Pension rule can mean big Social Security cut

Mary Beth Franklin looks at the Government Pension Offset, which can can turn retirement planning upside down.

I received a question from a reader the other day wondering why his ex-spouse was denied Social Security benefits. She collects a pension based on her years as a public school teacher in Rhode Island, where employees in some local jurisdictions do not pay into the Social Security system.

He said they were married for 15 years, so he figured she should be able to collect benefits on his earnings record as an ex-spouse.

Although their marriage lasted long enough for her to qualify for Social Security benefits as an ex-spouse, and at 62, she was old enough to collect a reduced spousal benefit, her pension from work not covered by Social Security wiped out her potential benefit.

She was hit by the Government Pension Offset — one of the most confusing rules in the Social Security benefits system.

If you receive a pension from a federal, state or local government —including some public school systems — for work for which you did not pay Social Security taxes, your spouse’s or widow’s or widower’s benefits may be reduced or even eliminated. The GPO rule applies to Social Security benefits only as a spouse or survivor.

HOW THE GPO WORKS

If you receive a pension from work not covered by Social Security and are also entitled to Social Security benefits based on your spouse’s, ex-spouse’s or late spouse’s work record, those spousal or survivor benefits may be reduced or eliminated.

Normally, Social Security spousal benefits are equal to half of the worker’s benefit if claimed at the spouse’s normal retirement age; less, if claimed earlier. Survivor benefits are worth 100% of the worker’s benefit if claimed at the survivor’s normal retirement age. Spousal benefits can be collected as early as 62; survivor benefits as early as 60.

But if you are subject to GPO rules, your Social Security benefits will be reduced by two-thirds of your government pension. For example, if you get a monthly civil-service pension of $600, $400 will be deducted from your Social Security benefits.

Let’s say you’re eligible for $500 in spouse’s or widow’s benefits from Social Security. The $400 government pension offset is deducted from your Social Security benefit so you receive just $100 per month in Social Security benefits.

And don’t think you can skirt the GPO rule by electing a lump-sum annuity payment of your government pension. Social Security will calculate the reduction as if you chose to get a monthly benefit from your government work.

BLINDSIDED

The GPO rule can come as a nasty surprise to individuals and their financial advisers who don’t realize until they apply for Social Security benefits that spousal or survivor benefits can be reduced or even wiped out .

Even individuals who dutifully review their latest Social Security estimated benefits statements can be caught off guard because their records don’t indicate they may be subject to the offset.

If your SS statement lists $0 for years you worked in a public-sector job, that’s your first hint that you might be subject to offset rules for your retirement or dependent benefits. If you’re not sure, contact your current or former employer to ask how your work may affect your Social Security benefits.

You can also use the GPO Calculator (ssa.gov/retire2/gpo-calc.htm) to estimate how your non-covered work could affect your Social Security benefits.

Although most current federal workers are covered by Social Security, some public school teachers and public-sector employees in 15 states are not. Those states are Alaska, California, Colorado, Connecticut, -Illinois, Louisiana, Maine, Massachusetts, Missouri, Nevada, Ohio and Texas, as well as certain local jurisdictions in Georgia, Kentucky and Rhode Island.