The Government Pension Offset (GPO): Top 7 Questions

Have you ever worked in a government job where you didn’t pay Social Security taxes? If that job also allowed you to earn a pension, then it’s critical that you understand the Government Pension Offset, or GPO.

The Government Pension Offset rule can drastically reduce, or even completely eliminate, your Social Security spousal or survivors’ benefits. That’s why it’s so important that if you ever worked in a public service job and earned a pension from your position, you take the time to learn everything you can about the GPO and how it could impact your Social Security income.

The Government Pension Offset’s mechanics are really simple: Your survivors’ or spousal benefits from Social Security will be reduced by an amount equal to two-thirds of your gross pension.

That’s a nasty surprise for the people who didn’t know about it, or fully understand how to plan for it. To avoid finding yourself in that situation, education is key. I’m sharing the top 7 questions I receive about the Government Pension Offset to help provide just that, so you can better plan for a successful retirement.

The Most Frequently Asked Questions on the Government Pension Offset

Here are the most common questions I receive on the GPO, how it works, and how it can impact your Social Security benefits:

Why does the GPO exist?
What if a retiree inherits their spouse’s non-covered pension?
What is the GPO last 60-month rule (formerly the “last day” rule)?
Can you just take out your pension in a lump sum and not worry about the GPO?
Do you need to tell the SSA if your pension has a cost of living adjustment?
How Do 401(k) and 403(b) Plans, 457 Accounts, and ORPs Factor into the GPO Rule?
Does the GPO apply to foreign pensions?

Let’s work through each question about the GPO one by one, to get you all the answers you need to feel more confident about managing this part of the Social Security rulebook.

Why Does the GPO Exist?

In the past, many people felt that workers who received a pension from a Federal, state, or local government job, and did not pay into Social Security via Social Security taxes, were taking advantage of the system.

And you can see why: Social Security spousal and survivors’ benefits are intended for beneficiaries who hadn’t worked and were financially dependent on a working spouse for income. Receiving both a government pension from a job as well as Social Security spousal or survivors’ benefits (without paying the associated payroll taxes) sure did seem like “double-dipping.”

Someone who earned income from a job covered by Social Security typically would not have received Social Security spousal or survivors’ benefits. Their own individual Social Security benefit would be higher based on the formulas used for determining benefits, and that’s what they would have received in lieu of spousal or survivors’ benefits.

By participating in a government job not covered by Social Security, though, some workers were able to earn a pension during their working years. Under the Social Security system at the time, they also qualified for a Social Security spousal or survivor benefit, as though they had never worked. To the Social Security Administration, having a non-covered job was the same as having never worked (and therefore, not earning a pension).

Thus, in the 1970s, there was an outcry and pushback against the system that allowed workers to receive both benefits. The Government Pension Offset was implemented to help correct this problem.

But over time, the system hasn’t always worked exactly as intended. The GPO can inadvertently punish public service workers like teachers and firefighters, which is why it’s extremely important for anyone with a history of government service to familiarize themselves with the GPO and how it could impact their benefits.

What If a Retiree Inherits a Spouse’s Non-Covered Pension?

You don’t only need to worry about your own benefits if the Government Pension Offset rule applies to you. It might also impact your spouse, too.

I hear many people wonder if they leave their pension payments to their spouse once they pass away, will the GPO then impact their surviving spouse’s Social Security benefit. It’s reasonable to ask if the GPO will go into effect even after you die if you name your spouse as the beneficiary on your pension from non-covered work.

Thankfully, the short answer is no – a surviving spouse’s own individual Social Security benefits would not be affected if the other spouse with the non-covered pension named them as a beneficiary on that pension.

The Social Security Administration addresses this issue in its manual. According to the SSA:

The Government Pension Offset (GPO) applies to a spouse’s Social Security benefit for any month the spouse receives a pension based upon his or her own government employment not covered under Social Security.

As long as your spouse doesn’t have non-covered pension benefits of their own, the GPO rule would not affect the income they could inherit from a non-covered pension that originally belonged to you.

