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Can a pension plan arbitrarily cut a monthly payment practically in half claiming a retiree can take early SS to compensate?

Hartland, MI |

I retired in 2007 when my employer closed the facility I worked at. My pension has been $2893 prior to taxes, $2432 after taxes. I received a letter saying that, because I turned 62 on May 9, as of July 1 my pension payment will be reduced to $1560 before taxes; probably around $1100 after taxes. I cannot get by on that. It says I “have reached the age at which you are eligible to begin receiving Social Security Retirement benefits at the 80% level.” But if I do that, if I understand correctly, my benefit will be reduced PERMANENTLY. Is this tactic legitimate, or do I have recourse of some sort? I checked and my benefit now (permanently) would be $1574/month, at 66 it would be $2087/month and at 70 would be $2755/month. Naturally, I would like to wait, but cannot get by on $1100/month.

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Attorney answers 1


It is legitimate as long as your pension plan is designed to work that way. Many employers have their pensions set up so that there is a social security offset built into the plan's benefit formula. The way it works is that the plan calculates your expected social security benefit at 62 and front loads your pension benefit so you receive the same amount of money each month from the time you retire through your passing between the pension and social security. Some employers explain it as creating predictability, others are a little more honest that they feel like since they paid half of your social security taxes they paid for half that benefit and owe you less through their pension.

Some pensions do not have the offset built into the formula but instead offer that as a voluntary payment option so can have that even payment from retirement through death. If your plan does not automatically calculate an offset you may have selected this option. It is normally labelled as an annuity option with social security leveling or social security offset. If you selected that option, unfortunately your plan probably will not allow you to change your payment method.

If you take social security now, you are correct that your social security benefits will be permanently reduced to the monthly benefit you begin to receive at 62 or whatever age you elect to begin social security benefits. The reason is social security, just like your employer's pension, is calculating how long they expect to pay your benefits based on standard mortality tables. The longer they expect to pay you a benefit the less money they will pay each month so whether you take payments at 62 or 70 you should receive roughly the same amount of money over the course of your life, assuming you live as long as the mortality tables says you should (which is around 84).

You may want to speak with a financial planner about your situation. Unfortunately there is not anything you can do about the plan's offset unless the benefit formula for your particular benefit should not have a social security offset.