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Will Receiving a Pension Reduce My Social Security Benefits?

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does pension affect social security

If you’re approaching retirement, you might wonder how your pension and Social Security benefits will work together. You may have heard that your Social Security benefits could be reduced if you receive a pension. This isn’t always the case, but your benefits can be impacted for some retirees, particularly those with government or foreign pensions.

Let’s explore how pensions and Social Security benefits work together, how rules like the Windfall Elimination Provision (WEP) and Government Pension Offset (GPO) affect them, and what to expect as you plan for retirement.

How Your Social Security Benefits Are Calculated

To qualify for Social Security, you need to earn 40 credits over your career, which is usually about ten years of work. Once you qualify, your benefit is calculated based on your average monthly earnings over your 35 highest-earning years. This amount, known as your Primary Insurance Amount (PIA), is the foundation for your Social Security benefits.

Your benefits will be reduced if you claim Social Security before your full retirement age. On the other hand, if you delay benefits until after full retirement age, your monthly amount will increase. Social Security also adjusts benefits annually based on cost of living changes to help your benefits keep pace with inflation.

How Pensions Affect Social Security

Most pensions don’t impact Social Security benefits if you paid FICA taxes (the payroll tax that funds Social Security and Medicare) during your employment. However, if your pension comes from a job where you didn’t pay into Social Security, such as certain government or foreign jobs, it may lead to reduced Social Security benefits. In these cases, the Windfall Elimination Provision (WEP) or the Government Pension Offset (GPO) could impact your benefits.

These provisions adjust your Social Security benefits when you receive a pension from a job where you didn’t pay into the Social Security system.

The Windfall Elimination Provision 

This provision applies to retirees who receive a pension from a job that didn’t withhold Social Security taxes and qualify for Social Security based on other work. WEP adjusts the formula used to calculate your benefits, meaning you may receive a lower Social Security benefit than you would otherwise.

How WEP Works

Social Security benefits are calculated based on a formula that uses your average lifetime earnings. The formula typically allows low-wage workers to receive a higher percentage of their earnings as Social Security benefits. However, WEP reduces the percentage applied to the first part of your earnings, known as the “bend points.”

For example, in 2024, Social Security would normally replace 90% of the first $1,174 of your average monthly earnings. The WEP can reduce this percentage to as low as 40%, depending on the number of years you worked in jobs that paid Social Security taxes on substantial earnings.

Example:

Let’s say Jane worked as a public school teacher for most of her career, receiving a pension from a state that didn’t withhold Social Security taxes. She also worked part-time in a private sector job covered by Social Security. Jane’s average monthly earnings from her covered job are $1,100. Without WEP, Social Security would multiply this by 90%, giving her a benefit of $990. However, due to WEP, her benefit drops to 40% of her earnings, resulting in a monthly Social Security benefit of $440 – a reduction of $550.

The maximum WEP reduction for 2024 is $557.

  • If you have 30 or more years of substantial earnings, WEP doesn’t apply. In 2024, substantial earnings mean $31,275 or more.
  • The WEP reduction is less severe if you have 21 to 29 years of substantial earnings. The percentage increases progressively from 45% for 21 years to 85% for 29 years.
  • If you have 20 years or less, the WEP reduction is applied at its maximum.

The Government Pension Offset (GPO)

This provision affects Social Security spousal and survivor benefits if you receive a pension from a government job that didn’t withhold Social Security taxes. The GPO reduces the spousal or survivor benefit by two-thirds of your pension.

Example:

Sarah receives $1,500 monthly in Social Security spousal benefits based on her husband’s work record. She also receives a $900 monthly pension from her government job, which didn’t withhold Social Security taxes. The GPO reduces her spousal benefit by two-thirds of her pension, or $600, leaving her with $900 in spousal benefits.

Sometimes, the GPO can reduce your spousal or survivor benefit to $0 if your pension is large enough.

Exceptions to WEP and GPO

There are several situations where the WEP or GPO won’t apply:

  • If you were first hired by the federal government after 1983 and paid Social Security taxes under the Federal Employees’ Retirement System (FERS), WEP doesn’t apply.
  • If your only work without Social Security taxes was before 1957, WEP and GPO do not apply.
  • You’re exempt from the WEP if you have 30 or more years of substantial earnings in Social Security-covered jobs.
  • Employees of certain non-profit organizations and those with railroad pensions may be exempt from WEP and GPO.
  • The GPO doesn’t apply if you receive a pension that’s not based on your earnings, such as a pension inherited from a spouse.

How to Estimate Your Benefit Reduction

If you’re unsure how much WEP or GPO could affect your benefits, you can use the calculators available on the Social Security Administration (SSA) website. These tools allow you to input your pension details and earnings history to estimate your Social Security benefits after applying for WEP or GPO reductions.

Does a Pension Count as Earned Income for Social Security?

Another common question is whether pensions count as earned income for Social Security purposes. The answer is no. A pension does not count as earned income. This means:

  • You won’t pay FICA taxes on your pension.
  • It doesn’t add to your Social Security earnings record.
  • It won’t count toward the earnings limit if you start taking Social Security before your full retirement age.

Can I still qualify for Medicare if WEP or GPO reduces my benefits?

Yes, WEP and GPO do not impact your eligibility for Medicare. Even if you have reduced Social Security benefits, you can still qualify for Medicare based on your spouse’s or work history.

Talking to an Expert Helps You Plan Better for Retirement

Understanding how your pension might affect your Social Security can help you plan better for retirement. The rules around WEP and GPO can be confusing, but knowing about them lets you prepare for any benefit changes. If you have questions, contact us at Tax Samaritan. We’re here to help you make sense of your options and get the most out of your retirement income.