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Social Security with a Pension: Windfall Elimination Provision and Government Pension Offset

If you receive a pension from a job for which you did not have to pay Social Security taxes (e.g. work as an employee of a local government), any Social Security benefits you would otherwise be eligible to receive could be reduced by two special rules:

  • The Windfall Elimination Provision (WEP), or
  • The Government Pension Offset (GPO).

Note that neither of these rules applies in the case of a worker who receives a pension from work that was subject to Social Security taxes.

Windfall Elimination Provision (WEP)

The Windfall Elimination Provision reduces any Social Security benefit you would receive for other work that you did — that is, work that was covered by Social Security taxes.

Example: Elena works for 21 years as a police officer — a job in which she does not pay Social Security taxes. She then works for another 19 years for a private security firm. Because of her work for the local government, Elena qualifies for a pension. And because of her work for the security firm, she also qualifies for Social Security. The Windfall Elimination Provision will reduce the amount of Social Security benefits that Elena receives.

The Windfall Elimination Provision works by changing the formula used to calculate the amount of benefits you would receive if you claimed at your “full retirement age.” From there, any percentage adjustments are applied as normal for claiming earlier or later than full retirement age.

For people not affected by the WEP, Social Security is calculated to replace a certain percentage of their “average indexed monthly earnings” — that is, the average monthly earnings from their 35 highest-earning years, after adjusting those earnings for inflation. For somebody becoming eligible for Social Security in 2012, if claimed at full retirement age, Social Security would replace:

  • 90% of average indexed monthly earnings (AIME) up to $767, plus
  • 32% of AIME from $767 to $4,624, plus
  • 15% of AIME beyond $4,624.

The Windfall Elimination Provision changes that 90% number (from the first line of the calculation) to a lower number, depending on the number of years in which you had “substantial earnings” covered by Social Security taxes. (The threshold for “substantial earnings” changes by year. For 2012, it is $20,475.)

  • If you have 20 or fewer years with substantial earnings, the figure used will be 40% instead of 90%.
  • For each year of substantial earnings beyond 20, the figure increases by 5%.
  • Once you reach 30 years of substantial earnings, the Windfall Elimination Provision will not apply.

Important exception: The Windfall Elimination Provision will never reduce a worker’s primary insurance amount (that is, the benefit he/she would receive if claimed at full retirement age) by more than 50% of the worker’s monthly pension amount. (If you are paid a pension in the form of a lump sum, the pension will be recalculated as if it were paid monthly.)

Government Pension Offset (GPO)

The Government Pension Offset reduces any Social Security spousal or survivor benefits you would receive based on your spouse’s work record. The reduction in monthly benefits is calculated as 2/3 of the monthly pension amount you receive. (Again, in the case of a pension taken as a lump sum, the reduction will be calculated as if the pension had been paid out on a monthly basis.)

Example: Bob worked for many years in an administrative role for his local fire department. Upon his retirement at age 67, Bob gets a monthly pension of $2,100 per month. At full retirement age, Bob’s wife Janice begins claiming her Social Security benefit of $2,000 per month.

Ordinarily, this would mean that Bob could get a spousal Social Security benefit of $1,000 per month (50% of Janice’s $2,000) as long as he claims it at full retirement age or later. However, because of the Government Pension Offset, Bob’s monthly spousal benefit will be reduced by $1,400 (2/3 of his $2,100 monthly pension), thereby eliminating it completely.

Upon Janice’s death, Bob will be able to claim a Social Security survivor benefit on Janice’s record. Ordinarily, since Janice claimed her benefit at her full retirement age and because Bob is claiming the survivor benefit after full retirement age, he’d be able to receive a survivor benefit equal to the $2,000 per month benefit she was receiving. But the GPO will reduce the benefit by $1,400 (2/3 of his $2,100 monthly pension), thereby leaving him with a monthly survivor benefit of $600.

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