If You Have a Pension & Social Security, Watch This Before You Claim

[00:00:00]I want you to imagine that your retirement income is a machine with two dials. One dial is your pension election. The other one is Social Security claiming age. Turning one dial changes what happens to the other.

[00:00:13]They're on the same machine. They're connected. When you set those dials separately without looking at how one affects the other, you end up with a combination that feels like you maximize your income, but actually left significant money on the table. Today, I want to show you exactly how to look at both dials at the same time. Let's start with the biggest change in Social Security policy in decades for public employees. Because if you or your spouse worked in a public sector job, this directly changes your planning math. On January 5th of 2025, the Social Security Fairness Act was signed into law. It repealed two long-standing provisions, the Windfall Elimination Provision, the WEP, the web, and the Government Pension Offset, the GPO. For decades, those two rules reduced or completely eliminated Social Security benefits for workers who received pensions from jobs that didn't pay into Social Security. Teachers, firefighters, police officers, roughly 2.8 million public sector workers were affected, according to the Congressional Budget Office. The repeal is retroactive to January 2024. The Social Security Administration spent much of 2025 sending out lump sum back payments and adjusting monthly benefits for everyone who qualified. If you or your spouse worked in non-covered public sector job and haven't checked your benefit status recently, that is the first thing you want to do before even watching this video. Here's the piece that matters most for couples, though. The Government Pension Offset used to reduce spousal and survivor's Social Security benefits by 2/3 of the non-covered pension amount. In many cases, it eliminated those benefits entirely. For instance, a teacher's spouse might have assumed reasonably that they'd receive nothing in survivor social security. That assumption is now wrong. With the GPO repealed, public sector workers and their spouses can receive full pension alongside their full unreduced spousal or social security benefits.

[00:02:12]That opens up entirely new planning options, particularly around the timing decision for the spouse with the higher social security benefit. So, the same applies for this. If you made assumptions about what your spouse would receive and haven't revisited those since January 2025, that calculation has changed. And I do understand that some people worked in non-covered social security jobs, so they don't have a benefit at all, but I'm going to take it as if you're still watching this video, you want to learn more about your social security and you have it coming. Now, most pension holders don't see this coming until after they file their first tax return in retirement. And by then, the damage has already been done, unfortunately.

[00:02:48]Hypothetical, call him David, retired firefighter, $58,000 pension, $720,000 sitting in his 457. Claims social security at 65. Diligent saver his whole career, did everything right. First retirement tax return comes back, and David is blindsided. Here's what happened. Pension income is taxed as ordinary income at your regular federal brackets. Most people are going to understand that part. But, what most people don't understand is how social security taxation works on top of it and comes into play. How this works is up to 85% of your social security benefits become federally taxable once your combined income crosses certain thresholds. Now, it's not taxed at 85%, 85% becomes taxable. For joint filers, that 85% taxability kicks in at 44,000 of combination income. That threshold has never been adjusted for inflation, not once, so it's going to catch people every single year. David's $58,000 pension blows past 44,000 before social security even enters the picture. So, right away, 85% of his social security is taxable. So, when we stack social security on top of the pension, now add even a modest withdrawal from his 457, which the government is eventually going to force him to take anyway, those RMDs, required minimum distributions, that some people will know about. David is now in a higher tax bracket than he was when he was working. This is just a hypothetical, it's not specific guidance, but your situation will depend on your income sources and filing status, where if you have a meaningful pension, you could have high odds at having 85% of your social security being taxable. With this, the stacking problem is real, and you could be in a higher bracket in retirement than even your working years. Therefore, if the tax picture is already complicated, how does the pension election itself affect social security decision? This is where the two dials that I talked about earlier really come into focus. Before you want to claim anything, you need to understand what your pension is actually offering you. Because the option you picked has a direct effect on what your social security claiming strategy probably should be. What I mean by this is most pensions are going to offer three main choices. Picture them side by side. On the left, the single life annuity, highest monthly payout, but it pays only during your lifetime. When you pass, it stops. Your spouse receives nothing from the pension after you're gone. In the middle, the joint and survivor annuity, lower monthly amount, but it continues to your spouse for the rest of their life after you die. You're trading some monthly income now for protection later.