What is the GPO Last 60 Month Rule?

The GPO Last 60 Month rule, which was formerly referred to as the “last day” rule, is the first approach to take if you don’t want the provision to impact your Social Security benefits.

The Last 60 Month rule helps you avoid being subjected to the Government Offset Pension rule if you meet the following criteria:

Work at a job where you contribute to Social Security for the last 60 months of employment, and
That job is covered by the same retirement plan

The Social Security Administration explicitly states the following about the last 60 month rule:

If at any time during the last 60 months of government service, the individual worked in non-covered employment under the retirement system that provides the pension, the individual’s spousal benefit will be subject to GPO. GPO will apply, with regard to that pension, even if the individual concurrently worked in another position with the same or a different employer covered by Social Security.

Here’s an example of how this works:

Dave worked for the Atlanta Independent School District for 30 years. Before retiring, however, he resigned from his position at Atlanta ISD and worked an additional 5 years at the Austin Independent School District.

Austin ISD participates in both Social Security and the Texas Teachers Retirement System (TRS). By working the last 60 months of his career in a job with covered income because it paid into the Social Security system, Dave will not be subject to the GPO rule when he files for Social Security benefits.

This is pretty simple to understand… but it’s fair to ask, how often does this happen? While the conditions required for the last-60-month rule may not often easily be met by non-educators, this strategy can be a viable option for workers in some school districts. Depending on your state, there may be a decent list of community colleges or school districts that participate in both Social Security and your state teacher’s retirement pension.

So it’s absolutely possible. The better question might be, would it be worth the hassle of a late-career change to exempt yourself from the GPO? Here are some numbers to help you decide for yourself:

Let’s assume that your spouse has a Social Security benefit of $2,000 per month at their full retirement age. If you can sidestep the GPO rule, you would be eligible for a spousal benefit of $1,000 per month at your full retirement age.

Assuming that Social Security has an average cost of living adjustment of 2% per year, and that your retirement lasts for 20 years, the spousal benefit would pay you $291,568 in lifetime benefit payments.

If your spouse dies, you’d also be eligible for a survivor benefit. Using the same cost of living and life expectancy number, that would be worth $583,136 in lifetime benefit payments.

Can You Take Out Your Pension in a Lump Sum to Avoid the GPO?

Can taking the lump sum option for your pension allow you to escape the GPO? In short, yes. You could completely withdraw from your pension plan. You’d withdraw your contributions and interest, and forfeit your future rights to the pension.

Just because you can do this, however, doesn’t mean it’s a good idea. Withdrawing your pension only for the sake of avoiding having the GPO impact your Social Security benefits might not make sense at all for your situation.

There are some circumstances where this could make sense, but you need to speak with a financial planner and Social Security expert to determine the potential tradeoffs and drawbacks. For many, being subject to the GPO is much better than cashing out their pension.

Here’s what the Social Security Administration says about this on their page titled Determining Pension Applicability and Pension Amount:

Withdrawals from a defined benefit plan, before or after eligibility for the pension, of only employee contributions plus any interest (i.e., none of the employer contributions are included in the withdrawal), and whereby the employee forfeits all rights to a pension, are not pensions for GPO purposes. This rule applies even if the employer paid the employee contributions for the employee (i.e., some employers may pay for the employee’s contribution).
Any other separation payment, withdrawal, or refund that consists of both employer and employee contributions from a defined benefit or defined contribution plan is a pension subject to GPO.

If you do pursue this strategy to avoid GPO, there is one major thing you need to make sure you do right: take only the amount you put into your pension plus interest. If the employer contribution is included in the withdrawal, you’ll still be subject to the GPO.

Do I Need to Tell the Social Security Administration About My Pension’s Cost of Living Adjustment??

Yes, you do need to report cost of living adjustments to the Social Security Administration if your pension includes this feature.

