Social Security
Issues Relating to Noncoverage of Public Employees Gao ID: GAO-03-710T May 1, 2003Social Security covers about 96 percent of all US workers; the vast majority of the rest are state, local, and federal government employees. While these noncovered workers do not pay Social Security taxes on their government earnings, they may still be eligible for Social Security benefits. This poses difficult issues of fairness, and Social Security has provisions that attempt to address those issues, but critics contend these provisions are themselves often unfair. Congress asked GAO to discuss these provisions as well as the implications of mandatory coverage for public employees.
Social Security's provisions regarding public employees are rooted in the fact that about one-fourth of them do not pay Social Security taxes on the earnings from their government jobs, for various historical reasons. Even though noncovered employees may have many years of earnings on which they do not pay Social Security taxes, they can still be eligible for Social Security benefits based on their spouses' or their own earnings in covered employment. To address the issues that arise with noncovered public employees, Social Security has two provisions--the Government Pension Offset (GPO), which affects spouse and survivor benefits, and the Windfall Elimination Provision (WEP), which affects retired worker benefits. Both provisions reduce Social Security benefits for those who receive noncovered pension benefits. Both provisions also depend on having complete and accurate information on receipt of such noncovered pension benefits. However, such information is not available for many state and local pension plans, even though it is for federal pension benefits. As a result, GPO and WEP are not applied consistently for all noncovered pension recipients. In addition to the administrative challenges, these provisions are viewed by some as confusing and unfair, and a number of proposals have been offered to either revise or eliminate GPO and WEP. Such actions, while they may reduce confusion among affected workers, would increase the long-range Social Security trust fund deficit and could create fairness issues for workers who have contributed to Social Security throughout their working lifetimes. Making coverage mandatory has been proposed to help address the program's financing problems, and doing so could ultimately eliminate the need for the GPO and the WEP. According to Social Security actuaries, mandatory coverage would reduce the 75-year actuarial deficit by 10 percent. However, to provide for the same level of retirement income, mandating coverage would increase costs for the state and local governments that would sponsor the plans. Moreover, GPO and WEP would still be needed for many years to come even though they would become obsolete in the long run.
RecommendationsOur recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.
Director: Team: Phone:GAO-03-710T, Social Security: Issues Relating to Noncoverage of Public Employees
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Testimony:
Before the Subcommittee on Social Security, Committee on Ways and
Means, House of Representatives:
United States General Accounting Office:
GAO:
For Release on Delivery Expected at 10:00 a.m. EDT:
Thursday, May 1, 2003:
SOCIAL SECURITY:
Issues Relating to Noncoverage of Public Employees:
Statement of Barbara D. Bovbjerg, Director
Education, Workforce, and Income Security Issues:
GAO-03-710T:
GAO Highlights:
Highlights of GAO-03-710T, a testimony before the Subcommittee on
Social Security, Committee on Ways and Means, House of Representatives
Why GAO Did This Study:
Social Security covers about 96 percent of all US workers; the vast
majority of the rest are state, local, and federal government
employees. While these noncovered workers do not pay Social Security
taxes on their government earnings, they may still be eligible for
Social Security benefits. This poses difficult issues of fairness, and
Social Security has provisions that attempt to address those issues,
but critics contend these provisions are themselves often unfair. The
Subcommittee asked GAO to discuss these provisions as well as the
implications of mandatory coverage for public employees.
What GAO Found:
Social Security‘s provisions regarding public employees are rooted in
the fact that about one-fourth of them do not pay Social Security taxes
on the earnings from their government jobs, for various historical
reasons. Even though noncovered employees may have many years of
earnings on which they do not pay Social Security taxes, they can still
be eligible for Social Security benefits based on their spouses‘ or
their own earnings in covered employment.
To address the issues that arise with noncovered public employees,
Social Security has two provisions”the Government Pension Offset
(GPO), which affects spouse and survivor benefits, and the Windfall
Elimination Provision (WEP), which affects retired worker benefits.
