Retirees Should Be Aware of Pension Offset Rules

By Sandy Taylor
District Manager, SSA

If you expect to receive more than one type of retirement pension, you need to know how your Social Security benefits may be affected.

If you are entitled to both Social Security and a pension based on your employment from a job not covered under Social Security, your Social Security benefit may be reduced.

There are two rules that may reduce your benefit. One, called the "Government Pension Offset" applies only if you receive a government pension from a job not covered by Social Security and are eligible for Social Security benefits as a spouse or widow(er).

This offset will reduce the amount of your Social Security spouse's or widow(er)'s benefit by two-thirds of the amount of your government pension. Here is an example: if you receive a monthly civil service or P.E.R.A pension of $600, two-thirds of that, or $400, must be used to offset your Social Security spouse's or widow(er)'s benefit. If you are eligible for a Social Security spouse's or widow(er)'s benefit of $500 monthly, you will receive $100 per month from Social Security after the offset has been applied ($500 - $400 = $100).

The other rule, called the "Windfall Elimination Provision" affects the way your own Social Security retirement or disability benefits are figured if you receive a pension from a job that is not covered by Social Security. This rule affects the person who spent most of his/her career working in a job not covered by Social Security such as civil service or other public employees, but who also worked at other jobs where they paid Social Security taxes long enough to qualify for Social Security retirement or disability benefits.

Prior to 1983, employees who spent time in jobs not covered by Social Security receive the advantage of a formula under which lower-paid workers received larger benefits in relation to their earnings than higher paid workers. Because of this formula, those who worked only part of their lives in jobs covered by Social Security had their benefits figured as if they were long-term, low-wage workers. These workers received the advantage of the higher percentage Social Security benefits in addition to their other pension. A modified benefit formula enacted in 1983 eliminates this windfall.

Here's how the formula works. Social Security benefits are based on the worker's average monthly earnings adjusted for inflation. When we figure your benefits, we separate your average earnings into three amounts and multiply the figures using three factors. For example, for a worker who became 65 in 1995, the first $387 of average monthly earnings is multiplied by 90%; the next $1946 is multiplied by 32%; and the remainder by 15%. In the modified formula, the 90% factor is reduced. The reduction is phased in for workers who reached age 62 or became disabled between 1986 and 1989. For those who reach 62 or become disabled in 1990 or later, the 90% factor is reduced to 40%.

There are some exceptions to this rule. For example, the 90% factor is not reduced if you have 30 or more years of "substantial" earnings where you paid Social Security taxes. If you have 21 to 29 years of "substantial" earnings, the 90% factor is reduced to somewhere between 45 and 85 percent. "Substantial" earnings are a certain amount of yearly earnings required for a year of coverage for this provision. These "substantial" earnings can be obtained by requesting the factsheet titled "A Pension From Work Not Covered By Social Security".

The modified formula does not apply to survivors benefits. It does not apply if you are a federal worker hired after December 31, 1983, or if you were employed on December 31, 1983, by a non-profit organization that was exempt from Social Security and it became mandatory covered under Social Security on that date. There are certain other cases where the modified formula does not apply.

A guarantee is provided to protect workers with relatively low pension. It provides that the reduction in the Social Security benefit under the modified formula cannot be more than one-half of "that part of the pension attributable to earnings after 1956 not covered by Social Security."

If you have any questions on these rules or would like a fact sheet on either the "Government Pension Offset" or the "Windfall Elimination Provision", call Social Security toll-free at 1-800-772-1213 Monday through Friday from 7 a.m. to 7 p.m.