This article was updated on Dec. 20, 2017.
For many Americans, Social Security is the only source of regular monthly income to help them supplement their retirement savings. But some workers are fortunate enough also to be eligible to receive pensions from past employment that can provide additional income. Unfortunately, in some cases, those separate pension payments can reduce the amount of Social Security benefits you receive -- but the rules don't make sense to everyone. Let's take a closer look at how pensions can affect your Social Security.
The private vs. public pension distinction
To figure out whether your pension will hurt your Social Security benefits, the first thing you need to know about your pension is whether you got it from a private employer or from a government or public-sector job. The answer to that key question is the biggest factor in determining whether you'll see a cut in your Social Security benefits because of your pension.
For Social Security purposes, all private employers pay taxes into the system, with workers having Social Security tax withheld from their pay and employers matching that amount with taxes of their own. Any pension program that a private employer provides comes at additional cost for the employer, and it's intended to supplement the Social Security benefits that its workers will receive. The Social Security Administration therefore doesn't factor those private pensions into benefits calculations, and the only potential adverse impact is that taxable private pensions can boost your income to high enough levels that some of your Social Security benefits might become subject to income tax.
By contrast, the rules covering government and public-sector workers aren't nearly as uniform. Some government employees do pay Social Security taxes, and those workers generally won't see their benefits reduced solely because of an additional pension. However, many state and local government entities opt to provide their own pension programs in lieu of Social Security, and their workers therefore don't pay Social Security withholding taxes. Because those workers didn't pay into the Social Security system, the Social Security Administration does take into account the pensions they receive instead, and those amounts can reduce any Social Security benefits that they'd otherwise be entitled to receive.
2 ways a pension can cut your Social Security benefits
If you get government pension payments, then your Social Security benefits are in danger in two ways. The Windfall Elimination Provision makes downward adjustments to benefits based on your own work history, affecting those who worked in non-government jobs in the past and therefore who have paid Social Security taxes into the system. The formula for the reduction is complicated, but the idea is to eliminate the preference that Social Security's benefit calculations ordinarily give workers with lower average incomes compared to those with higher average incomes. Depending on how many years you worked under Social Security, your benefits can be cut by as much as $428 per month or half of whatever you get from your government pension, whichever is less. Those who worked 30 or more years paying Social Security taxes, though, are exempt from the provision.
In addition, if you receive spousal or survivors benefits from Social Security, government pensions can eat into those benefits as well. The Government Pension Offset provision generally reduces your Social Security payment by two-thirds of whatever you receive from your pension. With no maximum, some people see their entire Social Security payment disappear as a result of the Government Pension Offset. Certain exemptions apply for pensions that aren't based on earnings or for those who paid into Social Security for at least the last five years of their government service.
Most workers don't have to worry about pension income cutting into their Social Security payments. But if you've worked for a government employer, it's worth taking a closer look to make sure you won't face any unpleasant surprises when you decide to retire.