A Public Pension and Full Social Security Benefits? No Way

Social Security benefits can be reduced for retirees who receive a pension from the federal, state or local government.

Perhaps you had two careers. In one job, you were a government employee whose earnings were exempt from the Social Security payroll tax. You also worked in the private sector, paying into the Social Security system. When you retire, you'll get your public pension, but don't count on getting your full Social Security benefit.

Under federal law, any Social Security benefits you earned will be reduced if you were a federal, state or local government employee who earned a pension on wages that were not covered by Social Security. Reductions also apply to Social Security spousal or survivor benefits that are claimed by government pensioners.

David Walrath, a lobbyist for the California Retired Teachers Association, says many government employees don't realize their Social Security will be squeezed until they apply. "People will get their annual statement with a benefit number, but they're not told they're subject to an offset," says Walrath, with the consulting firm of Murdoch, Walrath & Holmes, in Sacramento, Cal.

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The two rules that cover government employees are the "windfall elimination provision" (WEP) and the "government pension offset" (GPO). The WEP applies to workers, and the GPO applies to government pensioners who are applying for Social Security spousal and survivor benefits.

Patricia Kohlen got hit by both. Kohlen, 61, paid into a public pension system for 28 years when she worked as an elementary school teacher in Atascadero, Cal. She also worked part-time as a secretary and paid Social Security taxes through that job.

Just before Kohlen retired with a disability in 2003, her statement showed that she was due $247 a month in Social Security disability payments. The windfall provision reduced the payments to $108 a month. Her monthly teacher's pension is currently $1,930.

The big shock came when she asked the Social Security Administration about a survivor benefit after her husband, Kenneth, died at age 62 in 2006. A retired college professor, Kenneth was getting a Social Security benefit of $1,406 a month, plus a private pension of $4,000 a month.

Widows and widowers are typically eligible for a Social Security survivor benefit that's 100% of the deceased spouse's benefit. Because of the formula used to calculate the government pension offset, Kohlen was told she would receive nothing when she became eligible for a survivor benefit at age 60.

Kohlen, who lives in San Luis Obispo, Cal., says she and Kenneth had been counting on his Social Security payments. "He paid into Social Security for 49 years, and I feel, as a widow, that I am entitled to that money," she says. "It's just so terribly unfair."

Lawmakers on Capitol Hill have introduced legislation that would end or modify the two provisions. Don't expect any decision soon. These issues will likely be addressed only when Congress takes up the larger issues of Social Security solvency and deficit reduction.

In the meantime, you need to become familiar with the two rules if you ever worked in a job that was not covered by Social Security. While some federal, state and local employees have paid into Social Security, others have not. Most federal employees today are covered by Social Security. Check with your employer or former employer. Also, if your Social Security statement lists $0 for years you worked for a government agency, that's an indication you may be subject to the two rules.

First, let's look at the windfall elimination provision. To understand how the WEP works, you need to know how Social Security calculates benefits. Social Security looks at the average monthly earnings for the years a person paid into the system. Benefits are intended to replace a percentage of a worker's preretirement earnings. Lower-income workers get a larger percentage of their earnings replaced than higher-income workers.

Until the mid 1980s, the Social Security Administration used a formula that treated government employees, who may have contributed into the system for only a few years, as low-wage workers. As a result, public employees received a disproportionately large Social Security benefit -- plus their government pension. In 1983, Congress ended this so-called windfall.

The windfall provision does not apply to government pensioners who paid into the Social Security system for 30 years or longer. Nor does it apply to workers who receive a military pension or a private pension. You can use a WEP calculator at www.socialsecurity.gov (opens in new tab) to figure your benefit.

As with all Social Security beneficiaries, your WEP-reduced benefit could change based on your age when you claim it. Consider this example: After 20 years of covered earnings, you turn 62 in 2009. Your full monthly benefit at 66 would be $1,372, which is reduced $372 by the windfall provision. If you claim at 62, your benefit would be reduced by 25%, to $750. For each year you delay past 66, you get an 8% delayed-retirement credit until you reach 70.

For Survivor and Spousal Benefits

A government pensioner who applies for a spousal or survivor benefit based on his or her spouse's Social Security earnings record will also face cuts. Typically, a spousal benefit is about 50% of a husband or wife's benefit if that's more than the spouse would receive based on his or her own work record. A survivor generally receives 100% of a deceased spouse's benefit.

But if the government pension offset applies, your Social Security spousal or survivor benefit will be reduced by two-thirds of your government pension.

Let's look at Patricia Kohlen, the retired schoolteacher. The earliest a survivor can apply for a benefit is age 60, six years before full retirement. A survivor benefit is reduced by 28.5% if a widow or widower applies that early. If Kohlen had applied at 60, as she had hoped, the survivor benefit would have been reduced to $1,005, from Kenneth's monthly $1,406 benefit.

Then the GPO would kick in. At the time, Kohlen's teacher pension was a little less than $1,900. Two-thirds of $1,900 is $1,266. Because $1,266 is larger than $1,005, she was not eligible for a Social Security survivor benefit at age 60.

The same goes for spousal benefits. Assume your wife receives a $2,000 Social Security payment each month. You want to take a $1,000 spousal benefit. If your public pension is $1,200, your spousal benefit would be reduced to $200. (That's $1,000 minus $800, which is two-thirds of $1,200.)

EDITOR'S NOTE: This article was originally published in the August 2010 issue of Kiplinger's Retirement Report.

Susan B. Garland
Contributing Editor, Kiplinger's Retirement Report
Susan Garland is the former editor of Kiplinger's Retirement Report, a personal finance publication whose subscribers are retirees and those approaching retirement. Before joining Kiplinger in 2006, Garland was a freelance writer whose work appeared in the New York Times, the Washington Post, BusinessWeek, Modern Maturity (now AARP The Magazine), Fortune Small Business and other publications. For 12 years, Garland was a Washington-based correspondent for BusinessWeek, covering the White House, national politics, social policy and legal affairs. Garland is a graduate of Colgate University.