Social Security
Coverage of Public Employees and Implications for Reform Gao ID: GAO-05-786T June 9, 2005Social 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, but critics contend these provisions are themselves often unfair. The Subcommittee asked GAO to discuss Social Security's effects on public employees as well as the implications of reform proposals.
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, the GPO and the 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. In recent years, various Social Security reform proposals that would affect public employees have been offered. Some proposals specifically address the GPO and the WEP and would either revise or eliminate them. 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. Other proposals would make coverage mandatory for all state and local government employees. According to Social Security actuaries, mandatory coverage would reduce the 75-year actuarial deficit by 11 percent. It could also enhance inflation protection, pension portability, and dependent benefits for the affected beneficiaries, in many cases. However, to maintain the same level of spending for retirement, mandating coverage would increase costs for the state and local governments that sponsor the plans, and would likely reduce some pension benefits. Moreover, the GPO and the WEP would still be needed for many years to come even though they would become obsolete in the long run.
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Testimony:
Before the Subcommittee on Social Security, Committee on Ways and
Means, House of Representatives:
United States Government Accountability Office:
GAO:
For Release on Delivery Expected at 1:00 p.m. EDT:
Thursday, June 9, 2005:
Social Security:
Coverage of Public Employees and Implications for Reform:
Statement of Barbara D. Bovbjerg, Director, Education, Workforce, and
Income Security:
GAO-05-786T:
GAO Highlights:
Highlights of GAO-05-786T, 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 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,
but critics contend these provisions are themselves often unfair. The
Subcommittee asked GAO to discuss Social Security's effects on public
employees as well as the implications of reform proposals.
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, the GPO and the 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.
In recent years, various Social Security reform proposals that would
affect public employees have been offered. Some proposals specifically
address the GPO and the WEP and would either revise or eliminate them.
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. Other proposals would make
coverage mandatory for all state and local government employees.
According to Social Security actuaries, mandatory coverage would reduce
the 75-year actuarial deficit by 11 percent. It could also enhance
inflation protection, pension portability, and dependent benefits for
the affected beneficiaries, in many cases. However, to maintain the
same level of spending for retirement, mandating coverage would
increase costs for the state and local governments that sponsor the
plans, and would likely reduce some pension benefits. Moreover, the GPO
and the 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 Congress consider giving the
Internal Revenue Service (IRS) the authority to collect the information
that the Social Security Administration (SSA) needs on government
pension income, which could perhaps be accomplished through a simple
modification to a single form. GAO continues to believe that this
important issue warrants further consideration by the Congress.
www.gao.gov/cgi-bin/getrpt?GAO-05-786T.
To view the full product, including the scope and methodology, click on
the link above. For more information, contact Barbara D. Bovbjerg at
(202) 512-7215 or bovbjergb@gao.gov.
[End of section]
Mr. Chairman and Members of the Subcommittee:
I am pleased to be here today to discuss how Social Security affects
public employees and how reforms may change those effects. Social
Security covers about 96 percent of all U.S. workers; the vast majority
of the rest are state, local, and federal government employees. One
option for Social Security reform is extending coverage to all state
and local government employees who are not currently covered. 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. Still, 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 current provisions affecting noncovered public employees,
and proposals to modify those provisions or make coverage mandatory for
all 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 does not cover about one-fourth of public
employees, for various historical reasons. As a result, these employees
do not pay Social Security taxes on earnings from their noncovered
jobs. Nevertheless, they can still be eligible for Social Security
benefits based on their spouses' or their own earnings in covered
employment. Currently, Social Security has two provisions to address
the resulting fairness issues. The Government Pension Offset (GPO)
affects spouse and survivor benefits, and the Windfall Elimination
Provision (WEP) affects retired worker benefits. Both provisions reduce
Social Security benefits for those who receive noncovered pension
benefits. However, the Social Security Administration (SSA) cannot
effectively and fairly apply these provisions because it does not have
access to complete and accurate information on receipt of such
noncovered pension benefits. Implementation of some of our
recommendations has improved the availability and tracking of key
information for federal retirees, which we estimate will save hundreds
of millions of dollars. However, Congressional action is still needed
to improve access to information on state and local government
pensions.
