Pensions and Social Security: Will Your Benefits be Reduced? – Frugal Confessions

Pensions and Social Security: Will Your Benefits be Reduced?

I work for the government and have a pension plan that I will be vested in after five years. Currently, I am almost at 3 years of service. The idea of receiving a pension for many years in retirement is an exciting one, and I almost see it as banking some of the extra income I would be making right now if I worked in private industry. But while researching for the article on Social Security Benefits, something caught my eye on my Social Security Estimated Benefits Statement: Government Pension Offset (GPO) and Windfall Elimination Provision (WEP). Red flag!

It turns out that if you receive a pension from a government job, you might have your social security benefits reduced. It all hinges on whether or not social security taxes were paid on the pension money that you will be receiving. I know that we pay social security taxes on our income at our agency, but I am was not sure whether or not the money that goes into the pension is taxed for social security.

The Windfall Elimination Provision uses a modified calculation to calculate your Social Security Benefit if you receive a pension from work where Social Security taxes were not taken out of your pay. This could include work for federal, state, or local government, as well as non-profits and employers in other countries. For federal employment, this affects you when any part of a person’s federal service after 1956 is covered under the Civil Service Retirement System (CSRS), but not those who are covered under the Federal Employees’ Retirement System (social security taxes are withheld).

The Government Pension Offset (GPO) affects spouses and widows/widowers of people who qualify for a pension and social security benefits through their spouse who worked for a place that did not withhold social security taxes.  In this case, the SSA states that “your Social Security benefits will be reduced by two-thirds of your government pension.” This is the same if you choose a monthly payment or a lump sum payment.

How this Affects Me

As stated in my article earlier this week, I am not banking on Social Security Income (SSI) to fund my retirement. Still, I wanted to find out whether or not any SSI I received would be reduced because of the pension I will receive (if/when I become vested, which occurs at 5 years). After completing research, it turns out that our pension funds come from money that has been taxed for Social Security, so any Social Security benefits that I will receive in 2045 will not be affected by my pension received, and vice versa.

Are you going to receive a pension? Assuming you will receive partial or full Social Security Benefits, will they be affected by your pension? 

15 comments… add one

  • I’m not eligible for a pension, but I’m also not banking on receiving any social security benefits. If I get them it’ll be a very nice plus. I think my situation and attitude is pretty common for folks my age.

  • I’m also part of a pension plan and have a total of 8 years so far invested in the plan. It’s my understanding that the social security funds I contributed to before I was teaching will be reduced when I retire since I have a pension. I’m not exactly sure how much of my social security I’ll receive, but it won’t be the full amount that is listed on my annual statement. I should probably look into an exact amount, but it won’t be very accurate until I’m closer to retirement.

    • FruGal

      Krantcents just mentioned that it is a bit more complicated than I posted about, and it sounds like yours is along those lines. I’ve asked him for a bit more info if he’s got time. I am interested!

  • No pension for me. I’m kind of glad, I don’t know that I’d want to depend on someone else paying me, as opposed to investing the money myself.

    I’m curious, do pensions track inflation? Say you vest in 5 years, but don’t reach the payout age 205 years from now, where that money is worth half what it was when you earned it. How is that addressed?

    • FruGal

      Great question! I actually have no idea. I should look into that:).

      Also, we are both saving in our own Roth IRAs and his 401(K), so we’ll be covered.

  • No pension for me. I would have liked that option though, to know that I will receive x amount adjusted to inflation (I assume it is?) even it the amount is a little low. Helps me plan better. But I am not counting on my SSI, I am planning to not get any, if I end up with SSI… more travel for me :)

  • Actually, it is more complicated! It depends on how many years you have paid into Social Security. The offset varies based on the number of years. I contacted my Congressman and Senators about this inequity. You can have multiple pensions, but you cannot have Social Security and a pension.

    • FruGal

      Hello Krantcents!

      Interesting–I did not see that laid out on the Social Security website when I researched for these two articles. Do you have a link you could share?

      Great info!

  • If they go away, I hope they do soon. I’d hate to spend many years paying into a system that won’t pay me.

    More likely, they’ll probably push retirement age back, find sneaky ways to reduce benefits (by stating lower inflation), etc. I’m not counting on it, but I’ll welcome it if it’s there. But I’ll be PISSED if I have to pay into a system and get nothing out of it in the end. It’s my money!

  • I may be eligible for a pension from my present (private) company, but I’m not counting on it, nor am I counting on SS. If either is around by the time I get ready to retire, so much the better.

  • Retirement age is still a long way off for me (but getting less long all the time :) ) I don’t expect much of my current benefits to be around when I get there.

  • Amanda, This is a great article and all… but I must say, it’s a bit of added stress for us right now:) We are moving, we have paid into social security, state pensions, and other retirement accounts. Of course sometimes social security was witheld and others not. I think this is something I’m going to worry about later, but thanks for keeping it on the radar :)

    • Hi Barb! I know–you poor guys are under a lot of stress right now. I hope that it pays off in a big way. Continued good luck!

  • I planned for about 50% of what is currently on my benefit statement from SSA. I think SS will be there but in a different form, probably like a 401k where the government will match your contribution.
    Paul @ The Frugal Toad recently posted..Smoking Cigarettes is Hazardous to Your Financial Life

    • FruGal

      Sounds like a reasonable plan.

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