Social Security benefits are a major source of income for most retirees. But if you get a government pension, there are some situations where your Social Security benefits could be reduced and your pension will be a more important source of retirement funds for you to depend on.
Not everyone with a government pension will see a Social Security benefits reduction. There are two primary situations where your government pension could result in a cut to your monthly Social Security benefits:
- When you get Social Security benefits based on your work record but you also get a government pension from a job where your wages weren't subject to Social Security tax
- When you receive spousal or survivor benefits from Social Security and you get a pension from working at a government job where you had no Social Security taxes withheld from your wages
To understand how and why this reduction happens, it's helpful to know a little bit about how your Social Security benefits are determined.
How Social Security benefits are determined
In most jobs, you pay Social Security taxes on your wages up to a certain income threshold, which is called the wage base limit. You earn work credits when you pay Social Security taxes and you become eligible for retirement benefits after earning at least 40 work credits.
The specific amount of Social Security benefits you receive is determined based on applying a formula to your average monthly wage. Your average wage is calculated over the 35 years when you earned the most, after wages are adjusted to account for inflation. The average wage used to calculate your benefit is called your Average Indexed Monthly Earnings, or AIME.
The formula used to determine your benefits is a progressive one. You're entitled to a primary insurance amount, or standard benefit, equal to 90% of AIME up to a certain threshold plus 32% of AIME between a first and second dollar threshold plus 15% of AIME above the second dollar threshold. You can learn more about this formula in our guide to Social Security's AIME.
The primary insurance amount is the amount of benefits you'd get if you first claim Social Security at an age designated by law as your full retirement age. If you claim benefits before FRA, your primary benefit -- and monthly income -- is adjusted downward and if you claim after, it's adjusted upward. Full retirement age is based on your birth year, and is between 65 and 67 depending on when you were born.
If you haven't worked long enough to become eligible for benefits or if your AIME is low because you didn't pay Social Security tax on much of your income during your career, you could also claim either survivor's or spousal benefits based on a spouse's work history.
You can claim survivor benefits if your spouse dies or claim spousal benefits if your spouse is still alive and has already begun collecting his or her own retirement benefits. You can also get spousal or survivor benefits even if you're divorced, as long as you were married for at least 10 years. If you've been divorced for at least two years, you don't even need your ex to claim his Social Security first before you can start collecting spousal benefits on your ex's work record.
Why does earning a government pension affect this formula?
If you work at a government job, there are times when you will not have to pay Social Security tax on your wages because you instead pay into a separate pension system for government workers.
If you have lots of income from the government, you may end up with a substantial pension. If you also earned some money from a job you paid Social Security tax on, you could also become entitled to Social Security retirement benefits. Or you could become entitled to these benefits because you claim them as a survivor or claim them as a spouse.
If you're qualifying for Social Security benefits on your own work record, you may appear to have a pretty low income if the bulk of your wages came from the government job you didn't pay Social Security tax on. Since the Social Security benefits formula is progressive, you'd benefit from the fact the formula provides more money for lower income workers than for high earners -- even though you might not actually be low income.
The Social Security Administration doesn't want that to happen, so you could have your Social Security benefits reduced in this situation. This reduction is called the windfall elimination provision.
If you qualify for survivor or spousal benefits and you get a generous government pension from a job you didn't pay Social Security tax on, this is also seen as unfair. After all, survivor's and spousal benefits are intended to help out lower earning spouses by enabling them to get benefits on a higher earner's work history -- but you may not actually be a low earner at all if you earned a lot at your government job and have a big pension.
To make sure you don't get large survivor or spousal benefits intended for low income spouses when you aren't one, Social Security benefits are also reduced in this situation. This reduction is called the government pension offset.
How does the windfall elimination provision work?
The windfall elimination provision can reduce Social Security benefits if you claim them based on your own work history and you also get a government pension from a job you didn't pay Social Security tax on. Only certain workers are subject to it.
Who is subject to the windfall elimination provision?
The windfall elimination provision may result in a reduction of your Social Security retirement income if you:
- Reached the age of 62 after 1985 or become disabled after 1985
- First became eligible for a monthly pension based on work done after 1985 at a job where you didn't pay Social Security tax.
If you worked under the Federal Employees Retirement System (FERS) and had Social Security taxes withheld; if your only pension comes from working for a railroad; if you're a worker at a non-profit first hired after December 31, 1983; or if you are a federal worker first hired after December 31, 1983, you won't be subject to the windfall elimination provision.
This provision also applies to you only if you have fewer than 30 years in which you paid Social Security tax on "substantial earnings." The amount you must earn and pay Social Security taxes on to have "substantial earnings" changes each year. The table below shows how much you'd need to earn in recent years in order for you to have substantial earnings for the year.
The Social Security Administration has a table dating back to 1937 that shows the substantial earnings threshold each year. If you have at least 30 years in which you earned and paid Social Security taxes on at least the minimum designated amount, the windfall elimination provision won't affect your benefits.
How does the windfall elimination provision reduce Social Security benefits?
If you are subject to the windfall elimination provision, then you will see your benefits reduced based on the number of years that you fell short of having substantial earnings.
