If You Have a Pension Is Your Social Security Reduced?

Many individuals nearing retirement often wonder if their pension will lead to a reduction in their Social Security benefits. While this was a valid concern for many years due to specific provisions, the landscape of Social Security law has recently changed significantly. Understanding the nuances of how pensions previously interacted with Social Security, and the important legislative updates, is crucial for financial planning.

Understanding the Two Main Provisions and Their Repeal

Historically, the Windfall Elimination Provision (WEP) and the Government Pension Offset (GPO) could reduce Social Security benefits for individuals receiving certain pensions. These provisions aimed to ensure equitable benefit distribution for those who received a pension from employment not covered by Social Security while also receiving Social Security benefits.

The Social Security Fairness Act, signed into law on January 5, 2025, officially repealed both the Windfall Elimination Provision and the Government Pension Offset. These reductions no longer apply to benefits payable for months after December 2023. The repeal aims to increase monthly Social Security benefits for workers who receive a pension based on work not covered by Social Security.

How the Windfall Elimination Provision Used to Work

Prior to its repeal, the Windfall Elimination Provision (WEP) impacted individuals who received a pension from employment not covered by Social Security and also had sufficient Social Security covered earnings to qualify for their own retirement or disability benefits. “Non-covered employment” typically referred to jobs where Social Security taxes were not withheld from earnings, such as certain federal, state, or local government positions, including some teachers, police officers, and firefighters. The WEP aimed to adjust Social Security benefits to account for the fact that the regular Social Security benefit formula provides a higher replacement rate for lower average lifetime earnings.

The WEP worked by modifying the primary insurance amount (PIA) formula, which is used to calculate an individual’s basic Social Security benefit. Specifically, it reduced the first factor in the PIA formula, which ordinarily replaces 90% of a worker’s average indexed monthly earnings (AIME) up to a certain threshold, known as the first bend point. The percentage applied to this first bend point was reduced based on the number of years an individual had “substantial earnings” in Social Security-covered employment. This adjustment would result in a lower Social Security benefit than if they had only Social Security-covered employment or if the WEP did not apply.

How the Government Pension Offset Used to Work

The Government Pension Offset (GPO) historically reduced Social Security spousal or survivor benefits. This provision applied to individuals who received a pension from a federal, state, or local government for work not covered by Social Security, and were also eligible for Social Security spousal or survivor benefits based on their spouse’s (or deceased spouse’s) earnings. The GPO mirrored the “dual entitlement rule” that prevents individuals from receiving both their own worker benefit and a full spousal benefit.

Under the GPO, the Social Security spousal or survivor benefit was reduced by two-thirds of the non-covered government pension. For instance, if an individual received a monthly non-covered government pension of $1,500 and was eligible for a Social Security spousal benefit of $1,200, the GPO reduction would be $1,000 (two-thirds of $1,500). This would be subtracted from the $1,200 spousal benefit, leaving $200 payable. If two-thirds of the government pension exceeded the Social Security spousal or survivor benefit, the Social Security benefit could be reduced to zero.

The GPO only affected spousal or survivor benefits and did not reduce an individual’s own Social Security retirement or disability benefits earned from covered employment. While no longer in effect due to the Social Security Fairness Act, understanding its historical application clarifies why many government retirees previously saw their dependent Social Security benefits reduced.

Pensions Not Subject to Reduction

With the repeal of the Windfall Elimination Provision and the Government Pension Offset, the landscape for how pensions affect Social Security benefits has significantly changed. As of January 2024, pensions from jobs that did not contribute to Social Security no longer result in a reduction of Social Security benefits. This means that individuals who previously had their benefits reduced by WEP or GPO will now see an increase in their monthly payments.

Certain types of pensions were never subject to these reduction provisions. Private employer pensions, such as those from a 401(k) or traditional defined benefit plan, were not affected because Social Security taxes were typically paid on the earnings that generated these pensions. Similarly, military pensions and pensions from any employment where Social Security taxes were withheld did not trigger the WEP or GPO. The key determinant for the application of these provisions was always whether the employment generating the pension was not covered by Social Security, a distinction that is now moot due to the recent legislative changes.