Social Security spousal and survivor benefits were created to provide some level of Social Security benefits to households that relied primarily on a single worker, as a means to both financially support households with stay-at-home spouses, and to ensure that an earner’s widow was not left in poverty after the primary worker passed away. The caveat, however, is that in the early years of Social Security, some government workers had the opportunity to participate in jobs that did not pay into Social Security (so-called “non-covered” jobs), and instead directly received a private pension… with the end result that, in addition to their pensions, they also ended out receiving Social Security spousal and survivor benefits as though they were a stay-at-home spouse, when in reality they were simply a working spouse in a non-covered job.
To address this concern, Congress passed the Government Pension Offset (GPO) rule over 40 years ago to more fairly determine how Social Security benefits would be received by such non-covered government workers to ensure they were not effectively “double-dipping” into government pension benefits as workers and spousal and survivor benefits intended primarily for non-workers. Today, the GPO affects more than 695,000 Social Security beneficiaries.
The core of the GPO rule is that workers who receive pensions from government jobs that did not participate in Social Security will face a reduction of spousal and survivor benefits that they might otherwise be entitled to based on the work records of their spouses (who worked in covered jobs that did pay into Social Security). Specifically, the GPO rule applies to individuals who meet three criteria: 1) worked at a federal, state or local government job where they did not pay Social Security taxes; 2) qualified for a pension from that job (that did not pay into Social Security); and 3) are eligible to receive spousal or survivor’s benefits from a spouse who did work in a job covered by Social Security.
For those who are affected, the GPO reduces spousal and survivor benefit amounts by 2/3 of the government pension benefit received from the non-covered employer. And if 2/3 of the retiree’s pension exceeded their spousal or survivor benefit altogether, the net result is that they will receive none of that Social Security benefit at all! Importantly, though, this rule applies only to the person who actually owns (i.e., originally earned) the non-covered pension. Which means that if a retiree inherits their spouse’s non-covered pension, their Social Security survivor benefits are not reduced because the pension was originally owned by and based on the work history of another.
In some cases, an individual may have pension benefits based on earnings from covered and non-covered employment (having switched jobs over the years between employers who both paid into the pension). In these situations, the GPO will reduce the individual’s benefits by 2/3 of the pension portion attributable only to non-covered employment. This non-covered pension portion is determined by multiplying the full amount of the pension benefit by the ratio of non-covered months of employment to the total months of employment contributing to the pension.
While the GPO is generally difficult to avoid, there are a couple of strategies that financial advisors can consider for their clients who may be impacted by the rule. The “Last-60-Months” exception says that the “GPO does not apply if an individual was covered by both the government retirement system and Social Security throughout his/her last 60 months of Federal, State, and local government service. The 60 months need not be consecutive.” Thus, if a worker leaves their current job under which they would have been subject to the GPO, finds new employment that is covered by Social Security and the government pension, and stays in that job (or another job that contributes to the government pension and that is covered by Social Security) for at least 60 months of service prior to retirement, the GPO rule would not affect their Social Security spousal or survivor benefit.
Alternatively, a government employee has the option of withdrawing from their pension altogether. For this strategy to avoid the GPO, the worker would need to withdraw all of their own contributions (with interest) from the plan, forfeiting any employer contributions (unlike most non-government pensions, many government pensions consist of both employee and employer contributions). This strategy should be considered carefully, as while the GPO impact on Social Security benefits would potentially be eliminated, so too would any pension benefits to which the individual was once entitled (and the loss of the pension itself may easily end out costing more than the otherwise foregone Social Security benefits would have been in the first place!).
Ultimately, the key point is that advisors should be aware of when and how the Government Pension Offset may affect their clients, and if their clients can use a strategy to mitigate the GPO’s impact on their benefits. While there are stirrings of legislative proposals to eliminate the GPO rule (along with the WEP), the population actually affected by these rules is relatively small (approximately 1% of all Social Security beneficiaries in 2018 were affected by the GPO). Thus, traction on any amendments to eliminate or modify these rules may be difficult, especially since there arguably are good policy reasons for it to exist (to avoid the implicit ‘double dipping’ of earning a non-covered pension as a worker and a spousal or survivor benefit nominally intended for non-working spouses). In the meantime, advisors can help their clients by understanding when the GPO needs to be factored into a client’s financial plan, especially given that the GPO can heavily (or fully) eliminate Social Security spousal or survivor benefits that they might have otherwise anticipated receiving!