Today, it’s increasingly rare for retirees to rely on pension income as a primary source of retirement funding. Traditional defined-benefit pension plans — once a cornerstone of retirement planning — have largely been replaced by defined-contribution plans such as 401(k)s and IRAs.
That said, millions of Americans still participate in pension systems. According to the U.S. Census Bureau, there are more than 5,000 public-sector retirement systems in the United States, with approximately 27 million individuals participating in private-sector pension plans as of 2024. By comparison, nearly 69 million Americans currently receive monthly benefits from Social Security.
If you are among the fortunate retirees who will receive both pension income and Social Security benefits, understanding how these income streams interact is essential for effective retirement planning.
Pension Benefits: Are They Taxable?
In most cases, pension income is subject to federal income tax. This is because many pension contributions are made using pre-tax dollars during your working years. As a result, when distributions begin in retirement, those payments are generally taxed as ordinary income.
However, if you contributed after-tax dollars to your pension plan, a portion of your benefit may be considered a return of principal and therefore not subject to taxation. The exact taxable amount depends on your plan structure and contribution history.
It’s also important to note that state-level taxation varies. Some states do not tax pension income, which may influence retirement income planning depending on where you reside.
Will Pension Income Reduce Social Security Benefits?
Historically, certain retirees were concerned that receiving pension income could reduce their Social Security benefits due to provisions such as the Windfall Elimination Provision (WEP) or Government Pension Offset (GPO).
Recent legislative changes under the Social Security Fairness Act of 2023 updated how certain pensions interact with Social Security benefits. In many cases, pension income will no longer directly reduce your monthly Social Security retirement benefit as it may have in the past. However, pension payments still count toward your total income, which can increase the portion of your Social Security benefits that are subject to federal income tax.
Pension Income and Social Security Taxation
Social Security benefits may become partially taxable depending on your provisional income — a calculation that includes:
- Adjusted Gross Income (AGI)
- Non-taxable interest
- One-half of your Social Security benefits
Pension income is included in this calculation as part of your overall income.
For example, in 2026, married couples filing jointly with provisional income exceeding $44,000 may have up to 85% of their Social Security benefits subject to federal income tax. This makes pension income an important consideration when evaluating total retirement income and tax exposure.
Integrating Pension Income into Your Retirement Plan
While pensions can provide valuable income stability throughout retirement, they also introduce additional tax planning considerations that may affect:
- The taxation of Social Security benefits
- Medicare premium thresholds (IRMAA)
- Overall retirement cash flow
- Long-term tax efficiency
Incorporating pension income into a broader financial plan can help ensure that retirement income is distributed in a tax-efficient manner aligned with your long-term goals.
Don’t leave your retirement income to chance. Let’s review how your pension impacts your overall strategy and identify opportunities to reduce taxes and strengthen your long-term plan. Schedule your review today.
Bibliography
Public Plans Data. (2025, November 17). National Data: Public Plans. https://publicplansdata.org/quick-facts/national/#
Freeland, A. (2021, August 18). Is pension income taxable?. H&R Block. https://www.hrblock.com/tax-center/income/pension-tax/?srsltid=AfmBOor1wZ-YKRy2Xu5dm6AnWRYUBlujfpz4S5k87yvIY32AiiiIqKZs
Social Security Administration. (2025). Social Security Fact Sheet. https://www.ssa.gov/news/press/factsheets/basicfact-alt.pdf
Social Security Administration. (2025b, April 16). Will you lower my social security benefits if I get a pension from work not covered by Social Security? https://www.ssa.gov/faqs/en/questions/KA-01915.html
Internal Revenue Service. (2022, February 9). IRS reminds taxpayers their Social Security benefits may be taxable. https://www.irs.gov/newsroom/irs-reminds-taxpayers-their-social-security-benefits-may-be-taxable#:~:text=The%20portion%20of%20benefits%20that%20are%20taxable,they%20are%20married%20filing%20jointly%2C%20they%20should:
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