Social Security
Congress Should Consider Revising the Government Pension Offset 'Loophole' Gao ID: GAO-03-498T February 27, 2003The Government Pension Offset (GPO) exemption was enacted in 1977 to equalize the treatment of workers covered by Social Security and those with government pensions not covered by Social Security. Congress asked GAO to (1) assess the extent to which individuals retiring from jobs not covered by Social Security may be transferring briefly to covered jobs in order to avoid the GPO, and (2) estimate the impact of such transfers on the Social Security Trust Fund.
Because no central data exists on use of the GPO exemption by individuals in approximately 2,300 state and local government retirement plans nationwide, GAO could not definitively confirm that this practice is occuring in states other than Texas and Georgia. In those two states, 4,819 individuals had performed work in Social Security-covered positions for short periods to qualify for the GPO last-day exemption. In Texas, teachers typically worked a single day in nontechnical positions covered by Social Security, such as clerical or janitorial positions. In Georgia, teachers generally agreed to work for approximately 1 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 individuals' retirement planning. For the cases GAO identified, increased long-term benefit payments from the Social Security Trust Fund could be $450 million over the long term and would likely rise further if use of the exemption grows in the states GAO visited and spreads to others. SSA officials acknowledged that use of the exemption might be possible in other state and local government retirement plans that include both those positions covered by Social Security and those not. The GPO "loophole" raises fairness and equity concerns for those receiving a Social Security pension and are currently subject to the spousal benefit offset. In the states we visited, individuals with a relatively minimal investment of work time and Social Security contributions can gain access to potentially many years of full Social Security spousal benefits. The last-day exemption could also have a more significant impact if the practice grows and begins to be adopted by other states and localities. Considering the potential for abuse, our report presented options for revising the GPO exemption, such as changing the last-day provision to a longer minimum time period or using a proportional approach based on the number of working years spent in covered and noncovered employment for determining the extent to which the GPO applies.
GAO-03-498T, Social Security: Congress Should Consider Revising the Government Pension Offset 'Loophole'
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United States General Accounting Office:
GAO:
Testimony:
Before the Subcommittee on Social Security, Committee on Ways and
Means, House of Representatives:
For Release on Delivery:
Expected at 10:00 a.m. EST:
Thursday, February 27, 2003:
Social Security:
Congress Should Consider Revising the Government Pension Offset
"Loophole"
Statement of Barbara D. Bovbjerg, Director:
Education, Workforce, and Income Security Issues:
GAO-03-498T:
Mr. Chairman and Members of the Subcommittee:
I am pleased to be here today to discuss Social Security‘s Government
Pension Offset (GPO) exemption. As you know, the GPO was enacted in
1977 to equalize the treatment of workers covered by Social Security and
those with government pensions not covered by Social Security. In short,
the GPO prevents workers from receiving a full Social Security spousal
benefit on top of a pension earned from government employment not
covered by Social Security.[Footnote 1] However, the law provides an
exemption from the GPO if an individual‘s last day of state/local
government employment is in a position that is covered by both Social
Security and their state/local pension system. In these cases, the GPO
will not apply, and Social Security spousal benefits will not be
reduced.
Last year, you asked us to (1) assess the extent to which individuals
retiring from jobs not covered by Social Security may be transferring
briefly to covered jobs in order to avoid the GPO, and (2) estimate the
impact of such transfers on the Social Security Trust Fund. To complete
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. We
also performed limited work with associations, researchers, and
retirement system officials in 28 states.[Footnote 2] Finally, we
performed audit work in Texas and Georgia, two of the states where we
identified use of the last-day exemption. On August 15, 2002, we
reported to you on the results of our work.[Footnote 3] Today I will
discuss the findings of our review.
In summary, because no central data exists on use of the GPO exemption
by individuals in approximately 2,300 state and local government
retirement plans nationwide, we could not definitively confirm that this
practice is occurring in states other than Texas and Georgia. In those
two states, 4,819 individuals had performed work in Social Security-
covered positions for short periods to qualify for the GPO last-day
exemption. In Texas, teachers typically worked a single day in
nonteaching positions covered by Social Security, such as clerical or
janitorial positions. In Georgia, teachers generally agreed to work for
approximately 1 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 individuals‘ retirement planning. For the cases
we identified, increased long-term benefit payments from the Social
Security Trust Fund could be about $450[Footnote 4] million over the
long term and would likely rise further if use of the exemption grows
in the states we visited and spreads to others. SSA officials
acknowledged that use of the exemption might be possible in other state
and local government retirement plans that include both those positions
covered by Social Security and those not.
The GPO ’loophole“ raises fairness and equity concerns for those
receiving a Social Security pension and are currently subject to the
spousal benefit offset. In the states we visited, individuals with a
relatively minimal investment of work time and Social Security
contributions can gain access to potentially many years of full Social
Security spousal benefits. The last-day exemption could also have a
more significant impact if the practice grows and begins to be adopted
by other states and localities. Considering the potential for abuse,
our report presented options for revising the GPO exemption, such as
changing the last-day provision to a longer minimum time period or
using a proportional approach based on the number of working years
spent in covered and noncovered employment for determining the extent
to which the GPO applies.
