Saturday, September 17, 2022

Government Pension Offset (GPO) – What you need to know

Financial PlanningGovernment Pension Offset (GPO) - What you need to know
Government Pension Offset

By Tom Martin, WMCP® Candidate
Wealth Management Certified Professional®

Many people working in the United States pay into Social Security through the taxes from their paychecks—unless they work for the U.S. government or other public entities. This is because upon retiring, they will receive a government pension rather than Social Security benefits. 

However, there are many exceptions and scenarios where receiving retirement benefits isn’t as cut and dry as it’s laid out above. Maybe someone retires from their government job early and works another role where they pay into Social Security. Or perhaps, a government worker is the widow of someone who paid into Social Security during their career in the private sector and will receive survival benefits in addition to their pension. 

If you find yourself in either case described here or any scenario in-between, you may be aware of the Government Pensions Offset (GPO). So, what exactly is the Government Pension Offset rule, and when does it come into play? Although it can seem complex at first, gaining more clarity around its rules and when it’s applied can help you have a stronger understanding of its impacts and better prepare you for retirement. 

Defining the Government Pension Offset

First, let’s define what this term is. The Government Pension Offset is a rule that occurs when workers who will receive a government pension also opt-in for Social Security benefits, either from spousal or surviving benefits. In any case, the offset rule means their monthly Social Security payment will be reduced by two-thirds of the amount of their pension benefit. 

Why Does the GPO Exist?

For those working in the private sector, you will pay into the Social Security system throughout your career with a portion of your taxes, with the understanding that you can draw on these benefits during retirement through monthly payments. 

The Social Security program also allows additional benefit structures for married couples. For instance, it’s possible for one spouse to claim the benefits of their partner if it will provide the couple with greatly monthly payments. In simple terms, spousal Social Security benefits exist to help support those who may have stayed home throughout their lifetime or took some time off from their career for any reason. 

In some instances, a public-sector employee receiving a government pension may apply for spousal Social Security benefits through their partner who worked in the private sector. Thus, they will receive both retirement benefits at the same time. However, this wasn’t the intention behind the creation of spousal benefits, so Congress imposes a rule, the Government Pension Offset, in order to account for this “doubling up” of benefits. 

Who Does the GPO Rule Impact?

Simply put, the Government Pension Offset applies to any public sector worker entitled to a government pension who opts in to receive Social Security benefits through their spouse. 

It’s important to point out that the monthly payments for the spouse who paid into Social Security will not be affected—only the spouse receiving both the public pension and Social Security benefits. In addition, the Government Pension Offset applies to widows or widowers, ex-spouses, or current spouses who work in the public sector. 

Public sector workers who are set to receive a government pension include teachers, law enforcement, nurses, postal workers, firefighters, state government employees, and a number of other professions. Each of these roles often comes with a pension plan as a benefit, which they pay into throughout their careers–not Social Security. Thus, if they choose to claim Social Security benefits through their spouse, they are likely to face some penalties. 

Example of the Government Pension Offset

To get a better idea of how the Government Pension Offset works, let’s take a look at a couple where one person was in law enforcement and the other worked in the private sector. 

As a reminder, the partner who worked in the public sector and also chooses to receive spousal benefits will have their monthly Social Security checks reduced by two-thirds the amount of their government pension. 

For instance, a person who worked in law enforcement is entitled to $2,400 a month during retirement based on their work. So, their spousal Social Security benefits would be reduced by $1,600, which is two-thirds of $2,400. If their spousal benefit totals $1,800 a month, they would only receive $200 after accounting for the GPO. 

As you can see, if the spousal benefit is $1,600 or less, they would not receive any monthly payments. So, it can be important to consider the GPO and its potential impact on your benefits during retirement. 

Are There Exceptions to the Government Pension Offset?

So considering all the above points about when the Government Pension Offset comes into play and who it affects, it’s important to note that there are certain circumstances where the GPO rule can be waived. 

For instance, if you are a government worker entitled to a public pension, but you also worked in the private sector and paid into Social Security at some point, it’s possible to get the Government Pension Offset waived. Additionally, in some cases, a government pension is provided as a bonus rather than being based on earnings, so they also could avoid the GPO rule in certain cases. 

