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Social Security card with Capital in backgroundOne of the most valuable perks of working for the government is the pension. However, your government pension may reduce or eliminate survivor or disability benefits from Social Security in certain situations due to what’s called Government Pension Offset. These unexpected cuts can cause financial concerns when your retirement plan assumed that you’d receive both incomes in retirement. In this article, we’ll define what the Government Pension Offset is, how it works and who it affects.

Planning for retirement involves lots of moving parts, and a financial advisor can help you sort through all the pros and cons of your various options.

What Is Government Pension Offset?

Congress passed the Government Pension Offset law in 1977 to ensure that retirement benefits received by spouses and surviving beneficiaries would be roughly equal whether their pension was covered or non-covered. Non-covered pensioners are those whose employer did not withhold taxes on Social Security from their paychecks. These workers typically were employed by state and local governments or non-U.S. employers, such as educators, police officers and firefighters.

Under this law, pensioners who did not pay Social Security taxes on their wages experience a reduction in Social Security survivor benefits. This serves to level the playing field between private-sector employees who pay Social Security taxes and government employees who typically do not.

How Does Government Pension Offset Work?

When someone receives a government pension based on his work history and a spousal or survivor’s benefit from Social Security, the person is subject to the Government Pension Offset. It’s only applicable to Social Security spousal, widow and widower benefits. However, Social Security benefits from your work history may be affected by another policy known as the Windfall Elimination Provision.

Originally, this rule reduced Social Security benefits dollar-for-dollar, but it was amended in 1983 by Congress to a two-thirds reduction.

Under the current rules, your monthly Social Security benefits are reduced by $2 for every $3 you receive from your monthly government pension income. For example, if you have a government pension of $900, your Government Pension Offset is $600 ($900 x 2/3). This means that your Social Security benefits will be reduced by $600.

If the offset is less than your Social Security benefits, it is known as a “partial Government Pension Offset.” When the offset reduced your Social Security benefits to zero, then it is called a “total Government Pension Offset.”

To make it easier for you to understand the impact on your retirement income, the Social Security website provides a government pension offset calculator. It estimates how much your Social Security survivor benefits will be reduced based on your government pension income.

Total Offset Partial Offset
Government pension $900 $900
Social Security benefits $600 $700
Government pension offset -$600 -$600
Adjusted Social Security benefits $0 $100
Total retirement income $900 $1,000

Who Is Affected by Government Pension Offset?

"PENSION" written in wooden blocks

The Government Pension Offset affects spouses, widows and widowers who receive spousal benefits from both a non-covered government pension and Social Security. These pensions can be from a federal, state or local government position. According to unpublished 2014 data from the Social Security Administration, approximately 9.7% of the 6.5 million spousal, widow and widower beneficiaries were affected by the Government Pension Offset.

These 630,000 beneficiaries had an average non-covered pension of $2,250, which was $500 more than the average Social Security benefit of $1,708. Of these beneficiaries, nearly 75% had their entire benefit offset due to an average monthly non-covered pension of $2,769. Those with partial offsets had an average non-covered pension of $840.

Who Avoids Offsets Affecting Social Security Benefits?

While the Government Pension Offsets affect spouses, widows and widowers with non-covered pensions, there are seven beneficiary types who are not affected by these cuts.

  • Government pension not based on earnings.
  • Last day of employment prior to July 2004. Government employees who paid Social Security taxes and their last day of employment was before July 1, 2004, they avoid the Government Pension Offset.
  • Filed for spousal, widow or widower benefits before April 2004. Even if your last day of employment was after this date, if you filed for and were eligible for spousal, widow or widower Social Security benefits by April 1, 2004, your benefits will not be affected.
  • Paid Social Security during the last five years of service. If you paid Social Security taxes on your earnings during the last 60 months of government services, your benefits will not be cut.
  • Federal employees who switched from CSRS to FERS after December 1987. Employees who switched after Dec. 31, 1987, and met one of three following conditions will not have their benefits cut: 1) Last day of service was before July 1, 2004, 2) Paid Social Security taxes for 60 months or more after January 1988 and ending with the first month of entitlement benefits or 3) Filed for and were entitled to survivor benefits before April 1, 2004.
  • Eligible to receive government pension before 1982. If you received or were eligible to receive a government pension before December 1982 and met all of the Social Security spouse benefits in effect as of January 1977.
  • Eligible before July 1983 and received 50% spousal support. If you received or were eligible to receive a government pension before July 1, 1983, and were receiving one-half support from your spouse.

The Bottom Line

Retired spouseWorkers who have a government pension and expect to receive Social Security benefits from their spouse’s work history need to understand how their retirement income will be affected. For every $3 you receive from your government pension, your Social Security spousal or survivor benefits could be reduced by $2. In some cases, the Government Pension Offset could eliminate your entire Social Security benefit.

Tips for Retirement

  • Consider working with a financial advisor to plan your retirement in the most effective way possible. Finding one doesn’t have to be hard. SmartAsset matching tool can connect you with several financial advisors in your area in just a few minutes. If you’re ready, get started now.
  • To know whether you’ll have sufficient savings for a lifestyle in retirement that covers your annual retirement expenses use the free SmartAsset retirement calculator.
  • To understand the impact on your retirement income, use the Social Security Administration’s government pension offset online calculator or contact your local Social Security office.

Photo credit: ©iStock.com/zimmytws, ©iStock.com/tumsasedgars, ©iStock.com/Inside Creative House

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