Cashing in a pension is a way to finance your retirement years, especially because Social Security payments might not be enough to maintain your lifestyle after leaving the workforce. A person also might consider receiving unemployment benefits as another source of income. However, federal laws regarding unemployment benefits eligibility require a reduction or elimination of benefits for many pension recipients.
According to the Federal Unemployment Tax Act, your weekly pension can reduce your weekly unemployment benefits by one dollar for every dollar of your pension. The law encompasses all types of pensions, whether government or private, as well as other retirement plans or annuities for which funding depends on your service to your employer. Under this law, if you are eligible for $400 a week in unemployment benefits but also receive $400 or more in pension payments, you could not receive unemployment benefits.
In practice, however, many pensions would not reduce your unemployment benefits by one dollar for every dollar you receive in your pension payment. The federal law allows states to disregard contributions you made to your pension, thus limiting the dollar-for-dollar reduction to the portion of your pension payment that came from your employer's contribution. Most states use this option of disregarding employee contributions. In addition, if you received your pension as a lump-sum payment rather than on a periodic basis, no reduction applies to your unemployment benefits.
When calculating your reduction, more than half the states consider only those pensions that you or your employer funded during what is called your base period of employment. Your base-period earnings determine your financial eligibility for unemployment benefits. In most states, your base period is the first four of the last five calendar quarters before you filed for benefits. If your pension is from a job you had before your base period began, it would not affect your unemployment benefits rate in most states.
Because many pension recipients have retired from the workforce, they might not be eligible for unemployment benefits. For the most part, leaving work voluntarily, such as to retire, makes you ineligible for unemployment benefits. Most states have statutes or case law allowing you to receive benefits if your retirement was compulsory. However, to continue receiving unemployment benefits, you must conduct an active work search and be available to accept any suitable offer of full-time employment. Some retirees might not be willing or able to do that.