Social Security: How the Government Can Snatch Your Benefits

Boomers that have worked in both the public and private sectors could find their survivors’ benefits severely reduced

Jul 20, 2014 at 11:07AM

Maze
Flickr / odolphie.

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.

Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers