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Last month, Advisor Perspectives published my article warning advisors about a quirk in the Social Security benefits formula that has short changed seniors subject to the Government Provision Offset (GPO) by as much as $25,000 in lifetime benefits.
The issue is that Social Security applies a substantially higher penalty on people subject to GPO for claiming widow(er) and spousal benefits prior to normal retirement age.
The latest news is not good for advisors who may have clients subject to the GPO. While the GPO affects a relatively small number of clients, the potential losses are substantial and at times life changing for your clients. The size of the losses means that advisers dealing with those in or approaching retirement must understand how the rule works.
Who is affected?
The GPO applies widow(er) or spousal benefits claimed by people who have earned a pension working for employers that do not participate in Social Security. Generally, clients who have worked as state or local employees, such as teachers, police, or firemen, are more likely to be affected. (Learn about the GPO here.)
The problem is simple. If one of those clients claims spousal or widow(er) benefits prior to normal retirement age, the system generates an outsized GPO offset that is completely inconsistent with the intent of the GPO.
This aspect of the GPO is well known by the Social Security administration, and there is no plan to fix the formula. As a result, advisors need to think about this quirk in terms of both past and future clients.
What to do about past clients
According to the Office of Special Counsel, widow(er)s identified in the audit have been notified by letter that they are allowed to re-file and claim lost benefits. While that sounds like a solution, advisors still need to contact clients who claimed these benefits prior to normal retirement age because your client may not get notified. Consider the following:
- There is no assurance that the letter was received by your client.
- The audit undersized the number of people affected and understated the impact of the losses. It is possible that your client was not sent a letter.
- Some of your clients may not have filed for benefits because of being told that the GPO meant that they were not entitled.
All these clients should be told to consider the option to withdraw their application and re-file.
What to do going forward
The audit assumed that the decision to claim benefits rested solely on the claimant. If the client fails to understand how these rules interact, they are at fault. This puts the responsibility on the advisor to make sure that the client knows the rules.
If advisors use an outside service to help clients assess claiming strategies, make sure that the experts upon whom they place the clients trust are familiar with GPO and the audit itself.
Clients approaching retirement should contact their local Social Security office to determine whether they are subject to the GPO. Some people do not find out until their checks are reduced by the GPO until the check arrives.
For clients subject to the GPO, claiming benefits before normal retirement age is not wise. The outsized GPO offset may even ensure that the beneficiary never collects benefits.
Brenton Smith writes on the issue of Social Security reform with work appearing in Barron's, Forbes, MarketWatch, TheHill, USAToday, and more. He can be reached at [email protected].
Read more articles by Brenton Smith