Background:
The Social Security Act requires that most workers be covered by Social
Security benefits. Workers contribute to the program via wage
deductions. State and local government workers were originally excluded
from Social Security.
Starting in the 1950s, state and local governments had the option of
selecting Social Security coverage for their employees or retaining
their noncovered status. In 1983, state and local governments in the
Social Security system were prohibited by law from opting out of it. Of
the workers in the roughly 2,300 separate state and local retirement
plans nationwide, about one-third are not covered by Social Security.
In addition to paying retirement and disability benefits to covered
workers, Social Security also generally pays benefits to spouses of
retired, disabled, or deceased workers. 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. In contrast, 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 creating the GPO,[Footnote 5] which
prevented workers from receiving a full spousal benefit on top of a
pension earned from noncovered government employment.[Footnote 6]
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 7] In these cases, the GPO will not be applied to the Social
Security spousal benefit.
Nationwide Extent of Transfers to Avoid the GPO Unknown, but Expected
to Grow:
While we could not definitively confirm the extent nationwide that
individuals are transferring positions to avoid the GPO, we found that
4,819 individuals in Texas and Georgia had performed work in Social
Security-covered positions for short periods to qualify for the GPO
last-day exemption.[Footnote 8] Use of the exemption may grow further
as the practice becomes more rapidly institutionalized and the aging
baby-boom generation begins to retire in larger numbers. 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.
Use of GPO Exemption in Texas is Growing:
Officials in Texas reported that 4,795 individuals at 31 schools have
used or plan to use last-day employment to take advantage of the GPO
exemption. In 2002, one-fourth (or 3,521) of all Texas public education
retirees took advantage of this exemption.
In most schools, teachers typically worked a single day in a nonteaching
position covered by Social Security to use the exemption.
Nearly all positions were nonteaching jobs, including clerical, food
service, or maintenance. Most of these employees were paid about $6 per
hour. At this rate, the Social Security contributions deducted from
their pay would total about $3 for the day. We estimate that the
average annual spousal benefit resulting from these last-day transfers
would be about $5,200.
School officials also reported that individuals are willing to travel
to take these jobs”noting one teacher who traveled 800 miles to use the
last-day provision. Some schools reported that they charge a processing
fee, ranging from $100-$500, to hire these workers. These fees are a
significant source of revenue”last year one school district collected
over $283,000 in fees.
Our work shows that use of the exemption in Texas has increased since
1990, which was the earliest use reported to us.
In one school district, for example, officials reported that use of the
exemption grew from one worker in 1996 to 1,050 in 2002. Another school
district that began offering last-day employment in 2002 had received
over 1,400 applications by June of that year from individuals seeking
to use the exemption.
Use of the exemption is likely to grow further, according to trends in
Texas teacher retirements and information from school officials.
There were about 14,000 teacher retirements in 2002, as opposed to
10,000 in 2000. At one university we visited, officials have scheduled
workdays for imminent retirees, through 2005, to work in covered
employment, an indication of the rapid institutionalization of this
practice. The GPO exemption is also becoming part of teachers‘ regular
retirement planning process as its availability and use is publicized
by teaching associations and financial planners (via Web sites,
newspapers, seminars, etc.) and by word-of-mouth. One association‘s Web
site we identified lists the names and telephone numbers of school
officials in counties covered by Social Security and how to contact
those officials for such work. A financial planner‘s Web site we
identified indicated that individuals who worked as little as 1 day
under a Social Security-covered position to quality for the GPO
exemption could earn $150,000 or more in benefits over their lifetime.
In Georgia, Workers Obtain GPO Exemption by Transferring Positions:
In Georgia, officials in one district reported that 24 individuals have
used or plan to use covered employment to take advantage of the GPO
exemption. Officials told us that teachers generally agreed to work for
approximately 1 year in another teaching position in a school district
covered by Social Security to use the GPO exemption. These officials
told us that they expect use of the exemption to increase as awareness
of it grows.
According to Georgia officials, their need to address a teacher shortage
outweighs the risk to individual schools of teachers leaving after 1
year. Officials in fast-growing school systems reported they needed to
hire teachers even if they only intended to teach for 1 year. However,
some schools reported that they have had teachers leave shortly after
being hired. For example, in one district, a teacher signed a 1-year
contract to teach but left after 61 days, a time sufficient to avoid
the spousal benefit reduction. In some of the applications for school
employment we reviewed, individuals explicitly indicated their desire
to work in a county covered by Social Security in order to obtain full
Social Security spousal benefits.
Transfers to Avoid the GPO May be Possible Nationwide:
Use of the GPO exemption might be possible in other plans nationwide.
SSA officials told us that some of the approximately 2,300 state and
local government retirement plans”where such plans contain Social
Security-covered and noncovered positions”may offer individuals the
opportunity to use the GPO exemption. Officials representing state and
local government retirement plans in other states across the country
also told us that their plans allow covered and noncovered Social
Security positions, making it possible for workers to avoid the GPO by
transferring from one type of position to the other. For example:
* An official in a midwestern state whose plan covers all state
government employees, told us that it is possible for law enforcement
personnel (noncovered) to take a covered job in the state insurance
bureau (covered) just before retiring.
