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Social Security Strategies with a Government Pension

A reader writes in, asking:

“For those of us with government pensions, it’s difficult to know how to modify the most common bits of Social Security advice to fit our own situations, given the WEP and GPO.”

For those unfamiliar with what this reader is asking about: If you receive a government pension from work for which you did not pay Social Security taxes:

  • The Windfall Elimination Provision (WEP) changes the calculation of your primary insurance amount (PIA) in a way that, in most cases, reduces it by a significant amount (details here), and
  • The Government Pension Offset (GPO) reduces any benefits you can receive on your spouse’s work record (i.e. spousal benefits or widow/widower benefits) by an amount equal to 2/3 of your government pension.

Unmarried Retirees

If you’re unmarried (and have never been married), the answer is easy: There’s little to change with regard to the conventional when-to-claim-benefits advice. That’s because, while the Windfall Elimination Provision does reduce your benefit, it does not change the break-even math, because your benefit still grows at the same rate for each month you hold off on claiming benefits.

Married Retirees

For married retirees, as with unmarried retirees, the WEP’s effect is straightforward: It reduces the spouse with the pension’s PIA, which is no different from a situation in which that spouse simply had a lower retirement benefit to begin with (i.e., due to a lower earnings history). The effect of the GPO is more complicated though. Because of the GPO, the options available to the couple will vary depending upon the size of the government pension in question.

In short, because of the complexity added by the GPO, it’s difficult to make any broadly-applicable rules of thumb. Instead, it’s probably easier to run through a few different examples to give an idea of how things can play out.

Example #1: Melissa and Eric are married. Melissa has worked for her state government for her entire career. So a) she has never paid into Social Security and therefore doesn’t qualify for a retirement benefit of her own and b) her state pension is large enough to completely eliminate any Social Security benefits she could receive as Eric’s spouse or widow.

In this case, things are pretty straightforward. Melissa has no Social Security-related decisions to make. And Eric’s decisions are essentially the same as they are for an unmarried person (at least in terms of break-even math) because the only benefit in question is his retirement benefit — no spousal benefits of any kind are available.

Example #2: Michelle and James are married. Michelle worked in private industry for 10 years (just long enough to qualify for a Social Security retirement benefit), then worked for the rest of her career for the state government. Her government pension is large enough that the GPO will completely eliminate any spousal or widow’s benefits she could otherwise receive based on James’s work record. She does qualify for a retirement benefit of her own. But because of the WEP and because her average-indexed monthly earnings includes 25 years of zeros, her retirement benefit will be quite small.

This situation is similar to the common married couple situation in which one spouse simply has a much higher retirement benefit than the other. The primary difference is that Michelle cannot get a spousal benefit at any point, which means that:

  • Claiming strategies that involve Michelle receiving a spousal benefit (i.e., the typical “file and suspend” strategy, with James being the one filing and suspending) are not applicable, and
  • Having James delay his retirement benefit is not as advantageous as it normally is for the spouse with the higher benefit, because delaying his benefit only increases the amount the couple will receive as long as James is alive (whereas in most married couples, delaying the higher of the two retirement benefits increases the amount the couple receives as long as either spouse is still alive).

Because Michelle cannot receive a spousal benefit at any point, the only clever strategy Michelle and James can use is for James to get four “free” years of spousal benefits (between FRA and age 70) based on Michelle’s work record, by filing a restricted application for spousal benefits once he reaches his FRA of 66. But, given that Michelle’s PIA is so small, James’s Social Security benefit as Michelle’s spouse will be very small.

Example #3: Martha and Paul are married. Martha worked in private industry for 20 years (and therefore qualifies for a significant Social Security benefit), then worked for her local government for 20 years. Her government pension is large enough to eliminate any spousal benefits she could receive based on Paul’s work record, but it is not large enough to completely eliminate the benefit she could receive as Paul’s widow, if that ever becomes applicable.

This scenario works out much like example #2 above, with the exception of the facts that:

  • It is now more advantageous for Paul to delay claiming his retirement benefit, because doing so would result in an increased widow’s benefit for Martha, should she outlive him, and
  • It is now even more advantageous for them to use the restricted application strategy in which Paul gets 4 years of free spousal benefits, because those benefits will be based on a higher earnings history than were James’s spousal benefits in the previous example.

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