In recent years, various Social Security reform proposals that would
affect public employees have been offered. Some proposals specifically
address the GPO and the WEP and would either revise or eliminate them.
While we have not analyzed these proposals, we believe it is important
to consider both the costs and the fairness issues they raise. Still
other proposals would make coverage mandatory for all state and local
government employees. According to Social Security actuaries, doing so
for all newly hired state and local government employees would reduce
the 75-year actuarial deficit by about 11 percent. It 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, it could increase
costs for the state and local governments that would sponsor the plans.
Moreover, the GPO and the 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 don't 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' 2005 intermediate, or best-
estimate, assumptions, Social Security's cash flow is expected to turn
negative in 2017. In addition, all of the accumulated Treasury
obligations held by the trust funds are expected to be exhausted by
2041. Social Security's long-term financing shortfall stems primarily
from the fact that people are living longer and having fewer children.
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 employment because
there was concern over the question of the federal government's right
to impose a tax on state governments, and some had their own retirement
systems. 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, amendments to the Social Security Act extended mandatory
coverage to newly hired federal workers and to all members of the
Congress.
SSA estimates that in 2004 nearly 5 million state and local government
employees, excluding students and election workers, are not covered by
Social Security. In addition, about three-quarters of a million federal
employees hired before 1984 are also not covered. Seven states--
California, Colorado, Illinois, Louisiana, Massachusetts, Ohio, and
Texas--account for 71 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, members generally have a survivor annuity
option and disability benefits, and many 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 such plans are
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 nearly all
noncovered state and local employees become entitled to Social Security
as workers, spouses, or dependents. However, their noncovered status
complicates the program's ability to target benefits in the ways it is
intended to do.
Current Provisions Seek Fairness but Pose Administrative Challenges:
To address the fairness issues that arise with noncovered public
employees, Social Security has two provisions--the Government Pension
Offset, to address spouse and survivor benefits, and the Windfall
Elimination Provision, to address 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.
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 a 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 the 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 the WEP, the Congress was concerned that the design of the
Social Security benefit formula provided unintended windfall benefits
to workers who had 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 the GPO and the 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, SSA cannot apply these provisions effectively and
fairly because it lacks this information, according to our past
work.[Footnote 3] In response to our recommendation, SSA performed
additional computer matches with the Office of Personnel Management to
get noncovered pension data for federal retirees. These computer
matches detected payment errors; we estimate that correcting these
errors will generate hundreds of millions of dollars in
savings.[Footnote 4] However, SSA still lacks the information it needs
for state and local governments and therefore it cannot apply the GPO
and the WEP for state and local government employees to the same degree
that it does for federal employees. The resulting disparity in the
application of these two provisions is yet another source of unfairness
in the final outcome.
In our testimony before this committee in May 2003,[Footnote 5] we
recommended that the Congress consider giving the Internal Revenue
Service (IRS) the authority to collect the information that SSA needs
on government pension income, which could perhaps be accomplished
through a simple modification to a single form. Earlier versions of the
Social Security Protection Act of 2004[Footnote 6] contained such a
provision, but this provision was not included when the final version
of the bill, was approved and signed into law.
Some Reform Proposals Would Affect Public Employees:
In recent years, various Social Security reform proposals that would
affect public employees have been offered. Some proposals specifically
address the GPO and the WEP and would either revise or eliminate them.
Still other proposals would make coverage mandatory for all state and
local government employees.
Some Proposals Focus on the GPO or the WEP:
The GPO and the WEP have been a source of confusion and frustration for
the more than 6 million workers and 1.1 million beneficiaries they
affect. Critics of the measures contend that they are basically
inaccurate and often unfair. For example, some opponents of the 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. In the case of the GPO,
critics contend that the two-thirds reduction is imprecise and could be
based on a more rigorous formula. A variety of proposals have been
offered to either revise or eliminate the GPO or the WEP. 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 the most recent estimates from SSA eliminating the
GPO entirely would cost $32 billion over 10 years and cost 0.06 percent
of taxable payroll, which would increase the long-range deficit by
about 3 percent. Similarly, eliminating the WEP would cost nearly $30
billion and 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 the 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 on both their own work records and their spouses'. In such
cases, spouses may not receive both the benefits earned as a worker and
the full spousal benefit; rather they receive the higher amount of the
two. If the 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.