However, if you’re receiving a government pension you still may be subject to the Windfall Elimination Provision (WEP) for any Social Security benefits you receive based on your own earnings in the private sector or outside of the country.

What is the Windfall Elimination Provision?

We’ve covered that the Government Pension Offset is applicable to the Social Security benefits you receive as a spouse while collecting a public pension, but what if at some point you held a private-sector position and will be entitled to Social Security benefits of your own?

Since you’d be entitled to receive both Social Security benefits and a government pension based on your past roles, there is a rule in place to account for this. For example, maybe you started your career in the private sector and later became a postal worker. In this case, you would be subject to the Windfall Elimination Provision, which could reduce your Social Security benefits. 

As we mentioned above, there are some ways that you can avoid reductions to your Social Security benefits if they are in fact based on your own earnings. Namely, this is possible if you paid Social Security taxes for at least five of your final years working in the public sector. 

In any case, the WEP could reduce your Social Security benefits, so you’ll want to consult with your local Social Security office in order to see where you stand with these rules and what reductions in benefits you may face. 

Final Thoughts on the Government Pension Offset & Windfall Elimination Provision

At the end of the day, understanding why Congress enacted these rules can help you have a better idea of why they impose the GPO and WEP on those receiving Social Security benefits through their spouse in addition to a government pension. Overall, they’re trying to prevent people who didn’t pay into the Social Security system from receiving Social Security benefits, which is the case for someone who held their entire career in the public sector. 

So as you and your spouse are preparing for retirement, you’ll want to consider how these rules can impact the total monthly income for your household, and determine whether it would be worthwhile to claim spousal benefits or not. Additionally, if you’re entitled to a government pension and end up as the widow or widower of someone who received Social Security benefits, you may be surprised to find that your monthly survival benefits are lower than you had anticipated. 

All in all, there are many things you’ll need to keep in mind when it comes to figuring out how to maximize your retirement benefits and be financially prepared for this new chapter in your life. The GPO is just one of these aspects, though it is an important element to account for. For further planning, you can even visit the pension offset calculator on the Social Security website so you can see exactly how much you’ll receive in monthly payments after accounting for the GPO. 

And if you’d like to learn more about how you can work to maximize your benefits and best prepare yourself financially for retirement, join one of our upcoming webinars. Future topics of discussion include managing your wealth in a post-COVID world and maximizing your Social Security benefits.  

Tom Martin, WMCP®
Tom Martin, WMCP®
Tom Martin, is a financial advisor at Vaylark Financial Services, based in Hartford, Connecticut. He practices in the area of private wealth management offering comprehensive financial planning, custom investment portfolios, tax reduction strategies, risk management, estate and legacy planning, as well as advises on executive compensation and business owner profitability.

Related posts

Roth Conversions: What is it and how to do one?

Roth conversions are an underutilized tools that can help higher income families who don't qualify for a Roth IRA contribution to participate in the Roth.

Retirement Pension Payment: Lump-Sum or Monthly Annuity?

If you are nearing retirement and are entitled to receive a government or corporate pension,...

5 Tips To Help Maximize Social Security

Most workers today aim to retire between the ages of 62 and 65–but will this...

Are You Financially Ready for Retirement?

Looking forward to retirement is something that many of us get excited about. We anticipate...

Share this post

Tom Martin, is a financial advisor at Vaylark Financial Services, based in Hartford, Connecticut. He practices in the area of private wealth management offering comprehensive financial planning, custom investment portfolios, tax reduction strategies, risk management, estate and legacy planning, as well as advises on executive compensation and business owner profitability.

Most popular

Roth Conversions: What is it and how to do one?

Roth conversions are an underutilized tools that can help higher income families who don't qualify for a Roth IRA contribution to participate in the Roth.

Retirement Pension Payment: Lump-Sum or Monthly Annuity?

If you are nearing retirement and are entitled to receive a government or corporate pension,...

Episode #1 – 5 Biggest Financial Mistakes College-Bound Families Make

In case you didn't know it, college is expensive. It just is. With college costing...

Categories