[House Hearing, 105 Congress]
[From the U.S. Government Publishing Office]



 
    THE FUTURE OF SOCIAL SECURITY FOR THIS GENERATION AND THE NEXT: 
     IMPLICATIONS OF PROPOSALS AFFECTING FEDERAL, STATE, AND LOCAL 
                          GOVERNMENT EMPLOYEES

=======================================================================

                                HEARING

                               before the

                    SUBCOMMITTEE ON SOCIAL SECURITY

                                 of the

                      COMMITTEE ON WAYS AND MEANS
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED FIFTH CONGRESS

                             SECOND SESSION

                               __________

                              MAY 21, 1998

                               __________

                             Serial 105-49

                               __________

         Printed for the use of the Committee on Ways and Means

                     U.S. GOVERNMENT PRINTING OFFICE
52-908 cc                    WASHINGTON : 1999



                      COMMITTEE ON WAYS AND MEANS

                      BILL ARCHER, Texas, Chairman

PHILIP M. CRANE, Illinois            CHARLES B. RANGEL, New York
BILL THOMAS, California              FORTNEY PETE STARK, California
E. CLAY SHAW, Jr., Florida           ROBERT T. MATSUI, California
NANCY L. JOHNSON, Connecticut        BARBARA B. KENNELLY, Connecticut
JIM BUNNING, Kentucky                WILLIAM J. COYNE, Pennsylvania
AMO HOUGHTON, New York               SANDER M. LEVIN, Michigan
WALLY HERGER, California             BENJAMIN L. CARDIN, Maryland
JIM McCRERY, Louisiana               JIM McDERMOTT, Washington
DAVE CAMP, Michigan                  GERALD D. KLECZKA, Wisconsin
JIM RAMSTAD, Minnesota               JOHN LEWIS, Georgia
JIM NUSSLE, Iowa                     RICHARD E. NEAL, Massachusetts
SAM JOHNSON, Texas                   MICHAEL R. McNULTY, New York
JENNIFER DUNN, Washington            WILLIAM J. JEFFERSON, Louisiana
MAC COLLINS, Georgia                 JOHN S. TANNER, Tennessee
ROB PORTMAN, Ohio                    XAVIER BECERRA, California
PHILIP S. ENGLISH, Pennsylvania      KAREN L. THURMAN, Florida
JOHN ENSIGN, Nevada
JON CHRISTENSEN, Nebraska
WES WATKINS, Oklahoma
J.D. HAYWORTH, Arizona
JERRY WELLER, Illinois
KENNY HULSHOF, Missouri

                     A.L. Singleton, Chief of Staff

                  Janice Mays, Minority Chief Counsel

                                 ______

                    Subcommittee on Social Security

                    JIM BUNNING, Kentucky, Chairman

SAM JOHNSON, Texas                   BARBARA B. KENNELLY, Connecticut
MAC COLLINS, Georgia                 RICHARD E. NEAL, Massachusetts
ROB PORTMAN, Ohio                    SANDER M. LEVIN, Michigan
JON CHRISTENSEN, Nebraska            JOHN S. TANNER, Tennessee
J.D. HAYWORTH, Arizona               XAVIER BECERRA, California
JERRY WELLER, Illinois
KENNY HULSHOF, Missouri


Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public 
hearing records of the Committee on Ways and Means are also published 
in electronic form. The printed hearing record remains the official 
version. Because electronic submissions are used to prepare both 
printed and electronic versions of the hearing record, the process of 
converting between various electronic formats may introduce 
unintentional errors or omissions. Such occurrences are inherent in the 
current publication process and should diminish as the process is 
further refined.


                            C O N T E N T S

                               __________

                                                                   Page

Advisory of May 13, 1998, announcing the hearing.................     2

                               WITNESSES

U.S. General Accounting Office, Cynthia M. Fagnoni, Director, 
  Income Security Issues, Health, Education, and Human Services 
  Division; accompanied by John Schaefer, Senior Evaluator; and 
  Frank Mulvey, Assistant Director...............................    12
Congressional Research Service, Geoffrey Kollmann, Specialist, 
  Social Legislation, Education and Public Welfare Division......    22

                                 ______

American Federation of State, County and Municipal Employees, 
  Joseph Rugola..................................................    96
Coalition to Assure Retirement Equity, Robert E. Normandie.......    90
Coalition to Preserve Retirement Security, Robert J. Scott.......    43
Frank, Hon. Barney, a Representative in Congress from the State 
  of Massachusetts...............................................    11
Jefferson, Hon. William J., a Representative in Congress from the 
  State of Louisiana.............................................     5
Massachusetts Teachers' Retirement Board, Thomas R. Lussier......    59
National Association of Retired Federal Employees, Bernadine A. 
  Jernigan.......................................................    94
National Fraternal Order of Police, Marty Pfeifer................    56
Ohio Association of Public School Employees, Joseph Rugola.......    96
Public Employees' Retirement Association, Robert J. Scott........    43
Public Employees' Retirement System of Nevada, George Pyne.......    66
Public Employees Retirement System of Ohio, Richard E. Shumacher.    53
Washington Metropolitan Police Department, Marty Pfeifer.........    56

                       SUBMISSIONS FOR THE RECORD

Bixby, Jay W., National Conference on Public Employee Retirement 
  Systems, letter................................................   129
California Correctional Peace Officers Association, Donald L. 
  Novey, statement...............................................   105
California State Teachers' Retirement System, Sacramento, CA, 
  Jennifer DuCray-Morrill, statement.............................   107
Council for Government Reform, Arlington, VA, Charles G. Hardin, 
  statement......................................................   111
Deutsch, Eleanor, Brooklyn, NY, letter...........................   112
Doyle, Patrick L., Commonwealth of Kentucky, Division of Social 
  Security, statement............................................   113
DuCray-Morrill, Jennifer, California State Teachers' Retirement 
  System, Sacramento, CA, statement..............................   107
Dyer, Herbert L., State Teachers Retirement System of Ohio, 
  Columbus, OH, letter...........................................   140
Fierst, Edith U., Chevy Chase, MD, statement.....................   114
Graves, Russell, National Conference of State Social Security 
  Administrators, Oklahoma City, OK, statement...................   131
Hardin, Charles G., Council for Government Reform, Arlington, VA, 
  statement......................................................   111
International Association of Fire Fighters, Alfred K. Whitehead, 
  statement......................................................   117
Johnson, Tom, National Conference of State Legislatures, letter..   130
Kentucky, Commonwealth of, Division of Social Security, Patrick 
  L. Doyle, statement............................................   113
Mikulski, Hon. Barbara A., a U.S. Senator from the State of 
  Maryland, statement............................................   119
Miller, Pat N., Teachers' Retirement System of Kentucky, 
  Frankfort, KY, letter..........................................   141
National Association of Police Organizations, Inc., Robert T. 
  Scully, statement..............................................   120
National Committee to Preserve Social Security and Medicare, 
  statement......................................................   127
National Conference on Public Employee Retirement Systems, Jay W. 
  Bixby, letter..................................................   129
National Conference of State Legislatures, Tom Johnson, letter...   130
National Conference of State Social Security Administrators, 
  Oklahoma City, OK, Russell Graves, statement...................   131
National Education Association, statement........................   133
National Treasury Employees Union, Robert M. Tobias, statement...   135
Novey, Donald L., California Correctional Peace Officers 
  Association, statement.........................................   105
O'Hare, Sally D., Palos Heights, IL, statement...................   136
Ohio, State of, Hon. George V. Voinovich, Governor, statement....   137
Sandlin, Hon. Max, a Representative in Congress from the State of 
  Texas, statement...............................................   139
Scully, Robert T., National Association of Police Organizations, 
  Inc., statement................................................   120
State Teachers Retirement System of Ohio, Columbus, OH, Herbert 
  L. Dyer, letter................................................   140
Teachers' Retirement System of Kentucky, Frankfort, KY, Pat N. 
  Miller, letter.................................................   141
Tobias, Robert M., National Treasury Employees Union, statement..   135
Voinovich, Hon. George V., Governor, State of Ohio, statement....   137
Whitehead, Alfred K., International Association of Fire Fighters, 
  statement......................................................   117


    THE FUTURE OF SOCIAL SECURITY FOR THIS GENERATION AND THE NEXT: 
     IMPLICATIONS OF PROPOSALS AFFECTING FEDERAL, STATE, AND LOCAL 
                          GOVERNMENT EMPLOYEES

                              ----------                              


                         THURSDAY MAY 21, 1998

                  House of Representatives,
                       Committee on Ways and Means,
                           Subcommittee on Social Security,
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 10 a.m., in 
room B-318, Rayburn House Office Building, Hon. Jim Bunning 
(Chairman of the Subcommittee) presiding.
    [The advisory announcing the hearing follows:]

ADVISORY

FROM THE 
COMMITTEE
 ON WAYS 
AND 
MEANS

                    SUBCOMMITTEE ON SOCIAL SECURITY

                                                CONTACT: (202) 225-9263
FOR IMMEDIATE RELEASE

May 13, 1998

No. SS-16

                        Bunning Announces Ninth

                  Hearing in Series on ``The Future of

           Social Security for this Generation and the Next''

    Congressman Jim Bunning (R-KY), Chairman, Subcommittee on Social 
Security of the Committee on Ways and Means, today announced that the 
Subcommittee will hold the ninth in a series of hearings on ``The 
Future of Social Security for this Generation and the Next.'' At this 
hearing, the Subcommittee will examine the implications of proposals 
affecting Federal, State, and local government employees. These 
proposals include extending mandatory Social Security coverage to all 
newly hired State and local employees, and altering current law 
provisions affecting the Social Security benefits of persons who 
receive government pensions. The hearing will take place on Thursday, 
May 21, 1998, in room B-318 Rayburn House Office Building, beginning at 
10:00 a.m.
      
    In view of the limited time available to hear witnesses, oral 
testimony will be from invited witnesses only. Witnesses are expected 
to include Members of Congress, the U.S. General Accounting Office, 
Federal and State government employee representatives, and social 
insurance experts. However, any individual or organization may submit a 
written statement for consideration by the Committee and for inclusion 
in the printed record of the hearing.
      

BACKGROUND:

      
    Numerous Social Security reform proposals include a provision to 
extend mandatory coverage to all newly hired State and local government 
employees. Social Security coverage has been expanded since Social 
Security's beginning. Workers in business and industry, then about 60 
percent of the workforce, were the only persons covered in the initial 
Social Security Act of 1935. Over time, the program's coverage has 
grown to include the self-employed, nonprofit groups, agricultural and 
household workers, the Armed Services, Members of Congress, and all 
other Federal employees hired after 1983.
      
    State and local governments were excluded altogether in the 
original Social Security Act of 1935 to avoid raising the possible 
constitutional questions of whether the Federal Government could tax 
State and local governments, and because many State and local 
government employees were already covered under other pension plans. 
Beginning in 1950, Congress amended the law several times to make 
participation in Social Security available on a voluntary basis to 
employees of State and local governments. In 1983, the State and local 
government option to terminate Social Security coverage was repealed 
and all State and local governments participating in the system were 
required to continue their participation. Beginning July 1, 1991, 
Social Security coverage was made mandatory for State and local 
government workers who do not participate in a retirement system for 
such employment.
      
    The Social Security Administration estimates that 96 percent of the 
workforce, including 70 percent of State and local government workers, 
is now covered by Social Security and that about 4.9 million State and 
local government workers are not covered by Social Security. Seven 
States (California, Colorado, Illinois, Louisiana, Massachusetts, Ohio, 
and Texas) account for over 75 percent of non-covered payroll. Previous 
surveys have found that police, firefighters, and teachers are more 
likely to occupy non-covered positions.
      
    Also impacting Federal, State, and local government employees are 
two current law provisions that reduce entitlement to Social Security 
benefits. These provisions, commonly known as the Government Pension 
Offset (GPO) and Windfall Elimination Provision (WEP), were enacted in 
1977 and 1983, respectively, in an attempt to provide Social Security 
benefits which are fair to all workers, whether they work in non-Social 
Security-covered government employment or in jobs under Social 
Security.
      
    Since the enactment of the GPO and WEP, government workers have 
expressed concern that benefit reductions are imprecise and unfair. 
Legislative proposals have been introduced which modify the way 
benefits would be calculated.
      
    In announcing the hearing, Chairman Bunning stated: ``Most 
Americans are surprised to learn that not all workers are covered by 
Social Security. To many, covering those State and local government 
workers not covered under Social Security is an issue of simple 
fairness. Yet, changing the retirement systems of many of our teachers, 
firefighters, and police forces could have far reaching effects on 
these workers and the long-term financing of their retirement plans. 
These workers have devoted their careers to us, ensuring the safety and 
sound education of ourselves and our children. Their views are very 
important to this Subcommittee, and we need to listen and carefully 
consider what they have to say.''
      

FOCUS OF THE HEARING:

      
    The Subcommittee will receive views on proposals to extend 
mandatory Social Security coverage to all newly hired State and local 
government employees and altering current law provisions affecting the 
Social Security benefits of persons who receive government pensions.
      

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:

      
    Any person or organization wishing to submit a written statement 
for the printed record of the hearing should submit six (6) single-
spaced copies of their statement, along with an IBM compatible 3.5-inch 
diskette in WordPerfect 5.1 format, with their name, address, and 
hearing date noted on a label, by the close of business, Thursday, June 
4, 1998 , to A.L. Singleton, Chief of Staff, Committee on Ways and 
Means, U.S. House of Representatives, 1102 Longworth House Office 
Building, Washington, D.C. 20515. If those filing written statements 
wish to have their statements distributed to the press and interested 
public at the hearing, they may deliver 200 additional copies for this 
purpose to the Subcommittee on Social Security office, room B-316 
Rayburn House Office Building, at least one hour before the hearing 
begins.
      

FORMATTING REQUIREMENTS:

      
    Each statement presented for printing to the Committee by a 
witness, any written statement or exhibit submitted for the printed 
record or any written comments in response to a request for written 
comments must conform to the guidelines listed below. Any statement or 
exhibit not in compliance with these guidelines will not be printed, 
but will be maintained in the Committee files for review and use by the 
Committee.
      
    1. All statements and any accompanying exhibits for printing must 
be submitted on an IBM compatible 3.5-inch diskette in WordPerfect 5.1 
format, typed in single space and may not exceed a total of 10 pages 
including attachments. Witnesses are advised that the Committee will 
rely on electronic submissions for printing the official hearing 
record.
      
    2. Copies of whole documents submitted as exhibit material will not 
be accepted for printing. Instead, exhibit material should be 
referenced and quoted or paraphrased. All exhibit material not meeting 
these specifications will be maintained in the Committee files for 
review and use by the Committee.
      
    3. A witness appearing at a public hearing, or submitting a 
statement for the record of a public hearing, or submitting written 
comments in response to a published request for comments by the 
Committee, must include on his statement or submission a list of all 
clients, persons, or organizations on whose behalf the witness appears.
      
    4. A supplemental sheet must accompany each statement listing the 
name, company, address, telephone and fax numbers where the witness or 
the designated representative may be reached. This supplemental sheet 
will not be included in the printed record.
      
    The above restrictions and limitations apply only to material being 
submitted for printing. Statements and exhibits or supplementary 
material submitted solely for distribution to the Members, the press 
and the public during the course of a public hearing may be submitted 
in other forms.
      

    Note: All Committee advisories and news releases are available on 
the World Wide Web at `HTTP://WWW.HOUSE.GOV/WAYS__MEANS/'.
      

    The Committee seeks to make its facilities accessible to persons 
with disabilities. If you are in need of special accommodations, please 
call 202-225-1721 or 202-226-3411 TTD/TTY in advance of the event (four 
business days notice is requested). Questions with regard to special 
accommodation needs in general (including availability of Committee 
materials in alternative formats) may be directed to the Committee as 
noted above.
      