Otherwise, such couples would be worse off than couples that were no
longer subject to the GPO. And far more spouses are subject to the dual
entitlement offset than to the GPO; as a result, the costs of
eliminating the dual entitlement offset would be commensurately
greater.
Mandatory Coverage Has Been Proposed:
Making coverage mandatory for all state and local government employees
has been proposed to help address the program's financing problems.
According to Social Security actuaries, doing so for all newly hired
state and local government employees would reduce the 75-year actuarial
deficit by about 11 percent.[Footnote 7] Covering all the remaining
workers increases revenues relatively quickly and improves solvency for
some time, since most of the newly covered workers would not receive
benefits for many years. In the long run, however, benefit payments
would increase as the newly covered workers started to collect
benefits. Overall, this change would still represent a net gain for
solvency, although it would be small.
In addition to considering solvency effects, the inclusion of mandatory
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." Its 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."
Moreover, mandatory coverage could improve benefits for the affected
beneficiaries, but it could also increase pension costs for the state
and local governments that would sponsor the plans. The effects on
public employees and employers would depend on how states and
localities changed their noncovered pension plans to conform with
mandatory coverage. For example, Social Security offers automatic
inflation protection, full benefit portability, and dependent benefits,
which are not available in many public pension plans. Creating new
pension plans that kept all the existing benefit provisions but added
these new ones would increase the cost of the total package. Under this
scenario, costs could increase by as much as 11 percent of payroll,
depending on the benefit packages of the new plans. 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.
Mandating Social Security coverage for state and local employees could
also elicit a constitutional challenge. Finally, mandatory coverage
would not immediately address the issues and concerns regarding the GPO
and the WEP. If left unchanged, these provisions would continue to
apply for many years to come for existing employees and beneficiaries.
Still, in the long run, mandatory coverage would make these provisions
obsolete.
Conclusions:
In conclusion, there are no easy answers to the difficulties of
equalizing Social Security's treatment of covered and noncovered
workers. Any reductions in the GPO or the WEP would ultimately come at
the expense of other Social Security beneficiaries and taxpayers.
Mandating universal coverage would promise eventual elimination of the
GPO and the WEP but at potentially significant cost to affected state
and local governments, and even so the GPO and the WEP would continue
to apply for some years to come, unless they were repealed.
Whatever the decision, it will be important to administer the program
effectively and equitably. The GPO and the 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 disparity in the application of these two provisions is yet
another source of unfairness in the final outcome. We therefore take
this opportunity to bring the matter back to your attention for further
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, Ken Stockbridge, and Michael Collins.
[End of section]
Related GAO Products:
Social Security Reform: Answers to Key Questions. GAO-05-193SP.
Washington, D.C.: May 2005.
Social Security: Issues Relating to Noncoverage of Public Employees.
GAO-03-710T. Washington, D.C.: May 1, 2003.
Social Security: Congress Should Consider Revising the Government
Pension Offset "Loophole." GAO-03-498T. Washington, D.C.: Feb. 27,
2003.
Social Security Administration: Revision to the Government Pension
Offset Exemption Should Be Considered. GAO-02-950. Washington, D.C.:
Aug. 15, 2002.
Social Security Reform: Experience of the Alternate Plans in Texas.
GAO/HEHS-99-31, Washington, D.C.: Feb. 26, 1999.
Social Security: Implications of Extending Mandatory Coverage to State
and Local Employees. GAO/HEHS-98-196. Washington, D.C.: Aug. 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 GAO, 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 will
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] GAO, Social Security: Issues Relating to Noncoverage of Public
Employees, GAO-03-710T (Washington, D.C.: May 1, 2003).
[6] Pub. L. No. 108-203.
[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.
