Navigating the intricacies of retirement income can be challenging, especially when multiple sources of income are involved. This article delves into the potential reduction of Social Security benefits for individuals receiving pensions, specifically addressing the Windfall Elimination Provision (WEP) and the Government Pension Offset (GPO).
Understanding the WEP
The WEP applies to individuals who receive pensions from employers who did not withhold Social Security taxes from their wages. This typically includes government jobs and certain non-U.S. employers. If you have fewer than 30 years of substantial earnings on which Social Security taxes were paid, the WEP formula may reduce your Social Security retirement benefits.
Calculating the WEP Reduction
The WEP reduction is calculated by adjusting the percentage applied to your primary insurance amount (PIA). The PIA is the monthly retirement benefit you are entitled to at full retirement age. The WEP reduces the first percentage from 90% to 40% if you have fewer than 20 years of earnings on which Social Security taxes were paid. The SSA adds 5 percentage points for every year past 20 years that you have earnings on which you paid Social Security tax.
Exceptions to the WEP
There are exceptions to the WEP, meaning your Social Security benefits may not be reduced even if you have a noncovered pension. These exceptions include:
- Having 30 or more years of substantial earnings under Social Security.
- Being a federal worker first hired after December 31, 1983.
- Your only pension is for railroad employment.
- You are an employee of a nonprofit organization that was exempt from Social Security coverage on December 31, 1983.
Understanding the GPO
The GPO applies to spouses and widows/widowers who receive Social Security benefits based on the earnings record of a deceased spouse who received a government pension. The GPO reduces the Social Security benefit by two-thirds of the amount of the noncovered government pension.
Exceptions to the GPO
There are exceptions to the GPO, meaning your Social Security benefits may not be reduced even if your spouse received a government pension. These exceptions include:
- Your government pension is not based on your earnings.
- Your government pension is from a job where you paid Social Security taxes and meet specific criteria.
- You are a federal employee who switched from CSRS to FERS after December 31, 1987, or who were pension eligible in the early 1980s.
Impact of Pensions on Retirement Income
Understanding the WEP and GPO is crucial for planning your retirement income. If you anticipate receiving a pension, consider how it may affect your Social Security benefits and adjust your retirement savings accordingly. Consulting with a financial advisor can provide personalized guidance on maximizing your retirement income and navigating the complexities of Social Security and pensions.
Additional Resources
- Social Security Administration: https://www.ssa.gov/
- NerdWallet: https://www.nerdwallet.com/
Keywords:
- Social Security
- Pension
- Windfall Elimination Provision (WEP)
- Government Pension Offset (GPO)
- Retirement planning
- Retirement income
While the WEP and GPO can reduce Social Security benefits for certain individuals, understanding these provisions and their exceptions is essential for making informed retirement planning decisions. By carefully considering the impact of pensions on your Social Security benefits, you can develop a comprehensive retirement income strategy that meets your financial needs.
Can you collect Social Security and a pension at the same time?
It is possible to retire with both Social Security and a pension at the same time. However, if your pension comes from a job where you did not pay Social Security taxes on your wages, the Social Security Administration (SSA) may reduce your Social Security benefit.
There are two different kinds of pensions: covered and noncovered.
- A pension based on employment that deducted Social Security taxes from your pay is known as a covered pension.
- Based on employment that did not deduct Social Security taxes from your pay, a noncovered pension These employers are typically state and local governments or non-U. S. employers.
How much will my Social Security be reduced if I have a pension?
The Social Security Administration (SSA) employs a complex formula that applies three separate percentages to up to three different portions of an individual’s lifetime average indexed monthly earnings (AIME) in order to determine Social Security retirement benefits. Benefit Formula Bend Points. Accessed Nov 20, 2023. View all sources. Your primary insurance amount (PIA), or monthly retirement benefit at full retirement age, is calculated by adding the results.
|
Income range |
Percent applied to your PIA |
|---|---|
|
$0 – $1,174 |
90% |
|
$1,175 – $7,078 |
32% |
|
$7,079 and above |
15% |
An AIME of $8,000, for instance, would result in a PIA of $3,084. 19.
%20($5,904%20x%2032%)%20 %20($922%20x%2015%)%20=$1,174%20x%2090%)%20 60 + $1,889. 29 + $138. 30 = $3,084. 19.
The windfall elimination provision lowers the first of those percentages from 90% to 20%400% if you worked in jobs that required you to pay social security taxes for less time than 2020 years. For each of the previous 20 years that you have earned income on which you have paid Social Security tax, the SSA adds 5 percentage points.
|
Years of earnings on which you paid Social Security tax |
Adjusted percentage applied to your PIA |
|---|---|
|
30 or more |
No adjustment (remains at 90%) |
|
29 |
85% |
|
28 |
80% |
|
27 |
75% |
|
26 |
70% |
|
25 |
65% |
|
24 |
60% |
|
23 |
55% |
|
22 |
50% |
|
21 |
45% |
|
20 or fewer |
40% |
Your Social Security benefits cannot be lowered by the SSA by more than half of the noncovered pension. The windfall elimination provision, for instance, won’t lower your Social Security retirement benefits by more than $250 per month if your noncovered pension pays $500.
The SSA has a windfall elimination provision calculator that can help you understand how much your retirement benefits will be reduced when you begin receiving your monthly pension.
Your eligibility for Supplemental Security Income (SSI) will be impacted by your pension, which the SSA counts in the same manner as any other type of income.
How Much is Social Security Reduced if You Have a Pension? | Social Security & Your Pension
FAQ
Can you collect Social Security and a pension at the same time?
Does my pension affect how much Social Security I get?
What will reduce my Social Security benefits?
Does a FERS pension reduce Social Security?
Can a pension reduce Social Security payments?
But there are some types of pensions that can reduce Social Security payments. If your pension is from what Social Security calls “covered” employment, in which you paid Social Security payroll taxes, it has no effect on your benefits. The vast majority of Americans work in jobs covered by Social Security.
What happens if a government pension is more than social security?
If two-thirds of your government pension is more than your Social Security benefit, your benefit could be reduced to zero. If you take your government pension annuity in a lump sum, Social Security will calculate the reduction as if you chose to get monthly benefit payments from your government work. Why will my Social Security benefits be reduced?
What happens if I get a pension from work not covered by Social Security?
When you get a retirement or disability pension from work not covered by Social Security, we may calculate your Social Security benefits using a different formula. This lowers your Social Security benefit. We do this whether your pension comes from work you did for a U.S. government agency or in a foreign country. More Information
Will Social Security be reduced by two-thirds of my government pension?
We’ll reduce your Social Security benefits by two-thirds of your government pension. In other words, if you get a monthly civil service pension of $600, two-thirds of that, or $400, must be deducted from your Social Security benefits.