Offsetting Penalty

If you receive a pension under the Civil Service Retirement System, based on income from which Social Security taxes were not withheld, the Social Security benefits that you may be entitled to receive from your spouse (or former spouse) may be reduced due to the effects of what's known as the Government Pension Offset. Let's take a look at how the GPO works and its implications for your retirement planning.

Born in the '30s

In the 1930s, when Social Security was born, the assumption was that many women did not work outside the home and were financially dependent on their husbands. To provide for them, Social Security allocated up to 50 percent of a worker's Social Security benefit to his dependent wife. If the worker died, his widow could get as much as 100 percent of his benefit.

At first, only women were eligible for such benefits. In 1977, the Supreme Court ruled in Califano v. Goldfarb that men could claim spousal benefits if they were dependent on their wives.

If you are divorced (even if you have remarried), your ex-spouse may qualify for benefits on your record if you are 62 or older. In some situations, he or she may get benefits even if you're not receiving them yet. To qualify, your ex-spouse must:

• Have been married to you for at least 10 years.
• Be at least 62 years old.
• Be unmarried.
• Not be eligible for an equal or higher benefit on his or her own Social Security record, or on someone else's Social Security record.

Why Offset?

The Government Pension Offset, created in 1977, is designed to replicate the dual-entitlement provision of the Social Security program. That provision, which has applied since 1940, requires that Social Security benefits payable to a person as a spouse or surviving spouse be reduced by the amount of the person's own Social Security worker's benefit. Let's look at an example. Suppose Sally is eligible for Social Security retirement benefits of $800 per month based on her own employment, and also would be in line for a dependent benefit (earned by her husband) of $500. As long as her husband was alive, she would only receive the $800, since it's bigger than the $500 she would've received based on her husband's employment.

If Sally's husband dies before she does, she theoretically would be entitled to a $1,000 per month widow's benefit. But under the dual-entitlement provision, she would receive $1,000 minus $800 -- that is, $200 -- plus her own $800.

Before enactment of the Government Pension Offset provision, if Sally was a government employee who did not pay into Social Security, and who earned an $800 government pension, she would be entitled to the full spousal benefit in addition to her pension.

Now let's look at the example of Jane, who retired under CSRS and was expecting to receive a widow's benefit from her deceased husband's Social Security when she reached 60 years old. The GPO law mandates a reduction in that benefit of two-thirds of her CSRS benefit:

• CSRS retirement benefit: $2,500/month
• Social Security widow's benefit: $1,000/month
• GPO computation: 2/3 x $2,500 = $1,666 / month

Since $1,666 is more than $1,000, Jane's Social Security widow's benefit is eliminated.

Currently, more than 250,000 government retirees (about two-thirds of them women) have had their Social Security spousal benefits fully or partially offset due to the effects of the GPO. Are there any exceptions? Generally, your Social Security benefits as a spouse, widow or widower will not be reduced if you:

• Are receiving a government pension that is not based on your earnings (such as a survivor's annuity).
• Are a state or local employee whose government pension is based on a job where you were paying Social Security taxes (under certain date restrictions).
• Are a federal employee, including a CSRS Offset employee, who pays Social Security taxes on your earnings.
• Are a federal employee who switched from CSRS to the Federal Employees Retirement System on or before June 30, 1988. (If you switched after that date, including during the open season from July 1, 1998, through Dec. 31, 1998, you need five years under FERS to be exempt from the GPO.)
• Received or were eligible to receive a government pension before December 1982 and meet all the requirements for Social Security spouse's benefits in effect in January 1977.
• Received or were eligible to receive a federal, state or local government pension before July 1, 1983, and were receiving one-half support from your spouse.

Resources

• Social Security Administration Government Pension Offset Publication
• H.R.147: A bill to amend the Social Security Act to repeal the Government Pension Offset.

To Do

• At Home: Understand the Government Pension Offset and how it may affect your retirement plans.
• Human Resources: Request a retirement estimate for your planned retirement date.

Tammy Flanagan is the senior benefits director for the National Institute of Transition Planning Inc., which conducts federal retirement planning workshops and seminars. She has spent 25 years helping federal employees take charge of their retirement by understanding their benefits.