Your Financial Future:
Pension And Social Security Integration
Under the law, a pension plan can subtract all or part of your Social Security benefit from your pension benefit, sometimes leaving little or no pension benefit. This is called pension integration.
Lower and moderately paid workers, a greater percentage of whom are women, tend to be most affected by integration rules.
The pension plan administrator must follow certain rules when integrating a pension benefit:
- One basic rule is that the plan must use the actual Social Security benefit that you have earned and/or are receiving. It cannot use an estimate of your Social Security benefit. If your plan integrates, it may be a good idea to ask the plan to explain how it calculated your benefit.
If you earned your pension and Social Security benefits before 1989:
- The plan can subtract up to 83 1/3% of your Social Security benefits from your pension benefit.
- As a result, pension integration can be devastating for low-income workers. For example, a worker who had earned a $300 a month pension and $600 a month Social Security benefits before 1989, would likely receive no pension benefits at all.
If you earned benefits after 1988:
- The plan can subtract up to 50% of the Social Security benefit that you earned after 1988 from the pension benefit that you earned after 1988.
- The plan can still subtract up to 83 1/3% of the Social Security benefit you earned before 1989 from the pension benefit you earned before 1989. For example, if an employee worked for an employer from 1948 through 1989, the entire pension benefit earned from 1948 through 1988 could be offset, leaving her with only half of what she earned for 1989.
Various rationales are used to explain pension integration:
- Employers pay half of an employee’s Social Security, so they should be able to reclaim it from their pensions. However, employers receive a tax credit for the entire contribution they make.
- Higher paid workers are “discriminated against” under Social Security because they receive a smaller replacement rate than lower paid workers.