Social Security GPO: FOMO, IDK, or LOL??
By Michael Wilson, CFP®, RC®, RICP®, Integrity Financial Planning
If you do not know the acronyms, i.e., if you do not have a teenager running around, FOMO stands for fear of missing out. When people who have worked for an agency where they did not pay into Social Security, maybe they’ve heard of this GPO (government pension offset), and so they are thinking, this could affect what Social Security benefit I might get. So, that is the fear of missing out.
The IDK is I don’t know, as in, I don’t know anything about GPO. LOL sometimes stands for laugh out loud or lots of love. In this case, it means lots of luck trying to understand this thing because, even for those in the financial industry, understanding the GPO is challenging. You can imagine somebody, say, a schoolteacher or a police officer, firefighter, or somebody working for an exempt agency trying to understand how GPO will affect them.
If you haven’t done so yet, I recommend reading the sister article to this article on WEP, the Windfall Elimination Provision. These are two very, very different processes, two very different systems within the Social Security system. They have different impacts depending on whether you are subject to the WEP, you are subject to the GPO, or may be subject to both, as it turns out. It is essential to understand the different scenarios that you, your members, or your clients could run into regarding the WEP and the GPO.
How Social Security Defines Various Retirement Benefits
How does Social Security define a pension? In their lingo and system, any type of periodic lump-sum payment from an employer’s retirement plan that either comes solely from the employer or that could also include employee contributions is a “pension.” When those in the financial industry hear the term “pension,” we think lifetime paycheck. Here’s the kicker. A 401(k), a 457, or a 403(b) can also be considered a “pension” from Social Security’s perspective. Again, we do not usually think of defined contributions plans as pensions. But in Social Security’s world, any employer money and possibly including employee contributions to DC plans could be considered a pension.
Maybe a better way to think of a “pension” in Social Security’s terminology is just any type of employer-paid retirement benefit. If the employer is paying into it, it will be considered a pension. It does not matter if it is a 401(k) plan or a 457 or a traditional pension; always going to be considered a pension from Social Security’s perspective.
Now let’s understand the basics of how Social Security typically works so we can contrast that with how the GPO might affect somebody’s Social Security benefit. Typically, folks in the private sector, some public sector positions, cities, counties, states do pay into Social Security. It depends on the particular agency.
Typically, agencies that might not pay in are school systems, might be special service districts, like water districts or sewer districts, maybe public safety officers, maybe firefighter agencies, and maybe some cities, towns, and counties. For everybody else who pays into Social Security and pays FICA taxes and has at least ten years of what is called qualified earnings or work credits, they are entitled to a Social Security benefit.
For instance, in 2021, to count toward those ten years of work credits, you would have had to earn at least $1,470 a quarter. So, if somebody was making 20, 30, 40 thousand dollars a year in 2021 and they are paying into Social Security, they would get four work credits for the year or four quarters. Once you earn at least ten years of work credit, you will get some type of Social Security benefit. When Social Security calculates somebody’s Social Security benefit, it is based on the participant’s highest 35 years of earnings.
Social Security started back in 1935. It was designed as a welfare program. It was not designed to be the primary retirement resource; it was designed to supplement it. If anything, it was built to sort of slant the benefits more toward long-term, lower-income workers. That was the intent of the program. Nowadays, Social Security, in many cases, has become the primary retirement benefit for folks who do not have any other retirement savings. It was never intended to be that, but it is kind of a safety net for many folks.
When does the Government Pension Offset (GPO) Apply?
Who is impacted by the GPO? If you work for a Social Security exempt agency and you will receive a pension of some type. Again, pension, in Social Security lingo, could also mean defined contribution plans like a 401(k) or a 403(b). It will also apply if you have a spouse who is eligible to receive a Social Security benefit.
The GPO is only going to affect someone who is married. Assume I am a married exempt worker (working for an exempt agency). I am a school teacher, and I don’t pay into Social Security. My spouse works in the private sector. I could be affected by the GPO.
If I am single and retiring, the GPO will not affect me whatsoever. I do have to keep in mind, though, if I get married by the time I get into retirement, or I marry in retirement, the GPO might come back into play if the person I marry is entitled to some type of Social Security benefit.
