Social Security earnings and a pension from employment not covered by Social Security. This included those with foreign pensions. A recent legislative change, however, has fundamentally altered its applicability for current and future Social Security benefits. This article will clarify what the Windfall Elimination Provision was, how it previously interacted with foreign pensions, and the current status of its application.

Understanding the Windfall Elimination Provision

The Windfall Elimination Provision (WEP) was a federal law enacted in 1983 as part of broader amendments to the Social Security system. Its primary purpose was to prevent an unintended advantage for individuals who received both a Social Security benefit based on relatively few years of covered U.S. earnings and a pension from employment where Social Security taxes were not paid. The standard Social Security benefit formula is progressive, meaning it replaces a higher percentage of earnings for lower-income workers. Without WEP, individuals with non-covered pensions could appear as low-income earners in their U.S. Social Security records, leading to a disproportionately higher Social Security benefit compared to those who paid into the system throughout their careers.

The WEP applied to individuals who received a pension from non-covered employment and also qualified for U.S. Social Security benefits. Non-covered employment refers to jobs where Social Security payroll taxes were not withheld from wages. This often included certain state and local government jobs, some non-profit organizations, and employment in foreign countries where U.S. Social Security taxes were not paid. The provision aimed to create a more equitable distribution of Social Security benefits by adjusting the calculation for those with mixed employment histories.

The core mechanism of the WEP involved a modification to the Social Security benefit formula. Typically, the formula applies different percentages to a person’s average indexed monthly earnings (AIME) to determine their primary insurance amount (PIA). For individuals affected by WEP, the first factor in this formula, which is usually 90%, was reduced, potentially to as low as 40%. This adjustment resulted in a lower Social Security benefit amount for those with non-covered pensions. However, there was a guarantee that the reduction could not exceed one-half of the monthly non-covered pension.

Foreign Pensions and WEP Applicability

Historically, the Windfall Elimination Provision (WEP) could indeed apply to individuals receiving foreign pensions if that pension was based on earnings not subject to U.S. Social Security taxes. The critical determinant of WEP’s applicability to a foreign pension was whether a “totalization agreement” existed between the United States and the country providing the pension. These bilateral social security agreements coordinate the Social Security programs of the two countries involved.

If a totalization agreement existed between the U.S. and the foreign country, the treatment of the foreign pension under WEP was more nuanced. These agreements serve several purposes, including eliminating dual Social Security taxation on the same earnings and helping individuals qualify for benefits when they might not otherwise meet the minimum contribution requirements in one country alone. Under such agreements, earnings and contributions from both countries could be combined to meet eligibility criteria for benefits. Importantly, foreign pensions from countries with which the U.S. had a totalization agreement were often not subject to WEP, particularly if the entitlement to the foreign pension was established as a direct result of the totalization agreement. This meant the earnings were considered “covered” under the coordinated system, thus typically avoiding the WEP reduction. The United States currently maintains totalization agreements with approximately 30 countries.

Conversely, if no totalization agreement existed between the U.S. and the foreign country, a pension received from that country was generally treated as non-covered employment for WEP purposes. In such cases, if an individual also had U.S. Social Security earnings, the foreign pension would likely trigger the WEP, leading to a reduction in their U.S. Social Security benefit. This was because the foreign earnings were not considered part of a system integrated with U.S. Social Security, and no U.S. Social Security-equivalent taxes were paid on those earnings. The key factor was always whether the foreign earnings contributed to a U.S. Social Security-equivalent system or were integrated through an agreement.

Scenarios Where WEP May Not Apply

Even before the recent legislative changes, certain circumstances or exceptions could mitigate or eliminate the effect of the Windfall Elimination Provision (WEP). One significant exception was the “30-year rule.” This rule provided that the WEP’s impact was reduced or eliminated for individuals who had a substantial work history under U.S. Social Security. Specifically, if an individual accumulated 30 or more years of “substantial earnings” in Social Security-covered employment, the WEP would not apply at all. For those with 21 to 29 years of substantial earnings, the WEP’s reduction factor was incrementally lessened, reducing its overall impact.

“Substantial earnings” referred to a specific annual earnings threshold set by the Social Security Administration (SSA) that counted towards a year of coverage. While the precise dollar amount for substantial earnings changed annually, the concept was that an individual needed to earn a certain amount to have that year count as “substantial.” For example, in 2024, the amount of substantial earnings needed for a year of coverage was $31,275. Achieving these years of substantial earnings in covered employment was a direct way to lessen or avoid the WEP reduction.

Totalization agreements also provided exceptions to WEP’s application. If a foreign pension was based on a totalization agreement with the United States and the individual needed to rely on that agreement to establish entitlement to the foreign pension, the WEP generally did not apply to the U.S. Social Security benefit. This was particularly true for foreign pension payments received after 1994 that were explicitly based on such an agreement. These agreements ensured that credits earned in one country could be combined with U.S. credits to prevent benefit loss and avoid double taxation.

Estimating Your Social Security Benefit

For many individuals, understanding how the Windfall Elimination Provision (WEP) might affect their Social Security benefit has historically been a significant concern. The WEP modified the standard Social Security benefit formula by reducing the initial percentage applied to an individual’s average indexed monthly earnings (AIME). This adjustment directly led to a lower primary insurance amount (PIA), which forms the basis of the monthly Social Security benefit.

However, a significant change has occurred regarding the WEP and its impact on Social Security benefits. The Social Security Fairness Act was signed into law on January 5, 2025, effectively eliminating the Windfall Elimination Provision (WEP) and the Government Pension Offset (GPO). This repeal is retroactive, meaning it applies to benefits payable for January 2024 and later. For current and future Social Security benefits, the WEP no longer applies, and individuals who were previously affected should see their benefits recalculated and adjusted upwards. Those who had their benefits reduced by WEP or GPO should also receive retroactive payments covering the difference back to January 2024.

Given this legislative change, individuals concerned about their Social Security benefits should now focus on verifying their updated benefit amounts. The Social Security Administration (SSA) is the authoritative source for personalized estimates and information. While online “my Social Security” accounts can provide benefit estimates, it is important to confirm that these estimates accurately reflect the absence of the WEP for benefits from January 2024 onward. The SSA has been working to implement these changes, and their official website provides updates and guidance on the process. For the most precise information, contacting the SSA directly remains the recommended step. They can provide details specific to an individual’s earnings record and any foreign pension information they have on file.