If you’ve read this blog before, you know that sometimes you can have multiple possible claiming strategies when it comes to claiming your Social Security benefits. However, if you also have a government pension, the Government Pension Offset (GPO) can make your claiming decision an easier one. We recently dealt with a very eye-opening case where a person was affected by the GPO, and the summary description is this; for persons eligible for a spousal or survivor benefit who also have a non-covered (usually government) pension, their spousal or survivor benefit is reduced by 2/3 of their pension. Since this reduction is completely based on the pension amount and not their social security benefit, it can cause some very dramatic choices to present themselves. Let’s take a look at the example we came across recently.
Let’s call our hypothetical person “George”. George is about 63.5 years old with a full retirement age of 66. George is married and is eligible to receive a spousal benefit based on his spouse’s earnings record. George has no Social Security benefit of his own since he worked for a government agency that did not participate in Social Security, but instead provides him with a pension of $1,050 per month that he is currently claiming. His spouse reaches age 62 next month and has a Primary Insurance Amount (PIA) of $1900/month. George wants to know if he should claim his spousal benefit now or wait to his age 66 which he reaches in 2.5 years.
If George waits until his FRA of 66 he will be entitled to a spousal benefit equal to 50% of his spouses PIA. Since his spouse’s PIA is $1900/month that means his full spousal benefit would be $950 per month if he waited until age 66 to claim. However, we must remember that due to the GPO, George will have a reduction in his SS benefit of 2/3 of the amount of his pension, which means 2/3 of $1050 or about $700 per month. In addition to this reduction, if he claims before age 66, his SS spousal benefit will be reduced for claiming early. If he claims next month his spousal benefit will be reduced from $950 per month to about $765 per month, just for claiming early.
The eye opening part is when we compare the numbers if George claims next month versus claiming in about 30 months at his age 66.
|Claiming Next Month||Claiming at age 66|
|Monthly Spousal Benefit||$765||$950|
|Monthly Reduction for GPO||$700||$700|
|Net Benefit||$65 per month||$250 per month|
If George waits until age 66 to file for his spousal benefit he will receive a monthly amount 385% larger than his benefit would be if he started next month! This drastic change is due to the GPO being a fixed amount. As his SS benefit goes up the GPO does NOT, so every dollar increase in the SS benefit goes right into his pocket. I propose that this makes for an easy decision for George. He will receive huge benefits over time if he waits to claim. In fact, it will only take George about 10 months after his 66th birthday to have recouped ALL of the benefit he didn’t claim prior to turning 66, and then from that point forward he will be receiving $250 per month rather than $65.
GPO and WEP can affect those people who have a non-covered pension from work and the effects are very hard to understand for many people since the rules are complex. If you are wondering how the GPO or WEP might affect you, do not hesitate to contact us. For additional information, please use the play button below to listen to our audio post.