Public Employees and Social Security, Part II

How the Government Pension Offset can impact your clients’ Social Security benefits

Many advisors assist clients who worked as public employees in jobs not covered by Social Security. However, such public employees or their spouses may also be entitled to Social Security benefits earned in jobs that are covered by Social Security. In talking with these clients, the advisor should be aware of Social Security rules that may cause many to have reduced Social Security benefits. The two rules affecting these clients are the Windfall Elimination Provision (WEP) and the Government Pension Offset (GPO).

A previous article detailed the WEP; this article will detail the GPO.

Who Does the GPO affect?

The GPO affects people who:

• Worked for a state or local government or a public agency in non-Social Security-covered employment, and
• Are entitled to a government pension from that employment, and
• Are also entitled to a Social Security survivor, spousal, or dependent benefit.

A “government pension” is any periodic or lump-sum benefit that is based on non-Social Security-covered employment for a state or local government or a public agency. A government pension does not include such payments as:

• Social Security retirement or disability benefits,
• Payments from an optional savings plan, e.g., a 403(b) or 457 plan, which is separate from the retirement plan and yields only the amount the employee paid in (plus interest) rather than an amount calculated based on certain conditions such as age, earnings, and length of service,
• Early incentive retirement payments, or
• Survivor annuities from a spouse’s government pension.

The GPO does not apply:

• If for the five years before the worker retires, the worker
• was in a job that was covered under Social Security, and

1. the job was also covered by the same government pension plan as the non-Social Security-covered job, or

• If the worker is receiving a government pension from a state or local government or public-agency employment that is not based on the worker’s own earnings, or
• To workers who were eligible for a dependent/survivor benefit before December 1, 1977, or
• To workers who began receiving or were eligible to receive a government pension from non-Social Security-covered employment with a state or local government before December 1, 1982, and met the requirements for a dependent/survivor benefit in effect in January 1977.

Why Does the GPO Exist?

Benefits that Social Security pays to wives, husbands, widows, and widowers are dependents’ benefits. These benefits were established in the 1930s to compensate spouses who stayed home to raise a family and were financially dependent on the working spouse. However, as more and more couples became employed, they each earned their own Social Security retirement benefits. Social Security law has always required the Social Security Administration to offset one retirement benefit against another. For example, if a woman worked and earned her own $800 monthly Social Security retirement benefit but she was also due a $500 wife’s benefit on her husband’s Social Security record, the Social Security Administration could not pay that wife’s benefit because her own Social Security benefit offsets it.

However, if that same woman was a government employee who did not pay into Social Security and earned an $800 public pension, there was no offset (prior to the GPO law) and the Social Security Administration was required to pay her a full wife’s benefit in addition to her government pension.

In 1977, Congress revisited the Social Security Act and looked at many issues, including the dual entitlement rule. Congress decided that someone with both a government pension and a Social Security benefit as a survivor or dependent benefit violated the dual entitlement rule and enacted the GPO.

How Does the GPO Work?

Under the GPO, the SSA reduces a worker’s dependent or survivor benefit by two-thirds of the government pension. Because public pensions are often substantially higher than spousal benefits paid under Social Security, this rule generally means a public employee will typically qualify for little or no benefits on a spouse’s Social Security record.

Here’s an example:

Jane works in non-Social Security-covered employment for a state or local government or a public agency. She will receive a government pension from the job of $600 per month at retirement. Her husband works in Social Security-covered employment. Upon retirement she would be entitled to a dependent benefit from his work of $500 per month before the SSA applies the GPO. To calculate the GPO, the SSA does the following:

• multiplies $600 by 2/3 (600 X 2/3 = $400); and
• subtracts the $400 from the $500 dependent benefit (500 – 400 = $100)

The result: Jane receives a dependent/survivor benefit of only $100 per month.

Can a Client’s Social Security Benefits be Affected by Both WEP and GPO?

A worker’s Social Security retirement as well as his/her dependent/survivor benefit may be reduced if:

• The worker had both some Social Security-covered work and some non-Social Security-covered work, and
• The worker is or was married.

Here’s an example:

During Mary’s career she works both in the private sector in which she was covered by Social Security and for a school district in a non-Social Security position. Mary’s husband spends his entire career in Social Security-covered employment. Mary reaches the age at which she can draw a Social Security benefit. She goes to the local SSA office to apply for her benefits. Because of the WEP, Mary’s own Social Security benefit is reduced unless she had 30 or more years of Social Security coverage. Because of the GPO, her dependent benefit from her husband is either reduced or eliminated. If Mary had not worked in the non-Social Security position for the school district, the reductions would not have applied.

Where Can a Client Get More Information about the GPO?

The SSA has a downloadable pdf explaining the GPO rules and an interactive site with an online calculator.

Lawrence J. Owens, JD, CLU, ChFC, MBA, FLMI

Director Midwest Region

Advanced Underwriting Consultants

Email: larry.owens@alicsonline.com