How does the GPO work? What is the impact? Say both you and your spouse work in the private sector. While we are both alive, as one option, my spouse could potentially draw half of my Social Security benefits, or she can have her benefits based on her work earnings record. The other option for benefits is that when one of us passes away, the survivor gets the higher of the two benefits. If my spouse’s Social Security benefit was going to be $2,000 a month and mine is $1,500 a month, if she passes away first, my $1,500 a month goes away, and my benefit jumps to her $2,000 a month benefit. Again, these are kind of the typical scenarios: the ability to draw off of a spouse’s benefit while we are both alive, or once one of us passes away, the survivor gets the greater of either their own or their spouse’s benefit.
The GPO will affect me if I am an exempt worker and the Social Security beneficiary of a private-sector worker. Assume I work for a school system, and I am not paying into Social Security. My wife is working in the private sector and paying into Social Security. The GPO could affect the one-half spousal benefit or my ability to draw off her Social Security benefit. Her Social Security benefit that I would have assumed as a beneficiary if she were to pass away first will potentially be reduced.
How to Calculate the GPO’s Impact and Who is Affected
Let’s look at some examples. Say Tammy has worked for an exempt school district for 14 years. Before that, she worked for 16 years in the private sector. Because she worked in both the private and public sectors, the Windfall Elimination Provision (WEP) will apply to her. Her husband, Steve, works in the private sector as a mechanic. They decide to retire. Tammy’s pension benefit from the school district is $1,000 a month. Because the WEP applies to her, ultimately, she is only potentially going to get $400 a month of her own Social Security benefit from the time she worked in the private sector. (See this article for more information about WEP.)
Steve’s Social Security benefit is $2,000 a month. Typically, if both had paid into Social Security, Tammy would assume she would receive half of Steve’s benefit, or $1,000. But the GPO comes into play. The GPO is a two-thirds Social Security benefit reduction based on Tammy’s pension amount. For example, her pension is $1,000, so a two-thirds GPO reduction is about $670 a month. The $670 a month will then be subtracted from the half spousal benefit that Tammy would be entitled to from Steve’s earnings record. Tammy’s half spousal benefit is now only $330 a month.
She thought she would have $1,000 a month in pension benefits and $1,000 a month in the half spousal Social Security benefit from Steve’s record. She does get the $1,000 pension because the GPO does not affect her pension whatsoever. But she will not get the $1,000 Social Security spousal benefit that she was expecting based on Steve’s record. Her own WEP-adjusted Social Security benefits (see above) would be $400, which is more than the $330 GPO-adjusted benefit that she could collect in spousal Social Security benefits. She chooses to take the $400 WEP-adjusted benefit based on her own Social Security record.
The bottom line on all this is that Tammy probably thought she would have $2,000 a month after she retires, and instead, she only winds up with $1,400 a month or $600 a month less than expected. That is about a 30 percent drop in income. If Tammy has not planned for this, this could significantly impact their retirement income. Therefore, it is essential to understand how the GPO can come into play.
Let’s look at a different example. Say Tammy has worked her entire career for the school district. She never paid into Social Security. Steve is still in the private sector as a mechanic. They decide to retire.
Tammy’s pension benefit is now $2,500 a month because she worked in the school system for 32 years. She isn’t entitled to a Social Security benefit, so she doesn’t have to worry about the WEP. Steve’s Social Security is still $2,000. Tammy might think, “Oh, I get a spousal benefit of half of Steve’s Social Security, so we’ll have another $1,000 a month.” But the GPO comes into play. Two-thirds of Tammy’s $2,500 pension is $1,675 a month. Based on Steve’s record, this amount is subtracted from the half spousal benefit she was expecting. The GPO adjustment wipes out any spousal Social Security benefit. This $1,000 a month reduction is roughly about a third of their expected income. This could obviously be a huge surprise for her.
How Does the Government Pension Offset Affect Social Security Survivor Benefits?
What happens when Steve dies? Does Tammy get Steve’s full benefit? Theoretically, Tammy could “inherit” Steve’s Social Security. The GPO factor is still a two-thirds Social Security benefit reduction.
Tammy’s pension is $2,500 a month, and a two-thirds GPO reduction of that is $1,675 a month. Normally, Tammy might expect to receive Steve’s entire $2,000 a month survivor Social Security benefit. If Tammy had never worked outside the home for pay, she would still be entitled to 100 percent of Steve’s Social Security benefit as the survivor. But because Tammy had her entire career working for an exempt agency, the GPO applies.
When Tammy’s $2,000 a month survivor benefit is reduced by the GPO by $1,675 a month, she now only gets $325 a month of Steve’s benefit if Steve were to pass away. This can be a very, very big surprise because Tammy thought she would have her $2,500 pension and a $2,000 a month survivor Social Security benefit, or $4,500 a month retirement income. Instead, her monthly income drops to $2,825. This significant percentage drop can significantly impact Tammy’s survivor lifestyle if Steve were to pass away first.
