I retired 2016 and started collecting my social security benefit at age 66. I have been a permanent resident in U.S. for 20 years. Prior to that I lived in Australia where I eaned a pension benefit via Public Sector superannualtion scheme which I started withdrawing last year. When I applied for Social Security they reduced my monthly benefit due to the Australian pension using some type of formula. Why are they allowed to do this for a pension a pension I contributed and earned in Australia?
Social Security benefits depend on your past covered earnings, i.e. earnings on which you paid Social Security payroll taxes. The percentage of your past earnings paid as benefits to a lower-paid worker is higher than to a highly paid worker. Lower-paid workers can get a Social Security benefit that equals as much 55 percent of their pre-retirement earnings. The average replacement rate for highly paid workers is about 25 percent.
Since you only paid Social Security taxes on part of your total career earnings your average indexed monthly earnings are lower than they would have been had you paid Social Security taxes on all of your earnings. Prior to 1983 you would have had the unintended advantage of receiving a Social Security benefit representing a higher percentage of your earnings, plus a pension from a job for which you didn’t pay Social Security taxes. Congress passed the Windfall Elimination Provision (WEP) to remove this unintended advantage. If, however, you work 30 or more years in covered employment and earn above the substantial earnings amount, currently $22,050, there is no reduction. Furthermore, the reduction is less severe the more years you have substantial earnings in covered employment going from 20 up to 30 such years. Also, there is a limit to the amount of retirement benefits you can lose via the WEP, namely no more than half of the amount of the non-covered pension you receive.
Since the WEP removes an unintended advantage from Social Security benefits, it doesn't matter whether your non-covered pension was earned in the United States or Australia.
Basically, the WEP ensures that you are treated the same as workers who paid Social Security taxes for their whole career.