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What you need to know about retiring with a pension & Social Security

Mature man using laptop on sofa at home
10'000 Hours/Getty Images

Many people look forward to retiring with a pension and Social Security, perhaps supplemented by savings. If you're in that group, you'll want to know how much spending money you'll have to work with and whether it will cover your bills.

But it can be difficult to finalize your retirement budget if you have unanswered questions about these income streams. You might be wondering how much Social Security you can expect, if your pension affects Social Security or how taxes are going to work. Here's what you need to know about retiring on your pension and Social Security.

How your Social Security benefits are calculated

Several factors determine if you qualify for Social Security and how much you'll get.* First, you need to earn enough income over your career to gain 40 Social Security credits and become eligible to receive benefits.

Once you've met that requirement, the Social Security Administration calculates your benefit amount starting with a formula that uses your average monthly earnings for the 35 years when your income was highest, adjusting the numbers to take into account how average wages in the overall economy have changed during that time. This formula gives you your primary insurance amount (PIA).

The amount you actually receive might be higher or lower than the PIA depending on your age when you claim Social Security. If you start taking Social Security before reaching your full retirement age, your benefit will be reduced, but if you wait until you're past your full retirement age, you could receive a higher benefit.

Working while you take Social Security can affect your benefit amount, too. If you're under your full retirement age, earning income above a limit that's set for the year lowers your benefit. On the other hand, earning income while you're receiving Social Security can increase your benefit if your pay is high compared with the previous years.

Your benefit also can go up over time as the cost of living rises.

Benefits for spouses, former spouses, widows and widowers

If you're married but have fewer than 40 credits, you may qualify for a spousal benefit of up to half the amount your spouse is eligible for at their full retirement age, under certain conditions. If you do have enough credits but your benefit based on your own earnings record would be less than the spousal benefit, you may be awarded your benefit plus an additional amount that brings the total up to the level of the spousal benefit.

If you're divorced and you meet some conditions, you may be eligible for a spousal benefit that's up to half your former spouse's benefit at their full retirement age.

If your spouse has died, you may be eligible for a survivor's benefit as large as the full amount of your spouse's benefit if you've reached full retirement age, or a smaller amount if you're taking the benefit early.

Does pension affect Social Security?

Usually, receiving a pension doesn't change the Social Security benefits you're eligible for. As long as your employer withheld FICA taxes, which are the payroll taxes that pay for Social Security and Medicare, you're all set.

But if your employer didn't take FICA taxes out of your paycheck—typically because you worked in a foreign country, your employer was a U.S. state or local government or you worked for the federal government several decades ago—then a pension you receive from that employer is considered a noncovered pension. Income from a noncovered pension can reduce your Social Security benefits.

How noncovered pensions can lower your benefits

If you have a noncovered pension but you still qualify for Social Security because you earned credits through a different job, then the Windfall Elimination Provision (WEP) may apply to you. Under this provision, the Social Security Administration uses a smaller percentage of your earnings in its formula for calculating the PIA so that the result is a smaller benefit. The WEP can cut your benefit by as much as half of your pension amount, although it can't bring your benefit all the way down to $0.

If you qualify for a spousal benefit or survivor's benefit, a noncovered pension can reduce that benefit under the Government Pension Offset (GPO). This provision cuts your benefit by two-thirds of your pension amount, and you can end up with a $0 benefit if your pension is large enough.

Exceptions to the WEP and GPO

If any of these situations apply to you, then the WEP won't reduce your benefit:

  • You work for the federal government and were hired in 1984 or later.
  • You work for a nonprofit that was exempt from Social Security on December 31, 1983, and meets some other conditions.
  • You only have a railroad pension.
  • Your earnings that weren't covered by FICA taxes were from before 1957.
  • You have at least 30 years of substantial earnings on which FICA taxes were paid.

The GPO typically won't affect your benefit if any of these is true:

  • You get a government pension that isn't based on your earnings.
  • You're a government employee, you have a government pension from work that was covered by FICA taxes, and you meet one of a few other requirements.
  • You work for the federal government, you switched from the Civil Service Retirement System to the Federal Employees' Retirement System after December 31, 1987, and you meet one of a few other requirements.
  • You received or were eligible for a government pension before December 1982, and you qualified for spousal benefits under the rules in place in January 1977.
  • You received or were eligible for a government pension before July 1, 1983, and you had one-half support from a spouse.

Does a pension count as earned income for Social Security?

The Social Security Administration doesn't view a pension as earned income. So you don't pay FICA taxes on your pension, and it doesn't add to your earnings record. That means a pension can't add to your Social Security credits, and it doesn't enter into the PIA formula or affect your benefit amount.

If you start taking Social Security before your full retirement age, a pension won't count toward your earned income limit.

Looking up your Social Security benefits

You can open an online account with the Social Security Administration to view a statement of your earnings history. The statement tells you how much of your income was subject to FICA taxes for each year you've worked, and it lets you know if you have enough credits to be eligible for Social Security. It also shows your full retirement age and gives estimates of what your benefit amount could be if you start taking Social Security at different ages.

In addition, the Social Security Administration offers a WEP calculator that shows how a noncovered pension may affect your Social Security benefit amount. You can enter your monthly income from the noncovered pension, your earnings from each year of your Social Security record and the income you expect to earn in the future. It then will show you an estimate of your monthly benefit. There's also a GPO calculator that can help you figure out how much your spouse's or survivor's benefits may be cut.

A financial advisor can help you get ready for retirement

Social Security regulations are complex, but a knowledgeable expert can help you navigate them. Connect with a Thrivent financial advisor to learn about your eligibility for Social Security benefits and plan for retirement.

* Thrivent financial advisors and professionals have general knowledge of the Social Security tenets. For complete details on your situation, contact the Social Security Administration.