If your client or your client's spouse is a public sector employee and one of them expects to claim spousal Social Security benefits, be sure to read the fine print because the Social Security Administration may limit expected benefits.
There are two separate Social Security regulations which can reduce spousal benefits when either spouse has worked as a public-sector employee. The Windfall Elimination Provision and the Government Pension Offset have different features and are easy to confuse with one another.
In a previous blog, I discussed the Windfall Elimination Provision regulation. That can reduce the Social Security benefits of a public sector worker who is eligible for a government pension but also qualifies for Social Security because they have paid at least 40 quarters of Social Security payroll tax on earnings. And these reductions automatically pass on to the spouse if they are claiming spousal benefits based on this workers record. These reductions do not, however, affect survivor benefits.
But what about the situation where the roles are reversed? What happens when the spouse claiming spousal benefits is the public-sector worker instead of the primary worker upon whose record the spousal benefits are claimed? A separate regulation, the Government Pension Offset, addresses this situation. If the spouse will receive a pension from a federal, state or local government job for which they did not pay Social Security taxes, their spousal benefit will be reduced by two-thirds of their government pension.
Heres an example. A wifes government pension is $750 per month based on her work history for the state of California. Her husbands full retirement age benefit is $2,200. At her full retirement age, she would normally be eligible for a spousal benefit of $1,100 (50% of her husbands benefit of $2,200). In this case, however, her spousal benefit is reduced by $500 (two-thirds of the $750 government pension) so that her adjusted Social Security spousal benefit will be $600 ($1,100 - $500).
These reductions only apply if the wife in this example did not pay Social Security taxes for the California state earnings. If she did pay Social Security taxes there would be no reduction in benefits.
Importantly, the Government Pension Offset reductions, unlike the Windfall provision, also apply to survivor benefits. In the example above, the wifes survivor benefit would be reduced to $1,700 (the normal survivors benefit of $2,200 minus the $500 reduction).
Even if the wife took an option for a lump sum payment from California instead of an annuity, the Social Security Administration would still calculate the equivalent annuity payment and apply the reduction accordingly.
You can find helpful fact sheets on both of these regulations at SSA.gov.
Paul Norr is a financial planner in Thousand Oaks, Calif. and writes about planning and retirement. His website is www.paulnorr.com.
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