Monday, February 27, 2006

Private Defined Benefit Pensions and Social Security Offset

Many companies reduced payments by a portion of the pensioner’s expected social security benefits once the pensioner reaches social security eligibility age. The age at which this happens may be as early as 62, or may not happen until full retirement age. Sometimes after several mergers or acquisitions and employee may find that his pension is the sum of different pieces or purchased companies and the offset rules and ages can vary among these components. Sometimes the term “social security bridge” is used. The theory behind the offset is that the employer has made matching contributions towards the recipient’s social security tax. The practice has generated anger among many retirees who regard it as unfair.

A person’s basic pension amount is typically about 1.5 to 2% of each income for each year of Credited Service (up to some maximum). This may be limited by the pension’s becoming frozen (this became common with many companies in the late 1990s as they switched to a strategy of greater matching 401K contributions). The offset is typically 2% of the person’s expected Primary Social Security Benefit (not including survivor or dependent benefits) per year of credited service (which may be a lower number if the pension was frozen). It is often limited to a maximum reduction of benefit at some percent (like 50% of social security benefit). The offset is also reduced by a mathematical proportion of the person terminated employment (or, likely, had his or her pension frozen) before reaching the age at which the offset goes into effect, so a shorter period of employment some years before retirement will result in a much lower offset. It would not be uncommon for the offset to be between 10 and 30% of a person’s original pension in many situations. For a person concerned about financial stability, the offset does represent a significant issue and might encourage the person to start social security earlier, as the offset is often applied even if the person does not elect to start receiving social security benefits.

For public employees, the following legislation is interesting:

Other interesting references:

Much of the discussion about social security offset bills and litigation concerns public employees and workman’s compensation.

Update: July 1, 2007

I've distinguished the concepts "social security offset" and "social security bridge" in a newer posting, here.


Paul Adams said...
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Rae said...

Hello Bill, WOW! What a great blog on retirement information! I have read most of your information and what I might be interested in but still have not seen my question in your posts or links provided. Do you take questions? I have researched everywhere and can not come up with a firm answer. Thanks, Rae M.