Both provisions reduce Social Security benefits for those who receive
noncovered pension benefits. Both provisions also depend on having
complete and accurate information on receipt of such noncovered pension
benefits. However, such information is not available for many state
and local pension plans, even though it is for federal pension
benefits. As a result, GPO and WEP are not applied consistently for all
noncovered pension recipients. In addition to the administrative
challenges, these provisions are viewed by some as confusing and
unfair, and a number of proposals have been offered to either revise or
eliminate GPO and WEP. Such actions, while they may reduce confusion
among affected workers, would increase the long-range Social Security
trust fund deficit and could create fairness issues for workers who
have contributed to Social Security throughout their working
lifetimes.
Making coverage mandatory has been proposed to help address the
program‘s financing problems, and doing so could ultimately eliminate
the need for the GPO and the WEP. According to Social Security
actuaries, mandatory coverage would reduce the 75-year actuarial
deficit by 10 percent. However, to provide for the same level of
retirement income, mandating coverage would increase costs for the
state and local governments that would sponsor the plans. Moreover,
GPO and WEP would still be needed for many years to come even though
they would become obsolete in the long run.
What GAO Recommends:
GAO has previously recommended that the Internal Revenue Service (IRS)
provide for complete and accurate reporting of noncovered pensions,
but IRS has responded that it lacks the necessary authority from the
Congress. GAO therefore takes this opportunity to bring the matter to
the attention of the Congress for its consideration. To facilitate
complete and accurate reporting of government pension income, the
Congress should consider giving IRS the authority to collect this
information, which could perhaps be accomplished through a simple
modification to a single form.
www.gao.gov/cgi-bin/getrpt?GAO-03-710T.
To view the full report, including the scope
and methodology, click on the link above.
For more information, contact Barbara D. Bovbjerg at (202) 512-7215 or
bovbjergbj@gao.gov.
[End of section]
Mr. Chairman and Members of the Subcommittee:
I am pleased to be here today to discuss Social Security provisions
affecting public employees. Social Security covers about 96 percent of
all U.S. workers; the vast majority of the rest are state, local, and
federal government employees. While these noncovered workers do not pay
Social Security taxes on their government earnings, they may still be
eligible for Social Security benefits. This poses difficult issues of
fairness, and Social Security has provisions that attempt to address
those issues. However, these provisions have been difficult to
administer. They have also been a source of confusion and frustration
for the workers they affect.
I hope I can help clarify and provide some perspective on the complex
relationship between Social Security and public employees. Today, I
will discuss Social Security's coverage of public employees, Social
Security's provisions affecting noncovered public employees, and the
potential implications of mandatory coverage of public employees. My
testimony is based on a body of work we have published over the past
several years.[Footnote 1]
In summary, Social Security's provisions regarding public employees are
rooted in the fact that about one-fourth of them do not pay Social
Security taxes on the earnings from their government jobs, for various
historical reasons. Even though noncovered employees may have many
years of earnings on which they do not pay Social Security taxes, they
can still be eligible for Social Security benefits based on their
spouses' or their own earnings in covered employment. To address the
fairness issues that arise with noncovered public employees, Social
Security has two provisions--the Government Pension Offset (GPO), which
affects spouse and survivor benefits, and the Windfall Elimination
Provision (WEP), which affects retired worker benefits. Both provisions
reduce Social Security benefits for those who receive noncovered
pension benefits, and both provisions also depend on having complete
and accurate information on receipt of such noncovered pension
benefits. However, such information is not available for many state and
local pension plans, even though it is for federal pension benefits. As
a result, GPO and WEP are not applied consistently for all noncovered
pension recipients. We have made recommendations to improve the
availability and tracking of key information, and in the federal case,
the implementation of our recommendations has saved hundreds of
millions of dollars. However, congressional action appears to be needed
in this area with respect to state and local government pensions. At
the same time, a number of proposals have been offered to either revise
or eliminate GPO and WEP. While we have not analyzed such proposals, we
believe it is important to consider both the costs and fairness issues
they raise.
