Could Your Social Security Benefits be Reduced Because of an Untaxed Pension?

Distressed mature 60s husband and wife sit at table calculate manage household expenses having problems with finances, upset pensioners frustrated troubled with paying bills expenditures.
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Pensions used to be fairly standard for private-sector workers in the United States, but that was long ago. Only one-quarter of civilian workers were offered a traditional pension plan as recently as 2021, according to the U.S. Bureau of Labor Statistics.

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However, many public-sector workers still get pensions. In some cases, these workers pay Social Security taxes on their earnings — but many don’t. Those who don’t will have their Social Security benefits reduced through a Windfall Elimination Provision, or WEP.

The WEP is a formula that can reduce the size of your Social Security retirement or disability benefit if you received a pension from a job in which that didn’t withhold Social Security taxes, according to the AARP. These types of non-covered pensions are typically earned when you work for a state or local government agency that doesn’t participate in FICA payroll-tax withholding. 

If you collect such a pension, the WEP could reduce your Social Security benefit by up to half of the amount of your pension — but it can’t eliminate the benefit altogether. By law, the Social Security Administration sets maximums on the dollar amount of Social Security benefits.

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Not many American workers are affected by the WEP. A September 2022 report from the Congressional Research Service noted that only about 2 million Social Security beneficiaries were affected by it at the end of 2021, or roughly 3% of Social Security beneficiaries. Nearly all of those affected were retired workers.

As the SSA notes on its website, if you paid Social Security taxes on 30 years of “substantial earnings,” the WEP doesn’t apply. Here are a couple other things to keep in mind about the WEP:

  • The more years in which you had substantial earnings from Social Security-covered work, the less the provision cuts into your benefits. You can use the SSA’s WEP calculator to help determine the impact.
  • The WEP affects both retirement and disability benefits. A separate provision, called the Government Pension Offset, covers people who receive spousal or survivor benefits in addition to a non-covered government pension.

Meanwhile, if you think you can avoid the WEP reduction by rolling pension money over into an IRA, you might be in for disappointment. Even if you choose to roll your pension funds into an IRA, your Social Security retirement benefit rate could still be subject to the WEP.

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IRA rollovers that occur after you meet the minimum eligibility requirements for a non-Social Security covered pension are treated as lump-sum distributions for WEP purposes, according to Forbes. In these cases, Social Security prorates the lump sum into a monthly amount and applies the WEP based on the prorated monthly rate.

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About the Author

Vance Cariaga is a London-based writer, editor and journalist who previously held staff positions at Investor’s Business Daily, The Charlotte Business Journal and The Charlotte Observer. His work also appeared in Charlotte Magazine, Street & Smith’s Sports Business Journal and Business North Carolina magazine. He holds a B.A. in English from Appalachian State University and studied journalism at the University of South Carolina. His reporting earned awards from the North Carolina Press Association, the Green Eyeshade Awards and AlterNet. In addition to journalism, he has worked in banking, accounting and restaurant management. A native of North Carolina who also writes fiction, Vance’s short story, “Saint Christopher,” placed second in the 2019 Writer’s Digest Short Short Story Competition. Two of his short stories appear in With One Eye on the Cows, an anthology published by Ad Hoc Fiction in 2019. His debut novel, Voodoo Hideaway, was published in 2021 by Atmosphere Press.
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