As another example, let’s say Tammy retires, and she gets her pension benefit. Maybe she has a little bit of Steve’s spousal benefit. Steve, meanwhile, has paid into Social Security his entire career. If Tammy passes away first, the nonmember spouse, Steve, could still pick up a pension survivor benefit if Tammy had chosen an option where Steve gets all or part of her pension if she were to pass away first.
Steve also still gets his Social Security benefit, and there is no impact on him because he paid into Social Security his entire career. So, spouses of exempt members are just fine; there is no GPO impact on them whatsoever.
But what happens if you have some years where you paid into Social Security and maybe some years where you worked in an exempt agency like our first scenario? Tammy worked 14 years in an exempt school district, and she worked 16 years in the private sector. At that point, if you are trying to dial in some more specific numbers, you will probably have to go to Social Security and ask them to create an estimate for you.
In general, the more years that you pay into Social Security, you will have a lower GPO reduction. The logic is simply that if you are paying more years into Social Security, you are probably not working for a Social Security exempt agency. If you are not working for many years for an exempt agency, you wind up with a smaller pension and a smaller potential GPO reduction.
If you want to know more, you can go to the Social Security website, SSA.gov. You can type GPO into the search box at the top of the page, and you will get a lot of different resources. One I would recommend is a two-pager on the Government Pension Offset. It is pretty much plain English for the most part, something worthwhile reading. You also may want to make it available to your members or direct it to your employees.
Ways of Potentially Reducing the Impact of the Government Pension Offset (GPO)
If you do not work for an exempt agency for the last five years of your career, then the GPO goes away.
Think of it this way. Let’s say you have worked as a public safety officer for 25 or 30 years for your city. If everybody else in the city, i.e., the maintenance workers, the accountants, HR, etc., all pay into Social Security, and just public safety does not, theoretically, in the last five years of your career, you could jump over to the public employee side. Now you are no longer a public safety officer. You stepped away from being in an exempt agency, and you are paying into Social Security for those last five years.
Before making the switch, one factor to consider is if the public safety pension benefit system is richer than, say, the public employee maintenance benefit system. You also have to think about salary changes and benefits. Does it affect your commute? If you were a cop for 25 years, you get to pick when you want to go on vacation because you have seniority. If you join the maintenance department, you are the low person on the totem pole. However, the bottom line is that there is a way to entirely get out of the GPO.
The other thing to think about is supplemental employer plans. “Supplemental” as defined by Social Security means it is not the primary retirement benefit. But it could be a voluntary one or one that your agency pays into on top of the primary benefit.
Say I am a cop. I am not paying into Social Security. The city pays for my pension plan, but they also allow me to put money into a 401(k) or a 457, whatever it might happen to be. The 401(k), 457, or 403(b) are considered supplemental plans. Any of these plans that just have contributions that I have made do not affect the GPO. They are not going to make that two-thirds reduction get any bigger. Anything that I voluntarily put into a 401(k), a 457, 403(b), as long as it is just money from me, does not get counted in that GPO calculation. If there are matching contributions from the employer, that would potentially increase the GPO.
If you are a Social Security exempt member working for a system where you are not paying into Social Security and if your employer makes contributions into a 401(k), 457, a 403B, if you have a choice, do not put your money with their contributions because it is potentially going to increase the GPO. If the city is putting money into a 401(k) for me, and they happen to have a 457, I probably want to put my money in the 457 because my money in the 457 will not increase the GPO.
Summary of Key Points about the Government Pension Offset (GPO)
The GPO only affects a married Social Security exempt member. It does not affect their spouse’s Social Security benefits.
Suppose I am a married policeman working for the city, and I am not paying into Social Security. In that case, I must watch out if I am entitled to a one-half Social Security spousal benefit; it could also affect my survivor benefit. It does not take a whole lot of an agency-provided benefit to reduce or even eliminate the one-half spousal benefit, primarily if I worked my entire career working in a Social Security exempt agency.
The GPO has no impact whatsoever on the benefit provided by your agency.
Now here are some things about which to think. Say I am the policeman working for the city. Let’s say my spouse began in the private sector, and she has a pension plan available to her. If there are joint, married payout options for her, I may want to encourage her to pick one of those so that if she were to pass away first, I would still get her pension because I may lose that Social Security survivor benefit.