                                

    Chairman Bunning [presiding]. The Subcommittee will come to 
order.
    I want to let all of our people that are going to testify 
know that there is going to be a vote called very, very shortly 
on the floor of the House. So, I'm going to adjourn, because 
the first two panelists are Members, and they will be coming 
back with me, I hope, to testify, and then we will get on with 
all other testimony. We have a very long program, a lot of 
people that wanted to testify today. So if you'll bear with us 
for just a short period of time, we have a journal vote over on 
the floor, and I'll be back immediately. So, we'll stand in 
recess until I get back.
    [Recess.]
    Chairman Bunning. The Subcommittee will come to order.
    I'm going to do my opening statement and when Ms. Kennelly 
comes we'll allow her to do hers even though we may have to 
interrupt some of our testimony.
    Today marks our ninth hearing in a series of the future of 
Social Security for this generation and the next. The 
Subcommittee will examine the implications of proposals 
affecting Federal, State, and local government employees. These 
proposals including extending mandatory Social Security 
coverage to all newly hired State and local employees and 
altering current law provisions affecting the Social Security 
benefits of persons who receive government pensions.
    Most Americans are surprised to learn that not everyone 
pays FICA, Federal Insurance Contributions Act, taxes and 
receives Social Security benefits and believe it's only fair 
for State and local government employees to pay the same FICA 
taxes that most everyone else does. Perhaps, that is why just 
about every proposal for Social Security reform, including the 
recommendations of the 1994-96 Social Security Council, 
includes a provision to extend mandatory coverage to all newly 
hired State and local government employees.
    The Social Security Administration estimates that about 5 
million State and local government workers are not covered by 
Social Security. Seven States--California, Colorado, Illinois, 
Louisiana, Massachusetts, Ohio, and Texas--account for more 
than 75 percent of these workers. Yet, changing the retirement 
system of many of our teachers, firefighters and police force 
could have a far-reaching effect on these workers, their 
employees, and the long-term financing of their respective 
retirement plans. These workers have devoted their careers to 
us ensuring our safety and educating our children. Their views 
are very important to this Subcommittee, and we intend to 
listen carefully to what they have to say.
    Also impacting Federal, State, and local government 
employees are two current law provisions that reduce 
entitlement to Social Security benefits. These provisions 
commonly known as the GPO, government pension offset, and WEP, 
windfall elimination provisions, were enacted in 1977 and 1983, 
respectively, in an attempt to provide Social Security benefits 
which are fair to all workers whether they work in jobs covered 
by Social Security or jobs that are not covered by Social 
Security.
    As we consider major Social Security reform, we have the 
opportunity to closely examine those current law benefit 
provisions which have come under scrutiny. Since the enactment 
of the GPO and the WEP, government workers have expressed 
concern that benefit reductions are imprecise and unfair. 
Today, we'll hear more details regarding these concerns and the 
legislative proposals introduced which would modify the way 
benefits would be calculated.
    Let me emphasize that the purpose of this hearing series is 
to fully explore all options for Social Security reform so that 
when the time comes Members will be able to make informed 
decisions fair to all workers and all generations. We seek 
information. We do not seek to establish any particular 
position. Today, we look forward to hearing the views from all 
our witnesses, particularly those who have been or will be 
personally affected by these proposals.
    I reserve time for the Ranking Member, and I will go 
immediately to our first panel and the gentleman from 
Louisiana, Mr. Jefferson, and all Members can submit for the 
record any opening statements that they might have.
    Mr. Jefferson.

  STATEMENT OF HON. WILLIAM J. JEFFERSON, A REPRESENTATIVE IN 
              CONGRESS FROM THE STATE OF LOUISIANA

    Mr. Jefferson. Thank you very much, Mr. Chairman and 
Members of the Subcommittee, and I thank you for the bipartisan 
show of support this morning by providing me with my own 
statement, thank you.
    I'm pleased to have the opportunity to testify before the 
Subcommittee regarding the government pension offset. This 
issue is totally separate from the question of whether FICA 
should apply to hires or not, because if it were to start today 
in that direction, it still wouldn't fix the issue that we now 
have which has cropped up over the years of reliance under 
another system, so I don't have to state a position one way or 
another on that to talk about this issue which still needs 
fixing.
    After the 1935 act was established, some of local 
governments decided to remain outside of the system as you 
pointed out. It's estimated that about 4.9 million State and 
local government employees are not covered by Social Security 
and, as you pointed out, many of them are in 7 States.
    Many of the State and local government employees that are 
covered by government pension will be unfairly affected by the 
pension offset. As you may be aware, the pension offset was 
originally enacted in response to perceived abuses to the 
Social Security system resulting from the Goldfarb decision. 
The Social Security system provides that if a spouse who worked 
and paid into Social Security died, the benefits were to paid 
to the surviving spouse as a survivor benefit. Men were 
required to prove dependency on their spouses before they 
became eligible for Social Security benefits. There was no such 
requirement for women. The Goldfarb decision eliminated this 
different treatment of men and women. The court, instead, 
required Social Security to treat men and women equally by 
paying benefits to either spouse without regard to dependency. 
Many of the men who would benefit from the Goldfarb decision 
were also receiving large government pensions. It was believed 
that these retirees would bankrupt the system receiving 
government and private pensions in addition to survivor 
benefits.
    To combat this perceived problem, pension offset 
legislation was enacted in 1977. The legislation provided for a 
dollar for dollar reduction of Social Security benefits to 
spouses or retiring spouses who received earned benefits from 
the Federal, State, or local retirement system. The pension 
offset provisions can affect any retiree who receives a civil 
pension on Social Security but primarily affects widows or 
widowers eligible for survivor benefits.
    In 1983, the pension offset was reduced to two-thirds of 
the public employees survivor benefit. It was believed that 
one-third of the pension was equivalent to pension available in 
the private sector. The pension offset, which was aimed at 
higher paid government employees also applies to public service 
employees who generally receive lower pension benefits, and 
this is the nub of the problem. These public service employees 
include secretaries, school cafeteria workers, teacher aids, 
teachers, and others who don't receive high salaries. The 
pension offset as applied to this group is punitive, unfairly 
harsh, and bad policy. While government pensions were tailored 
to produce benefits that were equal to many combined, private 
pension and Social Security benefits for upper level government 
workers, this was not true for low-income workers such as the 
employees I mentioned.
    To illustrate the harsh impact of the pension offset, 
consider a widow who retired form the Federal Government and 
received a civil service annuity of $550 monthly. The full 
widows benefit is $385. The current pension offset law reduces 
the widow's benefit to $19 a month--two-thirds of the $550 
civil service annuity which is $367--this is then subtracted 
from the $385 widows benefit, leaving only $19. The retired 
worker receives $569 instead of almost $1,000 otherwise.
    Proponents of the pension offset claim that the offset is 
justified because survivor benefits were intended to be in lieu 
of pensions, however, if this logic was followed across the 
board, people with private pension benefits would also be 
subject to an offset but this is not the case. While Social 
Security benefits of spouses or surviving spouses earned in 
government pensions are reduced by two for every $3 earned, 
Social Security benefits of spouses or surviving spouses 
earning private pensions are not subject to offset at all.
    My office has received letters from around the country 
including one from a 68-year-old lady, Helen Emery from Fair 
Oaks, California, who writes to say that ``My government 
retirement, monthly, after deductions, is a very modest 
$988.69. I'm sure you know this is just a fraction above the 
poverty level. The government pension offset benefits will 
reduce my Social Security benefits and only allow me an 
additional $116 per month.'' These sorts of letters come from 
people who work for sheriff's departments and from people who 
work for other agencies that I've noted in my statement--I do 
not have time, apparently, to go through them all.
    But I do want to point out that in this Congress I've 
introduced H.R. 2273. There are 161 or 162 cosponsors on the 
bill. It's a bill that has a great deal of support. Senator 
Mikulski has introduced a similar bill in the Senate. It limits 
the pension offset to those--person to collect more than $1,200 
in overall pension benefits. As you can see H.R. 2273 has a cap 
on it, so it doesn't go to the high benefit pensioners, but it 
will affect those small people who were never, I don't believe, 
intended to be affected by the GPO, and it corrects, I think, 
an inequity in the system.
    So, I would urge the Subcommittee to take up this 
legislation in the remaining part of this session and--as it 
goes about the business of fixing the overall system, making 
sure that the system is fair to everyone, that it take into 
account this issue which is a very important issue, this many 
people around the country have a great deal of interest in. I 
thank the Subcommittee for listening to me. I appreciate your 
giving me the time.
    [The prepared statement follows:]

Statement of Hon. William J. Jefferson, a Representative in Congress 
from the State of Louisiana

    Mr. Chairman and members of the Subcommittee, I am pleased 
to have the opportunity to testify regarding the Government 
Pension Offset (Pension Offset).
    I thank the Chairman for having a hearing on this pressing 
issue. Pension Offset is an important issue to me. It is an 
important issue for my constituents in Louisiana and it is an 
important issue for many state and local government employees 
across the nation.
    As you are aware, state and local government employees were 
excluded from Social Security coverage when the Social Security 
System was first established in 1935. These employees were 
later given the option to enroll in the Social Security System 
and in the 1960's and 1970's many public employees opted to 
join in.
    Some local governments chose to remain out of the system. 
Their employees and spouses planned for retirement according to 
the rules in effect. It is estimated that about 4.9 million 
state and local government employees are not covered by Social 
Security. Seven states (California, Colorado, Illinois, 
Louisiana, Massachusetts, Ohio and Texas) account for over 75 
percent of non-covered payroll.
    Many of the state and local government employees that are 
covered by government pensions will be unfairly affected by the 
Pension Offset.
    As you may be aware, the Pension Offset was originally 
enacted in response to the perceived abuses to the Social 
Security system resulting from the Goldfarb decision.
    The Social Security System provides that if a spouse who 
worked and paid into Social Security died, the benefits were to 
be paid to the surviving spouse as a survivor benefit. Men were 
required to prove dependency on their spouses before they 
became eligible for Social Security survivor benefits. There 
was no such requirement for women.
    The Goldfarb decision eliminated the different treatment of 
men and women. The court instead required Social Security to 
treat men and women equally by paying benefits to either spouse 
without regard to dependency.
    Many of the men who would benefit from the Goldfarb 
decision were also receiving large government pensions. It was 
believed that these retirees would bankrupt the system, 
receiving large government and private pensions in addition to 
survivor benefits.
    To combat this perceived problem, Pension Offset 
legislation was enacted in 1977. The legislation provided for a 
dollar for dollar reduction of Social Security benefits to 
spouses or retiring spouses who received earned benefits from a 
federal, state or local retirement system. The Pension Offset 
provisions can affect any retiree who receives a civil service 
pension and Social Security but primarily affects widows or 
widowers eligible for survivor benefits.
    In 1983, the Pension Offset was reduced to two-thirds of 
the public employer survivor benefit. It was believed that one-
third of the pension was equivalent to the pension available in 
the private sector.
    The Pension Offset aimed at high paid government employees 
also applies to public service employees who generally receive 
lower pension benefits. These public service employees include 
secretaries, school cafeteria workers, teachers aides and 
others low wage government employees. The Pension Offset as 
applied to this group is punitive, unfairly harsh and bad 
policy.
    Government pensions were tailored to produce benefits that 
were equal to many combined private pension-Social Security 
policies in the private sector for upper level government 
workers. However, this was not true for lower income workers 
such as employees who worked as secretaries, school cafeteria 
workers, teachers aides and others who generally receive lower 
pension benefits.
    To illustrate the harsh impact of the Pension Offset, 
consider a widow who retired from the federal government and 
receives a civil service annuity of $550 monthly. The full 
widow's benefit is $385. The current Pension Offset law reduces 
the widow's benefit to $19 a month (\2/3\ of the $550 civil 
service annuity is $367, which is then subtracted from the $385 
widow's benefit, leaving only $19). The retired worker receives 
$569 ($550 + $19) per month.
    Proponents of the Pension Offset claim that the offset is 
justified because Survivor benefits were intended to be in lieu 
of pensions. However, were this logic followed across the 
board, then people with private pension benefits would be 
subject to the offset as well. But that is not the case.
    While Social Security benefits of spouses or surviving 
spouses earning government pensions are reduced by $2 for every 
$3 earned. Social Security benefits of spouses or surviving 
spouses earning private pensions are not subject to offset at 
all.
    If retirees on private pensions do not have Social Security 
benefits subject to offset, why should retirees who worked in 
the public service?
    The Pension offset has created a problem that cries out for 
reform. It will cause tens of thousands of retired government 
employees, including many former para-professionals, custodians 
or lunch room workers, to live their retirement years at or 
near the poverty level.
    My office has received numerous calls, all from widows, who 
are just getting by and desperately need some relief from the 
Pension Offset.

The following is a letter we received from Helen J. Emery from 
Fair Oaks, California.

    I am a 68 year old and worked 27 years for the Government. 
My government retirement monthly after deductions is a ``very'' 
modest $988.69. I am sure you know this is just a fraction 
above poverty level. The ``windfall'' benefits law reduced my 
social security benefits and only allows me an additional 
$116.00 per month even though I alone paid into this Social 
Security prior to working for the Government.
    Effective January 1998, I became a divorced widow and the 
``offset'' effecting my $724.80 widows Social Security benefits 
brings my widow's benefits to zero.
    I am hoping and praying that you will continue to fight 
this very unjust ``offset'' law.

Millard J. Downing from Wallingford, PA wrote:

    I am retired from the Agency for International Development 
with a $12,000.00 a year annuity and through employment outside 
of federal service have become eligible for Social Security, 
age 62. Upon visiting my local Social Security Office I was 
advised that normally I would be eligible for $425.00 month. 
However, due to the present Pension Offset and being a federal 
annuitant, my social security annuity will be reduced to 
approximately $207.00 month. I do not consider this reduction 
as being a fair game when all deductions for above were made 
while being employed outside of federal service.

Patricia C. Cook from Metaire, LA wrote:

    I get a small pension from the Jefferson Parish Sheriff's 
Office ($473.00) and because of this my Soc. Sec. Check is 
offset by half. I should receive close to $500.00 a month that 
I put in many years of my life for and it is cut to $243.00. I 
would appreciate what ever you can do about this and I hope 
someone will change the other off set also. When I paid my 
personal Soc. Sec. They grabbed; but when it comes to getting 
it back, its another story.
    During the 104th Congress, I introduced the Government 
Pension Offset Repeal Bill, H.R. 2167. I have re-introduced 
this important legislation in the 105th Congress as H.R. 2273.
    The legislation, does not completely repeal the Pension 
Offset, but provides a modification to a complete repeal. It 
will allow pensioners and widows affected by Pension Offset 
provisions to receive a minimum $1200 per month before offset 
provisions could be imposed. The bill has 162 recorded 
cosponsors. A corresponding Senate bill, sponsored by Senator 
Barbara A. Mikulski (D-MD), was introduced in November of 1997.
    H.R. 2273 has been referred to this committee, and I urge 
my colleagues to support this legislation.
    Mr. Chairman, I urge the Committee to take up this 
legislation in the remaining days of the session.
      