The GPO is calculated as a percentage of your pension. That means the corresponding amount of the reduction to your Social Security benefits will change as your pension increases over time to account for the cost of living adjustment.

Don’t be tempted to “forget” to tell the SSA, either. They may not notice right away, but Social Security will eventually catch the discrepancy. You don’t want to receive a nasty overpayment notice one day in the future.

(By the way, if you’ve already received a Notice of Overpayment, read my article on how to handle it.)

How Do 401(k) and 403(b) Plans, 457 Accounts, and ORPs Factor into the GPO Rule?

Many government employers offer supplemental retirement plans in addition to their pension plans. Specifically, there are workers in certain community colleges and universities who are given a choice between their state’s Teachers Retirement System (TRS) or an Optional Retirement Plan (ORP).

Certain higher education employees can opt out of their state’s TRS. Instead of participating, they can use a defined contribution plan that allows them to make their own contributions and get a match from their employer.

These plans generally vary on a state-by-state basis, so it’s important to understand the options that apply to you based on where you live.

Once you use a defined contribution plan, the dollars you contribute can be invested in a variety of ways, similar to 401(k) plans. This gives you more choice and freedom over how you save and invest for your retirement goals.

Even if you opt out of your state’s TRS, however, you may not be able to completely avoid the GPO. How distributions from defined contribution plans trigger your Social Security benefits to be subject to the GPO depends on how individual employers structure those plans.

Here’s what the Social Security Administration handbook says:

Payments from a defined benefit plan or defined contribution plan (e.g., 401(k), 403(b), or 457) based on earnings from non-covered government employment are pensions subject to GPO regardless of the source of contributions (employer only, employee only, or a combination of both), if the plan is the employee’s primary retirement plan. If the plan is a supplemental plan, the payments are subject to GPO when the plan payments contain employer or both employer and employee contributions.

Essentially, if the 403(b) or 457 is a supplemental plan and only contains a worker’s contributions, it will be subject to neither WEP nor the GPO reduction.

However, if the plan is a worker’s primary plan, or if it is a supplemental plan and only contains an employer’s contributions, it will trigger the GPO.

Does the GPO Apply to Foreign Pensions?

A foreign pension will not trigger the application of the GPO. What it does trigger, however, is another Social Security rule that can impact how much you receive in benefits: the Windfall Elimination Provision (WEP).

The GPO has a clear distinction of only being applied if an individual has a non-covered pension from government employment. By default, then, a foreign pension would not leave you subjected to the GPO’s rules.

The Social Security manual defines the term “government” clearly by saying:

For GPO purposes, Government means:

Federal – The United States Government, including military service

State – The 50 States, the District of Columbia, the Commonwealth of Puerto Rico, the U.S. Virgin Islands, Guam, American Samoa, and the Commonwealth of Northern Mariana Islands.

Local – A political subdivision including wholly owned instrumentalities, but not including interstate instrumentalities. For a description of political subdivision, see SL 30001.316.

The WEP, on the other hand, is applied to an individual with any non -covered pension. For more information on the WEP, see my article covering this in detail here.

Still Have Questions?

I have a few resources that may help you with questions on both the GPO and WEP. For starters, you should get your FREE copy of my latest guide: Top 10 Questions and Answers on the Windfall Elimination Provision. In this guide, I go over more detail on the WEP and answer questions like:

Can I avoid the WEP by taking a lump sum from my pension?
What about 457 accounts?
Does my pension affect my spouse’s Social Security?

Simply click this link to download today. http://www.devincarroll.me/top10WEPSSI

In addition, I’d highly encourage you to check out some of the additional resources I’ve created that will deepen your knowledge on the weird rules that apply to those with non covered pensions.

You should also consider joining the nearly 400,000 subscribers on my YouTube channel! This is where I break down the complex rules and help you figure out how to use them to your advantage.

And don’t leave without getting your FREE copy of my Social Security Cheat Sheet. The most important stuff from the 100,000 page website is all condensed down to just ONE PAGE! Get your FREE copy here.