Last week, I covered a rather esoteric part of the Social Security Act called the Windfall Elimination Provision, which could affect anyone who has worked in both the public and private sector. For baby boomers approaching retirement, knowing how this law can affect benefits can avert a rather nasty surprise later on.
The WEP isn't the end of the public-private employment issue, however. Another provision, the Government Pension Offset, can easily gobble up most of your Social Security spousal or survivor benefits – even if your spouse paid into that trust fund his or her entire work life.
How it works
If you thought the WEP was complicated, the GPO is even more convoluted. Probably, this is due to the fact that it covers both spousal and survivor benefits, whereas the WEP covers workers only. And, while the WEP has a handful of exceptions to the rule, the GPO has an absolute basketful.
First, let's take a look at the basic concept of the GPO, which is similar to the WEP: it prevents employees who have primarily worked outside of the Social Security system from collecting full Social Security benefits. In this case, the employees in question are not the workers, but the spouses of those workers.
How much is the offset? It is quite hefty, reducing by two-thirds the benefit amount a spouse or widow/widower might otherwise expect. For instance, let's say that you want to tap into your spouse's $1200 monthly Social Security payment, half of which you would be entitled to if you did not have a pension. Because you collect a pension of $900 per month, however, you must subtract $600, or two-thirds of your monthly pension total, from the amount due you.
Can you guess what will happen? Right – you will get nothing, because the amount subtracted is greater than – or, in this case, exactly – the amount you would otherwise collect. If your pension was $600 per month, you would be entitled to a $200 spousal benefit ($600 minus $400).
Surviving spouses run into the same problem. In that case, however, the law can be particularly punitive, due to the additional loss of the deceased spouse's benefit. Normally, if the surviving spouse had never worked, he or she would receive 100% of the deceased spouse's Social Security benefit. With a pension in the picture, however, the two-thirds rule kicks in.
The Social Security Administration notes that, even in the case of a surviving spouse who also qualified for Social Security, the survivor's benefit would not be paid if the surviving spouse's monthly check was the same or larger than the widow or widower's monthly benefit. In an effort to be fair to all, Congress amended the GPO in 1983, deciding to consider two-thirds of an outside pension the same way as an earned Social Security benefit.
In fact, before the GPO was enacted in 1977, the SSA would have had to pay full survivor's benefits to the deceased's spouse in addition to a private pension. The law was meant to supply income only to dependent spouses who would have no other means of income once the breadwinner died, not to add to the survivor's own benefit level.
Exceptions? Oh, yes
There are many exceptions to the GPO, including being eligible to draw your pension before 1983 – while, at the same time, you were already receiving one-half of your spouse's benefit.
A whole slew of exceptions revolve around a loophole that existed in the GPO language before 2004, when Congress finally took action to close it. Thousands took the opportunity to exempt their benefits from the law by working, on the very last day of their government careers, in a position covered by Social Security. The new language changed the "one day" rule to 60 months. An excellent explanation and history of these varied exceptions can be found in this recent Congressional Research Service report, which is definitely worth more than a cursory read.
Though your family will not escape the provisions of the GPO if it applies, knowing ahead of time that benefit levels will be affected will be invaluable to boomers as they plan for retirement – and beyond.
Another government rule that affects your retirement
Social Security plays a key role in your financial security, but it's not the only way to boost your retirement income. In our brand-new free report, our retirement experts give their insight on a simple strategy to take advantage of a little-known IRS rule that can help ensure a more comfortable retirement for you and your family. Click here to get your copy today.