Fewer and fewer companies offer pensions to their employees, but it's still rather common for government workers to have them. If you're looking forward to retiring with a government pension one day and also expect to receive spousal or survivor Social Security benefits tied to your spouse's work history, then you'd better learn about the government pension offset -- because it may leave you with less income in retirement than you expected.
In a nutshell, the government pension offset applies to spousal or survivor Social Security benefits, and reduces them if the receiver of the benefits also receives money from a government pension.
How bad a bite is it? Well, if you're collecting a government pension and also spousal or survivor Social Security benefits, the government pension offset is likely to reduce your Social Security benefits by two-thirds of the amount of your pension payments. Here's an example of how it works: Imagine that you would normally receive $1,500 per month from Social Security and another $1,500 from a government pension. Your Social Security benefit would be reduced by two-thirds of that $1,500, or $1,000. Thus, your $1,500 benefit would become a $500 one. 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 all of it, leaving you with just your pension income.
If you're not too familiar with spousal or survivor benefits, here are the basics: Spouses of Social Security-eligible workers can collect up to 50% of their spouses' retirement benefits instead of collecting their own. This is welcome if a spouse's own benefits are less than that. If you're widow or widower, you can collect up to 100% of your late spouse's benefit.
There are lots of rules about these situations, such as ones reducing how much you can collect if you do so before your full retirement age, which is 66 or 67 for many of us these days. The survivor benefit, meanwhile, is not available to those who remarry before age 60.
When the government pension offset doesn't apply
Fortunately, many people escape the government pension offset. After all, it doesn't apply to money from a private company pension and it doesn't apply to someone who is collecting both government pension money and Social Security benefits based on their own work history.
It also doesn't apply if your government pension isn't based on your earnings and it may not apply if you paid into the Social Security system for at least the last five years that you worked for the government.
Here's a bit of bad news, though: If you're not the spouse or survivor collecting Social Security benefits and a government pension, but are expecting to collect your own government pension income as well as your own Social Security benefits, you don't have to worry about the government pension offset -- but you may have to worry about the Windfall Elimination Provision. It's designed to reduce Social Security benefits by up to $428 per month or half of whatever you get from your government pension, whichever is less.
As you think about and approach retirement, it's smart to get a handle on how much income you can expect from various sources. If you or your spouse have a government pension coming to you, be sure to factor in its effect on your Social Security benefits. It's smart to learn more about Social Security in general, too, in order to employ benefit-maximizing strategies.