If you are (or were) married and you have worked in a domestic (US-based) government job where your earnings are not subject to Social Security taxation, you probably are familiar with the Government Pension Offset, or GPO. (You may also be interested in WEP – Windfall Elimination Provision – as well, but that’s another subject.) Have you ever learned just why GPO is a factor in Social Security calculations for many folks? In another article we reviewed why there is a WEP, but there are differences between WEP and GPO, so we’ll cover those first.
GPO versus WEP
You might think GPO and WEP go hand-in-hand. And for many folks, if you’re affected by one of these, likely you may be affected by the other as well. But they’re two distinctly-different provisions.
WEP, as we’ve discussed elsewhere, impacts the calculation of your own retirement benefit, by reducing the first bend point factor in calculating your Primary Insurance Amount, or PIA. See last week’s article for more details on how WEP affects your PIA.
GPO, on the other hand, affects benefits that you can receive as a spouse – either a Social Security spousal benefit that you can receive while your spouse is living, or a Social Security survivor benefit (aka “widow(er)’s benefit”) that you receive when your spouse has passed away.
The other primary difference between WEP and GPO triggering is that GPO can only be triggered by a pension from a US-based governmental entity where Social Security taxes were not withheld. WEP can also be triggered by a pension from a foreign government based on wages that were not subject to US Social Security taxation.
GPO reduction is a much simpler calculation as well. If you are receiving a pension from a US-based governmental entity (based on earnings not subject to Social Security taxation) and your spouse has a Social Security retirement benefit, GPO will likely apply.
Let’s walk through an example of a non-GPO-impacted couple first:
Sid and Nancy are married, and are both reaching FRA this year. Sid worked outside the home for his entire career in a Social Security-taxed job, while Nancy worked sporadically outside the home but was primarily present to raise and home-school their four children. As a result, Sid has a Social Security retirement benefit coming to him at his Full Retirement Age (FRA) in the amount of $2,600. Nancy’s sporadic Social Security-based employment earnings has produced a relatively small Social Security retirement benefit in the amount of $500 at FRA.
Because of the difference in the amount of Sid’s retirement benefit and Nancy’s retirement benefit, Nancy is entitled to a spousal “excess” benefit, in the amount of $800. This brings her total Social Security benefit up to 50% of Sid’s benefit, or $1,300. This is how it works when there is no GPO involved.
For an example including GPO, let’s say Simon worked as a teacher in a school district that provides a pension and his earnings were not subject to Social Security taxation. Simon’s wife, Beth, worked in Social Security-related jobs her entire career, and as such has a Social Security benefit of $2,500 per month coming to her. Simon’s teacher pension amounts to $2,100 per month.
By virtue of the fact that Simon is married to Beth, he is entitled to a spousal benefit based on Beth’s earnings. This spousal benefit is 50% of the amount that Beth could receive upon reaching her Full Retirement Age – and that amount is $2,500. So Simon is entitled to a spousal benefit of $1,250 – 50% of $2,500.
However, GPO is in play, since Simon is receiving the teacher’s pension in the amount of $2,100. The GPO offset is 2/3 of the amount of the pension – which is $1,400 – which effectively wipes out the spousal benefit altogether for Simon.
The reason that this offset is in place is because of the original reason that spousal benefits were created. Spousal benefits are intended to make up the difference for many couples between their lifetime earnings amounts. When this was initially created, the family dynamic quite often had one spouse working outside the home while the other worked within the home (at least a portion of his or her career), raising the family and taking care of domestic chores. As a result, very often the spouse who didn’t work outside the home had no (or a very small) Social Security retirement benefit when it came time for retirement.
The same applies to Social Security survivor benefits. In the case of Sid and Nancy, when Sid dies (if he dies first), Nancy becomes entitled to a survivor’s benefit equal to the benefit that Sid was receiving prior to his death. When Nancy starts receiving that $2,600 benefit, her own benefit and the spousal excess benefit are terminated, so her final total Social Security benefit at this point is $2,600.
On the other hand, if Beth were to die before Simon, he would be (prior to GPO) entitled to a survivor’s benefit equal to the Social Security benefit that Beth was receiving prior to her death, or $2,500. However, since Simon is receiving a pension from a governmental entity based on wages that were not subject to Social Security taxation, GPO applies to the survivor benefit as well. Just the same as with the spousal benefit, GPO offsets the survivor benefit by 2/3 of the amount of the pension that Simon is receiving, or $1,400. This leaves Simon with a survivor benefit in the amount of $1,100 ($2,500 minus $1,400).
Why is there a GPO?
Much the same as with the WEP, GPO was put in place to avoid “double-dipping” in two different retirement activities. If GPO wasn’t in place, in our examples from above, Simon would have been entitled to a survivor benefit equal to Beth’s Social Security retirement benefit, while at the same time continuing to receive his full teacher’s pension. Contrast that with the treatment that Nancy receives – she has to give up her own Social Security benefit (and the spousal benefit) in order to receive the survivor benefit. This is the “double-dipping” that GPO eliminates, or helps to somewhat mitigate.
The reasoning is that the governmental pension is designed to take the place of Social Security for that employee. If there was no offset, the spousal and survivor rules, which are designed to help out a spouse who had a smaller earnings record over his or her lifetime. Since the governmental employee was outside of the Social Security system, his or her Social Security record is artificially small, and without the GPO would result in an unfair distribution.
Different from WEP, there is no way to earn your way out of GPO impact. As you probably know, if you’ve worked in Social Security-covered jobs earning “substantial earnings” for enough years, WEP can be reduced or eliminated. There is no such provision for GPO. And this makes sense, because GPO is not factored based on your own Social Security record. GPO is factored totally based on the amount of your pension from the governmental entity.
When you’re collecting a governmental pension, GPO applies to any Social Security spousal or survivor that you may be eligible for, whether for your current spouse or an ex-spouse
One additional factoid – GPO is only triggered based on your receiving a pension based on your own work. So, if Edie is receiving a survivor’s pension that her spouse Jonathan had earned from his work with the state government, this pension will not trigger GPO for Edie. (Incidentally, this survivor’s pension would also not trigger WEP for Edie either). So in this case, Edie can receive the survivor pension (with whatever offset the pension requires) in addition to her own Social Security benefit without triggering GPO.