Aside from the issues surrounding GPO and WEP, another aspect of the
relationship between Social Security and public employees is the
question of mandatory coverage. Making coverage mandatory has been
proposed to help address the program's financing problems. According to
Social Security actuaries, doing so would reduce the 75-year actuarial
deficit by 10 percent. Mandatory coverage could also enhance inflation-
protection, pension portability, and dependent benefits for the
affected beneficiaries, in many cases. However, to provide for the same
level of retirement income, mandatory coverage could increase costs for
the state and local governments that would sponsor the plans. Moreover,
the GPO and WEP would continue to apply for many years to come even
though they would become obsolete in the long run.
Background:
Social Security provides retirement, disability, and survivor benefits
to insured workers and their dependents. Insured workers are eligible
for reduced benefits at age 62 and full retirement benefits between age
65 and 67, depending on their year of birth.[Footnote 2] Social
Security retirement benefits are based on the worker's age and career
earnings, are fully indexed for inflation after retirement, and replace
a relatively higher proportion of wages for career low-wage earners.
Social Security's primary source of revenue is the Old Age, Survivors,
and Disability Insurance (OASDI) portion of the payroll tax paid by
employers and employees. The OASDI payroll tax is 6.2 percent of
earnings each for employers and employees, up to an established
maximum.
One of Social Security's most fundamental principles is that benefits
reflect the earnings on which workers have paid taxes. Social Security
provides benefits that workers have earned to some degree because of
their contributions and those of their employers. At the same time,
Social Security helps ensure that its beneficiaries have adequate
incomes and do not have to depend on welfare. Toward this end, Social
Security's benefit provisions redistribute income in a variety of ways-
-from those with higher lifetime earnings to those with lower ones,
from those without dependents to those with dependents, from single
earners and two-earner couples to one-earner couples, and from those
who do not live very long to those who do. These effects result from
the program's focus on helping ensure adequate incomes. Such effects
depend to a great degree on the universal and compulsory nature of the
program.
According to the Social Security trustees' 2003 intermediate, or best-
estimate, assumptions, Social Security's cash flow is expected to turn
negative in 2018. In addition, all of the accumulated Treasury
obligations held by the trust funds are expected to be exhausted by
2042. Social Security's long-term financing shortfall stems primarily
from the fact that people are living longer. As a result, the number of
workers paying into the system for each beneficiary has been falling
and is projected to decline from 3.3 today to about 2 by 2030.
Reductions in promised benefits and/or increases in program revenues
will be needed to restore the long-term solvency and sustainability of
the program.
About One-Fourth of Public Employees Are Not Covered by Social
Security:
About one-fourth of public employees do not pay Social Security taxes
on the earnings from their government jobs. Historically, Social
Security did not require coverage of government employees because they
had their own retirement systems, and there was concern over the
question of the federal government's right to impose a tax on state
governments. However, virtually all other workers are now covered,
including the remaining three-fourths of public employees.
The 1935 Social Security Act mandated coverage for most workers in
commerce and industry, which at that time comprised about 60 percent of
the workforce. Subsequently, the Congress extended mandatory Social
Security coverage to most of the excluded groups, including state and
local employees not covered by a public pension plan. The Congress also
extended voluntary coverage to state and local employees covered by
public pension plans. Since 1983, however, public employers have not
been permitted to withdraw from the program once they are covered.
Also, in 1983, the Congress extended mandatory coverage to newly hired
federal workers.
The Social Security Administration (SSA) estimates that 5.25 million
state and local government employees, excluding students and election
workers, are not covered by Social Security. SSA also estimates that
annual wages for these noncovered employees totaled about $171 billion
in 2002. In addition, 1 million federal employees hired before 1984 are
also not covered. Seven states--California, Colorado, Illinois,
Louisiana, Massachusetts, Ohio, and Texas--account for more than 75
percent of the noncovered payroll.
