Now entering: Pension offset zone, a Social Security nightmare

I received a question from a reader the other day wondering why his ex-spouse was denied Social Security benefits. She collects a pension based on her years as a public school teacher in Rhode Island, where employees in some local jurisdictions do not pay into the Social Security system. He said they were married for 15 years, so he figured she should be able to collect benefits on his earnings record as an ex-spouse. Although their marriage lasted long enough for her to qualify for Social Security benefits as an ex-spouse and at age 62, she was old enough to collect a reduced spousal benefit, her pension from work not covered by Social Security wiped out her potential benefit. Welcome to the Government Pension Offset (GPO) zone—one of the most confusing rules in the Social Security benefits system. If you receive a pension from a federal, state or local government—including some public school systems—for work where you did not pay Social Security taxes, your spouse's or widow's or widower's benefits may be reduced or even eliminated. The GPO rule applies only to Social Security benefits as a spouse or survivor. There is a separate rule—the Windfall Elimination Provision—that applies to retirement benefits when an individual worked in both the private sector, where they paid Social Security payroll taxes, and in a public sector or job in another country, where they did not. I'll tackle the WEP rule in a separate column. How the GPO works If you receive a pension from work not covered by Social Security and are also entitled to Social Security benefits based on your spouse's, ex-spouse's or late spouse's work record, those spousal or survivor benefits may be reduced or totally eliminated. Normally, Social Security spousal benefits are equal to half of the worker's benefit if claimed at the spouse's normal retirement age; less, if claimed earlier. Survivor benefits are worth 100% of the worker's benefit if claimed at the survivor's normal retirement age; less if claimed earlier. Spousal benefits can be collected as early as age 62; survivor benefits as early as age 60. But if you are subject to GPO rules, your Social Security benefits will be reduced by two-thirds of your government pension. For example, if you get a monthly civil service pension of $600, two-thirds of that amount—or $400—will be deducted from your Social Security benefits. Let's say you're eligible for a $500 spouse's or widow's benefits from Social Security. The $400 government pension offset would be deducted from your Social Security benefit so you would receive just $100 per month in Social Security benefits. And don't think you can skirt the GPO rule by electing a lump sum annuity payment of your government pension. Social Security will calculate the reduction as if you chose to get a monthly benefit from your government work. Blindsided The GPO rule can come as a nasty surprise to individuals and their financial advisers who don't realize that spousal or survivor benefits could be reduced or even wiped out until they apply for Social Security benefits. Even individuals who dutifully review their latest Social Security estimated benefits statements can be caught off guard because their records don't indicate they may be subject to the offset. Remember, the Social Security Administration no longer mails annual benefit estimates to workers. You now must set up an online account (ssa.gov/myaccount) to retrieve that data. If your SS statement lists $0 for years you worked in a public sector job, that's your first hint that you might be subject to offset rules for your retirement or dependent benefits. If you're not sure, contact your current or former employer to ask how your work may affect your Social Security benefits. You can also use the GPO Calculator (ssa.gov/retire2/gpo-calc.htm) to estimate how your non-covered work could affect your Social Security benefits. Although most current federal works are covered by Social Security, public-sector employees in 15 states are not. Those states include Alaska, California, Colorado, Connecticut, Illinois, Louisiana, Maine, Massachusetts, Missouri, Nevada, Ohio and Texas, as well as certain local governments in Georgia, Kentucky, and Rhode Island.