Social Security Strategies: Government Pensions and the Offset Provision

Last Updated Jun 6, 2011 10:47 AM EDT

Today, we'll continue our look at how having a government pension from a job where you didn't contribute to Social Security can affect your Social Security benefits. Yesterday, we looked at the windfall elimination provision, which affects your benefits. Today, we'll talk about the Government Pension Offset Provision (GPO) which affects your spouse's or widow(er)'s benefits.The offset, or reduction, is equal to 2/3 of your government pension and can eliminate your spouse's or widow(er)'s benefit.

Why the Reduction? Dependent benefits are benefits paid to wives, husbands, widows and widowers. They were established to compensate spouses who were financially dependent on the working spouse. In cases where both spouses worked, Social Security has always offset dependents' benefit by the amount of his or her own retirement benefit.

So if dependents receive benefits based off their own work record (from Social Security or a public pension), their own benefits will offset Social Security benefits they might receive from a spouse.

Assume a married woman who has reached full retirement age is eligible for her own benefit of $800 per month and a dependent (spouse's) benefit of $500 per month. If the $800 is from Social Security, it would completely offset the $500 spousal benefit, leaving her total payment from Social Security at $800.

The same is true if the $800 came from a government pension, but the math is slightly different. For Social Security purposes, her spousal benefit would be compared to 2/3 of her pension, or $533. As the reduced amount is still greater than her spousal benefit, she wouldn't receive a spousal benefit from Social Security, and her total monthly benefit would remain at $800.

Now if her own benefit was only $400 per month instead of $800, things would be different. Since the spousal benefit is greater than her personal benefit, she would receive her own benefit of $400 plus the difference between her spousal benefit of $500 and her personal benefit, totaling $500. On the other hand, if the $400 came from a government pension, she would have her spousal benefit compared to 2/3 of her pension, or $267. The $267 would be subtracted from her spousal benefit, leaving her with a monthly payment from Social Security of $233. This would be on top of her government pension, giving her a total monthly benefit of $633.

The same reductions would also apply to a survivor's benefit.

For further reading on Social Security, see the following posts: Hear Larry Swedroe discuss current investment trends and topics every Sunday at noon on 550 AM KTRS in St. Louis or streaming via the KTRS Web site. Can't catch the show? Download the podcast via www.investmentadvisornow.com or through the Buckingham Asset Management podcast page on iTunes.
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    Larry Swedroe is a principal and director of research for the BAM Alliance. He has authored or co-authored 12 books, including his most recent, Think, Act, and Invest Like Warren Buffett. His opinions and comments expressed on this site are his own and may not accurately reflect those of the firm.

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