                                

    Chairman Bunning. If you will remain, I'm going to let Ms. 
Kennelly make her opening statement, and we would like to do 
some questions if we can.
    Mr. Jefferson. Thank you.
    Mrs. Kennelly. Thank you, Mr. Chairman, and thank you for 
the courtesy of allowing me to make my statement at this 
moment.
    In 1995, the Social Security Advisory Council recommended 
that all newly-hired State and local employees be covered under 
Social Security, and I believe today's hearing is the first 
forum in which State and local employees have had the 
opportunity to express to us their views on the proposal, and I 
thank the Chairman for calling this hearing.
    As we know, 90 percent of all workers are covered under 
Social Security. Only 70 percent of State and local workers are 
covered under the program. Workers who are not covered are 
unevenly distributed among the States. Seven States account for 
over 75 percent of the noncovered workers. With this unequal 
distribution, it is important that we take a careful look at 
both the impact on individual workers and the financial impact 
on States and localities. We need to ask whether the benefits 
for individuals increase or decrease, and we need to ask 
whether the cost to States will rise. We will hear some of 
those answers today.
    We will also be looking at proposals to change the windfall 
elimination provision and the government pension offset. These 
provisions were enacted in an effort to assure consistent 
benefit treatment between those who paid Social Security and 
those who did not. It is argued, however, that both of these 
provisions unfairly reduce Social Security benefits for 
individuals who have worked in the government employment.
    Several of distinguished colleagues, as Mr. Jefferson has 
just done, will testify, and I look forward to hearing that 
testimony. Thank you, Mr. Chairman.
    Chairman Bunning. Thank you.
    Bill, can I just refer to your bill that you have in, H.R. 
2273?
    Mr. Jefferson. Yes.
    Chairman Bunning. How do you pay for the offset or how do 
you propose to pay out of the trust funds for the offset or do 
you just intend to use the trust funds to pay the offset 
without any way to increase the trust funds? Obviously, these 
people are already on their own pensions, so they're already 
retired.
    Mr. Jefferson. Yes. The bill doesn't propose to treat that 
question, but it presumes that the answer is contained within 
the overall system. We know it costs additional money, perhaps, 
$200 million according to some estimates but a little less 
according to others. It's a good deal of money, but it is not 
so much money that it's out of bounds to be considered to be 
done. It leaves a lot of people who had expectations of a 
different outcome in their retirement years suffering in their 
retirement years even though they had a spouse who worked the 
entirety of their lives. I don't have the complete answer to 
how we would fund it, but we're coming to grips, still, with 
how much it costs. It's somewhere within the range I've spoken 
of, I'm confident.
    Chairman Bunning. Are you talking about $200 million out of 
the trust funds every year to take care of everyone that's 
offset?
    Mr. Jefferson. Yes.
    Chairman Bunning. In other words, that's the total cost 
annually out of the trust funds to take care of 100 percent of 
the offsets?
    Mr. Jefferson. Yes. In the context of the bill, the bill 
limits it to $1,200.
    Chairman Bunning. In other words, up to $1,200.
    Mr. Jefferson. That's right. If you let everybody go it 
would be much more, but since we put a cap on it, yes, sir, 
that is the result.
    Chairman Bunning. We'll take a look at the bill for sure, 
and we may even have a hearing on the bill to see, because that 
amount of dollars to take care of the people that are being 
offset--for lack of a better word--ought to be looked at, and I 
guarantee you that we will take a look at the bill.
    Mr. Jefferson. Well, I thank you very much for that.
    Chairman Bunning. Barbara, do you have some questions?
    Mrs. Kennelly. Just to follow up----
    Chairman Bunning. You have a friendly question in mind. 
[Laughter.]
    Mrs. Kennelly. Yes.
    Chairman Bunning. Not that the Chairman's wasn't friendly.
    Mrs. Kennelly. Obviously, we are addressing the issue of 
saving of Social Security and reform of Social Security, and 
it's becoming an important issue. While we are discussing 
reform you would expect that the issue you have raised would be 
addressed as part of the bigger reform question.
    Mr. Jefferson. That's correct. And as I said starting out, 
this is totally different from the question of whether you 
should start today requiring everyone to pay into a FICA 
system. This is a relic of the old system where people weren't 
required to do that. They made other choices, and that needs to 
be addressed.
    Mrs. Kennelly. And you want to put that to rest.
    Mr. Jefferson. Yes.
    Mrs. Kennelly. Thank you, Mr. Jefferson.
    Chairman Bunning. J.D.
    Mr. Hayworth. Thank you, Mr. Chairman. I just want to thank 
my colleague from Louisiana, because I'm a cosponsor of his 
legislation and happy to help out with your testimony this 
morning in trying to get copies together.
    Mr. Jefferson. Thank you, J.D.
    Mr. Hayworth. Thank you very much. Nothing else, Mr. 
Chairman.
    Chairman Bunning. Mr. Frank, would you like to begin.

 STATEMENT OF HON. BARNEY FRANK, A REPRESENTATIVE IN CONGRESS 
                FROM THE STATE OF MASSACHUSETTS

    Mr. Frank. Thank you, Mr. Chairman. Thank you for alerting 
me to the impending vote when I ran into you and saving me from 
coming down. I appreciate the courtesy when we bumped into each 
other.
    I am a supporter of the legislation sponsored by my 
colleague from Louisiana, and I also am a sponsor, myself, of a 
bill that deals with the windfall elimination provision. Let me 
begin by saying the bill I have introduced has full effects for 
people whose combined benefits with the passage of the bill 
would be $2,000 a month or less, and it would phase out at 
$3,000 a month. So, if this is a windfall for people who are 
making--trying to live in this society on $18,000, $19,000 or 
$20,000, it is not much of a windfall, and what we have are 
people who I think are being unfairly picked. They worked at 
the jobs at the time they worked at them, and they qualified 
for this combination of Social Security and pension and were 
then told after their working years, in some cases, or toward 
the end of them that they were going to suffer this reduction.
    I understand it to have been aimed at people who would be 
getting a windfall because they made a lot of money in one job 
and then just sneaked in the effect under Social Security, and 
that's why there is another piece of legislation our colleague 
from Texas, Mr. Sandlin, has which would eliminate the program 
entirely.
    Mine is narrower than that, and while it does affect most 
of the people, it does hit most of the people who would be 
affected by the formula--I'm told 93 percent--I think that 
shows, in effect, this is not a windfall for people who are 
rolling in dough, because this is for people with $3,000 or 
less, and it is only fully applicable for people who make 
$2,000 or less.
    The Social Security Administration has said it would cost 
$3.4 billion over the next 5 years. I believe that we have the 
revenues to fix this up and essentially we're talking about 
people who when they went to work were told this is what they 
were going to get, and it does seem to me particularly when 
we're talking about people whose total income is less than 
$24,000 a year that we ought to give it to them.
    Chairman Bunning. OK, Mr. Frank. Let me ask you this: 
Everybody that is covered under the windfall has paid into the 
Social Security system?
    Mr. Frank. Yes, these are people who worked----
    Chairman Bunning. So, you're proposing to eliminate the 
total windfall in your----
    Mr. Frank. No, actually, Mr. Sandlin has a bill that would 
repeal it all together which I'd vote for. Mine is a compromise 
although it does cover most of the people. It would totally 
eliminate it for people who make less than $2,000, and it would 
phase it out till $3,000, so it's a complete fix for people 
under $2,000; partial as you get close to $3,000, and if you 
get any more than $3,000 a month, it doesn't help you at all.
    Chairman Bunning. Thank you. Barb.
    Mrs. Kennelly. Nothing.
    Chairman Bunning. No questions? Thank you, Mr. Frank for 
your testimony.
    The second panel, if they would take their place--well, 
we're going to mess up some names here. Cynthia Fagnoni.
    Ms. Fagnoni. Fagnoni, right.
    Chairman Bunning. John Schaefer, Frank Mulvey, and Geoffrey 
Kollmann. Cynthia is the Director of Income Security Issues at 
the General Accounting Office, GAO; Mr. Schaefer, Senior 
Evaluator, Income Security Issues at GAO. Frank is the 
Assistant Director, Income Security Issues at the GAO, and Mr. 
Kollmann is the specialist in social legislation, education and 
public welfare division at the Congressional Research Service.
    Cynthia, if you would begin, we'd appreciate it.

  STATEMENT OF CYNTHIA M. FAGNONI, DIRECTOR, INCOME SECURITY 
 ISSUES, HEALTH, EDUCATION, AND HUMAN SERVICES DIVISION, U.S. 
GENERAL ACCOUNTING OFFICE; ACCOMPANIED BY JOHN SCHAEFER, SENIOR 
        EVALUATOR; AND FRANK MULVEY, ASSISTANT DIRECTOR

    Ms. Fagnoni. Thank you, Mr. Chairman. Good morning, Mr. 
Chairman and Members of the Subcommittee. I'm pleased to be 
here today----
    Chairman Bunning. Would you please pull it--that's it, so 
we can hear.
    Ms. Fagnoni. I'm pleased to be here today to discuss the 
implications of extending mandatory Social Security coverage to 
all newly hired State and local government employees. 
Currently, the SSA, Social Security Administration, estimates 
that about 30 percent, or 5 million of the State and local work 
force is not covered by Social Security. As you are aware, 
Social Security Trust Funds will be exhausted by 2032 according 
to SSA estimates. To offset a part of this financial shortfall, 
the Social Security Advisory Council and others favor extending 
mandatory coverage to all newly hired State and local 
government workers.
    Today, I will focus on three issues associated with 
mandatory coverage. These are: The implications of mandating 
such coverage for the Social Security Program; the impact of 
mandatory coverage on public employers, newly hired employees, 
and the affected pension plans; and the potential legal and 
administrative issues that are associated with implementing 
mandatory coverage.
    My observations are based on work we are currently 
conducting for you, Mr. Chairman. Our work shows that in 
deciding whether to extend mandatory Social Security coverage 
to all newly hired State and local employees, that Congress 
will need to weigh several important factors associated with 
the three issues I'm going to discuss.
    Regarding the first issue, implications for the Social 
Security Program, we found that mandatory coverage would 
benefit Social Security in several ways. Specifically, 
extending mandatory Social Security coverage to States and 
localities with noncovered workers would reduce the trust funds 
long-term financial shortfall; increase program participation, 
and simplify program administration. SSA estimates that 
mandatory coverage would reduce Social Security's financial 
shortfall by about 10 percent and extend the program's solvency 
by 2 years. As with most other individual elements aimed at 
improving long-term Social Security solvency such as raising 
the retirement age, extending coverage would resolve only a 
part of the trust fund solvency problem. This point has been 
well recognized in various reform packages such as those 
presented by the Social Security Advisory Council where a 
combination of adjustments were proposed in order to extend the 
program's solvency over a 75-year period.
    Mandatory coverage would also increase participation in an 
important national program and simplify program administration. 
SSA estimates that about 95 percent of employees who are not 
covered by Social Security through their jobs with State and 
local governments become entitled to Social Security anyway 
either through other employment or as spouses or dependents. 
Individuals with dual coverage are subject to certain offsets 
as we've heard--the GPO and the WEP--that reduce their Social 
Security benefits. The Congress enacted these benefit reduction 
provisions to reduce the unfair advantage that workers who are 
eligible for pension benefits might have when they apply for 
Social Security benefits.
    However, in a study we recently completed for you, Mr. 
Chairman, we found that SSA is often unable to determine 
whether applicants should be subject to the GPO or WEP. We 
estimate that failure to reduce benefits to Federal, State, and 
local employees has caused $160 to $355 million in overpayments 
between 1978 and 1995. Mandatory coverage would reduce such 
benefit adjustments by gradually reducing the number of 
employees in noncovered jobs.
    With respect to the second mandatory coverage issue, we 
have determined that the impacts on employers, employees, and 
pension plans would vary depending on how States and localities 
respond to this new requirement. If all newly hired public 
employees were to receive Social Security coverage, they would 
have the income protections afforded by Social Security. At the 
same time, they and their employers would pay the combined 
Social Security payroll tax of 12.4 percent. Each State and 
locality with noncovered workers would need to decide how to 
deal with this increase in retirement costs and benefits. They 
could absorb the added cost and leave current pension plans 
unchanged or eliminate plans completely.
    From discussions we've had with State and local 
representatives, we believe States and localities with 
noncovered workers would likely adjust their pension plans to 
reflect Social Security's costs and benefits. They could, for 
example, maintain similar benefits for current and newly hired 
employees or provide newly hired employees with benefits 
similar to those provided through the pension plans that are 
already coordinated with Social Security. Both of these 
responses would likely increase costs and benefits for newly 
hired employees.
    On the other hand, States and localities could maintain 
level retirement spending. This may require a reduction in 
pension benefits. According to pension plan representatives, 
each of these responses to mandatory coverage would result in 
reduced contributions to current plans which could affect long-
term financing of these plans.
    The third area of impact we have addressed involved legal 
and administrative issues associated with mandatory coverage. 
Regarding legal issues, mandating Social Security coverage for 
State and local employees could elicit a constitutional 
challenge. Also, States and localities have told us that they 
may require up to 4 years to redesign pension formulas; 
legislate changes; adjust budgets, and disseminate information 
to employers and employees.
    Mr. Chairman, this completes my statement this morning. I'd 
be pleased to answer any questions you or the Members may have.
    [The prepared statement and atttachment follow:]

Statement of Cynthia M. Fagnoni, Director, Income Security Issues, 
Health, Education, and Human Services Division, U.S. General Accounting 
Office

    Mr. Chairman and Members of the Subcommittee:
    Thank you for inviting me to testify on extending mandatory 
Social Security coverage to all newly hired state and local 
government employees. Currently, the Social Security 
Administration (SSA) estimates that about 30 percent--or about 
5 million employees--of the state and local workforce is not 
covered by Social Security. As you are aware, SSA projects 
Social Security revenues to fall short of expenditures starting 
in 2021 and the trust funds to be exhausted by 2032. To offset 
a part of the financial shortfall, the 1994-1996 Social 
Security Advisory Council favored extending mandatory coverage 
to all newly hired state and local government workers.
    Today, I would like to focus on the implications of 
mandating such coverage for the Social Security program, public 
employers, newly hired employees, and the affected pension 
plans. I will also address potential legal and administrative 
issues associated with implementing mandatory coverage. My 
testimony is based on work we are currently conducting for the 
Chairman of this Subcommittee.
    In summary, our work shows that mandating coverage for all 
newly hired public employees would reduce Social Security's 
long-term financial shortfall by about 10 percent, increase 
participation in an important national program, and simplify 
program administration. The impact on public employers, 
employees, and pension plans would depend on how states and 
localities with noncovered employees would react to these new 
coverage provisions. One often-discussed option would be for 
public employers to modify their pension plans in response to 
mandatory Social Security coverage. We will focus on this 
option. For example, many public pension plans currently offer 
a lower retirement age and higher retirement income benefit 
than Social Security. Social Security, on the other hand, 
offers complete inflation protection, full benefit portability, 
and dependent benefits, which are not available in many public 
pension plans. Costs would likely increase for those states and 
localities that wanted to keep their enhanced benefits for 
newly hired employees. Alternatively, states and localities 
that wanted to maintain level spending for retirement would 
likely need to reduce some pension benefits. Regardless, 
mandating coverage for public employees would present legal and 
administrative issues that would need to be resolved. For 
example, states and localities could require up to 4 years to 
design, legislate, and implement changes to current pension 
plans.

                               Background

    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. State and local government 
employees were excluded 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.
    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. SSA estimates that 96 
percent of the workforce, including 70 percent of the state and 
local government workforce, is now covered by Social Security.
    Social Security provides retirement, disability, and 
survivor benefits to insured workers and their dependents. 
Insured workers are eligible for full retirement benefits at 
age 65 \1\ and reduced benefits at age 62. 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 the final year's 
wages for low earners. Social Security's primary source of 
revenue is the Old Age, Survivors, and Disability Insurance 
portion of the payroll tax paid by employers and employees. The 
payroll tax is 6.2 percent of earnings each for employers and 
employees, up to an established maximum.
---------------------------------------------------------------------------
    \1\ 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.
---------------------------------------------------------------------------
    SSA estimates that 5 million state and local government 
employees, excluding students and election workers, are not 
covered by Social Security. SSA also estimates that annual 
wages for noncovered employees total about $132.5 billion. 
Seven states--California, Colorado, Illinois, Louisiana, 
Massachusetts, Ohio, and Texas--account for more than 75 
percent of the noncovered payroll. A 1995 survey of public 
pension plans found that police, firefighters, and teachers are 
more likely to occupy noncovered positions than other 
employees.
    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 
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.
    As part of our study, we examined nine state and local 
defined benefit plans covering over 2 million employees. For 
those plans, employer contributions ranged from 6 to 14.5 
percent of payroll and employee contributions ranged from 6.4 
to 9.3 percent of payroll. (See the appendix.)

      Mandatory Coverage Would Benefit the Social Security Program

    Extending mandatory Social Security coverage to states and 
localities with noncovered workers would reduce the trust 
funds' long-term financial shortfall, increase program 
participation, and simplify program administration.
    SSA estimates that mandatory coverage would reduce Social 
Security's financial shortfall by about 10 percent--from 2.19 
percent of payroll (a present discounted value of $3.1 
trillion) to 1.97 percent of payroll (a present discounted 
value of $2.9 trillion)--over a 75-year period.\2\ Figure 1 
shows that mandatory coverage would also extend the program's 
solvency by about 2 years, from 2032 to 2034. As with most 
other elements of the reform proposals put forward by the 1994-
1996 Social Security Advisory Council, such as raising the 
retirement age, extending mandatory coverage to newly hired 
state and local employees would resolve only a part of the 
trust funds' solvency problem. A combination of adjustments 
will be needed to extend the program's solvency over the entire 
75-year period.
---------------------------------------------------------------------------
    \2\ 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.


