If your household receives or expects to receive a pension from a government job considered a non-covered employer (while working your employer did not withhold Social Security taxes) and Social Security benefits from other employment, you’d better learn about the Government Pension Offset (GPO)– because it may leave you with less income than you expected. How bad a bite is it? Well, if you’re collecting a government pension and eligible for spousal or survivor Social Security benefits, the GPO is likely to reduce your Social Security benefits by two-thirds of the amount of your non-covered employer pension payments.
The GPO, enacted as part of the 1977 Social Security Amendments, treated pensions from public employers as though they were Social Security benefits, thus instituting dual entitlement provisions. Spousal benefits were offset dollar for dollar beginning in December 1982.
State workers were left out of the original Social Security Act in 1935, initially because of concerns whether the federal government could tax state and local governments. Later when states were given the opportunity to extend coverage to public sector workers in the 1950s, most states chose to extend coverage. A handful of states, however, chose not to extend coverage to employees. Instead, these states bet they could provide better coverage through state pension plans alone rather than through the combination of a pension and Social Security. Indeed, pension benefits for full-career workers typically have a higher rate of investment return than Social Security.
Here’s an example of how GPO works: Imagine that you would normally receive $1,300 per month from Social Security as a spousal benefit and $1,500 from a government pension. Your Social Security spousal benefit would be reduced by two-thirds of that $1,500 pension, or $1,000. Therefore, your $1,300 spousal benefit would become $300. If your government pension was $3,000 per month, then your Social Security benefit would be reduced by two-thirds of that, or $2,000 — which would effectively wipe out any Social Security benefit, leaving you with just your pension income.
There are currently 15 states where teachers do not pay into the Social Security system – one of them being Louisiana. It is a real shocker to clients from that area when these formulas are attached to their pension and Social Security benefit amounts and we must deliver the news.
There are many exceptions to the rule regarding GPO and each case is an individual story. Before retiring and counting on income that may not be available to you because of GPO, plan and look before you leap.
Call Pillars LLC at 601-954-0699 and Roy and Diane will help you with these decisions and show you how to maximize your benefit and accomplish your personal goals. They are both National Social Security Advisors and Roy is a former CPA of 40+ years. We are in Corinth but service all 50 states. www.pillarsllc.com