* In a southern state with a statewide retirement plan for school
employees, teachers and other school professionals (noncovered) can
potentially transfer to a job in the school cafeteria (covered) to
avoid the GPO.
* A retirement system official from a north central state reported
hearing of a few cases where teachers had taken advantage of the
exemption by transferring to jobs in other school districts covered by
Social Security.
* Finally, in a western state with a statewide retirement plan, workers
could move from one government agency (noncovered) to a position in
another agency (covered).
Cost of Transfers to the Social Security Trust Fund is Growing, but
Options Exist to Address Potential Abuse:
The transfers to avoid the GPO we identified in Texas and Georgia could
increase long-term benefit payments from the Social Security Trust Fund
by about $450 million.[Footnote 9] We calculated this figure by
multiplying the number of last-day cases reported in Texas and Georgia
(4,819) by SSA data on the average annual offset amount ($4,800) and
the average retirees life expectancy upon receipt of spousal benefits
(19.4 years). We believe that these estimated payments would likely
increase as use of the exemption grows.
Our prior report identified two options for addressing potential abuses
of the GPO exemption. The first option, as proposed in H.R. 743, is to
change the last-day provision to a longer minimum time period. This
option would require only small changes to administer and would be less
burdensome than other methods for SSA to administer. Also, this option
has precedent. Legislation in 1987 required federal employees
transferring between two federal retirement systems, the Civil Service
Retirement System (CSRS) and Federal Employees Retirement System
(FERS), to remain in FERS for 5 years before they were exempt from the
GPO. We found that most of the jobs in Texas last for about 1 day, so
extending the time period might eliminate many of the exemption users
in Texas.
The second option our report identified is to use a proportional
approach to determine the extent to which the GPO applies. Under this
option, employees who have spent a certain proportion of their working
career in a position covered by Social Security could be exempt from
the GPO. This 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 using 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.
Conclusions:
The GPO ’loophole“ raises fairness and equity concerns for those
receiving a Social Security pension and currently subject to an offset
of their spousal Social Security benefits. The exemption allows a
select group of individuals with a relatively small investment of work
time and only minimal Social Security contributions to gain access to
potentially many years of full Social Security spousal benefits. The
practice of providing full spousal benefits to individuals who receive
government pensions but who made only nominal contributions to the
Social Security system also runs counter to the nation‘s efforts to
address the solvency and sustainability of the Social Security program.
Based on the number of people reported to be using the loophole in Texas
and Georgia this year, the exemption could cost the Trust Fund hundreds
of millions of dollars. While this currently represents a relatively
small percentage of the Social Security Trust Fund, costs could increase
significantly if the practice grows and begins to be adopted by other
states and localities.
Considering the potential for abuse of the last-day exemption and the
likelihood for its increased use, we believe timely action is needed.
Accordingly, our August 2002 report includes 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.
Mr. Chairman, this concludes my prepared statement, I will be happy to
respond to any questions you or other members of the Subcommittee may
have.
[End of testimony]
GAO Contributions and Acknowledgments:
For information regarding this testimony, please contact Barbara D.
Bovbjerg, Director, Education, Workforce, and Income Security Issues, on
(202) 512-7215. Individuals who made key contributions to this testimony
include Daniel Bertoni, Patrick DiBattista, Patricia M. Bundy, Jamila L.
Jones, Daniel A. Schwimer, Anthony J. Wysocki, and Jill D. Yost.
Related GAO Products:
Social Security Administration: Revision to the Government Pension
Offset Exemption Should Be Considered. GAO-02-950. Washington, D.C.:
August 15, 2002.
Social Security Reform: Experience of the Alternate Plans in Texas.
GAO/HEHS-99-31, Washington, D.C.: February 26, 1999.
Social Security: Implications of Extending Mandatory Coverage to State
and Local Employees. GAO/HEHS-98-196. Washington, D.C.: August 18,
1998.
Social Security: Better Payment Controls for Benefit Reduction
Provisions Could Save Millions. GAO/HEHS-98-76. Washington, D.C.:
April 30, 1998.
Federal Workforce: Effects of Public Pension Offset on Social Security
Benefits of Federal Retirees. GAO/GGD-88-73. Washington, D.C.: April 27,
1988.
[End of section]
Footnotes:
[1] Currently the reduction in spousal benefits is two-thirds of the
amount of their public pension.
[2] States were selected either because they were authorized to operate
retirement systems with both covered and noncovered positions or
because their state and local government plans had a mix of covered and
noncovered positions, thus offering the greatest potential for use of
the last-day exemption.
[3] See U.S. General Accounting Office, Social Security Administration:
Revision to the Government Pension Offset Exemption Should Be
Considered, GAO-02-950 (Washington, D.C.: Aug. 15, 2002).
[4] This estimate 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).
[5] Public Law 95-216, Section 334 (1977).
[6] Currently, the reduction in spousal benefits is two-thirds of the
amount of their public pension.
[7] 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).
[8] 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.
[9] 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.
[End of section]
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