In United States tax law, the windfall elimination provision is a regulation that aims to prevent retirees from receiving more Social Security benefits than they are entitled to, based on their payments into the Social Security system during their working years. This would have an effect for someone who receives a pension from a job where Social Security payments were not deducted from his paychecks. Whatever pension that person collected from such employment would reduce the amount of his Social Security benefits during retirement.
The windfall elimination provision was implemented in 1983 as an effort to increase fairness in the way that Social Security benefits were given. Prior to this time, someone could unfairly receive retirement benefits as if they had earned a low income during their working years. This happened to retirees who contributed little to the Social Security system while working in jobs covered by it, but were well paid in jobs not covered by the program. A person could thus receive benefits that had not been earned, as far as the Social Security Administration was concerned.
The windfall elimination provision has the effect of reducing one's retirement benefits if he receives a pension from a job where Social Security taxes were not taken out of his pay. Retirement benefits are intended to replace only a certain percentage of someone's earnings while employed. For example, a worker who earned a relatively low wage could receive benefits equal to 50% of his pre-retirement wages. A person who held a high-paying job, however, may only receive benefits in the amount of 25% of his former wages.
Until the windfall elimination provision was instated, someone who worked primarily at jobs where Social Security taxes were not deducted from pay could receive more than his intended percentage. This is because from a Social Security standpoint, his earnings had been low throughout his life. A job that is not covered by Social Security might for a nonprofit entity, or a job held in another country, for example.
Some exceptions were written into this legislation in an effort to avoid unintended consequences. For example, this provision does not apply to money paid out as survivor's benefits after the death of the worker. It also does not apply if the wages that were untaxed by Social Security were earned before 1957. Those whose pensions are relatively low are also protected from receiving too little, because the windfall elimination provision is limited in the amount by which it can reduce benefits.