What Is The Effect On Social Security If You Participate In 401(a), 403(b) Or 457 Plans?

Jun 12 2017 - 7:06am

What is the impact on Social Security benefits when you work in the private sector, but then work in the public sector such that you opt out of the public employee pension system (matching contributions from state, but without a guaranteed pension benefit, that is, no pension payment, just a pot of money to invest) and participate fully in 401(a), 403(b), and 457 plans? Since there is no pension, per se, is there no reduction in SS benefits? My spouse, age 59, will get a very modest private sector pension at age 65 from a private sector non-profit, and a modest SS benefit after 15+ years at modest wages. Can a return to the private sector for a couple years boost the SS benefit? FYI, I, at age 60, have only worked in the private sector. We will take SS at age 70. It is hard to research these matters. Any help or direction is appreciated.


Distributions from those types of retirement plans are counted as a pension for purposes of the Windfall Elimination Provision (WEP) if that is the employer's primary retirement plan rather than a supplemental plan (https://secure.ssa.gov/apps10/poms.nsf/lnx/0300605364). And, if the plan doesn't specify a monthly pension rate, Social Security uses an allocation method for determining a monthly rate for WEP calculation purposes.

People with at least 30 years of substantial Social Security covered earnings are exempt from any WEP reduction, and the reduction rate is lessened for people with between 20 & 30 years of substantial covered earnings (https://www.ssa.gov/pubs/EN-05-10045.pdf).

Social Security retirement benefits are calculated using an average of a person's highest 35 years of wage-indexed Social Security covered earnings (https://www.ssa.gov/pubs/EN-05-10070.pdf), so a person with fewer than 35 years of covered earnings would almost certainly increase their retirement benefit rate with additional years of covered work.

By the way, the maximization software available on this website not only handles basic benefit calculations, but is also programmed to handle the effects of WEP and the Government Pension Offset (GPO) provision (https://www.ssa.gov/pubs/EN-05-10007.pdf). You may want to strongly consider using it to determine the best filing strategy for you and your wife.

Best, Jerry