Friday, September 27, 2013

How a Pension Could Affect Social Security Benefits

How a Pension Could Affect Social Security Benefits
If you expect retirement income from a pension and Social Security, congratulations! These two income streams, along with your retirement savings, could put you on a comfortable financial footing. However, you might not be aware that your pension could affect your Social Security benefits.
Eliminating Windfalls
Private-sector workers who earn a pension typically pay Social Security payroll taxes, in which case the pension should not affect their Social Security benefits. However, an issue arises when someone receives a pension based on earnings in which Social Security taxes were not paid — typically from a federal, state, or local government, a nonprofit organization, or an employer in a foreign country — and the individual is also eligible for Social Security benefits based on employment from other jobs. In these situations the Social Security benefit may be reduced by the Windfall Elimination Provision (WEP).

Congress enacted the WEP in 1983 to address an unfair advantage in the way Social Security benefits were calculated for people who worked mainly in a job not covered by Social Security. Because federal workers who were first hired after December 31, 1983, do pay Social Security payroll taxes, they are generally not subject to the WEP. However, public-sector employees in certain states and workers in foreign countries could be subject to the WEP, regardless of hire date.
The benefit reduction depends on the year in which the worker turns 62 (the eligibility year) and the number of years in which the individual had “substantial earnings” and paid into Social Security (see chart). The reduction cannot be more than one-half of the individual’s pension from non-covered employment.
Offsetting a Government Pension
Although the WEP does not apply to survivor benefits, another factor — the Government Pension Offset (GPO) — could reduce Social Security spousal or survivor benefits by two-thirds of the amount of a government pension. For example, someone who receives a $900 monthly civil service pension and is eligible for a $1,000 Social Security survivor benefit would instead receive $400 per month from Social Security [$1,000 – $600 (two-thirds of $900) = $400].

For more information, visit these pages on the Social Security website:
The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. Copyright © 2013 Emerald Connect, Inc.

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