Most full-time public employees participate in defined benefit pension
plans. Minimum retirement ages for full benefits vary; however, many
state and local employees can retire with full benefits at age 55 with
30 years of service. Retirement benefits also vary, but they are
usually based on a specified benefit rate for each year of service and
the member's final average salary over a specified time period, usually
3 years. For example, plans with a 2-percent rate replace 60 percent of
a member's final average salary after 30 years of service. In addition
to retirement benefits, a 1994 U.S. Department of Labor survey found
that all members have a survivor annuity option, 91 percent have
disability benefits, and 62 percent receive some cost-of-living
increases after retirement. In addition, in recent years, the number of
defined-contribution plans, such as 401(k) plans and the Thrift Savings
Plan for federal employees, has been growing and becoming a relatively
more common way for employers to offer pension plans; public employers
are no exception to this trend.
Even though noncovered employees may have many years of earnings on
which they do not pay Social Security taxes, they can still be eligible
for Social Security benefits based on their spouses' or their own
earnings in covered employment. SSA estimates that 95 percent of
noncovered state and local employees become entitled to Social Security
as workers, spouses, or dependents. Their noncovered status complicates
the program's ability to target benefits in the ways it is intended to
do.
Provisions Seek Fairness but Pose Administrative Challenges:
To address the fairness issues that arise with noncovered public
employees, Social Security has two provisions--GPO, which addresses
spouse and survivor benefits and WEP, which addresses retired worker
benefits. Both provisions depend on having complete and accurate
information that has proven difficult to get. Also, both provisions are
a source of confusion and frustration for public employees and
retirees. As a result, proposals have been offered to revise or
eliminate both provisions.
Under the GPO provision, enacted in 1977, SSA must reduce Social
Security benefits for those receiving noncovered government pensions
when their entitlement to Social Security is based on another person's
(usually their spouse's) Social Security coverage. Their Social
Security benefits are to be reduced by two-thirds of the amount of
their government pension. Under the WEP, enacted in 1983, SSA must use
a modified formula to calculate the Social Security benefits people
earn when they have had a limited career in covered employment. This
formula reduces the amount of payable benefits.
Regarding GPO, spouse and survivor benefits were intended to provide
some Social Security protection to spouses with limited working
careers. The GPO provision reduces spouse and survivor benefits to
persons who do not meet this limited working career criterion because
they worked long enough in noncovered employment to earn their own
pension.
Regarding WEP, the Congress was concerned that the design of the Social
Security benefit formula provided unintended windfall benefits to
workers who spent most of their careers in noncovered employment. The
formula replaces a higher portion of preretirement Social Security-
covered earnings when people have low average lifetime earnings than it
does when people have higher average lifetime earnings. People who work
exclusively, or have lengthy careers, in noncovered employment appear
on SSA's earnings records as having no covered earnings or a low
average of covered lifetime earnings. As a result, people with this
type of earnings history benefit from the advantage given to people
with low average lifetime earnings when in fact their total (covered
plus noncovered) lifetime earnings were higher than they appear to be
for purposes of calculating Social Security benefits.
Both GPO and WEP apply only to those beneficiaries who receive pensions
from noncovered employment. To administer these provisions, SSA needs
to know whether beneficiaries receive such noncovered pensions.