[00:05:22]Then on the right, we've got the lump sum, full value up front, full control, full flexibility, but you take on all the investment risk and all the longevity risk yourself. But, here's where it connects directly to social security. If you elect the single life pension to maximize your current monthly check, your surviving spouse loses that pension income entirely at your death.

[00:05:42]What that means is your social security claiming age becomes a lot more consequential. Delaying Social Security to age 70 increases your benefit by 8% per year between your full retirement age and 70. And that higher benefit, whatever you're collecting when you pass, becomes the survivor benefit for your spouse for the rest of their life.

[00:06:03]That is good survivor protection. The worst outcome though, and unfortunately it's a pattern that can play out, is someone takes the single life pension for the highest monthly check and then claims Social Security at 62.

[00:06:15]On the surface, this strategy, claiming Social Security at 62 with the single life pension, feels like you're maximizing everything. You've got income right away and you've got your highest pension. What it's actually doing though is guaranteeing that the surviving spouse will have the lowest possible income from both sources at the same time permanently. Some people I understand aren't worried about this.

[00:06:36]They might not have a spouse or their spouse has protection in some other way, but neither of these decisions, pension timing and Social Security timing, can be undone. This is going to depend on your situation. The right pension election depends on your spouse's health, your other assets, your income needs, and a number of other factors, but the point here is this. These two decisions are not independent of each other. One dial affects the other. Run the numbers on them together before you make either one. What I want to do now is show you exactly what this looks like in practice cuz this is where the stakes are highest and when the most avoidable mistakes happen with the survivor math.

[00:07:14]David and his wife Linda, these two hypotheticals, David is the higher earner, $58,000 pension, larger Social Security benefit. Linda has a smaller Social Security benefit of her own though. Let's say that David passes first. Spouses can live 10 to 15 years after the first spouse's death. That's a long time to be living on whatever income survived the first death. So now let's look what happens to Linda's income. She's going to keep the higher of the two Social Security checks and lose the smaller one. So, total household social security is going to drop significantly immediately at David's death. How the math works with social security is the survivor benefit Linda's going to receive equals whatever David was actually collecting when he passed, not what he could have gotten if he waited, whatever he was collecting.

[00:08:00]So, if David claimed at 62 and received a permanently reduced benefit, Linda inherits that reduced benefit for the rest of her life across potentially 10 to 15 years, however much longer Linda lives. Now, that can be a meaningful number, and what that is is it's called the widow's penalty. In most cases, it's locked in the day the higher earner files. Now, when you add the pension back in, if David elected the joint and survivor pension, Linda continues to receive that income after he's gone.

[00:08:28]That could be one great layer of protection. Although, if David had elected the single life pension, which paid him more per month, that income is now gone the day he passes. Linda is now living on one social security check, a reduced one if David claimed early, and nothing from the pension. Social security then becomes the only inflation-adjusted lifetime income Linda has, and the size of that check was determined years earlier by a decision David made in a few minutes on a website. Now, this is just a hypothetical scenario, but it shows you how looking at that and planning survivor math can be very important for your retirement. Seeing how these two work together, the pension election and the social security claiming age, if you're still a few years from retirement, sitting on a pension in a large pre-tax account, what are you actually supposed to do between now and the day you sign that paperwork? That's exactly what we're going to walk through next. The day that you retire, a window opens up. Potentially the most flexible tax planning period of your entire financial life. And most pension holders aren't realizing that it's there, and by the time that they do, it's already closing. What this window is is it's the window between when you retire and when RMDs are going to kick in. RMDs are required minimum distributions and that's going to happen at age 73 if you're born before 1960 or 75 if you were born 1960 or later. What RMDs are is it's when the government is forcing you to take money out of your pre-tax accounts whether you need the income or not.

[00:09:58]Once those start, your taxable income goes up whether you want it to or not.

