A Public Pension and Full Social Security Benefits? No Way

If you receive a public pension from federal, state or local government, don't count on full Social Security benefits. Here's how to protect your retirement.

Pension written on a folder
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Are you counting on a public pension and Social Security? 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 Social Security did not cover. Reductions also apply to Social Security spousal or survivor benefits that are claimed by government pensioners. 

The public pension "penalty"

David Walrath, a California Retired Teachers Association lobbyist, 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, California.

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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

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. 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.

"The WEP and GPO provisions were initially designed to address perceived inequities in the Social Security system regarding individuals who received both a government pension and Social Security benefits based on other employment," Michèle Walthert, Managing Director & Head of Advisor Success at Wealthspire Advisors tells Kiplinger. "However, they can disproportionately affect certain groups, such as individuals who worked in both the public and private sectors over their careers (State and local government employees, including teachers, firefighters, and police officers tend to be among those most affected by the WEP and GPO)."

Windfall elimination provision

First, let's look at the windfall elimination provision (WEP). 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 pre-retirement 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 to 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.

Under the windfall elimination provision, Social Security benefits for workers (and eligible family members) are reduced if the worker receives a pension based on earnings from employment not covered by Social Security. However, the WEP includes a guarantee that this reduction in benefits can never exceed more than one-half of the noncovered pension, or the maximum monthly reduction limit for 2024, which is $587. You can use a WEP calculator at www.socialsecurity.gov to figure out how the WEP will impact your benefits specifically. 

Additionally, the windfall provision does not apply to government pensioners who have 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. 

Government pension offset

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 thanks to the government pension offset (GPO). 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 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. For example, if an individual receives a monthly noncovered pension of $900, two-thirds of that amount (or $600) is deducted from his or her Social Security spousal benefit. And if two-thirds of your government pension is more than your Social Security benefit, your benefit could be brought down to zero.

Survivor and spousal benefits

Patricia Kohlen got hit by both the "windfall elimination provision" (WEP) and the "government pension offset" (GPO). Kohlen 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. At that time, the windfall provision reduced the payments to $108 a month. Her monthly teacher's pension was $1,930. 

But 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. However, 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.

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.

Kohlen said 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."

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.)

"Despite their importance, many government employees may not fully comprehend the implications of these provisions until they are nearing retirement age," shares Walthert. "This lack of awareness can lead to unexpected financial strain during retirement, especially if they had been planning based on the assumption of receiving full Social Security benefits. Given the complexity of these regulations, seeking guidance from a financial advisor or Social Security representative becomes crucial. By understanding the intricacies of the WEP and GPO, individuals can make informed decisions about their retirement planning, ensuring a more stable financial future."

How to minimize the impact of the WEP and GPO

Use these strategies to mitigate the impacts of the WEP:

  •  Work longer a job that pays into Social Security: After 20 years of substantial earnings under Social Security, the effect of the WEP gets smaller by 10% each year. And after 30 years, the WEP doesn’t apply. Consider working even just part-time at a job that pays into Social Security after you reach full retirement age. 
  • Delay claiming Social Security: While this won't lessen the WEP impact, it will boost your overall Social Security benefit.
  • Anticipate the WEP when retirement planning: Thoroughly understanding how your benefits will be affected by the WEP can help you plan appropriately for retirement. Use the Windfall Elimination Provision (WEP) Online Calculator to get started.

Use these strategies to mitigate the impacts of the GPO: 

  • Use the last 60-month rule: You can avoid the GPO altogether by utilizing the last 60-month rule, which requires that you pay taxes on your earnings during the last 60 months of government service.
  • Maximize covered work credits: If possible, increase the amount of time you work in a job that pays into Social Security to accumulate more substantial earnings and credits, which can help lessen the impact of the GPO. 
  • Consider other retirement plans: If you know you'll be greatly impacted by the GPO, use alternative methods to invest and save for retirement, like contributing to an IRA account or a 403(b) retirement plan.

EDITOR'S NOTE: The original version of this article was published in the August 2010 issue of Kiplinger's Retirement Report.

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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.
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