    SSA data indicate that revenues from payroll taxes on the 
newly covered workers, taxes on their benefits, and interest on 
the added trust fund balances would substantially exceed 
additional expenditures throughout the 75-year period. SSA 
assumes that payroll tax collections for new employees would 
accelerate early in the 75-year period, while benefits for 
those employees would not rise significantly until later in the 
period.
    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 Advisory Council stated 
that mandatory coverage is basically ``an issue of fairness.'' 
The Advisory Council report stated 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.''
    Mandatory coverage would also simplify program 
administration in the long run. SSA's Office of Research, 
Evaluation, and Statistics estimates that 95 percent of 
noncovered state and local employees become entitled to Social 
Security as either workers, spouses, or dependents. SSA's 
Office of the Chief Actuary estimates that 50 to 60 percent of 
noncovered employees will be fully insured by age 62 from 
covered employment.
    The Congress has established the government pension offset 
and windfall elimination provisions to reduce the unfair 
advantage that workers who are eligible for pension benefits 
based on noncovered employment might have when they apply for 
Social Security benefits. The earnings histories for workers 
with noncovered earnings may appear to qualify them for the 
higher earnings replacement rates that Social Security assigns 
to lower earners, when in fact they have substantial income 
from public pension plans. With some exceptions, the government 
pension offset and windfall elimination provisions require SSA 
to use revised formulas to calculate benefits for workers with 
noncovered employment.
    However, a separate GAO study for the Chairman of this 
Subcommittee indicates that SSA is often unable to determine 
whether applicants should be subject to the government pension 
offset or windfall elimination provisions.\3\ We estimate 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, SSA plans to perform 
additional computer matches with the Office of Personnel 
Management and the Internal Revenue Service (IRS) to get 
noncovered pension data in order to ensure that these 
provisions are applied. Mandatory coverage would reduce benefit 
adjustments by gradually reducing the number of employees in 
noncovered jobs. Eventually, all state and local employees, 
with the exception of a few categories of workers, such as 
students and election workers, would be in covered employment.
---------------------------------------------------------------------------
    \3\ Social Security: Better Payment Controls for Benefit Reduction 
Provisions Could Save Millions (GAO/HEHS-98-76, Apr. 30, 1998).
---------------------------------------------------------------------------
    Additionally, in 1995, SSA asked its Inspector General to 
undertake a review of state and local government employers' 
compliance with Social Security coverage provisions. In 
December 1996, SSA's Office of the Inspector General reported 
that Social Security provisions related to coverage of state 
and local employees are complex and difficult to administer.\4\ 
The report stated that few resources were devoted to training 
state and local officials and ensuring that administration and 
enforcement roles and responsibilities are clearly defined. The 
report concluded that there is a significant risk of sizeable 
noncompliance with state and local coverage provisions. In 
response, SSA and IRS, which is responsible for collecting 
Social Security payroll taxes, initiated an effort to educate 
employers and ensure compliance with legal requirements for 
withholding Social Security payroll taxes.
---------------------------------------------------------------------------
    \4\ Social Security Coverage of State and Local Government 
Employees, SSA Office of the Inspector General (A-04-95-0613, Dec. 13, 
1996).
---------------------------------------------------------------------------

Impact of Mandatory Coverage on Employers, Employees, and their Pension 
                            Plans Would Vary

    If all newly hired public employees were to receive 
mandated Social Security coverage, they would have the income 
protection afforded by Social Security. Also, they and their 
employers would pay the combined Social Security payroll tax of 
12.4 percent of payroll. Each state and locality with 
noncovered workers would decide how to respond to the increase 
in retirement costs and benefits. They could absorb the added 
cost and leave current pension plans unchanged or eliminate 
plans completely. From discussions with state and local 
representatives, however, we believe states and localities with 
noncovered workers would likely adjust their pension plans to 
reflect Social Security's costs and benefits. To illustrate the 
implications of mandatory coverage to employers and employees, 
we examined three possible responses:
    --States and localities could maintain similar benefits for 
current and newly hired employees. This response would likely 
result in an increase in total retirement costs and some 
additional benefits for many newly hired employees.
    --States and localities could examine other pension plans 
that are already coordinated with Social Security and provide 
newly hired employees with similar benefits. This response 
would also likely increase costs and benefits for newly hired 
employees.
    --States and localities could maintain level retirement 
spending. This response could require a reduction in pension 
benefits.
    According to pension plan representatives, each of these 
responses to mandatory coverage would result in reduced 
contributions to current plans, which could affect long-term 
financing of the plans.

Maintaining Level Benefits Would Likely Increase Costs

    States and localities with noncovered workers could opt to 
provide newly hired employees with Social Security and pension 
benefits that, in total, approximate the pension benefits of 
current employees. Studies indicate that such an option could 
increase retirement costs by 7 percent of new-employee payroll. 
Using SSA's data and its assumption that mandatory coverage 
would start January 1, 2000, a 7 percent of payroll increase in 
retirement costs for newly hired employees would mean 
additional costs to states and localities with noncovered 
workers of about $9.1 billion over the first 5 years.
    A 1980 study of the costs of providing Social Security 
coverage for noncovered workers provides support for the 
estimated 7 percent of payroll increase. The Universal Social 
Security Coverage Study Group developed options for mandatory 
coverage of employees at all levels of government and analyzed 
the fiscal effects of each option. The study group used two 
teams of actuaries to study over 40 pension plans. The study 
estimated that costs, including Social Security taxes and 
pension plan contributions, would need to increase an average 
of 2 to 7 percent of payroll to maintain level benefits for 
current and newly hired employees.\5\
---------------------------------------------------------------------------
    \5\ The study estimate was 5 to 10 percent of payroll. We deducted 
the 2.9 percent of payroll Medicare tax since it was mandated for all 
newly hired state and local employees in 1986, after the study was 
completed.
---------------------------------------------------------------------------
    The study assumed that most newly hired employees would 
have salary replacement percentages in their first year of 
retirement that would be comparable to those provided to 
current employees. For example, employees retiring before age 
62 would receive a temporary supplemental pension benefit to 
more closely maintain the benefits of the current plan. Since 
Social Security benefits are fully indexed for inflation and 
many pension plans have limited or no cost-of-living 
protection, total lifetime benefits for many newly hired 
employees would be greater than those provided to current 
employees. Existing pension plan disability and survivor 
benefits were also adjusted to reflect Social Security 
disability and survivor benefits.
    More recent studies by pension plan actuaries in Colorado, 
Illinois, and Ohio also indicate the cost increase would be in 
that same range. For example, a December 1997 study for a plan 
in Ohio indicated that providing retirement and other benefits 
for future employees that, when added to Social Security 
benefits, approximate benefits for current employees would 
require an increase in contributions of 6 to 7 percent of new-
employee payroll. A 1997 study for a pension plan in Illinois 
indicated the increased payments necessary to maintain similar 
total benefits for current and future employees would be about 
6.5 percent of new-employee payroll.
    The 1980 study stated that the causes of the cost increase 
cannot be ascribed directly to specific Social Security or 
pension plan provisions. The study also states, however, that 
certain Social Security and pension plan provisions are among 
the most important factors contributing to the cost increase. 
Social Security is fully indexed for cost-of-living increases, 
is completely portable, and provides substantial additional 
benefits for spouses and dependents. In addition, pension plans 
would need to provide special supplemental benefits for 
employees who retire before age 62, especially in police and 
firefighter plans.
    The study also found that the magnitude of the cost 
increase would depend on the pension plan's current benefits. 
Cost increases would be less for plans that already provide 
disability, survivor, and other benefits similar to those 
provided by Social Security because those plans would be able 
to eliminate duplicate benefits.

Matching Pension Benefits of Currently Covered Employees Would 
Likely Increase Costs

    About 70 percent of the state and local workforce is 
already covered by Social Security. If coverage is mandated, 
states and localities with noncovered employees could decide to 
provide newly hired employees with pension plan benefits 
similar to those provided to currently covered employees.
    The 1980 study examined this option and concluded that 
implementation would increase costs by 6 to 14 percent of 
payroll--or 3 to 11 percent of payroll after eliminating the 
Medicare tax. The study also found that most pension plans for 
covered employees did not provide supplemental retirement 
benefits for employees who retire before Social Security 
benefits are available. For most of the examined pension plans, 
the present value of lifetime benefits for employees covered by 
Social Security would be greater than the value of benefits for 
current noncovered employees.
    Our analysis of 1995 Public Pension Coordinating Council 
data also indicates that retirement costs for states and 
localities covered by Social Security are higher than the costs 
for noncovered states and localities. For the pension plans 
that responded to the survey, the average employee cost rate 
was about 9 percent of pay in covered plans, including Social 
Security taxes, and 8 percent of pay in noncovered plans. The 
average employer cost rate, excluding the cost of unfunded 
liabilities, was about 12 percent of payroll for employers in 
covered plans, including Social Security taxes, and 8 percent 
of payroll for employers in noncovered plans.
    These data also indicate that many employees in covered and 
noncovered plans, especially police and firefighters, retire 
before age 65, when covered employees would be eligible for 
full Social Security benefits. Our analysis indicates that 
covered employees who retire before age 65 initially have a 
lower salary replacement rate than noncovered employees. The 
average salary replacement rate with 30 years of service was 53 
percent for members of Social Security covered plans and 64.7 
percent for members of noncovered plans.
    At age 65, however, Social Security covered employees have 
a higher total benefit than noncovered employees. According to 
the Department of Labor's 1994 survey, for example, an employee 
age 65 with 30 years of service, final earnings of $35,000, and 
Social Security coverage had 87 percent of earnings replaced--
51 percent by a pension plan and 36 percent by Social Security. 
The same employee with no Social Security coverage had 63 
percent of earnings replaced by a pension plan. We did not 
compare the expected value of total lifetime benefits for 
covered and noncovered employees because amounts would vary 
depending on the benefits offered by each plan.
    Additionally, the extent to which the experience of states 
and localities with covered employees can be generalized to 
those with noncovered employees is limited. According to the 
1980 study, most public pension plans that coordinated with 
Social Security did so in the 1950s and 1960s when Social 
Security benefits and payroll taxes were much smaller. As 
Social Security benefits grew, pension plan benefits remained 
basically unchanged. Starting in the 1970s, however, rising 
pension costs caused several large state systems to consider 
reducing their relatively liberal pension benefits. In the 
1980s, for example, California created an alternative set of 
reduced benefits for general employees to, among other things, 
reduce the state's retirement costs. Initially, general 
employees were permitted to select between the higher costs and 
benefits of the original plan and the lower costs and benefits 
of the revised plan. Subsequently, however, newly hired general 
employees were limited to the reduced benefits.

Level Retirement Spending Could Mean Reduced Benefits

    Several employee, employer, and plan representatives stated 
that spending increases necessary to maintain level retirement 
income and other benefits for current and future members would 
be difficult to achieve. They indicate that states and 
localities might decide to maintain current spending levels, 
which could result in reduced benefits under state and local 
pension plans for many employees.
    A June 1997 actuarial evaluation of an Ohio pension plan 
examined the impact on benefits of mandating Social Security 
coverage for all employees, assuming no increase in total 
retirement costs. The study concluded that level spending could 
be maintained if (1) salary replacement rates for employees 
retiring with 30 years of service were reduced from 60.3 
percent to 44.1 percent, (2) current retiree health benefits 
were eliminated for both current and future employees, and (3) 
the funding period for the plan's unfunded accrued liability 
were extended from 27 years to 40 years.

Impact on Pension Plan Finances Is Uncertain

    Most states and localities use a reserve funding approach 
to finance their pension plans. In reserve funding, employers--
and frequently employees--make systematic contributions toward 
funding the benefits earned by active employees. These 
contributions, together with investment income, are intended to 
accumulate sufficient assets to cover promised benefits by the 
time employees retire.
    However, many public pension plans have unfunded 
liabilities. The nine plans that we examined, for example, have 
unfunded accrued liabilities ranging from less than 1 percent 
to over 30 percent of total liabilities. Unfunded liabilities 
occur for a number of reasons. For example, public plans 
generally use actuarial methods and assumptions to calculate 
required contribution rates. Unfunded liabilities can occur if 
a plan's actuarial assumptions do not accurately predict 
reality. Additionally, retroactive increases in plan benefits 
can create unfunded liabilities. Unlike private pension plans, 
the unfunded liabilities of public pension plans are not 
regulated by the federal government. States or localities 
determine how and when unfunded liabilities will be financed.
    Mandatory coverage and the resulting changes to plan 
benefits for newly hired employees are likely to result in 
reduced contributions to the current pension plan. The impact 
of reduced contributions on plan finances would depend on the 
actuarial method and assumptions used by each plan, the 
adequacy of current plan funding, and other factors. For 
example, plan representatives are concerned that efforts to 
provide adequate retirement income benefits for newly hired 
employees would affect employers' willingness or ability to 
continue amortizing their current plans' unfunded accrued 
liabilities.

                     Legal and Other Considerations

    Mandatory coverage presents several legal and 
administrative issues, and states and localities could require 
several years to design, legislate, and implement changes to 
current pension plans.
Legal Considerations

    Mandating Social Security coverage for state and local 
employees could elicit a constitutional challenge. We believe 
that mandatory coverage is likely to be upheld under current 
Supreme Court decisions.
    Several employer, employee, and plan representatives with 
whom we spoke stated that they believe mandatory Social 
Security coverage would be unconstitutional and should be 
challenged in court. However, recent Supreme Court cases have 
affirmed the authority of the federal government to enact taxes 
that affect the states and to impose federal requirements 
governing the states' relations with their employees.
    A plan representative suggested that the Court might now 
come to a different conclusion. He pointed out that a case 
upholding federal authority to apply minimum wage and overtime 
requirements to the states was a 5 to 4 decision and that until 
then, the Court had clearly said that applying such 
requirements to the states was unconstitutional. States and 
localities also point to several recent decisions of the Court 
that they see as sympathetic to the concept of state 
sovereignty. However, the facts of these cases are generally 
distinguishable from the situation that would be presented by 
mandatory Social Security coverage.
    Unless the Court were to reverse itself, which it seldom 
does, mandatory Social Security coverage of state and local 
employees is likely to be upheld. Current decisions indicate 
that mandating such coverage is within the authority of the 
federal government.

States Would Require Up to 4 Years to Implement Mandatory 
Coverage

    The federal government required approximately 3 years to 
enact legislation to implement a new federal employee pension 
plan after Social Security coverage was mandated for federal 
employees in 1983. According to the 1980 Universal Social 
Security Coverage Study Group, transition problems for state 
and local employers would be different from those faced by the 
federal government. For example, benefit provisions vary among 
the thousands of public employee retirement plans, as do the 
characteristics of the employees covered by those plans. 
Additionally, state governments and many local governments have 
laws regulating pensions. The study group estimated that 4 
years would be required to redesign pension formulas, legislate 
changes, adjust budgets, and disseminate information to 
employers and employees. Our discussions with employer, 
employee, and pension plan representatives also indicate that 
up to 4 years would be needed to implement a mandatory coverage 
decision.
    Additionally, constitutional provisions or statutes in some 
states may prevent employers from reducing benefits for 
employees once they are hired. These states may need to 
immediately enact legislation to draw a line between current 
and future employees until decisions are made concerning the 
pension benefits for new employees who would be covered by 
Social Security. According to the National Conference of State 
Legislators, legislators in seven states, including Texas and 
Nevada, meet only biennially. Therefore, the initial 
legislation could require 2 years in those states.

