How a government pension may reduce your Social Security benefits

cointowersThe Windfall Elimination Provision (WEP) is a little-known rule that reduces your Social Security retirement benefits if you receive a pension from a past job in which you were not required to pay Social Security taxes. It’s little-known because it applies only to a small segment of retirees. Mostly it applies to former state and local government employees, like police officers, firefighters, teachers, and workers at state and local governments and nonprofit organizations that are not part of the federal Social Security system.

To be affected by the WEP, an individual must have worked in covered employment long enough to qualify for Social Security benefits; must have also worked in noncovered employment, meaning that Social Security payroll taxes were not paid; and, importantly, must have earned a pension in that noncovered employment.

If you fall into this category, your Social Security retirement benefits will be reduced from their original amounts. The Social Security Administration (SSA) will apply a formula to determine how much the benefits are reduced. The rule often comes as a surprise to many people because neither the SSA nor their employers are, in most cases, required to give them notice that their benefits would be reduced.

The rule was enacted in 1983 to prevent beneficiaries from “double-dipping” from both Social Security and a pension. The Social Security benefits system is designed to provide higher benefits to retirees who had lower total earnings. Without the WEP, those who worked only 20 years in a job covered by Social Security would receive higher benefits than those who worked 30 or more years in a covered job.

The rule is intended to prevent a 20-year worker who also received a pension from a non-covered job from getting more benefits than the 30-year worker. Says SSA Chief Actuary Stephen C. Goss: “If you had worked in non-covered employment for a significant portion of your career, there should be a shared burden between the pension you receive from that period of your employment and from Social Security in providing your benefit. Just because a person worked only a portion of their career with Social Security-covered employment, they should not be benefiting by getting a higher rate of return.”

If you have fewer than 30 years of Social Security-covered employment, your benefit is reduced based on the number of years of employment you have. Your benefits are reduced the most if you have 20 or fewer years. The rule does not apply if you have 30 or more years of covered employment and earnings. It also doesn’t apply if your only pension comes from working for a railroad company. The most your benefit can be reduced is one-half of your pension.

If you are already receiving a pension when you file for Social Security, the reduction applies immediately. If your pension starts after you file, the reduction will occur at that time. The same Social Security rules, such as credit for filing after full retirement age and annual cost of living adjustments, continue to apply to you; your benefits are calculated first and then the reduction is applied.

Social Security benefits for survivors may be reduced by even more because of another rule, enacted in 1977, called the Government Pension Offset (GPO). Under the GPO, survivor benefits are decreased by two-thirds of the amount of a pension you receive from a job in which you were not required to pay Social Security taxes.

The WEP and the GPO affect only about 3.5 percent of households, or about 1.5 million Social Security beneficiaries in 2012. But the rules can substantially reduce benefits in those households, up to $413 per month. The SSA’s analysis suggests that the present value of lifetime Social Security benefits for affected households is reduced by roughly one-fifth, which amounts to 5–6 percent of their total wealth.

Both the WEP and GPO were controversial when enacted, and continue to be so. Efforts are being made to repeal both rules, but so far unsuccessfully.

For more information about the WEP and GPO, see the SSA’s WEP and GPO study page.  To calculate your reduction under the WEP, see the online calculator.