Social Security and Government Pension Offset Simplified


KEY POINTS

  • Government Pension Offset (“GPO”) adjusts Social Security spousal or survivor’s benefits for those who receive “non-covered” pensions.
  • GPO reduces Social Security spousal and survivor benefits by 2/3rd of the monthly pension payment from a non-covered government job.
  • The bipartisan Social Security Fairness Act (“SSFA”) bill, designed to eliminate both GPO and the Windfall Elimination Provision, was reintroduced this year with increasing support.

Retired couple who used to be a teacher and CPA enjoying coffee.

Are you a federal, state, or municipal employee with a state-funded pension plan?  If your answer is yes, you are considered a “non-covered” employee. This means that your employer does not withhold Social Security taxes on your behalf because you are covered by your state-funded pension plan.

When you retire or become disabled, you will receive a pension based on your lifetime earnings. Unless you or your spouse held another job that withheld Social Security Taxes, you will not be entitled to Social Security.

However, it is common that government employees are eligible for spousal or survivor’s benefits. If this pertains to you, it’s important to know about Government Pension Offset (“GPO”). If you’re affected, the offset could drastically reduce and, in some cases, eliminate your Social Security Benefits.

We’ve seen many government employees become blindsided when it’s time to retire because they were expecting to receive a spousal or survivor’s benefit, but due to GPO, they received little to none. This is mainly due to a lack of understanding of the complex rules surrounding GPO because your Social Security statement doesn’t reflect these adjustments.

What is Government Pension Offset (“GPO”)?

The Government Pension Offset reduces any Social Security benefits you may be paid as a spouse or surviving spouse if you receive a pension related to a government job that was not covered by Social Security. The reduction via the GPO is two-thirds of the pension payment provided by that “non-covered” employment pension.

Take a look at this example:

Taylor worked for the Town of Colchester for 32 years and his wife was a CPA. When he retired, he began receiving his retirement pension of $3,000 per month. His wife also retired and filed for her Social Security benefits of $2,500 per month. As a spouse, he’s entitled to a Social Security spousal benefit of 50% of his wife’s benefit. Half of his wife’s $2,500 amounts to $1,250. According to GPO, Taylor’s spousal benefits are adjusted based on 2/3rds of his government pension so $3,000 x 2/3 = $2,000. Since this amount is greater than the spousal benefit of $1,250, Taylor’s benefit would be reduced to zero.

Now, if Taylor’s wife passes away, he would be entitled to the Social Security survivor benefit which equals 100% of his wife’s benefit ($2,500). Since his GPO reduction is $2,000 (two-thirds of his government pension), his entitlement would be $500 ($2,500 – $2,000 = $500).

How do I Know if I’m Subject to GPO?

If you meet the following criteria, you will most likely be subject to the GPO rule:

  1. You work for a Federal, State, or Local government job where Social Security taxes are not withheld from your earnings.
  2. You will receive a state-funded pension plan from your job that did not pay into Social Security.
  3. Your spouse works at a job that is covered by Social Security which means you are eligible for spousal or survivor benefits.

According to a CRS report, in 2018 approximately 6.6 million state and local government workers (28% of all state and local government workers) were in non-Social Security-covered positions. Since every state varies, it’s important to understand your coverage when planning for retirement.

Why Does GPO Exist?

The rationale behind the GPO is related to how Social Security benefits are calculated using the average of the highest 35 years of indexed covered earnings and the impact of non-covered government employment which reduces the average. Given that Social Security benefits are calculated using “bend points” to provide a higher share of income to lower workers, these non-covered earnings would allow higher-income governmental workers to have their benefits calculated as low-wage workers with a higher replacement ratio.

This GPO provision is designed to equalize benefits such that the spouse or surviving spouse of a non-covered worker would not be treated more favorably than that of a covered worker. The GPO intends to reduce the amount of Social Security spousal benefits for those who receive their own non-Social Security pension benefits which makes them financially independent from their spouse.

What’s the Status of GPO Repeal Legislation?

There has been an ongoing effort to repeal both the Windfall Elimination Provision (“WEP”) and GPO. The bipartisan H.R. 82 Social Security Fairness Act (“SSFA”) is designed to eliminate both provisions. As of this article, the bill introduced by Rodney Davis (R-IL) and Abigal Spanberger (D-VA) has 127 co-sponsors in the House (previously 264 last session). While we can’t forecast the outcome, it has gained more followers each cycle so it’s worth watching.

In Conclusion

While the legislation is gaining popularity, the outcome is unforeseeable. We understand that these provisions and their impact are quite complex. If you have any questions regarding your entitlements or a specific scenario you would like to go over, feel free to leave a comment below or reach out to one of our Odyssey consultants.

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