Social Security Administration
Revision to the Government Pension Offset Exemption Should Be Reconsidered Gao ID: GAO-02-950 August 15, 2002Social Security benefits are payable to the spouses of retired, disabled, or deceased workers. The benefits often provide income to wives and husbands who have little or no Social Security benefits of their own. Until 1977, workers receiving pensions from government positions not covered by Social Security could receive their full pension benefit and their full spousal benefits as if they were nonworking spouses. Since then, a government pension offset has been in effect to equalize the treatment of workers covered by Social Security and those with noncovered government benefits. This report was prompted by a referral to GAO's Fraudnet that questioned a practice in which individuals in Texas were transferring to Social Security-covered positions for one day to avoid the offset. GAO found no central data on the use of the offset exemption by individuals, and time constraints did not permit in-depth audit work on the 2,300 state and local government retirement plans. However, GAO did establish that, as of June 2002, more than 4,800 persons in Texas and Georgia worked for brief periods in jobs covered by Social Security to qualify for the "last-day exemption." GAO estimates that the long-term Social Security payments to these individuals could be as high as $450 million. Such abuses of the offset exemption could be prevented by (1) changing the last-day provision to a longer minimum time period or (2) using a proportional approach based on the number of working years as a government employee spent in covered and noncovered employment to determine the extent to which the government pension offset applies.
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Director: Team: Phone:GAO-02-950, Social Security Administration: Revision to the Government Pension Offset Exemption Should Be Reconsidered
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Report to the Chairman, Subcommittee on Social Security, Committee on
Ways and Means, House of Representatives:
United States General Accounting Office:
GAO:
August 2002:
Social Security Administration:
Revision to the Government Pension Offset Exemption Should Be
Considered:
GAO-02-950:
Contents:
Letter:
Matter for Congressional Consideration:
Agency Comments:
Appendix:
Abbreviations:
CSRS: Civil Service Retirement System:
FERS: Federal Employees Retirement System:
GPO: Government Pension Offset:
SSA: Social Security Administration:
August 15, 2002:
The Honorable E. Clay Shaw
Chairman
Subcommittee on Social Security
Committee on Ways and Means
House of Representatives:
Dear Mr. Chairman:
This report addresses your request for information on the Government
Pension Offset (GPO) exemption. Generally, Social Security benefits are
payable to the spouses of retired, disabled, or deceased workers
covered by Social Security. These benefits often provide income to
wives and husbands who have little or no Social Security benefits of
their own. If both spouses worked in positions covered by Social
Security, each may not receive both the benefits earned as a worker and
the full spousal benefit; rather the worker receives the higher amount
of the two. However, until 1977, workers receiving pensions from
government positions not covered by Social Security could receive their
full pension benefit and their full Social Security spousal benefits as
if they were nonworking spouses. At that time, legislation was
enacted[Footnote 1] creating a GPO, to equalize the treatment of
workers covered by Social Security and those with noncovered government
pensions. The GPO prevented workers from receiving a full spousal
benefit on top of a pension earned from noncovered government
employment.[Footnote 2] However, the law provides an exemption from the
GPO if an individual‘s last day of state/local employment is in a
position that is covered by both Social Security and the state/local
government‘s pension system.[Footnote 3] In these cases, the GPO will
not be applied to the Social Security spousal benefit. The intent of
the ’last-day“ exemption is unclear in the legislation.
Specifically, you asked us to (1) assess the extent to which
individuals retiring from jobs not covered by Social Security may be
transferring briefly to jobs covered by Social Security in order to
avoid the GPO,
(2) estimate the impact of such transfers on the Social Security Trust
Fund, and (3) identify options for addressing potential abuses of the
last-day exemption. On July 9, 2002, we briefed your staff on the
results of our work. This report formally conveys the final version of
the document used at that briefing.
This review originated from a referral to GAO‘s FraudNET questioning a
practice in Texas where individuals were transferring to Social
Security-covered positions for one-day to avoid the GPO.[Footnote 4] To
perform our work we first reviewed the GPO‘s legislative history and
government reports documenting the purpose of the offset and the Social
Security Administration‘s (SSA) policies and procedures for
administering it. There is no central data on use of the GPO exemption
by individuals and time constraints did not permit in-depth audit work
on the approximately 2,300 state and local government retirement plans
nationwide. Therefore, to assess the extent of these job transfers, we
performed limited work with associations, researchers, and retirement
system officials in 28 states. We selected these states either because
they were authorized to operate retirement systems with both covered
and noncovered positions or because their state or local government
plans had a mix of covered and noncovered positions, thus offering the
greatest potential for use of the last-day exemption. We also
interviewed and obtained documentation from SSA headquarters and
regional officials; and other federal officials knowledgeable about the
subject matter, such as the Congressional Budget Office and the
Internal Revenue Service. Finally, we visited and performed audit work
in Texas and Georgia, two of the states where we identified use of the
last-day exemption. We conducted our work from April through June 2002
in accordance with generally accepted government auditing standards.
