If you work for the federal, state, or local government, you are likely eligible for a pension. You may also be eligible if you work for a public university or other agency. If you’re one of the lucky few who work for a private employer who offers a defined-benefit pension (a truly endangered species today), then you should probably stay in that job for as long as they’ll have you.
Receiving a pension, however, may affect your Social Security benefits, depending on the type of pension you have, and how long you worked for a public institution.
Will your pension affect your Social Security benefits? And what if you switch between private and public sectors your whole career? Will you end up with an insufficient pension and reduced Social Security benefits?
Let’s walk you through it. There’s no one answer, as it all depends on the type of pension you have and the rules of your particular state or institution.
Corporate pension plans
Let’s get the easy one over with first. Corporate pension plans do not affect whether or not you will get Social Security benefits, or the amount that those benefits will be. Since the pensions are accrued through, and paid by, private entities, they do not affect your benefits. It’s a win-win for your future financial health.
Corporate pension plans can, however, affect how much of your Social Security benefits will be taxable in retirement. We’ll get to that later.
Federal government pensions
Participation in a pension plan while employed by the federal government can affect your Social Security benefits. In fact, you may not be eligible for Social Security benefits at all.
At one time, federal employees were covered under the Civil Service Retirement System (CSRS), and, as a result, they did not participate in the Social Security program. That means that they did not make payments (via payroll tax) into the system and the Social Security Administration has no records relating to that income. As such, if you are still participating in the CSRS, you will not be eligible for Social Security benefits; however, you will be eligible for Medicare participation.
In 1984, the federal government introduced a second retirement system, known as the Federal Employees Retirement System, or FERS. If you began working for the federal government from 1984 on, you’re automatically part of the FERS system, and not CSRS. Employment under the FERS system is covered by Social Security, so that when you retire you will receive both a federal pension and a Social Security benefit. You pay into the system via payroll taxes, as the rest of us do.
This will also be true for employees originally covered by the CSRS system who converted to the FERS system. And of course, participation in either system means that you are automatically eligible for Medicare.
State and local government pensions
Like federal government employment, Social Security eligibility also varies when it comes to employment with state and local governments. This also includes agencies, school systems, and state sponsored colleges and universities.
Some state and local governments do not participate in the Social Security program. Social Security taxes will not be withheld from your pay, and you will not receive benefits upon retirement. In this situation, your retirement income will be provided by the pension plan established by your employer. However, since Medicare wages are withheld even if the plan does not include participation in Social Security, you will be eligible for Medicare benefits.
Often, if this is the case, your employer (for instance, The Ohio State University) will require that employees contribute at least 10% of every paycheck to the pension fund. Unlike 401(k)s, where employees choose their own level of involvement (and often underfund their own retirement) this allows the pension program to plan and provide for its beneficiaries. (When you consider that public employees are not paying their half of the payroll tax—6.2%—the 10% requirement works out to roughly a 3.8% contribution toward their retirement.)
Other state and local governments provide pensions, but also participate in the Social Security program. If you work for such an agency, then you will receive benefits for both your state or local pension, and Social Security.
With both federal pensions and state and local government pensions, the Social Security question is either/or. That is, either you will get Social Security benefits, or you won’t. As a general rule, your Social Security benefits are not reduced by your participation in a federal, state, or local pension plan.
In many situations, the benefits that you will receive under a government pension will be equal—or even superior—to Social Security benefits with an equivalent employment and earnings record. But if you are concerned by the absence of Social Security benefits, you should consider the following to help secure your retirement:
- Be sure that you understand the terms of your government pension
- Pay close attention to the projected monthly benefit you can expect to receive in retirement
- Maximize the amount of the pension by working the required number of years to get the highest benefit
- If a 403(b) or 457 plan is available, be sure to participate in it, and make the highest contributions that you can
- Add participation in a traditional or Roth IRA if necessary
Job hopping between public and private sectors requires more math
If you follow these steps you should have a secure retirement. But what happens if you switch to the private sector before you qualify for your full pension?
