|Government Pension Offset Can Substantially Reduce Social Security Benefits
The Government Pension Offset offers an opportunity to provide value and grow your practice.
February 18, 2010
Two little known rules can substantially reduce Social Security benefits. The first, the Windfall Elimination Provision (WEP) was covered in a previous article. A second rule, the Government Pension Offset (GPO) will be covered in this article.
Both the WEP and GPO rules apply to government employees (including school teachers) who earned a pension based on wages not covered by Social Security. Many of these workers are unaware that they are subject to the WEP, the GPO or both. The annual Social Security statement contains only a general comment regarding the WEP and the GPO. The recipient is not told if he or she is subject to these rules. The recipient sees only his or her Social Security benefit calculated before the reduction. Because the reduction can be substantial many participants greatly overestimate their Social Security benefit.
The Difference Between the WEP and the GPO
The WEP and the GPO apply to government employees receiving a pension based on wages earned that were not covered by Social Security. Receipt of the pension can result in a reduction to the Social Security benefit they are otherwise entitled to receive. An individual can be subject to both the WEP and the GPO reductions.
Below are the types of payments that can be reduced by either the WEP or the GPO:
A spousal benefit is paid to a husband or wife based on the work record of his or her spouse. It is equal to 50 percent of the worker’s benefit paid. For example, if based on Don’s work history, his worker’s benefit was $1,600 his spouse Jan would be entitled to a spousal benefit of 50 percent of that amount or $800. If Jan had her own work history and was entitled to a worker’s benefit, the rules regarding dual entitlement apply.
Example: A survivor benefit is paid based on the deceased spouse’s work history. When Don dies, Jan will no longer receive her spousal benefit of $800 but will receive a survivor benefit of $1,600 per month — what Don had been receiving just prior to his death. See the discussion regarding dually entitled participants below in the case where Jan was also entitled to a worker’s benefit.
The GPO applies if a client:
See SSA Publication No. 05-10007 for exceptions.
If the GPO applies, the Social Security payment must be reduced by two-thirds of the government pension.
Example: Impact on spousal benefits — Virginia worked as a school teacher for over 35 years. Her wages were not covered by Social Security. She earned a pension that will pay her $1,800 per month at age 65. Her husband Niles’ wages were covered by Social Security. His Social Security benefit is $2,200. Absent the GPO, Virginia would be entitled to a Social Security spousal benefit of $1,100 per month (50% of $2,200). The GPO reduces her spousal benefit by two-thirds of $1,800 or $1,200. Her spousal benefit is equal to $1,100 minus $1,200 or zero dollars (where the GPO reduction is larger than the spousal benefit, the benefit is reduced to zero dollars).
Impact on survivor benefits — Absent the GPO, should Niles predecease Virginia, she would be entitled to a survivor benefit equal to 100 percent of Niles’ monthly Social Security benefit or $2,200. The GPO, however, requires a reduction in the survivor benefit by two-thirds of her teacher’s pension. That leaves a survivor’s benefit of $2,200 minus $1,200 (two-thirds of $1,800) or $1,000.
Dual Entitlement and Financial Dependency
To understand the reason for the GPO you must understand the concepts of financial dependency and dual entitlement. Individuals who qualify for both a Social Security benefit based on their own work history and for a benefit based on their spouse’s work history are dually entitled. A dually entitled individual, however, cannot receive the full amount of each benefit.
Example: Andrew is entitled to a Social Security benefit of $1,400 per month based on his own work record. He is also entitled to a spousal benefit of $800 per month based on the work history of his wife, Karen. He is “entitled” to both his worker’s benefit and a spousal benefit. He can take no more than $1,400 per month. In this case, Andrew will take the higher benefit he earned based on his own work record.
If his monthly benefit based on his own work record were $700 and his spousal benefit were $800 he would be entitled to a spousal benefit of $100 calculated as follows. His spousal benefit must be first reduced by the benefit he earned based on his own work record. $800 minus $700 leaves a spousal benefit of $100. Andrew receives an $800 monthly check from Social Security consisting of his worker’s benefit of $700 and the spousal benefit of $100.
In the early years of Social Security, wives typically did not have work histories sufficient to earn a Social Security worker’s benefit. They were considered financially dependent on their husbands. A woman with no work history was provided a spousal benefit based on her husband’s work history. She did not have to work outside the home and establish a work history in order to be entitled to a spousal benefit. Any benefit the spouse earned based her own work history, however, is treated as reducing her financial dependency on their husband. Times have changed and in today’s world it may be the husband who is financially dependent and receives a spousal benefit based on his wife’s work history.
In the example, the $700 Andrew earned based on his own work record reduced his financial dependency on his spouse. His $800 spousal benefit is reduced by his worker’s benefit of $700 to $100. Similarly, the payment of a government pension earned based on non-covered wages is considered as reducing the recipient’s financial dependency and a reduction is required. The reduction is based on the two-thirds formula.
Why two-thirds? According to a report by the Congressional Research Service (Social Security: The Government Pension Offset), the formula “… assumes that two-thirds of the government pension is basically equivalent to the Social Security retirement or disability benefit the spouse would have earned as a worker if his or her job had been covered by Social Security.”
Baby boomers have taken a second look at Social Security. Reliable monthly payments, adjusted annually for inflation, look pretty good since the collapse of the stock market and home values in 2008. Understanding and applying the complex Social Security rules can give CPA, PFS advisors an edge in growing their practice as more and more boomers reach Social Security retirement age.
Additional Resources: The AICPA PFP Section provides information, tools, advocacy and guidance to CPAs who specialize in providing tax, retirement, estate, risk management and investment advice to individuals and their closely held entities. All members of the AICPA are eligible to join the PFP section. For CPAs who want to demonstrate their expertise in this subject matter apply to become a PFS Credential holder.
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James Sullivan, CPA, PFS, MAS, is an investment counselor at Core Capital Solutions LLC. He has almost 25 years of experience in individual tax, investing and personal financial planning. Before joining Core Capital Solutions, Sullivan spent 20 years at Arthur Andersen LLP. He is a member of the AICPA PrimePlus/ElderCare Task Force.