The exempt member may want to talk to their spouse about picking a joint payout pension option. For exempt members themselves, if your system allows a pension option where if your spouse passes away first, you revert to a higher pension amount. That might be something you want to consider. If your pension benefit were to increase when your spouse passes away, that could help again offset that reduction in the survivor benefit from Social Security. Not all systems will offer these reversion options, and they go by different names.
Can you minimize the effect of the GPO? Just work more years in a Social Security paying job. The WEP, by the way, works the same way, so that is kind of a win-win. The more years you work in a Social Security paying job helps the GPO to go down and potentially help the WEP to go down.
Let’s say if my employer is making contributions to the 457 on my behalf and if I have another retirement plan defined contribution plan option, I may want to put my money in that other plan voluntarily. It might not help a lot, but it could certainly help some. The whole idea is here is that you are separating employer money from employee money. If they are not mixed, any employee money will be invisible as far as the GPO is concerned. If the employer is putting money into a 401(k) and I also have a 457 available to me, I may want to use the 457. Again, not a huge impact, but every little bit helps.
What about matching contributions? Let’s say you have a 457 plan, and your employer says if you put 4 percent into the 457, they will match 2 percent. Go ahead and take the match. Yes, the GPO will bite you a little bit, but you are getting a 100 percent return in essence on those matching contributions that are free money from the employer. Take the dollars in that scenario. If the match is up to 4 percent, put in up to 4 percent. I probably want to stop at 4 percent. If I have another defined contribution plan available, I will put the rest of my savings in a plan with employee-only money because that will help a little bit with the GPO.
There is that final five-year option to switch to another state or local government agency that pays into Social Security. Anybody who is thinking about doing that ought to call Social Security first and tell them exactly what your scenario is and what it is you are thinking about before you go. Avoid doing anything extreme like quitting one job to take the other job because it can get a little grey, especially if you are moving between different agencies and employers. But it is an option and can work for some folks.
Say we have a Social Security exempt worker. They have a stay-at-home spouse who has never worked outside the home and paid into FICA. If so, there is no Windfall Elimination Provision (WEP). There is no GPO because neither the worker nor the spouse has ever paid into Social Security.
If you have a client or member in this situation, it gets complicated when the worker has some years where they did not pay into Social Security and some years where they did pay into Social Security. For that stay-at-home spouse, now the WEP could apply to the worker. (Read this article on the Windfall Elimination Provision (WEP) for more information.)
The WEP could apply to the exempt worker, but not the GPO, as the GPO is based on a working spouse’s Social Security benefit. If you are an exempt worker with a spouse working full time in the private sector, they have paid into Social Security. The GPO may and probably will impact my survivor benefit if my spouse passes away first, and it will likely also affect my one-half spousal benefit.
What if we have mixed years? If some years I did not pay into Social Security and some years I did, and I still have the spouse who has been in the private sector their entire career and paid Social Security the entire time. The WEP may affect me now because there were some years I did not pay into Social Security, and the GPO will probably also affect me.
Other Government Pension Offset (GPO) Resources
Another resource for you on this topic is Kitces.com. Michael Kitces is a financial advisor, private sector, super sharp guy, and does a lot of good research understanding on a whole host of different financial planning topics. He has this quick summary of how the WEP and the GPO apply and when it does not.
On the Social Security website, there are WEP calculators. That is probably one of the best tools out there for somebody who will be subject to the WEP. There is a GPO calculator. In my opinion, it is not as helpful, as it does not probably do justice to coming up with how the GPO might impact somebody. But there is one there.
There are also designations/certifications out there. So again, if you want to go deeper into Social Security, there is the National Social Security Advisor Certificate program.
It has a more academic understanding of how Social Security works. I have had some colleagues who have gone through this program, and they really liked it.
The second one there, the Registered Social Security Analysts, is a little more practice-oriented, more maybe for financial advisors trying to help their clients understand when to draw Social Security. It also covers the basics, and you get short-term access to some pretty sophisticated Social Security optimization software.
About Michael Wilson, CFP®, CRC®, RICP®, Integrity Financial Planning
Mike Wilson is the owner and founder of Integrity Financial Planning, which specializes in personal retirement planning. In one form or another, Mike has been in the training and financial services industry for 30 years. He earned his MBA in Finance from Baylor University and is a Certified Financial Planer®, Certified Retirement Counselor® and a Retirement Income Certified Professional®.
Mike and his wife Nancy reside in Salt Lake City, where he enjoys hiking and mountain biking whenever possible.
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©2022, Michael Wilson, CFP®, CRC®, RICP®. All rights reserved. Used with permission.
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