If you have a pension coming from work where you did not pay Social Security tax, you need to know about the Government Pension Offset. Why? If you are affected, it could drastically reduce, or even completely eliminate, your Social Security benefits.
I’ve had more than one client who was shocked to find out they would not receive a spousal or survivor’s benefit due to the Government Pension Offset. It can seem incredibly unfair and can be a nasty surprise. Especially if you’ve been planning your retirement income with this stream of payments calculated in.
History of The Government Pension Offset
The Government Pension Offset (GPO) was enacted as part of the 1977 Social Security Amendments. It was meant to keep public sector employees from receiving both a Social Security benefit and a pension from work where they did not pay into the Social Security system. This intent was to stop an indivual from “double dipping.” The result has been that it sometimes works as intended. But in many cases, it’s overly punishing to those who can’t afford the offset.
This rule is often confused with the Windfall Elimination Provision, so it’s important to understand the differences.
The Windfall Elimination Provision: Only applies to individuals who are entitled to a Social Security benefit based on their own work history AND have a pension from work where they did not pay Social Security tax.
The Goverment Pension Offset: Only applies to individuals who are entitled to a Social Security benefit as a survivor or spouse AND have a pension from work where they did not pay Social Security tax.
How The GPO Works
The mechanics of the Goverment Pension Offset (GPO) are really simple. If you have a pension from non-covered employment (no Social Security tax paid),your survivor’s or spousal benefit from Social Security will be reduced by an amount equal to two-thirds of your pension.
For example, let’s consider the case of Ann. She worked as a schoolteacher for 30 years and her husband was an accountant. Her years teaching were spent in Texas, one of the 15 states where teachers are not covered by Social Security. When she retired, she began receiving her Texas teachers retirement pension of $3,000 per month. Her husband also retired and filed for his Social Security benefits of $2,200 per month. Sadly, her husband passed away a short two years later.
She was devastated by his passing and it didn’t help to find out that she would not continue to receive his full Social Security benefit. Instead, the Government Pension Offset kicked in and reduced the survivor’s benefit down to a measly $200 per month.
Some would say that’s not necessarily fair. I think they have a valid point. Why? The GPO only applies because of Ann’s chosen profession! This is effectively a penalty for public service. If she would have worked as an accountant instead, she would have been eligible to receive the full $2,200 per month.
If that doesn’t sound equitable to you, you’re not alone. In fact, earlier this year the Social Security Fairness Act of 2015 was introduced as HR 973. This bill would repeal certain provisions of both the Windfall Elimination Provision and the Government Pension Offset.
One thing is for sure. If you may be subject to the GPO, you need to have a strategic Social Security filing plan. If I can help, please don’t hesitate to contact me.