How a Government Pension Can Offset Social Security

Retirees who are eligible for government pensions may have their Social Security benefits reduced due to rules designed to keep people from getting excess payments. Understanding how a government pension can offset Social Security is important for teachers, police officers, firefighters and other public employees who may rely on both sources for a comfortable retirement. Here’s what you need to know. 

If you need help planning for retirement, a financial advisor can work with you to grow and protect your nest egg.

The WEP affects individuals who receive a pension from a job where they did not pay Social Security taxes and who also qualify for Social Security benefits based on other employment. The WEP reduces the Social Security benefits for these individuals, modifying the standard benefit calculation to account for the pension income.

The WEP can apply to anyone who worked in a job where they received a government pension and did not contribute to social security. This can include state or local government jobs, certain nonprofit organizations and foreign employers. WEP alters the benefit formula used to calculate Social Security benefits, reducing the amount the individual receives. The reduction depends on factors such as the number of years of substantial earnings covered by Social Security, and it can significantly lower monthly benefits.

The WEP is designed to address concerns about individuals who might receive a full pension from non-Social Security-covered work in addition to Social Security benefits based on minimal covered work. By adjusting the benefit formula, the WEP ensures a more equitable distribution of benefits.

The GPO affects Social Security spousal and survivor benefits for individuals who receive a government pension from work not covered by Social Security taxes. Unlike the WEP, which applies to benefits based on one’s own work record, the GPO impacts benefits received as a spouse, widow or widower.

The GPO reduces Social Security spousal or survivor benefits by two-thirds of the government pension amount. For example, if a retired teacher receives a monthly government pension of $1,200, two-thirds of that amount ($800) would be deducted from their Social Security spousal benefits. This reduction can completely eliminate Social Security benefits if the offset exceeds the benefit amount.

The GPO aims to provide a fair distribution of benefits by considering the financial support already received through a government pension. It addresses concerns about individuals receiving full Social Security spousal or survivor benefits alongside a government pension, which could result in higher-than-intended total benefits.

For the WEP, those with at least 30 years of substantial earnings in Social Security-covered employment are not subject to WEP reductions. Those with 21 to 29 years of substantial earnings receive a partial exemption with reduced impact.

The WEP also doesn’t apply to individuals who receive a pension from a private-sector job or if their government pension comes from employment where they did pay Social Security taxes.

For the GPO, there are exceptions for certain federal employees covered by the Civil Service Retirement System (CSRS) who switched to the Federal Employees Retirement System (FERS) and worked for a specified period under FERS. This exception can reduce or eliminate the impact of the GPO on their Social Security benefits. 

Here are three common scenarios to consider when it comes to determining how a government pension could impact your Social Security:

If you are eligible for spousal benefits and have access to your spouse’s Social Security estimate, you can calculate the potential impact of the GPO on your benefits. Start by determining the amount of your government pension and then apply the two-thirds reduction to see how it affects your spousal benefits. 

For example, if your government pension is $1,500 per month, the GPO would reduce your spousal benefits by $1,000 (two-thirds of $1,500). Subtract this amount from your spousal benefit estimate to determine your net benefit. Social Security has an online calculator that will perform these calculations as well. 

When calculating Social Security retirement benefits based on your earnings, consider the potential impact of the WEP. The WEP modifies the formula used to calculate benefits, potentially reducing your monthly payments. To estimate your benefits, obtain your Social Security earnings record and identify any years of substantial earnings. If you have fewer than 30 years of substantial earnings, use the WEP-adjusted formula to calculate your benefit amount.

Retiring before reaching full retirement age can further complicate the calculation of your benefits, as early retirement results in reduced Social Security payments. To calculate the impact, consider how the combination of early retirement reductions and the WEP or GPO adjustments affect your overall benefit amount.

Determine your full retirement age and calculate the percentage reduction for claiming benefits early. Apply this reduction to your WEP or GPO-adjusted benefits to determine your final payment amount. 

The Windfall Elimination Provision and Government Pension Offset can significantly reduce benefits for those receiving pensions from non-Social Security-covered employment. By familiarizing yourself with these provisions and calculating the potential impact on your benefits, you can make informed decisions about retirement timing and income sources. Exploring available exceptions and consulting with financial advisors can help you maximize your retirement income.

• A financial advisor can help you analyze and manage investments for your retirement portfolio. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
• Getting an estimate of your Social Security benefits is an important part of retirement planning. And you can do just that with the help of SmartAsset’s Social Security calculator.

Photo credit: ©iStock.com/insta_photos, ©iStock.com/South_agency, ©iStock.com/RgStudio