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A reader from Colorado asks for clarification on a couple of questions regarding the effects of the Government Pension Offset (GPO) on Social Security benefits.
“I retired in May 2022 and am now 66. I do not have enough Social Security credits to qualify for my own benefit, but my wife (age 70) does. Two questions regarding the Government Pension Offset (GPO): First, as a long-time local government employee, I have a 401(a) account and a 457 account. Neither account has a defined benefit (or typical monthly payment) because they are both defined contribution plans. Do both factor into calculating the GPO, or only one? Second, because my 'pension' has no lifetime income stream, what is the Social Security formula for translating the appropriate account balance(s) to a monthly or annual pension equivalent to define the GPO impact on any Social Security spousal or survivor benefits due to me? I am beginning to receive a full spousal benefit based on my wife's record, which I expect will continue free of GPO until I take money from a GPO-relevant account.”
First, let's look at the basics of GPO, or the Government Pension Offset. You have a non-covered pension – your 401(a) – that replaces Social Security. Your employer elected to participate in that instead of Social Security. While you worked for that employer, neither you nor your employer contributed money to Social Security; instead, both contributed to this 401(a).
The GPO essentially says that if, in addition to a non-covered pension, you are eligible to receive a Social Security spousal or survivor benefit, they will adjust that spousal or survivor benefit by reducing it in an amount equal to $2 for every $3 of your other pension.
I don't want to go too deeply into the details of GPO, such as its fairness, as that could be a whole new article. You're just asking if and how they will apply the GPO formula to your Social Security benefits, especially considering your pension does not have a monthly defined benefit. You have a lump sum, as you'd have with a 401(k).
First, a GPO only starts when you become eligible for your non-covered pension, which is when you take your first dollar from that account. GPO will not affect your spousal benefit (or potentially a survivor benefit) until you access that first dollar. Your next question is how they are going to apply GPO.
Only your 401(a) will be used to determine the GPO, not your 457 account, because Social Security only uses the primary account or pension that was the substitute for Social Security. Your 457 is considered a secondary or additional retirement plan you're participating in, not a replacement for Social Security. So, only the 401(a) will be considered.
Next, since your 401(a) only has a lumpsum amount and not a monthly payout amount, Social Security will determine a monthly equivalent amount in one of two ways:
The pension-paying agency will often prorate the lump sum to determine a monthly equivalent amount, which Social Security will use in its calculations.
If the pension-paying agency does not determine an amount, you will prorate the lump sum according to a table provided by Social Security.
Use Social Security's "Program Operations Manual System (POMS)" to calculate a monthly equivalent amount. Googling "POMS" and the name of the relevant table, "Determining Pension Applicability and Pension Amount," will take you to a document that describes the process. A table called "Table of actuarial values" appears in that document.
The first column lists "Age on the Lump Sum Date (years)," which is your age when you access the pension. Everything related to your GPO offsets will be keyed off that factor.
The second column provides the "Actuarial Value Lump Sum Award Date 06/01/2021 or Later," indicating that the table was updated in June 2021. (This is relevant to you as you will be accessing the account after that date.) The numbers in that column represent a 'divisor' – or a number you will use to divide the amount of your lump sum to determine the monthly equivalent amount.
Let's walk through an example. We'll pretend you will access your 401(a) account at age 68. Find 68 in the first column and note the related divisor: 132.6. Next, take the lumpsum value of your 401(a) and divide it by 132.6. That will give you the monthly equivalent amount that Social Security will use to determine the GPO offsets of your spousal benefit or (ultimately) your survivor benefit if your wife predeceases you. That's how they transform the lumpsum amount into a reasonably equivalent monthly amount.
Here's a fun fact related to GPO. The divisor is based on life expectancy, so if you live long enough, you'll eventually have drained the 401(a) of its lump sum. At that point, it's conceivable that Social Security will stop applying GPO because you've received all the benefits of the distributions from that 401(a).
That was possible when I last looked into that aspect of GPO, but I am not sure recent legislation hasn't changed that possibility. You'll want to confirm if you think it will apply to you.
Reviewing the answers to your questions:
Yes, you will be affected by GPO.
Only the 401(a) account will apply, not the 457 account.
Social Security will use either the monthly equivalent supplied by the pension-paying agency or the figure generated using the table published in Social Security's operations manual.
If you'd rather not look it up, you can call the Social Security Administration and have the telephone representative do the calculation. They can tell you the GPO offset based on your 401(a) balance.