INmail: Divorce and Social Security offset rules

Katie: I have a client who is eligible to receive a portion of her ex-husband’s state pension through a spousal divorce agreement. His pension is based on work where he did not pay FICA payroll taxes. Will her Social Security benefits be reduced if she collects half of his pension? And if so, should we take her Social Security benefit first or the pension first in order to maximize the largest Social Security benefit?

MBF: Normally, if you receive a pension from a government job, including public school teachers in about a dozen states, your Social Security benefits may be reduced. But only the person who did not pay FICA taxes is penalized by the offset rules. So, your client’s Social Security benefits will not be reduced if she receives a portion of her ex-husband’s public pension.

There are two separate rules that can reduce Social Security benefits for some public employees.

The Windfall Elimination Provision affects workers with a noncovered public pension who also worked long enough in the private sector — at least 10 years — to earn a Social Security benefit.

Those workers will receive a Social Security benefit, but it can be reduced by up to half of the amount of their public pension. However, the WEP reduction cannot exceed $480 per month in 2020.

The Government Pension Offset rule affects spouses, widows and widowers with pensions from a federal, state or local government job.

The GPO reduces any potential Social Security spousal or survivor benefit by two-thirds of the amount of the noncovered government pension with no dollar limit, which means it can totally wipe out a potential Social Security benefit.

Normally the WEP and GPO do not apply until you begin collecting a noncovered public pension. So in some cases, it may make sense to collect Social Security first and delay collecting the public pension until later, knowing Social Security benefits will be reduced at that point.

But in this case, your client does not need to worry about any Social Security reductions because the GPO will not apply as the pension is not based on her earnings.

Mary Beth Franklin, a certified financial planner, is a contributing editor for InvestmentNews.