                        Concluding Observations

    In deciding whether to extend mandatory Social Security 
coverage to all newly hired state and local employees, the 
Congress will need to weigh several factors. First, the Social 
Security program would benefit from mandatory coverage. The 
long-term actuarial deficit would be reduced, and the trust 
funds' solvency would be extended for about 2 years. However, 
there are other considerations besides this relatively small 
contribution to the program's solvency. Mandatory coverage 
would also increase participation in an important national 
program and simplify program administration.
    The implications for state and local employers, employees, 
and pension plans would be determined in part by employers' 
responses to Social Security coverage. States and localities 
with noncovered workers would likely need to increase total 
retirement spending to provide future workers with pension 
benefits that, when combined with Social Security benefits, 
approximate the benefits provided to current workers. At the 
same time, Social Security would provide newly hired employees 
with benefits that are not available, or are available to a 
lesser extent, under current state and local pension plans.
    In addition, mandatory coverage would present legal and 
administrative issues. States and localities might attempt to 
halt mandatory Social Security coverage in court, although such 
a challenge is unlikely to be upheld. Finally, states and 
localities could require up to 4 years to implement mandatory 
coverage.
    Mr. Chairman, this concludes my prepared statement. At this 
time, I will be happy to answer any questions you or the other 
Subcommittee Members may have.
      

                                

Appendix

Noncovered Employees and their Pension Plans

    SSA estimates that about 4 million of the approximately 5 
million state and local employees not covered by Social 
Security are in the seven states with the largest number of 
noncovered workers. (See table I.1.)

     Table I.1: States With the Largest Number of Noncovered Workers
------------------------------------------------------------------------
                                                           Number of
                                                           noncovered
                        State                            employees (in
                                                           thousands)
------------------------------------------------------------------------
California...........................................              1,200
Colorado.............................................                200
Illinois.............................................                400
Louisiana............................................                300
 Massachusetts.......................................                400
Ohio.................................................                800
 Texas...............................................                700
                                                      ------------------
    Total............................................              4,000
------------------------------------------------------------------------
Source: Office of the Chief Actuary, SSA.


    The nine public pension plans included in our study have 
about 2 million members. For the most part, members of these 
plans are not covered by Social Security. (See table I.2.)

               Table I.2: Membership, Contribution Rates, and Assets for Nine Public Pension Plans
----------------------------------------------------------------------------------------------------------------
                                                                             Contribution rate \1\        Net
                                                   Active      Benefit  ------------------------------   assets
              Public pension plan                  members   recipients                                   (in
                                                                         Employer  Employee    Total   billions)
----------------------------------------------------------------------------------------------------------------
California State Teachers' Retirement System...     364,000    154,000     12.5%      8.0%     20.5%      $74.8
Public Employees'..............................     148,000     46,000     11.6       8.01      9.61        9.9
Teachers' Retirement System of Illinois........     137,000     59,000      7.9       8.0      15.9        17.4
Louisiana State Employees' Retirement System...      70,000     27,000     12.0       7.5      19.5         4.3
Massachusetts State Employees' Retirement            83,000     42,000     14.5       9.0      23.5         9.6
 System........................................
Massachusetts State Teachers' Retirement System      69,000     29,000     14.0       9.0      23.0         9.9
State Teachers Retirement System of Ohio.......     169,000     89,000     14.0       9.3      23.3        42.4
Public Employees Retirement System of Ohio.....     345,000    146,000     13.3       8.5      21.8        39.8
Teacher Retirement System of Texas.............     695,000    158,000      6.0       6.4      12.4        62.2
                                                ----------------------------------------------------------------
Total..........................................   2,080,000    750,000   ........  ........  ........    $280.3
----------------------------------------------------------------------------------------------------------------
\1\ Employer rate includes contributions toward the plan's unfunded liability. Employee rate is the rate for
  general employees.
Source: State and pension plan financial reports.

      

                                
    Chairman Bunning. Thank you very much.
    Mr. Kollmann.

STATEMENT OF GEOFFREY KOLLMANN, SPECIALIST, SOCIAL LEGISLATION, 
 EDUCATION AND PUBLIC WELFARE DIVISION, CONGRESSIONAL RESEARCH 
                            SERVICE

    Mr. Kollmann. Thank you, Mr. Chairman. Mr. Chairman and 
Members of the Subcommittee, I was asked to summarize and 
briefly discuss issues concerning two provisions of current law 
that can reduce or eliminate Social Security benefits payable 
to government employees. The two provisions are the government 
pension offset provision and windfall elimination provision. 
They affect the Social Security benefits of persons who also 
receive a pension from employment not covered by Social 
Security--for example, the civil service retirement system for 
Federal workers and State and local government employees whose 
States have not chosen Social Security coverage and who are 
participating in retirement plans. The purpose of both 
provisions is to prevent what otherwise would be considered to 
be an unfair advantage for government compared to private 
sector workers.
    The first provision, the windfall elimination, reduces the 
Social Security benefit, earned as a worker, of the affected 
individuals by applying a different formula to the computation 
of their benefits. Ordinarily, the Social Security benefit 
formula applies three progressive factors--90, 32, and 15 
percent--to three different levels or brackets of average 
monthly covered earnings. However, for a worker subject to the 
windfall elimination rules, the 90-percent factor in the first 
band of a benefit formula is replaced by a factor of 40 
percent. The effect is to reduce their benefits by lowering the 
amount of the earnings in the first bracket that is converted 
to benefits.
    The provision includes a guarantee, which is designed to 
protect workers with low pensions, that the reduction in 
benefits caused by the windfall formula cannot exceed one-half 
of the noncovered pension. The provision exempts workers who 
have 30 or more years of substantial employment covered under 
Social Security, and lesser reductions apply to workers with 21 
through 29 years of substantial covered employment.
    Enacted in 1983, the purpose of this provision was to 
remove an unintended advantage that the regular Social Security 
benefit formula provided to persons who also had pensions from 
non-Social Security covered employment. The regular formula was 
intended to help workers, who spent their work careers in low-
paying jobs, by providing them with a benefit that replaces a 
higher proportion of their earnings than the benefit that's 
provided for workers with high earnings. However, the formula 
could not differentiate between those who worked in low-paying 
jobs throughout their careers and other workers who appeared to 
have been low paid because they worked many years in jobs not 
covered by Social Security. Those years show up as zeros in the 
Social Security earnings records.
    Thus, under the old law, workers who were employed for only 
a portion of their careers in jobs covered by Social Security, 
even highly paid ones, also received the advantage of this 
weighted formula, because their few years of covered earnings 
were averaged over their entire working career to determine the 
average covered earnings on which their Social Security 
benefits were based. The windfall elimination is intended to 
remove this advantage for these workers.
    Proponents of the provision say that it is a reasonable 
means to prevent payment of overgenerous and unintended 
benefits to certain workers who otherwise would profit from 
happenstance, that is, the mechanics of the Social Security 
benefit formula. Opponents of the provision believe it is 
unfair, because it substantially reduces a benefit that workers 
had included in their retirement plans. Others criticize how 
the provision works. They say the 40-percent factor is 
arbitrary and is an inaccurate way to determine the actual 
windfall when applied to individual cases. For example, they 
say it overpenalizes low-paid workers with short careers or 
with full careers that are fairly evenly split. They also say 
it is regressive, because the reduction is confined to the 
first bracket of the benefit formula and causes a relatively 
larger reduction in benefits for low-paid workers.
    The second provision, the government pension offset, 
reduces Social Security benefits' spousal benefits that is, 
benefits payable as a dependent of Social Security--covered 
workers to persons who receive a pension from government 
employment that was not covered by Social Security. It is 
intended to place spouses whose government employment was not 
covered by Social Security in approximately the same position 
as other workers by applying the equivalent of Social 
Security's ``dual entitlement'' rule, which subtracts 100 
percent of Social Security worker benefit from any Social 
Security spousal benefit. To do this, it is assumed that two-
thirds of the government pension is approximately equivalent to 
a Social Security benefit the spouse would receive as a worker 
if his or her job had been covered by Social Security. Thus, 
the provision attempts to replicate the Social Security dual 
entitlement rule by requiring that two-thirds of the government 
pension be subtracted from the Social Security spousal benefit.
    As with the windfall elimination provision, critics say 
that the GPO is not well understood and that many affected by 
it are unprepared for smaller Social Security benefits than 
they had assumed in making retirement plans. They also argue 
that whatever its rationale, reducing everyone's spousal 
benefit by two-thirds of the their government pension is an 
imprecise way to estimate what the spousal would be, had the 
government job been covered by Social Security. They say that 
this procedure has uneven results and it may be especially 
disadvantageous for surviving spouses with low income, 
particularly women.
    Defenders of the government pension offset maintain it is 
an effective method to curtail what otherwise would be an 
unfair advantage for government workers. They also point out 
that Social Security's dual entitlement rule, which the 
government pension offset is designed to replicate, also can 
reduce the income of already low-income recipients, and that if 
this issue is to be addressed, using other means or programs 
that more accurately measure need and apply to the general 
population would be more appropriate than changing just the 
government pension offset provision.
    Mr. Chairman, this concludes my testimony.
    [The prepared statement follows:]

Statement of Geoffrey Kollmann, Specialist, Social Legislation, 
Education and Public Welfare Division, Congresssional Research Service

    Mr. Chairman and Members of the Committee, I was asked to 
summarize and briefly discuss issues concerning two provisions 
of current law that can reduce or eliminate Social Security 
benefits payable to government employees. The two provisions 
are the government pension offset provision and the windfall 
elimination provision. They affect the Social Security benefits 
of persons who also receive a pension from non-Social Security-
covered employment, e.g., the federal Civil Service Retirement 
System (CSRS) and state and local government employees whose 
states have not chosen Social Security coverage and who are 
participating in a retirement plan. They do not affect 
government workers whose pensions are based on Social Security-
covered employment, e.g., those with full careers under the 
Federal Employees Retirement System (FERS). The purpose of both 
provisions is to prevent what otherwise would be an unfair 
advantage for government compared to private sector workers.

                   The Windfall Elimination Provision

    Enacted in 1983, this provision reduces the Social Security 
benefit, earned as a worker, of the affected individuals by 
applying a different formula to the computation of their 
benefits. Ordinarily, the Social Security benefit formula 
applies three progressive factors--90%, 32%, and 15%--to three 
different levels, or brackets, of average monthly covered 
earnings. However, for workers subject to the Windfall 
Elimination rules, the 90% factor in the first band of the 
benefit formula is replaced by a factor of 40%. The effect is 
to reduce their benefits by lowering the amount of their 
earnings in the first bracket that is converted to benefits. 
Following is an example of how the provision works in 1998:

   Monthly Benefit for Worker With Average Monthly Earnings of $1,000

Regular formula

    90% of first $477      $429.30
    32% of $477 through $2,875      167.30
    15% over $2,875      00.00
     Total     583.90

``Windfall formula''    

     40% of first $477      $190.80
    32% of $477 through $2,875     167.30
    15% over $2,875      00.00
     Total     358.10

    The provision includes a guarantee (designed to help 
protect workers with low pensions) that the reduction in 
benefits caused by the windfall formula can not exceed one-half 
of the pension that is based on non Social Security-covered 
work. The provision also exempts workers who have 30 or more 
years of ``substantial'' employment covered under Social 
Security (i.e., having earned at least one-quarter of the 
Social Security maximum taxable wage base for each year in 
question). Also, lesser reductions apply to workers with 21 
through 29 years of substantial covered employment.
    The purpose of this provision was to remove an unintended 
advantage that the regular Social Security benefit formula 
provided to persons who also had pensions from non-Social 
Security-covered employment. The regular formula was intended 
to help workers who spent their work careers in low paying 
jobs, by providing them with a benefit that replaces a higher 
proportion of their earnings than the benefit that is provided 
for workers with high earnings. However, the formula could not 
differentiate between those who worked in low-paid jobs 
throughout their careers and other workers who appeared to have 
been low paid because they worked many years in jobs not 
covered by Social Security (as earnings in these years do not 
show up on Social Security's records, they are shown as zeros 
for Social Security benefit purposes). Thus, under the old law, 
workers who were employed for only a portion of their careers 
in jobs covered by Social Security--even highly paid ones--also 
received the advantage of the ``weighted'' formula, because 
their few years of covered earnings were averaged over their 
entire working career to determine the average covered earnings 
on which their Social Security benefits were based. The 
Windfall Elimination Provision formula is intended to remove 
this advantage for these workers.
    Proponents of the provision say that it is a reasonable 
means to prevent payment of overgenerous and unintended 
benefits to certain workers who otherwise would profit from 
happenstance, i.e., the mechanics of the Social Security 
benefit formula. They maintain that the provision rarely causes 
hardship because by and large the people affected are 
reasonably well off, as most of them also receive government 
pensions.
    Opponents of the provision believe it is unfair because it 
substantially reduces a benefit that workers had included in 
their retirement plans. Others criticize how the provision 
works. They say the arbitrary 40% factor in the formula is an 
inaccurate way to determine the actual windfall when applied to 
individual cases. For example, they say it over-penalizes lower 
paid workers with short careers, or with full careers that are 
fairly evenly split. They also say it is regressive, because 
the reduction is confined to the first bracket of the benefit 
formula and causes a relatively larger reduction in benefits 
for low-paid workers.

                The Government Pension Offset Provision

    Enacted in 1977, this provision reduces Social Security 
spousal benefits, i.e., benefits payable as a dependent of a 
Social Security-covered worker, to persons who receive a 
pension from government employment that was not covered by 
Social Security. The GPO is intended to place retirees whose 
government employment was not covered by Social Security and 
who are eligible for a Social Security spousal benefit in 
approximately the same position as other retirees whose jobs 
were covered by Social Security. Social Security retirees are 
subject to an offset of spousal benefits according to that 
program's ``dual entitlement'' rule. That rule requires that a 
Social Security retirement benefit earned by a worker be 
subtracted from his or her Social Security spousal benefit, and 
the resulting difference, if any, is the amount of the spousal 
benefit paid. Thus, workers retired under Social Security may 
not collect their own Social Security retirement benefit as 
well as a full spousal benefit. The rationale is that a Social 
Security spousal benefit is based on the concept of 
``dependency,'' and someone who receives his or her own Social 
Security benefit as a retired worker is not completely 
financially dependent on his or her spouse.
    The GPO replicates the Social Security dual entitlement 
rule by assuming that two-thirds of the government pension is 
approximately equivalent to a Social Security retirement 
benefit the worker would receive if his or her job had been 
covered by Social Security. Thus, the GPO requires that two-
thirds of the government pension be subtracted from the Social 
Security spousal benefit, and only the resulting difference, if 
any, is paid. (Implicit in this arrangement is the assumption 
that the remaining one-third is equivalent to a private 
pension.). Following is an example of the way the GPO works. 
Before the GPO is applied, a couple's situation could be like 
this:

Government Worker's Benefits

    $600 = government pension
    $450 = potential spousal benefit (\1/2\  $900)

Worker's Spouse's Benefits

    $900 = Social Security worker benefit

    After application of the GPO, the couple's situation would 
be this:

Government Worker's Benefits

    $600 = government pension
    $50 = spousal benefit (\2/3\  $600 = $400, which 
subtracted from $450 = $50)

Worker's Spouse's Benefits

    $900 = Social Security worker benefit

    Critics of the GPO say that it is not well understood and 
that many affected by it are unprepared for a smaller Social 
Security benefit than they had assumed in making retirement 
plans. They also argue that, whatever its rationale, reducing 
everyone's spousal benefit by two-thirds of their government 
pension is an imprecise way to estimate what the spousal 
benefit would be had the government job been covered by Social 
Security. They say that this procedure has uneven results and 
that it may be especially disadvantageous for surviving spouses 
with low incomes.
    Defenders of the GPO maintain that it is an effective 
method to curtail what otherwise would be an unfair advantage 
for government workers. The provision was phased in over six 
years and now has been in the law for 21 years; therefore, they 
say, there has been ample time for people to adjust their 
retirement plans. They also point out that Social Security's 
dual entitlement rule, which the GPO is designed to replicate, 
also can reduce the income of already low-income recipients, 
and that if this issue is to be addressed, using other means or 
programs that more accurately measure need, and apply to the 
general population, would be more appropriate than changing 
just the GPO.
      