Given our time constraints we could not definitively confirm that this
practice is occurring in other states. However, we were able to
establish that in Texas and Georgia 4,819 individuals as of June 2002
performed work in Social Security covered positions for short periods
to qualify for the GPO last-day exemption.[Footnote 5] Texas officials
reported 4,795 individuals; Georgia officials reported an estimated 24
cases. SSA officials also acknowledged that use of the exemption might
be possible in some of the approximately 2,300 state and local
government retirement plans in other states where such plans contain
Social Security covered and noncovered positions. In Texas, teachers
typically worked a single day in a nonteaching position covered by
Social Security, such as a clerical or janitorial position. Based on an
hourly wage of about $6, these individuals in Texas typically paid a
total of $3 in Social Security taxes. In Georgia, teachers generally
agreed to work for approximately one year in another teaching position
in a school district covered by Social Security. Officials in both
states indicated that use of the exemption would likely continue to
grow as awareness increases and it becomes part of individual‘s
retirement planning.
For the cases we identified in Texas and Georgia, increased long-term
benefit payments from the Social Security Trust Fund could be about
$450 million.[Footnote 6] This figure was calculated by multiplying the
number of last-day cases reported in Texas and Georgia (4,819) by SSA
data on average annual offset amount ($4,800) and the average life
expectancy upon receipt of spousal benefits (19.4 years). These
estimated payments would likely increase as use of the exemption grows.
Options for addressing potential abuses of the GPO exemption include
(1) changing the last day provision to a longer minimum time period or
(2) using a proportional approach based on the number of working years
as a government employee spent in covered and noncovered employment for
determining the extent to which the GPO applies. The first option would
require only small changes to administer and has precedent in 1987
legislation that required federal employees who transferred from the
Civil Service Retirement System (CSRS) to the Federal Employees
Retirement System (FERS) to remain in FERS for 5 years before
retirement to be exempt from the GPO. The second option may represent a
more calibrated approach to determining benefits for individuals who
have made contributions to the Social Security system for an extended
period of their working years. However, SSA has noted that a
proportional approach would take time to design and would be
administratively burdensome to implement, given the lack of complete
and reliable data on noncovered Social Security employment.
The GPO ’loophole“ raises fairness and equity concerns for those
receiving a Social Security pension and are currently subject to an
offset of their spousal Social Security benefits. In the states we
visited, individuals with a relatively small investment of work time
and only minimal Social Security contributions can gain access to
potentially many years of full Social Security spousal benefits by
using the GPO exemption. Also, providing full spousal benefits to
individuals who receive government pensions and made only nominal
contributions to the Social Security system runs counter to the
nation‘s efforts to address the solvency and sustainability of the
Social Security program. Finally, the last-day exemption could have a
more significant impact if the practice grows and begins to be adopted
by other states and localities.
Matter for Congressional Consideration:
Considering the potential for abuse of the last-day exemption and the
likelihood for its increased use, we believe timely action is needed.
We are making a matter for congressional consideration that the last-
day GPO exemption be revised to provide for a longer minimum time
period. This action would provide an immediate ’fix“ to address
possible abuses of the GPO exemption identified in our review.
Agency Comments:
We provided a draft of this briefing to SSA officials for comment on
July 3, 2002. On July 8, 2002, SSA provided oral comments on our draft
briefing. SSA generally agreed with our briefing‘s findings and
provided several technical comments, which we incorporated where
appropriate. We also provided a draft of this report to the
Commissioner of Social Security for comment. On August 7, 2002, we
obtained written comments on our draft report from SSA. SSA generally
agreed with our report‘s findings and provided several technical
comments, which we incorporated where appropriate.
We are sending copies of this report to relevant congressional
committees and other interested parties and will make copies available
to others upon request. In addition, the report will be available at no
charge on the GAO Web site at http://www.gao.gov.
If you or your staff have any questions about this report, please
contact me on (202) 512-7215 or Daniel Bertoni on (202) 512-5988.
Patricia M. Bundy, Jamila L. Jones, Daniel A. Schwimer, Anthony J.
Wysocki, and Jill D. Yost also made key contributions to this report.
Sincerely yours,
Barbara D. Bovbjerg
Director, Education, Workforce,
and Income Security Issues:
Signed by Barbara D. Bovbjerg:
[End of section]
Appendix:
[See PDF for image]
[End of section]
FOOTNOTES
[1] Public Law 95-216, Section 334 (1977).
[2] Currently, the reduction in spousal benefits is two-thirds of the
amount of their public pension.
[3] Exemption due to ’The Last Day of Employment“ Covered Under Social
Security - State/Local or Military Service Pensions (SSA‘s Program
Operations Manual System, GN 02608.102).
[4] FraudNET is a service maintained by GAO‘s Office of Special
Investigations. GAO subsequently determined that use of the GPO last-
day exemption is permitted under the law.
[5] Technically, individuals could have used this exemption since its
passage in 1977. However, nearly all of the transfers we identified in
Texas and Georgia occurred in the last several years.
[6] This estimate may over/under estimate costs due to the use of
averages, the exclusion of inflation/cost-of-living/net present value
adjustments, lost investment earnings by the Trust Funds, and other
factors that may affect the receipt of spousal benefits.
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