[00:10:03]So, when you factor in social security and you stack that on top of your pension and your RMDs, your tax flexibility is essentially gone for the rest of retirement. But, you could have a window between retirement and RMD age if you're delaying social security and living off your pension in the meantime.

[00:10:20]Your taxable income may be lower than it ever will be again for the rest of your life if you have this window. Now, what this window gives is the prime opportunity for Roth conversions. Moving money from your pre-tax 403b or IRA into a Roth account where it grows tax-free and comes out tax-free. You pay the tax now at today's rate. When pension holders skip this window, the consequences can compound. RMDs begin, social security is already in payment, the pension is there. Taxable income in that scenario can easily exceed working income. That higher tax burden can play out year after year. But, the right Roth conversion strategy depends on your income, your bracket, and your long-term plan. Just understand that window is real and look into what you might have for that Roth conversion strategy. So, now you can see all the pieces, the pension election, the social security claiming age, the tax stacking problem, the survivor math, Roth conversion window. The question is, how do you actually put all these pieces together?

[00:11:22]Three things separate households who get this right from those who default into decisions that they can't undo. First, treat these as coordinated decisions, not separate choices made at different times. The pension election and the Social Security claiming age are two dials on the same machine.

[00:11:39]Running them through the same analysis at the same time allows you to maximize both without neglecting one or the other. Second, run your specific numbers, not rules of thumb, not general advice built for someone with a 401k and no pension who has to rely fully on that portfolio balance for all of their retirement. Rules of thumb were not built for a household with a $58,000 pension, $720,000 of 457, two Social Security benefits of different sizes, government pension offset, and windfall elimination provision. When you're combining those income sources, that math then becomes specific to you, and the math of your retirement needs to reflect that. Third, understand which decisions are permanent before you make them. The pension election, you sign the paperwork, there's no changing it. The Social Security claiming age works the same way. You can run multiple scenarios side-by-side, different pension elections paired with different Social Security claiming ages, compared across realistic longevity numbers, and you stress test against early death, market downturns, and then you find the math and the decisions that work best for you, not only for you, if you have a spouse that protects your spouse as well. There is something I need you to understand though, is everything I've said so far might leave you thinking that delaying Social Security is always the right answer. I want to push back on that one because it isn't necessarily always the right answer. Here's the fear most people in your situation carry quietly. If I claim early, I'm leaving money on the table. I'm getting less than I'm owed, and it feels wrong. 67, I need full retirement age.

[00:13:15]That fear is reasonable, but it's based on one assumption, that you'll live long enough for the math to work out, and that assumption deserves more scrutiny than most people give it. If you've heard of a break-even chart before, the break-even point is the age which delaying starts to pay off compared to claiming early. And these tables leave a lot out of the picture, including opportunity cost. If your honest read of your health says you're unlikely to get there, claiming early may put more lifetime money in your pocket. There's also though the value of what you could do with that income in your early retirement years. The years when you're the most mobile, most active, and most able to spend and actually enjoy your retirement. This may be obvious, but a dollar 62 and a dollar at 70 are not the same dollar. The experiences you can have at 62 may not be available at 70 in the same manner. And now that is not a financial calculation, but it's a real calculation that's going to go beyond the math. And also, if your spouse has a strong survivor benefit locked in through the joint survivor and survivor pension election, the pressure on your own claiming age is lower than it would otherwise be. The survivor's already protected through the pension, so the Social Security decision can be made differently. This is going to depend heavily on your specific situation. Just understand that the dollars that you have in your the early years of your retirement are going to go a lot further in terms of your healthy and active living. So the take away from this one, the combination you choose, including which pension option you elect and when each of you claim Social Security, determines your income for the rest of your retirement and your spouse's income for the rest of theirs. Getting these two dials right comes down to knowing that one turn can affect another. And getting it right requires running your specific numbers across multiple scenarios before you lock any of that in. If you're looking for this type of planning, someone who specializes in pensions and works with people in your exact situation, you can schedule a 15-minute call with me. Link is below.

[00:15:12]And if this video is helpful, please subscribe. I put out new content every week for pension holders and public employees navigating exactly these decisions. Thank you guys for watching and I'll see you in the next one.