The benefits reduction is determined by changing the formula used to determine your primary benefit amount. Remember, as mentioned above, the benefit you'd be entitled to at full retirement age is normally determined by a formula that gives you benefits equal to:
- 90% of AIME up to a certain threshold
- 32% of AIME between a first and second threshold
- 15% of AIME above the second threshold
If you are subject to the windfall elimination provision, you will not get benefits equal to 90% of AIME. Instead, you'll get a lesser percentage of your AIME up to the first income threshold. The table below shows the percentage of AIME used to determine benefits, based on your years of substantial earnings.
|Years of Substantial Earnings||Percentage of AIME|
|20 or less||40%|
Say you worked at a job and paid Social Security tax on substantial earnings for a total of 21 years -- and you also worked at a government job that entitles you to a benefit and that didn't require you to pay Social Security tax on wages.
The SSA would determine your average indexed monthly earnings over the highest 35 years when you earned the most, after adjusting your wages for inflation. Only wages that you paid Social Security tax on would count. If you had only 21 years when you paid Social Security tax, you'd have 14 years of $0 wages factored in when determine your average wage because you don't have 35 years of countable earnings.
Let's say that your average indexed monthly earnings amounted to around $800 after taking the inflation-adjusted average over 35 years. If you're retiring in 2019 and you didn't have that government job and pension, you'd get benefits equal to:
- 90% of AIME up to $926 (this is the first income threshold that applies for this year)
- 32% of AIME between $926 and $5,583
- 15% of AIME above $5,583
Since AIME is only $800, you'd get benefits equal to 90% of that $800 so you'd receive $720 in monthly Social Security income. You wouldn't have any AIME above $926 to get a percentage of.
However, because you do have the government pension and you have only 21 years of substantial earnings, a different formula would be used to determine your benefits. You'd only get 45% of AIME up to the first $926 threshold -- so you'd get benefits equal to 45% of the $800 AIME or $360 per month.
How much can the windfall elimination provision reduce your benefits?
The amount your Social Security benefits are reduced due to the windfall elimination provision will depend upon how many years of substantial earnings you have. But there's also some protections in place to ensure your benefits aren't reduced too much.
First and foremost, your Social security benefits can't be reduced by more than half of the pension amount you receive from the job where you paid no Social Security tax.
So if your government pension was only $200 per month then in our above example, your Social Security wouldn't be reduced down to $360. The maximum your benefit could be reduced by would be half of your $200 government pension or $100.
The SSA also establishes a maximum reduction regardless of how much your pension is. There's a table on the Social Security website showing the maximum benefits reduction due to the windfall elimination provision each year. The maximum depends on your years of substantial earnings.
The maximum reduction is the lesser of 1/2 your government pension or the amount of the reduction listed on the SSA's table.
How does the government pension offset work?
The government pension offset also reduces Social Security benefits, but this time it reduces survivor's or spousal benefits instead of benefits you get based on your own work history.
Who is subject to the government pension offset?
You could be subject to the government pension offset if:
- You receive a retirement pension or disability pension from the federal government or from a state or local government
- You didn't pay Social Security taxes on your wages from the job you're receiving the pension from
- You claim Social Security spousal or survivor benefits
You will not be subject to this offset if the government pension that you're receiving isn't based on your earnings or if you're a government worker receiving a pension from a job you paid Social Security tax on and:
- The last day you worked at the job providing the pension was before July 1, 2004
- You filed for your spousal or survivor's benefits and were entitled to receive them prior to April 1, 2004
- You paid Social Security taxes on the money you earned during the last 60 months that you worked for the government
There are also a few other situations where the government pension offset may not apply to you, including if you switched from the Civil Service Retirement System to the Federal Employees Retirement System after December 31, 1987. You can find out more details about these other exceptions to the government pension offset in the Social Security Administration's guide.
How will the government pension offset reduce your Social Security benefits?
The government pension offset will reduce Social Security benefits by 2/3 of the amount of the pension you receive from the government.
If you would normally receive an $800 survivor's or spousal benefit from the Social Security Administration but you also get a $400 pension from the government, your Social Security retirement benefits would need to be reduced by 2/3 of the $400 pension you're getting from the government.
Since 2/3 of $400 is $266, your government pension would come down to $534. If 2/3 of your government pension exceeds the amount of your Social Security benefits, then it is possible you could end up reducing your benefit to $0 and get no Social Security retirement income at all.
Can you be subject to both the government pension offset and windfall elimination provision?
The government pension offset and the windfall elimination provision apply to different sources of Social Security benefits.
The windfall elimination provision affects you only if you claim benefits on your own work record and have a government pension you earned while the government pension offset affects you only if you're claiming spousal or survivor's benefits and you have a government pension you earned.
Now you know how a government pension can reduce your Social Security benefits
Now you have a clearer idea of how a government pension could result in a reduction in your Social Security benefits.
You will only need to worry about your retirement benefits from the SSA being reduced if you have a pension from a government job where you did not pay Social Security tax on your wages. If you paid Social Security tax on all of your wages, then you should not have an issue with any pension you receive from the government causing a reduction in monthly benefits.
There are, however other things that could reduce your benefits such as filing for benefits early or remarrying and changing your eligibility for survivor's or spousal benefits. It is important to have a full understanding of how the Social Security benefits system works so you can maximize the income you receive and make smart choices about when and how you claim benefits.
Our guides to how much Social Security pays you and what can reduce your Social Security benefits will help you to better understand this important earned benefit so you can ensure you have the retirement funds you both need and deserve as you enjoy your golden years.