How Retirees’ Pensions Work Against Social Security Benefits
If you receive a government pension, your Social Security benefit may suffer a reduction due to a rule called the Windfall Elimination Provision. It pays to know how it works when you plan for your retirement income.
This provision, or WEP, reduces your Social Security benefit when you receive a pension based on work where you did not pay Social Security taxes. The point of this rule is ostensibly to act as an offset, since the pension is intended to replace Social Security benefits for that worker.
First, you should understand a few things about how the Social Security Administration views your pension.
- The WEP applies to pensions based on your earnings from non-Social Security-covered employment, regardless of your years of service.
- The pension is your own, not your spouse’s or someone else’s. In other words, receiving a survivor pension from a non-covered job does not trigger the WEP. (However, another reduction called the Government Pension Offset may come into play.)
- The SSA uses the amount of pension you receive per month for calculation. If you receive payments on a different schedule, such as quarterly or in a lump sum, the SSA translates them into a monthly amount.
If half of the pension is more than $413, the maximum WEP impact is limited to $413. If not, the WEP impact is half of the amount of your pension (as a monthly amount).
The SSA lowers the maximum WEP reduction if you paid Social Security tax on substantial earnings for more than 20 years. For each additional year, it dropped 10%.
Below are a couple examples to help explain how this works.
Example 1. Rick is due to receive a lump sum pension from his work for the state government. This lump sum benefit calculates to a monthly pension amount of $300. Rick also worked part-time for 20 years in a job that Social Security covered. He is due (before WEP impact) a Social Security benefit of $900 per month at his full retirement age.
Rick began receiving Social Security benefits earlier this year. When he receives the lump sum from his state pension, the WEP kicks in. Rick’s impacted Social Security benefit will be $750 ($900 minus $150), because 50% of his pension ($150) is lower than the maximum amount of reduction ($413).
Example 2. Brad worked alongside Rick for several years. However, Brad, being a more highly skilled worker, has a pension coming from the state government in the amount of $1,400 per month. Brad had the same part-time job as Rick, which garnered him a Social Security benefit of $900 per month.
Reducing his benefit by $413, we come up with $487; reducing his benefit by 50% of his pension ($700), we come up with $200. The higher of those two amounts, $487, is what Brad receives after the WEP impact.
Example 3. Freddy worked the exact same job as Brad, earning the monthly pension of $1,400, but Freddy had a part-time job where he received substantial earnings for 24 years, and his Social Security benefit is $1,200 per month.
Since Freddy had substantial earnings for more than 20 years, the maximum WEP reduction decreases from $413 to $248, a 40% drop for the four additional years.
For the calculation, we reduce Freddy’s Social Security benefit by $248, resulting with $952; again, subtract 50% of his pension ($700), we get $500. The higher amount, $952, is Freddy’s Social Security benefit.
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Written by Jim Blankenship, CFP, EA, who is an independent, fee-only financial planner at Blankenship Financial Planning in New Berlin, Ill. He is the author of An IRA Owner’s Manual and A Social Security Owner’s Manual. His blog is Getting Your Financial Ducks In A Row, where he writes regularly about taxes, retirement savings and Social Security.
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