However, our prior work found that SSA lacks payment controls and is
often unable to determine whether applicants should be subject to GPO
or WEP because it has not developed any independent source of
noncovered pension information.[Footnote 3] In that report, we
estimated that failure to reduce benefits for federal, state, and local
employees caused $160 million to $355 million in overpayments between
1978 and 1995. In response to our recommendation, SSA performed
additional computer matches with the Office of Personnel Management to
get noncovered pension data for federal retirees in order to ensure
that these provisions are applied. These computer matches detected
payment errors; correcting these errors will generate hundreds of
millions of dollars in savings, according to our estimates.[Footnote 4]
Also, in that report, we recommended that SSA work with the Internal
Revenue Service (IRS) to revise the reporting of pension information on
IRS Form 1099R, so that SSA would be able to identify people receiving
a pension from noncovered employment, especially in state and local
governments. However, IRS does not believe it can make the recommended
change without new legislative authority. Given that one of our
recommendations was implemented but not the other, SSA now has better
access to information for federal employees but not for state and local
employees. As a result, SSA cannot apply GPO and WEP for state and
local government employees to the same degree that it does for federal
employees. To address issues such as these, the President's budget
proposes "to increase Social Security payment accuracy by giving SSA
the ability to independently verify whether beneficiaries have pension
income from employment not covered by Social Security.":
In addition to facing administrative challenges, GPO and WEP have also
faced criticism regarding their design in the law. For example, GPO
does not apply if an individual's last day of state/local employment is
in a position that is covered by Social Security.[Footnote 5] This GPO
"loophole" raises fairness and equity concerns.[Footnote 6] In the
states we visited for a previous report, individuals with a relatively
minimal investment of work time and Social Security contributions
gained access to potentially many years of full Social Security spousal
benefits. To address this issue, the House recently passed legislation
that provides for a longer minimum time period in covered employment.
At the same time, GPO and WEP have been a source of confusion and
frustration for the roughly 6 million workers and nearly 1 million
beneficiaries they affect. Critics of the measures contend that they
are basically inaccurate and often unfair. For example, some opponents
of WEP argue that the formula adjustment is an arbitrary and inaccurate
way to estimate the value of the windfall and causes a relatively
larger benefit reduction for lower-paid workers. A variety of proposals
have been offered to either revise or eliminate them. While we have not
studied these proposals in detail, I would like to offer a few
observations to keep in mind as you consider them.
First, repealing these provisions would be costly in an environment
where the Social Security trust funds already face long-term solvency
issues. According to SSA and the Congressional Budget Office (CBO),
proposals to reduce the number of beneficiaries subject to GPO would
cost $5 billion or more over the next 10 years and increase Social
Security's long-range deficit by up to 1 percent. Eliminating GPO
entirely would cost $21 billion over 10 years and increase the long-
range deficit by about 3 percent. Similarly, a proposal that would
reduce the number of beneficiaries subject to WEP would cost
$19 billion over 10 years, and eliminating WEP would increase Social
Security's long-range deficit by 3 percent.
Second, in thinking about the fairness of the provisions and whether or
not to repeal them, it is important to consider both the affected
public employees and all other workers and beneficiaries who pay Social
Security taxes. For example, SSA has described GPO as a way to treat
spouses with noncovered pensions in a fashion similar to how it treats
dually entitled spouses, who qualify for Social Security benefits both
on their own work records and their spouses'. In such cases, each
spouse 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. If GPO were eliminated or reduced for spouses who had paid
little or no Social Security taxes on their lifetime earnings, it might
be reasonable to ask whether the same should be done for dually
entitled spouses who have paid Social Security on all their earnings.
Far more spouses are subject to the dual-entitlement offset than to
GPO; as a result, the costs of eliminating the dual-entitlement offset
would be commensurately greater.
Mandatory Coverage Has Been Proposed:
Aside from the issues surrounding GPO and WEP, another aspect of the
relationship between Social Security and public employees is the
question of mandatory coverage. Making coverage mandatory has been
proposed in the past to help address the program's financing problems.
According to Social Security actuaries, doing so would reduce the 75-
year actuarial deficit by 10 percent.[Footnote 7] Mandatory coverage
could also enhance inflation-protection for the affected beneficiaries,
improve portability, and add dependent benefits in many cases. However,
to provide for the same level of retirement income, mandatory coverage
could increase costs for the state and local governments that would
sponsor the plans. Moreover, if coverage were extended primarily to new
state and local employees, GPO and WEP would continue to apply for many
years to come for existing employees and beneficiaries even though they
would become obsolete in the long run.