                                

    Chairman Bunning. Thank you both for your testimony. Let me 
ask you both one simple question. In the overall 
restructuring--or whatever we come up with as far as Social 
Security reform is concerned--to make sure that the trust fund 
remains solvent past the year 2032--or whenever the deadline is 
where we can only pay 75 percent of our benefits out--do you 
both think that this needs to be addressed in the overall 
restructuring of the Social Security system? In other words, 
both the pension offset and the offset for windfall.
    Mr. Kollmann. Well, I would point out that the two 
antiwindfall measures, as time goes by, and you get out toward 
that 2032 figure, in many instances they won't be applicable 
anymore. For example, Federal workers have been covered 
mandatorily by Social Security if they were hired after 1983.
    Chairman Bunning. I am speaking only of those who are 
uncovered or are subject to the offsets.
    Mr. Kollmann. Yes, and what I'm saying is that Social 
Security's financial problems, of course, are not in the short 
range since we have substantial surpluses over the next decade 
or so, and the projected date of insolvency being three decades 
from now, with the passage of time the effect of changing these 
provisions won't have much of an effect in the out years when 
Social Security really starts to face financial problems. Now, 
if you----
    Chairman Bunning. But it will have--if we do it 3 years 
from now, it will have a direct effect on the short term 
particularly for those who are getting a major offset in their 
benefit presently.
    Mr. Kollmann. That's correct.
    Ms. Fagnoni. On the mandatory coverage issue, as we've 
noted in our testimony and as you've pointed out, the proposals 
to reform Social Security when they include this mandatory 
coverage, are always just one piece of a whole package of 
reforms, because mandatory coverage alone will not solve the 
problem. If mandatory coverage were enacted, though, as we 
mention in our testimony, that would accelerate the phase out 
of the WEP and GPO because then new State and Federal employees 
would be covered under Social Security, and, therefore, no 
longer needs to be subject to the WEP/GPO.
    Chairman Bunning. Do you both believe that we should 
address--the offset seemed fair at the time of enactment. Do 
you think it is fair now? In other words, we have an awful lot 
of people that really get whacked on their Social Security 
benefits because of their pension being done by State and local 
government, not so much in the Federal Government, but do you 
think it's fair and we should change it?
    Ms. Fagnoni. We haven't examined that issue directly. It's 
understandable why the WEP and GPO were enacted because----
    Chairman Bunning. Well, I know the reasons at that time.
    Ms. Fagnoni. Right, but they would look like a low-income 
earner when they might not in fact be. One thing I would point 
out: The study we did for you that we issued recently--you 
asked us to look at how effectively WEP and GPO are being 
administered by SSA--and what our report really shows is how 
difficult those provisions are to administer.
    Chairman Bunning. Well, if we're blowing $350 million out 
the door for mistakes in overpayment, yes, it's important.
    Ms. Fagnoni. So, they're complicated provisions to 
administer. It's difficult for SSA to, check up to see that 
they're applying the WEP and GPO correctly. So, in that sense, 
that would be one advantage to at least mandating where these 
sort of interactions----
    Chairman Bunning. If we mandated coverage, how quickly 
would we be able to implement doing away with the offsets? In 
other words, it's going to take some transition time to do it.
    Ms. Fagnoni. Yes, because the coverage would just apply to 
new workers and the estimate would be that it could take up to 
a whole generation of workers of 30 years for it to completely 
phase out, but it would depend on what the makeup of the new 
work force looked like, how quickly that really would happen.
    Chairman Bunning. Well, obviously, if somebody has been 
working in local, State, and municipal governments for 40 years 
and they're 62, their transition is going to be very difficult, 
but somebody who's just starting in employment in local, State, 
or municipal governments, you would have a transition period of 
20, 25 years if they stayed with it.
    I appreciate your testimony.
    Mrs. Kennelly.
    Mrs. Kennelly. Thank you both. You indicate that the cost 
to States would increase if States were to try to provide 
benefits to current workers which are equal to the benefits 
which would be provided to newly hired workers covered under 
Social Security, and I just have a couple of questions to play 
off that statement. First of all, as the Chairman and I have 
been involved with disability improvements and trying to reform 
and improve disability benefits, how would you compare the 
disability--and I'll add survivor and spousal benefits--
available to State and local workers to the benefits available 
under Social Security?
    Ms. Fagnoni. Overall, one of the biggest differences seems 
to be that most State and local plans provide for disability 
and survivors benefits. Many of them do not provide a spousal 
benefit, so there's one difference right there. One of the 
biggest differences has to do with how the disability benefits 
are applied; when somebody becomes eligible. Generally, under 
State and local plans, they're tied to years of service and 
earnings, so that, for example, one plan, one of the nine plans 
we looked at, an individual would not be entitled to disability 
benefits until he had worked there for 5 years. Now, under 
Social Security, that's generally true that one would have to 
have worked for 5 years, 20 quarters, to be eligible for DI, 
Disability Insurance, but there are special provisions for 
workers who are under the age of 31 who become disabled early 
in their work years, and that kind of adjustment is not 
generally available under the State and local plans. Studies 
have indicated that younger, low-earning workers might not fair 
as well under the State and local plans as they might under 
Social Security, both for the disability as well as the 
survivor's benefits.
    Mrs. Kennelly. Thank you. Another area we've been looking 
at and continue to look at is benefits for people age 62 to 65. 
Would you do the same comparison of replacement rates for 62-
to-65-year-old retirees under Social Security and under State 
and local plans?
    Ms. Fagnoni. In terms of replacement rates----
    Mrs. Kennelly. If you don't have that right----
    Ms. Fagnoni. Yes, I'm not sure we have that in terms of the 
difference. We do know that a number of the State and local 
plans provide for earlier retirement than Social Security does, 
and many of the plans that have elected to be covered under 
Social Security in the past have continued to provide for that 
supplemental early retirement benefit to keep people in some 
kind of retirement income before Social Security retirement 
eligibility kicks in.
    Mrs. Kennelly. Thank you.
    Thank you, Mr. Chairman.
    Chairman Bunning. The gentleman from California.
    Mr. Becerra. Thank you, Mr. Chairman. Can you give me a 
sense as to whether you've been able to calculate the amount 
that Social Security provides to those who are disabled or 
become disabled, or for the surviving spouse of a Social 
Security recipient; what that benefit amounts to, and how that 
compares to what a State or local government pension plan might 
provide?
    Ms. Fagnoni. We did not look at that provision specifically 
from a disability comparison. We did look more generally at how 
the disability provisions vary, and one other aspect of 
disability in State and local plans is that the provisions vary 
widely among the plans, and the definition of disability can 
vary considerably. Generally, a major distinction in the 
disability definition between Social Security and State and 
local plans is that under Social Security one must be disabled 
and unable to have any substantial gainful activity in any kind 
of job, whereas the State and local disability provisions 
generally target the disability in terms of whether or not that 
individual can continue to work at that specific job. Beyond 
that, how disability is defined can vary widely among the 
different plans. So, it's pretty difficult to compare other 
than to say the provisions vary considerably.
    Mr. Kollmann. I would add that Social Security benefits 
vary by the person's earning history, but if you take someone 
who always earned an average wage, the disability benefits are 
computed as if they were age 65 when they become disabled. 
Social Security replaces 42 percent of their preretirement 
earnings for such a worker.
    Mr. Becerra. Do you have any sense of what the State and 
local government plans would replace, generally?
    Mr. Mulvey. One of the things we are doing for this 
Subcommittee, as you know, the several counties in Texas have 
allowed the unique program, and we are looking specifically as 
to the disability survivor and retirement benefits for workers 
who have various earnings histories and who become disabled at 
various times in their careers and comparing those to Social 
Security, and we expect to have that out pretty soon, but that 
work is still preliminary.
    Mr. Becerra. What about the issue of survivor and spousal 
survivor benefits.?
    Mr. Mulvey. We were also looking at that and comparing 
Social Security to those Texas plans, but we haven't finished 
that work yet.
    Mr. Becerra. Can you give us a general sense of what you're 
finding?
    Mr. Mulvey. We're still doing the analysis, but, obviously, 
as was pointed out earlier, for those working who are low 
income and who may be injured earlier in their lives, and so 
forth, Social Security is probably going to be relatively 
better for them than the alternative plans.
    Mr. Becerra. What's the best way to respond to someone 
who's been in a State teacher retirement fund for some time if 
we should require that now State and local governments 
participate in Social Security? How do you best respond to 
those folks who've been in the system for a while?
    Ms. Fagnoni. Those entities, those bodies that have 
proposed mandated coverage as part of the Social Security 
solvency fix, point to a couple of things: One that the goal--
the original goal of the Social Security Program was to aim for 
universal coverage so that everybody would be covered under one 
system. There is an issue that some have raised regarding the 
fairness--and Mr. Bunning alluded to it in his opening 
statement. People are surprised to learn that not everybody's 
paying FICA taxes for their careers, so there's that element. 
We've got 96 percent of the work force already in Social 
Security covered jobs, and there may be questions from the 
public about why everybody isn't covered, so there's that 
aspect of it; the goals of the program; the perceived fairness 
of having what now end up being a handful of people outside the 
system. But, on the other hand----
    Mr. Becerra. For that handful that have contributed and 
would not have the opportunity to collect, if we mandated that 
they go into a system--from here on in we mandate that people 
go into the Social Security system, if you're saying to them 
that it's one or the other----
    Ms. Fagnoni. But it would depend on how the States respond 
to the mandatory coverage requirement, and we've laid out in 
our testimony some different possible options or approaches 
that States could take. A State could choose to coordinate the 
existing pension plan with Social Security to provide a package 
of benefits that incorporate Social Security features while 
also maintaining those pension features. So, it doesn't at all 
mean that they would necessarily lose their current pension 
benefits although that is a possibility. So, States have 
various options as to how they respond to this requirement.
    Mr. Becerra. Is there a problem having States respond in 
various ways and having a system out there that has a myriad of 
choices and selections by the various States?
    Ms. Fagnoni. I would imagine that the question of State 
choice might get into some issues of State sovereignty, and 
basically, they don't have a choice in terms of paying the 
Social Security payroll tax, but beyond that, they do have 
choices as to how they manage their pension plans.
    Mr. Mulvey. And private companies all have different 
pension plans associated with paying Social Security, so you 
might get variations among States the same as you get 
variations amongst private employers.
    Chairman Bunning. The gentleman's time has expired.
    Mr. Ensign. No questions?
    Mr. Hulshof.
    Mr. Hulshof. Thank you, Mr. Chairman. Ms. Fagnoni, I'm 
interested in the constitutional implications, and you 
discussed the fact that mandating Social Security coverage may 
present some constitutional issues. Could you highlight these 
in a little more detail, please?
    Ms. Fagnoni. In talking to State and local officials as 
we've been doing our work, a number of them have said they 
question the constitutionality of this. There would be court 
challenges, and they based the questions on the issue of State 
sovereignty; the authority of the Federal Government to tax 
States; and the authority of the Federal Government to regulate 
State employee activities. But our General Counsel's analysis 
of recent Supreme Court decisions suggest that such challenges 
would not be upheld; that, in fact, recent court decisions 
would appear to us to uphold the Federal Government's authority 
to do this type of mandatory coverage.
    Mr. Hulshof. So, other than, perhaps, the resources that 
would have to be committed to a court challenge, such a court 
challenge is likely to fail, at least on behalf of the 
Governors or the States?
    Ms. Fagnoni. That's our assessment based on recent Supreme 
Court decisions, yes.
    Mr. Hulshof. I want to follow up on what Mr. Becerra was 
asking about, in particular, mandatory coverage and some of the 
transition problems and lead time. Now, I know it's tough 
because you mentioned that different States have--some of 
them--use a reserve funding approach to finance plans and there 
are different plans out there, but could you talk just a little 
about these transition problems as far as lead time and 
accomplishing this mandatory coverage if we move in that 
direction?
    Ms. Fagnoni. Assuming mandatory coverage occurs, there 
would be a number of activities that would have to occur for 
the States to implement this, and some of them would have to be 
occurring simultaneously that would be fairly complex, because, 
first of all, it would require that the pension plans and the 
employers take a look at the plans; determine how they might 
want to adjust the plans given that there's now Social Security 
coverage in addition. They would be needing to work with 
employer and employee groups, because they would have to both 
be educated as well as have some understanding and buy into the 
proposals. The State legislatures would have to, ultimately, 
agree to whatever's proposed in terms of what happens to the 
State pension plans, and actuaries would have to come up with 
cost estimates on what these new plans would cost. So, there 
would be a lot of different plan design and political issues 
that would have to be addressed and would take some time. To 
give you some comparison, it took about 3 years for the 
transition to occur from the CSRS, Civil Service Retirement 
System, to the FERS Program, Federal Employees Retirement 
System, for the Federal Government, and for this type of 
transition at the State and local level would probably even be 
somewhat more complex because of all the entities involved.
    Mr. Hulshof. Thanks, Mr. Chairman. I yield back my time.
    Chairman Bunning. Mr. Neal, you do not want to question? 
OK.
    Mr. Portman.
    Mr. Portman. Thank you, Mr. Chairman. I'm sorry I couldn't 
be here for all the testimony, but I want to commend the 
Chairman for having this hearing; another one in a series of 
hearings about Social Security, and this is an important aspect 
of it, certainly, for my State of Ohio and for many of us on 
the panel.
    I also have a few questions for our friends at the GAO, Ms. 
Fagnoni, particularly. I hear sometimes that if we just make 
Social Security mandatory for new hires that it really won't 
have any affect on existing plan participants or those folks 
who have already retired. I know GAO's done some studies on 
this. Can you tell us what GAO has learned about that?
    Ms. Fagnoni. In talking to State and local officials, it is 
true that the existing plan could continue for the current 
workers. They might be given the option to go into a newly 
developed plan that might include Social Security, but I think 
the issues that people have raised with us are questions that 
have to do with the fact that the contributions would not be as 
great in the existing plans, what might happen, and, John, 
you've got an example--we tried to look for plans where we 
could make some kind of judgment on how an existing plan might 
be affected if a new plan were established.
    Mr. Schaefer. Basically, we've talked not only to the 
States and localities that have many noncovered workers, but 
we've also talked to States and localities that have changed 
their current pensions plans or considered their current 
pension plans in ways that would be, perhaps, similar to how 
the States and localities with noncovered workers have to 
change their plans. There seem to be two basic issues--there 
are probably more, but at least two. You have to figure out a 
way to finance their unfunded accrued liabilities. Many of 
these plans have unfunded liabilities that have to be financed. 
They are typically financed as a percentage of payroll and as 
that closed group of employees--if you closed the current 
pension plan to new members--as that closed group changes, 
their payroll changes, and it becomes an issue of how to 
finance the unfunded liabilities.
    Mr. Portman. For both those who've already retired and 
those who are within the State system.
    Mr. Schaefer. Right, but there are ways--the actuaries do 
an analysis and they come up with ways to do that, and there 
are ways to do that. They could finance, for example, as a 
percentage of total payroll not just the payroll of the closed 
group of employees. But it is an issue, and at the same time 
you have costs, percentage of total payroll for all covered and 
noncovered employees.
    Mr. Portman. Even those who are now covered under the new 
system and paying payroll taxes to the new----
    Mr. Schaefer. The employer would have----
    Mr. Portman. Would it be double?
    Mr. Schaefer [continuing]. To continue paying the unfunded 
liability for the current employees as a percentage of payroll. 
That unfunded liability doesn't go away because you close the 
plan to new members.
    The second large problem that could occur--and it depends 
on the plan; each plan is different; has different 
demographics; it uses different actuarial methods--but a 
problem that may occur is a liquidity issue. As you close the 
plan to new members, the contributions go down. You still have 
people retiring, and those benefits have to be paid. So, you 
could have a cash flow problem, especially in later years, but 
at least the actuaries have to analyze that and come up with a 
way of dealing with it, and that can result in a change in 
asset allocations, because you have to go through shorter term 
investments that could reduce your investment income in the out 
years, so that could be another way of increasing your costs, 
in essence. But, again, that will depend on each plan; each 
plan will be different. Some actuaries say that's not a 
problem; other actuaries say it is. It would be specific to the 
plan.
    Mr. Portman. Thank you. Just a general question: Those of 
us who are interested in Social Security reform are looking at 
models around the world, and we've talked about the Chilean 
model, for instance. I've been down there a couple times, and 
you learn a lot about their system which is very successful for 
that country, but there are some different external 
circumstances when they put that system into effect, and they 
have a different approach, generally, than we would have on a 
lot of their investment approaches. But there is something we 
can learn, I think, from other countries. How about State and 
local, particularly, State pension plans? Is there something we 
can learn in your studies from the way the State public plans 
are working?
    Ms. Fagnoni. We have some ongoing work where we're looking 
at some plans that opted out of the Social Security system 
right before they could no longer opt out and are looking at 
how those plans have set up their benefit structures and 
whether we might learn something from that. That work is 
underway right now.
    Mr. Portman. Is that something GAO plans to issue a report 
on?
    Mr. Mulvey. Yes, it's for this Subcommittee. It's for the 
Chairman.
    Mr. Portman. Chairman Bunning requested it, so you're going 
to do it, right.
    Ms. Fagnoni. That's right.
    Mr. Portman. There you go. My time is up. Thank you very 
much.
    Chairman Bunning. The big thing about Chile, as you all 
know, they had a benevolent dictator that changed the Social 
Security. If we had one, we could do it a lot easier too. 
[Laughter.]
    Let me talk to you about the seven major States that have 
75 percent of those who are not included. Have you studied the 
State plans in those seven States to the point of benefits 
received in direct proportion to those that--and how many 
dollars have gone in from each employee into those, and what 
return they've got on their dollar compared to the return on 
the dollars from the Social Security trust funds?
    Ms. Fagnoni. We did not look at that sort of lifetime 
benefit comparison specifically.
    Mr. Schaefer. We have work underway on the, basically----
    Chairman Bunning. In other words, you're not finished yet, 
and you are working on that, and you will have that ready for 
us? [Laughter.]
    Mr. Mulvey. We have a number of studies going on. We have 
another one looking specifically at the rate of return issue in 
a more broad sense than simply these seven States.
    Chairman Bunning. It would really help when we get into 
comparisons, and it would help for us to determine whether we 
think mandatory requirement is a good thing or bad thing.
    I want to let you know that I'm going to submit some 
questions in writing to each of you so that you can be prepared 
to respond in writing, so that we can move on to the next 
panel.
    [The questions and answers follows:]

Responses of Cynthia M. Fagnoni to Mr. Bunning's Questions

1. You said that most full-time public employees participate in 
defined benefit pension plans. Do you have information 
regarding what the average monthly benefit is for these 
workers?

