Will your pension hurt your Social Security benefit?

Dear Liz: Could you please address the issue of Social Security for those with pensions? I understand that if you have a pension, you won’t get 100% of the standard monthly Social Security benefit. I believe that this happens even if you only have a defined contribution account. But I’ve never seen this discussed in news reports. Many people are surprised when I tell them this.

Answer: Perhaps they’re surprised because what you’re saying isn’t true.

Defined contribution plans, such as 401(k)s, don’t affect your Social Security benefit at all. Neither do most pensions. The time that a pension might affect your benefit is if you didn’t pay into Social Security while you were earning the pension.

Here’s how the Social Security website puts it: “A pension based on work that is not covered by Social Security (for example, federal civil service and some state or local government agencies, such as police officers and some teachers) may cause the amount of your Social Security benefit to be reduced.”

The reduction can come under one of two provisions. The first, called government pension offset, applies if you get a government pension not covered by Social Security and are eligible for Social Security benefits as a spouse or survivor. The spousal or survivor benefit may be reduced in that case. You can learn more at http://www.socialsecurity.gov/retire2/gpo.htm.

The second provision is the windfall elimination provision, which may reduce your Social Security or retirement benefit if you receive a pension from a job not covered by Social Security. You can learn more at http://www.socialsecurity.gov/retire2/wep.htm.

These provisions were put into place because some people with a pension from a job that didn’t pay into Social Security were getting more Social Security benefits than the system intended. If they worked mainly in the job with the pension, but also had jobs that paid Social Security taxes, their Social Security benefits were often calculated as if they were long-term, low-wage workers. Since Social Security is designed to replace a larger percentage of earnings for low-paid workers — and a smaller percentage for higher-paid workers — these folks wound up with a bigger benefit than their earnings actually justified.

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  1. A pension or withdrawals from a defined contribution plan can hurt your Social Security benefit by making it taxable. After you pay tax on your Social Security benefit, you won’t get 100% of it. If you don’t have a pension or if you don’t withdraw from a defined contribution plan, chances are your Social Security benefit isn’t taxable. Then you get to keep 100%.

    • Hi, Harry. There’s nothing special about a pension when it comes to taxation. Income from any other source, if it’s substantial, can make your Social Security benefits taxable, whether it’s from a pension, wages, self-employment income, investment income, interest or dividends. If you’re married and have a “combined income” between $32,000 and $44,000, up to 50% of your benefits may be taxable; above that, up to 85% may be taxable. (“Combined income” means your adjusted gross income plus any nontaxable interest plus one half of your Social Security benefits.) By the way, that does NOT mean the government takes back 85% of your benefit! People often get confused on that point. It means that 85% of your benefit is subject to your income tax rate. If you’re in the 15% bracket, for example, you might pay 12.75% (15% of 85%).

  2. jay Hartnett says

    We have chatted via e-mail before on a number of subjects! I have a deferred compensation account that I have elected to take now! (reason will come later) Will this effect my SS whenever I take it? I am still of the opinion that everyone should take SS at 62 because nobody nows how long we will live! The reason I have elected to take my Deffered Comp account is that I am a self employed Insurance agent who has derived more than 60% of my income from the sale of health insurance!Now, with the new healthcare plan in full force in Jan of 2014, I will no longer be able to sell Ind. Health!!!!! I am forced into semi-retirement! Did our government work that into the healthcare plan??????????? Anyway, Defferred Comp/SSamount? Thanks Jay Hartnett

    • Hi, Jay. There are serious disadvantages to taking benefits at 62, so make sure you research all the options before you make a decision. Jonathan Peterson’s book “Social Security for Dummies” is a must read. Deferred comp shouldn’t affect your SS benefit, though. As for the future for health insurance brokers, what I’ve heard is that the exchanges will create a commodity-like market, and there may not be much if any room for paying commissions. If you’re not ready to retire, it might be a good time to look into other options.

  3. I agree there is nothing special about a pension or retirement plan withdrawals in terms of making Social Security taxable. I just thought because it’s a substantial source of income for people on Social Security, much more than wages, self-employment income, investment income, interest or dividends, perhaps that’s why the reader thought you don’t get 100% of the Social Security benefit if you have a pension, which is effectively true.

    • I see what you mean. People are really confused about taxation. Some think they have to give 85% of their benefit back to the government! Thanks for commenting.