Benefits for Social Security and traditional pensions are apportioned very differently. With traditional Social Security, your benefits are calculated based on your work record and supported by taxes removed from your salary during the course of your working life. With pensions, the company or government entity you worked for puts aside money in a fund to pay out your retirement checks (a defined benefit), and you do not pay taxes to, or participate in, the Social Security system.
What happens if you have a career in both? Are you entitled to both a pension and Social Security? Yes, but there are some concerns and limitations. Old methods used to calculate benefits gave some people filing for both benefits a so-called “windfall” of extra funds. Further, Social Security does not allow for “dual entitlement” – the receipt of both earned benefits and full survivor benefits.
Two pieces of legislation address these concerns. The Windfall Elimination Provision (WEP) was passed in 1983 to address the former problem, and the 1977 Government Pension Offset (GPO) addresses the latter. Both can affect your Social Security benefits, depending on whether you are receiving your own benefit or spousal benefits.
The WEP addresses an issue with benefits that were tilted to favor lower incomes. Originally, the benefit formula was intended to protect workers who worked in low-paying jobs for their entire career by increasing the percentage of their benefits.
However, anyone who worked in the government sector with pension benefits (teachers, firefighters, etc.) for the majority of their career and then switched to a private-sector job with Social Security taxes would appear to have a low-paying job within the formula, because the private-sector income is averaged over the entire working career to define Social Security benefits. Thus, one could receive both a full pension and a weighted Social Security benefit.
WEP offsets that result by breaking your career average monthly income (the basis for Social Security benefit determination) into three increments and adding percentage multipliers to reduce the benefits, with a lower percentage included in the later increments.
The Social Security website gives the example of a worker turning 62 in 2014. In this case, 90% of the first $812 of monthly benefits is retained, along with 32% of the next $4,101, and 15% of any remaining monthly income. Tables with the exact values are available at the Social Security website; 2014 WEP tables may be found at http://www.ssa.gov/pubs/EN-05-10045.pdf.
While this removes the “windfall” of some workers, others argue that the provision goes too far and harms those who truly did have low wages over a larger portion of their career, or those whose careers were evenly divided between public and private sectors.
It also provides disincentives in some cases – for example, someone wishing to enter teaching as a second career after a private-sector career must carefully consider the effect on their Social Security benefits that will make up the bulk of their retirement benefits.
There are exceptions and exclusions to WEP to address such issues; if you have 30 years of “substantial earnings” under the Social Security system (in other words, if you paid sufficient Social Security taxes for a long enough time), the WEP does not apply. A lower limit applies as well – your Social Security benefit cannot be more than half of your pension-based earnings (post-1956). Other exceptions are covered on the WEP webpage listed above.
Meanwhile, the GPO covers the situation where you have a pension but apply for Social Security benefits based on your spouse’s work record. This offset affects both spousal and widow/widower benefits.
The GPO deducts two-thirds of your pension benefit from your Social Security benefit. For example, if your monthly pension is $900, $600 must be deducted from your monthly spousal benefits. If your SS spousal benefits were calculated at $700, that would leave you with a total of only $1,000 in monthly benefits ($900 pension plus $100 Social Security) instead of your expected $1,700. Lump sum government pensions are calculated as if payments were made monthly.
There are also exclusions to the GPO, such as when the government pension component is not based on your earnings, or if the job for your government pension includes Social Security taxes (as is the case with most Federal Employee pensions, which are now based on the newer Federal Employees Retirement System, or FERS). See http://www.ssa.gov/pubs/EN-05-10007.pdf for other exclusions or contact your local Social Security office.
Links to WEP and GPO calculators are provided at www.socialsecurity.gov/gpo-wep so you can calculate the effect on your benefits under either program, or both. If you are not sure if this applies to you, take the time to use these calculators and contact your local Social Security office if you are still unsure. This could save you from making a late-life employment decision that could seriously reduce your retirement benefits.