While Social Security's solvency problems have triggered an analysis of
the impact of mandatory coverage on program revenues and expenditures,
the inclusion of such coverage in a comprehensive reform package would
need to be grounded in other considerations. In recommending that
mandatory coverage be included in the reform proposals, the 1994-1996
Social Security Advisory Council stated that mandatory coverage is
basically "an issue of fairness." The Advisory Council's report noted
that "an effective Social Security program helps to reduce public costs
for relief and assistance, which, in turn, means lower general taxes.
There is an element of unfairness in a situation where practically all
contribute to Social Security, while a few benefit both directly and
indirectly but are excused from contributing to the program.":
The impact on public employers, employees, and pension plans would
depend on how states and localities with noncovered employees would
react to mandatory coverage. Many public pension plans currently offer
a lower retirement age and higher retirement income benefit than Social
Security. For example, many public employees, especially police and
firefighters, retire before they are eligible for full Social Security
benefits; new plans that include Social Security coverage might provide
special supplemental benefits for those who retire before they could
receive Social Security benefits. Social Security, on the other hand,
offers automatic inflation protection, full benefit portability, and
dependent benefits, which are not available in many public pension
plans. Costs could increase by as much as 11 percent of payroll for
those states and localities, depending on the benefit package of the
new plans that would include Social Security coverage. Alternatively,
states and localities that wanted to maintain level spending for
retirement would likely need to reduce some pension benefits.
Additionally, states and localities could require several years to
design, legislate, and implement changes to current pension plans.
Finally, mandating Social Security coverage for state and local
employees could elicit a constitutional challenge.
Conclusions:
There are no easy answers to the difficulties of equalizing Social
Security's treatment of covered and noncovered workers. Any reductions
in GPO or WEP would ultimately come at the expense of other Social
Security beneficiaries and taxpayers. Mandating universal coverage
would promise the eventual elimination of GPO and WEP but at
potentially significant cost to affected state and local governments,
and even so GPO and WEP would continue to apply for some years to come,
unless they were repealed. Whatever the decision, it will be important
to administer all elements of the Social Security program effectively
and equitably.
GPO and WEP have proven difficult to administer because they depend on
complete and accurate reporting of government pension income, which is
not currently achieved. The resulting disparities in the application of
these two provisions is yet another source of unfairness in the final
outcome. We have made recommendations to the Internal Revenue Service
to provide for complete and accurate reporting, but it has responded
that it lacks the necessary authority from the Congress. We therefore
take this opportunity to bring the matter to the Subcommittee's
attention for consideration.
Matter for Congressional Consideration:
To facilitate complete and accurate reporting of government pension
income, the Congress should consider giving IRS the authority to
collect this information, which could perhaps be accomplished through a
simple modification to a single form.
Mr. Chairman, this concludes my statement, I would be happy to respond
to any questions you or other members of the Subcommittee may have.
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 and Ken Stockbridge.
[End of section]
Related GAO Products:
Social Security: Congress Should Consider Revising the Government
Pension Offset "Loophole." GAO-03-498T. Washington, D.C.: February 27,
2003.
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.
FOOTNOTES
[1] See the list of related GAO products at the end of this statement.
[2] Beginning with those born in 1938, the age at which full benefits
are payable will increase in gradual steps from age 65 to age 67.
[3] See U.S. General Accounting Office, Social Security: Better Payment
Controls for Benefit Reduction Provisions Could Save Millions, GAO/
HEHS-98-76 (Washington, D.C.: Apr. 30, 1998).
[4] SSA performed the first such match in 1999 and advised that it
willl be done on a recurring basis in the future. SSA identified about
14,600 people whose benefits should have been calculated using WEP's
modified formula. We estimate that detecting these payment errors will
generate $207.9 million in lifetime benefit reduction for this cohort.
We further estimate each year's match will generate about $57 million
in lifetime benefit reductions for each new cohort.
[5] 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).
[6] 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).
[7] SSA uses a period of 75 years for evaluating the program's long-
term actuarial status to obtain the full range of financial commitments
that will be incurred on behalf of current program participants.