If you work for a state or local government, it all depends upon the vesting requirements of the pension plan. Once you are vested, you will be entitled to benefits, or a rollover of the plan assets. You’ll have to check with your pension plan administrator to determine what the rules are.
For an example, OSU employees are entitled to pension benefits once they’ve worked for the university for five years. Their monthly benefit, of course, would be much smaller than one received by an employee who completed the full 25-year term. But they would still receive it. If not vested, they can take their contributions (and any earnings), and roll them over into an IRA or a new employer’s 401(k).
For federal employees, there are specific rules under the FERS program. You are vested in the plan after five years, after which you have the choice to either take a refund of your contributions, plus interest, or leave the money in the plan, and sign up for a deferred annuity when you get close to retirement.
If you are not vested in the plan, you can either take a refund of your contributions, plus interest, or you can leave the money in the plan if you believe you may return to federal government employment. You can also request a refund at a later date if you do not return to the federal government.
If you do leave government employment, whether you are vested in a government pension plan or not, you will automatically be covered under the Social Security system if you enter employment in the private sector.
It’s possible, however, that you may have missed out on several years of contributions (or “credits”) into the Social Security system, which will reduce your benefit in retirement. (Whether it’s reduced by more or less than what you receive from your pension—if you vested—will depend on a number of factors. If, for instance, your salary went up significantly when you moved to the private sector, then you may make up the shortfall quickly.)
One of the limitations in the private sector is that few employers offer traditional defined-benefit pension plans, the way governments do. If that’s the case, then you’ll have to participate in a 401(k) plan, if it is available, or a traditional or Roth IRA. Failing that, you will have to be conscientious about saving money in taxable non-retirement accounts, such as brokerage accounts and mutual funds.
Even if pensions don’t affect the amount of Social Security benefits you will receive, they do have an impact when it comes to income taxes on those benefits.
For federal income tax purposes, the taxability of Social Security benefits is determined by your income level. According to the Social Security Administration, benefits are taxable as follows:
- If you file as “single” on your federal income tax return and your combined income is:
- Between $25,000 and $34,000, you may have to pay income tax on up to 50% of your Social Security benefits
- More than $34,000, up to 85% of your Social Security benefits may be taxable.
- If you file as married filing jointly, and you and your spouse have a combined income of:
- Between $32,000 and $44,000, you may have to pay income tax on up to 50% of your Social Security benefits
- More than $44,000, up to 85% of your Social Security benefits may be taxable.
- If you are married and file a separate return, you’ll probably pay taxes on your benefits.
There are two bits of good news here. First, your Social Security benefits will not be taxable if your combined income is below the minimum numbers above. And second, the maximum amount of your Social Security benefits that will be taxable under the worst case scenario is 85%.
Now I’ve bolded the term “combined income,” and there’s a specific reason for that. In order to determine the amount of your Social Security benefits that will be taxable, you have to calculate this number.
This how you calculate your “combined income”:
Your adjusted gross income (not including your Social Security benefits) + nontaxable interest (like municipal bond interest) + half of your Social Security benefits
Once you have that number, you can compare it to the income numbers above, to determine what percentage of your Social Security benefits will be taxable.
Since pension income will represent part of your adjusted gross income, it will have an impact on how much of your Social Security benefits are taxable.
If you work in a job that offers a pension, and you stay in that job or that sector your whole career, then your pension will be easy to calculate. Depending on the laws of your state, or the time you started your career, you may or may not be eligible for Social Security benefits. But if you do receive Social Security benefits, those benefits will not be affected by whatever pension you receive.
If you jump between the public and private sectors your entire career, then your retirement benefits may be slightly more work to calculate, but they will not be any more complicated.
Regardless, you should always aim to make your own plans for retirement—via either a traditional or a Roth IRA.
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