How Pensions Affect Social Security

Having a government pension is a double-edged sword in the Social Security world. There are two laws that come into play when someone has a government pension and also qualifies for Social Security benefits. It is important to understand these two laws in order to accurately plan for retirement income.

This Law Affects Spouses & Widows/Widowers (GPO)

The Government Pension Offset is a law that reduces a spousal or widow/widower Social Security benefit. The reasoning behind the law is that the spousal and widow benefits (also called dependent benefits) were meant to supplement income when the spouse or widow/widower was a homemaker relying upon one household income. Therefore, if the spouse or widow/widower earns their own income and subsequently their own Social Security benefit or government pension benefit, the “dependent” benefits should be reduced. Before the law was enacted in 1977, spouses that earned a government pension by working were treated more favorably than spouses that earned their own Social Security benefit by working because their “dependent” benefit was not offset by their pension. Spouses who qualified for their own Social Security benefit and a “dependent” benefit had to choose the higher of the two benefits instead of getting both a government pension benefit and the “dependent” benefit.

The Government Pension Offset is calculated as follows:

Social Security “Dependent” Benefit – (Government Pension x .667) = New Social Security “Dependent” Benefit

  • If you take your government pension in a lump sum, your Social Security benefit will still be reduced as if you chose the monthly payment option.

For example, if you are entitled to a spousal Social Security benefit of $1,000 per month and you have a government pension of $1,000 per month, you will be reduced by $667 per month. Your new dependent Social Security benefit will be $333 per month.

Some exclusions to the Government Pension Offset are as follows:

  • You are receiving a government pension that was not based on your earnings
  • You are a government employee, but your pension is from work that you also paid Social Security taxes into during employment
  • For the last 60 months of government work you paid Social Security taxes

This Law Affects your own benefit (WEP)

The Windfall Elimination Provision is a law that reduces your own Social Security benefit. To understand the reasoning behind the law, first look at the calculation below and then come back to this paragraph. The equation shows the first $926/month of income being multiplied by a certain percentage based on years you contributed to Social Security. Before the Windfall Elimination Provision was set into place, there were workers that received a government pension, did not pay much into Social Security, and still reaped the benefits of being a “low wage worker”. Being a “low wage worker” meant that the first $926/month of income was replaced 90% by Social Security benefits even though they made most of their income in the government sector and didn’t have it taxed for Social Security purposes. The government wanted to get rid of this advantage and ensure that actual low-wage workers were benefiting from Social Security Benefits more than those who had “low wages” on paper, but made the bulk of their income in the FICA Tax-Free government sector.

The Windfall Elimination Provision is calculated as follows:

(Average Indexed Monthly Earnings up to $926/month * Table1%) + (Next $4,657/month * 32%) + (Up to next $5,492 * 15%) = New Social Security Benefit

To calculate your Average Indexed Monthly Earnings (AIME), do the following:

1) Get a list of your yearly taxable Social Security Earnings

2) Calculate each year of earnings based on Inflation. Use the National Average Wage Index to find the average wage in the year. Social Security uses 60 years old as the indexing year, so divide the average wage of the indexing year, by the average wage of the year you are calculating. Now multiply this factor by your taxable Social Security earnings that year.

3) Use the top 35 years in your calculations. 

Table 1


Table 2

For example, if your average indexed monthly earnings is $1,000 per month, you have had 26 years of substantial taxable Social Security earnings and you have a government pension of $1,000 per month, the math is as follows:

($926 * 70%) + ($74 * 32%) = $671.88 per month.



  • If “table1%” was replaced with 90%, that would be the normal Primary Insurance amount calculation used by those not offset by the Windfall Elimination Provision.
  • If you have a low pension, the law limits the reduction of Social Security benefits. Your Social Security benefit will not be reduced more than half of your pension benefit. In the above example, your $1,000 per month benefit has a maximum reduction of $500 per month.

Having a clear picture of your income in retirement is one of the foundations to a successful retirement. By understanding possible reductions to your Social Security benefit, you will be able to more accurately plan for the future.