    Answer: Most public pension plans base retirement benefits 
on the employee's final average salary over a specified period 
of time, usually 3 years, and both the Department of Labor 
(DOL) and Public Pension Coordinating Council (PPCC) studies 
estimate employee retirement benefits as a percentage of final 
average earnings. Table 1 shows average employee retirement 
benefits, as a percentage of final earnings, in 1994, for 
Social Security covered and noncovered state and local 
government employees retiring at age 62 with 30 years of 
service.

   Table 1: Average 1994 Retirement Benefits in Defined Benefit Plans for Full-time State and Local Employees
                                   Retiring at Age 62 With 30 Years of Service
----------------------------------------------------------------------------------------------------------------
                                                                 Employees  Employees covered by Social Security
                                                                  covered             and pension plan
                         Final salary                             only by  -------------------------------------
                                                                  pension     Pension      Social
                                                                   plan        plan     Security \1\     Total
----------------------------------------------------------------------------------------------------------------
$15,000.......................................................         62%         50%          37%          87%
$25,000.......................................................          62          50           31           81
$35,000.......................................................          62          50           27           77
$45,000.......................................................          62          50           23           73
$55,000.......................................................          62          50           20           70
$65,000.......................................................          62          50           17           67
----------------------------------------------------------------------------------------------------------------
\1\ Excludes Social Security spousal and dependent benefits.
Source: Employee Benefits in State and Local Governments, 1994, DOL Bureau of Labor Statistics, Bulletin 2477,
  May 1996.



Follow-up: You cited a DOL study that found that, in addition 
to retirement benefits, all members of these plans have a 
survivor annuity option, 91 percent have disability benefits, 
and 62 percent have some cost-of-living increases after 
retirement. Are the survivor and disability benefits provided 
through the basic payroll tax, or is there an additional charge 
in some or most of these plans?

    Answer: Generally, employer and employee contribution rates 
for public pension plans are calculated to finance plan 
benefits, including disability and survivor benefits. However, 
the most prevalent type of survivor benefit, joint and survivor 
annuities, requires the retiree to accept a reduced benefit and 
provides a percentage of that reduced benefit to the spouse 
upon the retiree's death.

Follow-up: On the basis of your research, if newly hired state 
and local government workers were covered under Social 
Security, would those individuals be better off in terms of 
total lifetime benefits, given Social Security's comprehensive 
benefit package (survivors and disability benefits), 
portability, and inflation protection?

    Answer: Should Social Security be mandated, the effect on 
newly hired employees would depend on each employee's 
circumstances and any changes made to current pension plans in 
response to mandatory coverage. It seems certain, however, that 
some employees would receive greater lifetime benefits in 
covered employment. For example, employees who work for several 
years in noncovered employment but move to another job before 
vesting in a noncovered pension plan may be better off with the 
fully portable benefits offered by Social Security. Similarly, 
employees who become fully disabled before qualifying for 
disability benefits under a noncovered pension plan might be 
better off with the disability benefits afforded by covered 
employment.

2. Several plan representatives have told you that the spending 
increases necessary to maintain level retirement income and 
other benefits for current and future members will be 
difficult. These states and localities might decide to maintain 
current spending levels, which could result in reduced 
benefits. What kind of benefit reductions might plans be faced 
with if they have no choice but to cut benefits?

    Answer: A June 1997 actuarial evaluation of an Ohio pension 
plan concluded that level spending could be maintained if (1) 
service retirement benefits are reduced (for example, salary 
replacement rates for employees retiring with 30 years of 
service would be reduced from 60.3 percent to 44.1 percent), 
(2) retiree health benefits are eliminated for both current and 
future employees, and (3) the funding period of the plan's 
unfunded accrued liability is extended from 27 years to 40 
years. The study also stated that additional benefit reductions 
might be needed to maintain level spending if additional 
investment income is not available to subsidize pension 
benefits for newly hired employees.

Follow-up: In your research, did you check into the current 
status of the state budgets that would be most affected? So 
many states, like the federal government, are seeing the 
benefit of budget surpluses. Could these surpluses assist in 
paying transition costs?

    Answer: Our review did not include an evaluation of state 
budgets. However, state and pension plan officials noted that 
spending for retirement benefits must compete for funds with 
spending for education, law enforcement, and other areas. In 
Ohio, for example, officials stated that the state is having 
difficulty finding the additional funds for education needed to 
comply with court-ordered changes in school financing. A 
representative of local government officials in Ohio stated 
that payroll represents 75 to 80 percent of county budgets, and 
there is little chance that voters would approve revenue 
increases needed to maintain level retirement benefits. He 
stated that the more likely options for responding to increased 
retirement costs were to decrease the number of employees or 
reduce benefits under state and local pension plans.

3. You indicate that one option for states and localities with 
noncovered workers is to provide newly hired employees with 
Social Security and pension benefits that, in total, 
approximate the pension benefits of current noncovered 
employees. And that studies show that such an option could 
increase retirement costs by 7 percent of new-employee payroll. 
A 7-percent of payroll increase in retirement costs for newly 
hired employees would mean additional costs of about $5.7 
billion over the next 5 years. Is this estimate based on the 
assumption that all states and localities would select this 
option?

    Answer: The testimony stated that applying a 7-percent of 
payroll increase to newly hired state and local employees would 
result in additional costs to states and localities of $9.1 
billion over the first 5 years, using Social Security 
Administration (SSA) data and assumptions. The statement 
assumed that the 7-percent of payroll increase would apply to 
all states and localities affected by mandatory coverage.

Follow-up: Under this scenario, employees retiring before age 
62 would need to receive a temporary supplemental pension 
benefit to more closely maintain the benefits of the current 
plan, correct?

    Answer: Yes.

Follow-up: Another option for states and localities, if 
coverage is mandatory, is to provide newly hired employees with 
pension plan benefits similar to those provided to employees 
currently covered under Social Security. You point out that 
retirement costs for states and localities covered by Social 
Security are higher than the costs for noncovered states and 
localities--9 percent versus 8 percent in terms of average 
employee cost rate and 12 percent versus 8 percent in terms of 
average employer cost rate. Why are these costs so much higher, 
and given the increased cost, why would states and localities 
choose this option?

    Answer: As stated in the 1980 study, the cost increase 
cannot be ascribed to any specific provisions. A major factor 
is that Social Security provides additional benefits that are 
not provided by most public pension plans. The 1980 study also 
noted that the extent to which the experience of states and 
localities with covered employees can be generalized to that of 
noncovered employees is limited because many public pension 
plans for covered employees were implemented in the 1950s and 
1960s when Social Security payroll taxes were much lower. 
However, employee groups in states and localities with both 
covered and noncovered pension plans might negotiate for 
revised retirement benefits that are similar to those of 
employees in covered plans. Additionally, states and localities 
with noncovered employees might find it necessary to provide 
new employees with revised benefits that are similar to those 
provided to covered employees in neighboring states and 
localities to remain competitive in recruiting qualified 
employees.

Follow-up: In your testimony, you cited a study that showed 
that most pension plans for covered employees do not provide 
supplemental retirement benefits for employees who retire 
before Social Security benefits are available. You also 
indicated that many employees, especially police and 
firefighters, retire before age 65. Do most of these police and 
firefighters try to hang on until age 62--or what happens to 
these individuals if they must retire earlier than age 62?

    Answer: Our analysis of PPCC data indicates that police and 
firefighters retired, on average, at age 54 in noncovered plans 
and age 55 in covered plans. Generally, state and local 
employees in covered employment would receive a smaller 
retirement benefit than employees in noncovered employment 
until they reach age 62 and begin receiving Social Security 
benefits.

4. You mention that most states and localities use a reserve 
funding approach to finance their plans. How does this approach 
work?

    Answer: Under a reserve funding approach, employers--and 
frequently employees--make systematic contributions toward 
funding the benefits earned by active employees. These 
contributions, together with investment income, are intended to 
accumulate sufficient assets to cover promised benefits by the 
time employees retire.

Follow-up: How many plans have unfunded liabilities?

    Answer: We reported in Public Pensions: State and Local 
Government Contributions to Underfunded Plans (GAO/HEHS-96-56, 
Mar. 14, 1996) that funding of state and local pension plans 
has improved substantially since the 1970s. Still, in 1992, 75 
percent of state and local government pension plans in a PPCC 
survey were underfunded. A 1997 PPCC survey indicates that plan 
funding has continued to improve. The survey report stated that 
of the plans responding to the question, 51 percent were more 
than 90-percent funded while only 16 percent were less than 70-
percent funded.

Follow-up: How do these unfunded liabilities occur? Are these 
plans audited? And how do states determine what corrective 
action to take?

    Answer: Unfunded liabilities occur for a number of reasons. 
For example, public plans generally use actuarial methods and 
assumptions to calculate required contribution rates. Unfunded 
liabilities can occur if a plan's actuarial assumptions do not 
accurately predict reality. Additionally, retroactive increases 
in plan benefits can create unfunded liabilities. We did not 
review the extent to which public plans are audited; however, 
for a variety of reasons, we believe most public pension plans 
are audited on a regular basis. A Government Accounting 
Standards Board official stated, for example, that many states 
have legal requirements for plan audits. Unlike private pension 
plans, the funding requirements of public plans are not 
regulated by the federal government. States or localities 
decide how and when unfunded liabilities will be financed.

Follow-up: Mandatory coverage of newly hired employees would 
obviously reduce contributions to these funds. What would be 
the effect on these pension funds?

    Answer: The effect of reduced contributions on plan 
finances would depend on the actuarial method and assumptions 
used by each plan, the adequacy of current plan funding, and 
other factors. Under certain conditions, for example, reduced 
contributions could affect a plan's liquidity over time, which 
could, in turn, affect its long-term costs. In 1997, a state 
legislative committee considered closing the state's defined 
benefit pension plan to new members and implementing a defined 
contribution plan. The employees were already covered by Social 
Security; however, states and localities faced with mandatory 
coverage might consider making a similar change to their 
pension plans.
    An actuarial analysis found that as the number of employees 
covered by the plan decreased, the amount of contributions 
flowing into the plan would also decrease. At the same time, 
the number of members approaching retirement age was 
increasing, and benefit payments were expected to increase. As 
a result, external cash flow would become increasingly negative 
over time. According to the analysis, the large negative 
external cash flow would require that greater and greater 
proportions of investment income be used to meet benefit 
payment requirements. In turn, this would require the plan to 
allocate larger proportions of plan assets to cash or lower-
yielding short-term assets. Once this change in asset 
allocation occurred, the plan would find it increasingly 
difficult to achieve the investment returns assumed in current 
actuarial valuations, and costs would increase.

5. In your testimony, you point out SSA estimates that 95 
percent of noncovered state and local employees become entitled 
to Social Security as workers, spouses, or dependents and that 
50 percent to 60 percent of noncovered employees will be fully 
insured by age 62 from covered employment.
    The Congress established the government pension offset 
(GPO) and windfall elimination provisions (WEP) to reduce the 
unfair advantage that workers who are eligible for pension 
benefits based on noncovered employment might have when they 
apply for Social Security benefits.
    Yet the administration of these provisions (government 
pension offset and windfall elimination provision) is 
difficult, as you recently reported in a separate study at my 
request. Would you briefly discuss the key findings of that 
study?

    Answer: To implement GPO and WEP, SSA needs to know which 
Social Security applicants and beneficiaries are or will be 
receiving pensions earned in noncovered employment. For state 
and local employees, however, SSA has no independent 
information to identify those who receive pensions from 
noncovered state and local employment. Generally, SSA is 
limited to reviewing an applicant's earnings record and asking 
questions based on that record. As a result, SSA is often 
unable to verify information provided by the applicant or to 
detect the subsequent receipt of a pension from noncovered 
employment. This undermines its ability to determine whether 
applicants should be subject to WEP or GPO and has led to 
overpayments. We estimated the extent of overpayments at $160 
million to $355 million between 1978 and 1995. In the past, SSA 
considered obtaining pension payment information directly from 
state and local retirement systems; however, legal and 
administrative concerns may make this approach impractical. In 
response to our report, SSA is working with the Internal 
Revenue Service (IRS) to revise reporting requirements for 
pension income. IRS believes that a technical amendment to the 
tax code is needed to allow it to obtain the necessary 
information. With such information, SSA plans to perform 
additional computer matches to ensure that GPO and WEP are 
correctly applied.
      

                                

Responses of Geoffrey Kollmann to Mr. Bunning's Questions

1. Under the government pension offset provision (GPO), how was 
it determined that two-thirds of a government pension is 
equivalent to the Social Security benefit the worker would have 
received if his or her job had been covered by Social Security?

