What is Government Pension Offset?
Government Pension Offset is a provision that pertains to Social Security and whether a survivor benefit will be paid to you in the event that your spouse passes away and you receive a Government pension. Let's start at the beginning - most government pensions (think teachers, city workers, etc.) don't participate in Social Security. They pay into their pension system, and their employer pays into that system, but neither put any money towards Social Security. As a result - if you don't have any other Social Security based work history when you get to retirement you won't receive a Social Security check. That's not a big deal for most of these folks, as they've been aware of this their entire work lives, and they will receive a monthly pension from their system. In Ohio this is most common with teachers in the State Teachers Retirement System (STRS) and with public employees through the Ohio Public Employees Retirement System or OPERS. These folks have known all along they won't receive Social Security from their work at those jobs, so it doesn't have as great an impact on them. Government Pension Offset however CAN impact them through what happens with their spouse's earning record and retirement income. If they have a spouse that pays into the Social Security system it can offset or eliminate a survivor benefit should their spouse pass away first. Here's the scoop:
How it works:
Let's say that your pension benefit through your retirement system is $5,000 per month. And now let's say that your spouse receives $2,000 a month from Social Security. If your spouse passes away first, you are subject to Government Pension Offset. The way the calculation works is this - Social Security will "offset" your survivor benefit by 2/3rds the amount of your pension payment. In this case with a monthly pension benefit of $5,000 the amount that would be offset is $3,350. Because the Social Security benefit is only $2,000 which is less than the $3,350 offset the entire amount will be "offset" or eliminated. What that means is that as the surviving spouse - while your pension check will continue the $24,000 a year that was coming in to your annual budget through your spouse's Social Security is now gone.
What Can You Do?
In short there is no way to avoid Government Pension Offset if it will apply to your situation. The best thing that you can do is to plan accordingly. An example is to carry enough life insurance that should your spouse pass away early in retirement there would be an additional influx of funds to supplement your annual income. In this case the life insurance doesn't necessarily need to be permanent, it just needs to last long enough into retirement to cover an early demise. Most of the time as long as both of you live well into your retirement years the impact of the lost income is less impactful on the plan.
So what does it mean for you?
If you are likely to be in a Government Pension Offset situation the sooner you begin planning the better off you are likely to be. You can seek out information from the Social Security website (www.ssa.gov) to begin understanding your options. You can also give us a call or drop us a line and we can help you review your situation and create a plan to protect your retirement income!