Most pensions have no impact on Social Security benefits because they are based on work covered by Social Security.
However, a government pension from work not covered by Social Security can affect the amount of your SSA benefit. This mainly involves government pensions and that is how I will refer to them. One example is a pension from the old Federal Civil Service Retirement System (CSRS). Some state pensions are involved because not all state employees are covered by Social Security. Local government entities, such as a school district, might not have SSA coverage and be affected by this too. Sometimes a government pension from another country could be involved.
Since 1983, a government pension from work not covered by Social Security could affect your Social Security in two ways. The first, called the Windfall Elimination Provision, involves benefits payable to you on your own SSA record. The second, called the Government Pension Offset, involves benefits payable to you based on the SSA record of someone else.
The Windfall Elimination Provision (WEP) is today’s topic.
Since the government pension was from work where Social Security taxes were not taken out of your pay, you would have also worked long enough in other jobs that were covered by Social Security to qualify for SSA benefits.
The Windfall Elimination Provision is not a direct offset or reduction of the pension against the Social Security benefit. It affects how the amount of your retirement or disability benefit is calculated. The formula used results in a lower Social Security amount than you otherwise would receive.
Why is this? Social Security benefits replace a percentage of a worker’s pre-retirement earnings. By design, lower-paid workers get a larger percentage of pre-retirement earnings than higher paid workers. Work not covered by Social Security does not appear on the person’s SSA record. This incorrectly makes the person’s average earnings appear lower, leading to a larger percentage of pre-retirement earnings paid. The Windfall Elimination Provision benefit formula is intended to adjust for this.
The WEP formula takes into account how many years of work you have under Social Security covered employment. Overall, the Social Security benefit reduction cannot be more than one-half of the amount of the pension from work not covered by Social Security taxes.
The Windfall Elimination Provision does not affect most people. You need to know about the WEP if it affects you. Learn more in SSA publication 05-10045 – Windfall Elimination Provision.
Do you have a pension from work not covered by Social Security? If yes, use the special calculators at http://www.socialsecurity.gov/retire2/anyPiaWepjs04.htm to estimate future benefits. Other SSA calculators do not usually adjust for these pensions.
The Government Pension Offset will be a future topic. It involves benefits payable to you based on the SSA record of someone else, if you receive a government pension from work not covered by Social Security.