    When the GPO was first enacted in 1977, it provided that 
100% of the government pension based on employment that was not 
covered by Social Security was to be subtracted from any Social 
Security spousal benefit for which the worker was eligible. 
Because the purpose of the GPO is to replicate Social 
Security's ``dual entitlement'' rule, under which 100% of a 
benefit earned as a worker is subtracted from the spousal 
benefit, the notion was implicit that 100% of the government 
pension is analogous to the Social Security benefit that the 
worker would have received if his or her job had been covered 
by Social Security.
    Shortly after enactment, opponents of the GPO intensified 
their criticism of the 100% offset provision. They pointed out 
that government pensions typically combine the purposes of 
Social Security and staff pension plans designed to supplement 
Social Security. While a spouse covered under Social Security 
may have his or spousal benefit reduced under the dual 
entitlement rule, the rule takes into account only the Social 
Security worker's benefit, not the income he or she may have 
from a private pension. To address these concerns, in 1982 the 
House of Representatives included in a tax bill affecting the 
Virgin Islands (H.R. 7093) a modification of the offset 
provision so that only one-third of the pension would be 
counted. However, the proposal was dropped in the conference 
with the Senate version of the bill.
    P.L. 98-21, The Social Security Amendments of 1983 (the 
main purpose of which was to solve Social Security's financing 
crisis) provided another opportunity to amend the offset 
provision. As proposed by the House, only one-third of the 
government pension would be counted in computing the offset. 
The Senate version of the Amendments had no such provision. In 
conference, a compromise was reached where two-thirds of the 
government pension would be counted, and that became final law. 
Thus, it does not appear that the determination that two-thirds 
of a government pension is equivalent to the Social Security 
benefit the worker would have received if his or her job had 
been covered by Social Security was based on particular 
findings or analyses, but as a byproduct of the myriad 
legislative bargaining involved with enacting urgent and 
complex legislation.
    Follow-up: In the Windfall Elimination Provision (WEP), how 
was it determined that the 90% replacement factor in the 
benefit formula should be reduced to 40%?
    Follow-up: In the Windfall Elimination Provision (WEP), how 
was it determined that the guarantee that the reduction in a 
government worker's Social Security benefit not be more than 
50% of the government pension?
    The origin of the WEP was a recommendation by the 1982 
National Commission on Social Security Reform (also known as 
the Greenspan Commission, after its Chairman), that Congress 
should modify the computation of benefits for workers who 
receive pensions from non-Social Security covered employment. 
The Commission, which was established to develop proposals to 
solve Social Security's looming financial crisis, and whose 
recommendations were the basis for the 1983 Social Security 
Amendments, made no specific recommendation on how this revised 
computation was to be made. When legislation was crafted to put 
the Commission's recommendation into effect, the Senate version 
of the WEP lowered the Social Security benefit by substituting 
a 32% replacement rate for the 90% replacement rate in the 
Social Security benefit formula. It also included a guarantee 
that the reduction in Social Security under the WEP could not 
be more than one-third of the non-covered pension. The House 
version lowered the Social Security benefit by substituting a 
61% replacement rate for the 90% replacement rate in the 
benefit formula, and specified that the reduction could not be 
more than one-half of the non-covered pension. In conference, 
it appears that it was agreed, in effect, to split the 
difference. The House conferees apparently agreed to accept a 
lower replacement rate (40%), while the Senate conferees agreed 
to the guarantee that the reduction could not be more than one-
half of the non-covered pension. There is no indication in the 
record that these provisions were based on particular findings 
or analyses.

2. What does research by the Congressional Research Service 
(CRS) show about the formulas used to determine the GPO and the 
WEP?

    Because the GPO and the WEP are based on the premise that 
non-Social Security covered government workers should be placed 
in approximately the same position as are other workers, CRS 
has prepared illustrations that show how much of a government 
pension (i.e., benefits earned under the federal Civil Service 
Retirement System) is equivalent to a Social Security benefit. 
It also tried to assess how well the two anti-windfall measures 
work. It concluded that because the illustrations covered a 
very wide range, it is difficult to generalize. However, the 
illustrations did seem to show that for many civil service 
annuitants the GPO and the WEP are inaccurate. It appears that 
generally the WEP is appropriate for typical civil service 
annuitants, but over-penalizes lower-paid workers with short or 
evenly-split careers, while under-penalizing workers with long 
Social Security-covered careers. The GPO is basically 
imprecise, but in many cases this has little effect on 
considerations of equity. Those likely to be adversely affected 
by its inaccuracy are surviving spouses of high-paid workers, 
and those who may partially escape its intended effect are 
shorter-term, lower-paid workers.

3. Are there potential problems regarding proposals that 
restrict the full application of the GPO and WEP to higher-
income workers?

    There are three issues involved in such an approach. One is 
that by applying a form of means-testing to Social Security, it 
could be criticized as weakening the ``earned right'' nature of 
the program. Generally, economic circumstances do not affect 
Social Security benefits. To do so, opponents would argue, 
would make the system appear more like welfare and therefore 
erode its public support.
    Another issue is how such an approach could accurately 
measure economic need. Full means-testing, such as is done in 
welfare programs like the Supplemental Security Income program, 
require that recipients submit annually to a full accounting of 
income and resources. Bills that have been introduced in 
Congress whose stated purpose is to exempt low-income workers 
from the GPO and WEP do so by exempting those whose combination 
of Social Security and government pensions are below a 
threshold amount. It appears there is a presumption that these 
two sources of income correlate with low overall income. In 
fact, using just these two measures of income often can be a 
poor indicator of a person's economic condition. For example, 
there could be substantial income from private pensions, 
assets, royalties, rents, and earnings (subject, of course to 
the Social Security earnings test). This caution particularly 
applies with regard to family income. For example, one member 
of a couple may have a substantial work history while the other 
may not. Even if a worker on whose record the Social Security 
spousal benefit is based is receiving a maximum benefit, 
reflecting a lifetime of very high earnings, the spouse could 
still receive higher benefits under this bill if his or her 
government pension were low (e.g., if the government service 
were of short duration). Absent some sort of direct means test 
on total income, there are likely to be instances where 
families with above-average incomes would receive higher 
benefits. On the other hand, individuals or families whose 
incomes consist almost entirely of Social Security and a 
government pension could get no relief from these bills even 
though their total income was considerably below average.
    Another issue is fairness. For example, in the research 
done by CRS mentioned earlier on the GPO, one conclusion was 
that ``for short-term, lower-paid government workers, more 
(emphasis added) than two-thirds of the CSRS pension should be 
counted in computing the offset. Otherwise, it is possible that 
spouses of high-paid Social Security-covered workers could 
receive a higher spousal benefit than they would receive were 
their government work covered under Social Security.'' Thus, in 
regard to workers with low earnings histories, the technical 
analysis of the report did not agree with the premise that the 
full application of the GPO and WEP should not apply to lower-
income workers. Put another way, from the viewpoint that the 
goal of the anti-windfall measures is to prevent advantages 
accruing to government workers that are not available to 
comparable workers in the private sector, such an approach 
could create such an advantage.
    This is not to say that there are not instances where the 
GPO and the WEP have the effect of lowering income of already 
low-income beneficiaries. However, the same effect is produced, 
often to a larger degree, by Social Security's ``dual 
entitlement'' rules and the weighted benefit formula that apply 
to the population at large (and that the GPO and WEP are 
designed to replicate). A case might be made that, if the 
Congress wishes to provide additional benefits to low-income 
beneficiaries, other means or programs that more accurately 
measure need and apply to the general population might be more 
appropriate.
      

                                

Responses of Cynthia M. Fagnoni to Mr. Portman's Questions

1. In your testimony you stated on page 1 that ``Our work shows 
that mandating coverage for all newly hired public employees 
would reduce Social Security's long-term financial shortfall by 
about 10 percent . . . .''
    a. Please define ``long-term financial shortfall.''

    Answer: Social Security's long-term financial shortfall is 
calculated as the difference between the present value of 
revenues and expenditures over a 75-year period, after 
adjusting for trust fund balances. A 75-year period is used to 
obtain the full range of financial commitments that will be 
incurred on behalf of the great majority of current program 
participants. Table 2 shows the present value of Social 
Security revenues and expenditures with and without mandatory 
coverage, over the 75-year period beginning January 1, 1998. 
The analysis indicates that extending mandatory coverage to all 
state and local employees would reduce the program's long-term 
shortfall by 10 percent, from about 2.19 percent of taxable 
payroll to 1.97 percent of taxable payroll.

    Table 2: Present Value of Social Security Revenues, Expenditures,
 Payroll, and Actuarial Balance Over 75 Years With and Without Mandatory
                     Coverage (Dollars in Billions)
------------------------------------------------------------------------
                                     Without        With
                                    mandatory    mandatory      Change
                                     coverage     coverage
------------------------------------------------------------------------
Beginning trust fund balance.....       $655.5       $655.5         $0.0
Present value of total revenues..     18,413.4     18,934.6        521.2
Present value of total                21,983.0     22,274.7        291.7
 expenditures....................
Revenue minus expenditures.......    (3,569.6)    (3,340.1)        229.5
Target trust fund balance \1\....        185.4        192.7          7.3
Actuarial balance................   ($3,099.5)   ($2,877.3)        222.2
Present value of taxable payroll.   $141,779.0   $145,878.9      4,099.9
Actuarial balance as a percent of       (2.19)       (1.97)         0.22
 payroll.........................
------------------------------------------------------------------------
\1\ The target trust fund balance is an amount equal to the following
  year's projected expenditures.
Source: SSA, Office of the Chief Actuary.


b. Please specifically state all economic, demographic, and 
other assumptions used in determining a 10-percent reduction in 
this ``shortfall.''

    Answer: SSA assumed that mandatory coverage would become 
effective on January 1, 2000, and that the existing noncovered 
workforce would be replaced by covered employees at a rate 
similar to that experienced by states and localities affected 
by the extension of mandatory Medicare coverage to public 
employees hired after March 31, 1986. SSA's analysis used the 
intermediate demographic and economic assumptions detailed in 
the Board of Trustees' 1998 annual report. The intermediate 
assumptions represented the Board's best estimate of the future 
course of the population and the economy. Table 3 shows the 
ultimate values for the intermediate assumptions that apply to 
years after 2023.

Table 3: Ultimate Intermediate Economic and Demographic Assumptions Used
              in the Board of Trustees' 1998 Annual Report
------------------------------------------------------------------------
                                                               Ultimate
                         Assumption                             value
------------------------------------------------------------------------
Annual percentage change in:
Average wage in covered employment.........................          4.4
Consumer Price Index.......................................          3.5
Real wage differential (percent)...........................          0.9
Unemployment rate (percent)................................          6.0
Annual interest rate (percent).............................          6.3
Total fertility rate (children per woman)..................          1.9
Life expectancy at birth in 2075 (combined average for men          81.7
 and women) \1\............................................
Net annual immigration (thousands).........................        900.0
------------------------------------------------------------------------
\1\ Life expectancy is assumed to continue improving throughout the
  projection period.
Source: Social Security Board of Trustees Annual Report for 1998.


c. Can you explain what part of the 10-percent reduction is 
attributable to reduction in administrative expenses?

    Answer: SSA assumed that mandatory coverage would not 
affect overall administrative costs over the 75-year period.

d. How will mandatory coverage reduce or simplify program 
administration?

    Answer: Should coverage be mandated, eventually all state 
and local employees with the exception of a few categories of 
workers, such as students and election workers, would be in 
covered employment. Over time, this would reduce the number of 
potential adjustments under GPO and WEP. Additionally, the SSA 
Inspector General has reported that Social Security provisions 
related to the coverage of state and local employees are 
complex and difficult to administer and that there is a 
significant risk of sizable noncompliance with state and local 
coverage provisions. SSA and IRS have initiated an effort to 
educate employers and ensure compliance with legal requirements 
for withholding Social Security payroll taxes. Extending 
coverage to all newly hired state and local government 
employees would, over time, greatly reduce or eliminate this 
problem.
2. Other panels that appeared before the subcommittee testified 
that compound interest is a vital part of their systems' 
funding. What increase would be necessary in the interest rate 
paid by the U.S. Treasury to SSA to achieve the same 2-year 
funding period extension as mandatory coverage for new hires 
would provide?

    Answer: According to SSA's Office of the Chief Actuary 
(OACT), if the real annual interest rate earned by the trust 
funds is increased by 0.7 percent over the 75-year period, then 
the year of exhaustion would be extended an extra 2 years, 
achieving the same period of extension as the provision to 
cover newly hired state and local government employees 
beginning in 2000. The increase in annual rates begins in 1998 
and is assumed for all bonds held by the trust funds. The 
ultimate real interest rate would be 3.5 percent, rather than 
2.8 percent, as assumed in the 1998 Board of Trustees' report.

3. As you are aware, mandatory coverage has been extended to 
other groups over the decades. Please provide us with evidence 
of the effect this has had on the reduction of the shortfall 
for each of these extensions and the increase in liabilities to 
Social Security.

    Answer: In addressing cost increases between 1940 and 1971, 
the 1972 annual report of the Board of Trustees stated that the 
extension of coverage to new workers had had an upward effect 
on both costs and taxable payroll and, in most cases, had not 
materially affected program costs as a percentage of taxable 
payroll. During the period, however, expanded coverage was not 
limited to newly hired employees. As a result, experience 
through 1971 may not be relevant to an evaluation of the 
potential financial effect of expanded coverage that is limited 
to newly hired employees.
    Mandatory coverage has been extended to several groups 
since 1971, including federal employees hired after December 
31, 1983. In recommending the extension of mandatory coverage 
to nonprofit and newly hired federal employees, the National 
Commission on Social Security Reform estimated a long-range 
savings of 0.30 percent of payroll. According to a 
representative of SSA's OACT, OACT has not estimated actual 
program income and costs with and without the federal employees 
hired after December 31, 1983, or for any other groups that 
were added.

4. In your testimony you stated:
    ``For most of the examined pension plans, the present value 
of lifetime benefits for employees covered by Social Security 
would be greater than the value of benefits for current 
noncovered employees.'' (page 8)
    ``We did not compare the expected value of total lifetime 
benefits for covered and noncovered employees because amount 
would vary depending on the benefits offered by each plan.'' 
(page 9)
    These statements are contradictory. What is the factual and 
financial basis upon which the conclusion in the first 
statement was made?

    Answer: The statement on page 8 refers to the 1980 study 
performed by the Universal Social Security Coverage Study 
Group, which analyzed a large number of plans in depth. We did 
not replicate the 1980 study and calculate the expected value 
of lifetime benefit offered by current pension plans.

5. In your written testimony, you refer to seven states that 
have a majority of noncovered workers. Is it true that other 
states such as Nevada, Alaska, Connecticut, and Kentucky have 
significant percentages of workers who are not covered by 
Social Security? What would the effect on systems that have 
high percentages of public employees not covered by Social 
Security?

    Answer: SSA estimates that more than 50 percent of state 
and local government employees are not covered by Social 
Security in Alaska (59 percent), California (51 percent), 
Colorado (63 percent), Louisiana (71 percent), Maine (54 
percent), Massachusetts (86 percent), Nevada (66 percent), and 
Ohio (92 percent). Other states have lower percentages of 
noncovered employees. The effect on the pension plans in these 
states would depend on how state and local governments with 
noncovered employees respond to the additional costs and 
benefits associated with Social Security coverage.

6. As a response to a question about how noncovered systems 
would plan for changes brought about by mandating coverage, the 
reply essentially was that it would depend on the actuarial 
method used by the plan. To a small extent that is a factor, 
but the real issue is how plans would deal with significant 
reductions in the stream of income necessary to continue the 
plans as they are now constituted. Please provide greater 
detail on how large noncovered plans would be affected costwise 
and the extent to which current active members and retirees 
would also be affected.

    Answer: The effect of reduced contributions on each plan's 
finances would depend on a number of factors. However, reduced 
contributions to current plans could adversely affect the 
liquidity and ultimately increase the cost of some plans. In 
1997, for example, a state legislative committee considered 
closing a defined benefit pension plan to new members and 
implementing a defined contribution plan. State employees were 
already covered by Social Security; however, states and 
localities faced with mandatory coverage might consider making 
a similar change to their pension plans. An analysis of the 
proposed change stated that as the number of employees covered 
by the plan decreased, the amount of contributions flowing into 
the plan would also decrease. At the same time, the number of 
members approaching retirement age was increasing, and benefit 
payments were expected to increase. As a result, external cash 
flow would become increasingly negative over time. In turn, 
this would require the plan to allocate larger proportions of 
plan assets to cash or lower-yielding short-term assets. Once 
this change in asset allocation occurred, the plan would find 
it increasingly difficult to achieve the investment returns 
assumed in current actuarial valuations, and costs would 
increase.
    The implications for current active members depends on how 
states and localities respond to the increased costs. According 
to an analysis by the Public Retirement Institute, however, 
most state and local government pension plans are covered by 
provisions that would preserve benefits for current employees. 
The benefit guarantees cover benefit formulas, vesting, 
purchase of service credit, benefit rights, and any other 
provision provided in the pension agreement. The guarantees are 
enforced through the courts. According to information provided 
by the Government Finance Officers Association, for example, 
there are implicit or explicit restrictions against benefit 
reductions for employees in Alaska, California, Colorado, 
Louisiana, and Nevada, among others. Employees in states that 
permit benefit reductions for active employees would need to 
rely on the process for changing benefits to safeguard current 
benefit levels.

7. The Third Millennium Report entitled ``The Consequences of 
Non-FICA Status on State and Local Pension Plans'' clearly 
states that noncovered employees can expect a much higher rate 
of return on contributions and that non-FICA plans are advance 
funded. Further, non-FICA plans have a much higher rate of 
return on their investments. When asked a question during the 
hearing about what could be learned from these large state 
plans, the reply was directed to an ongoing study of three 
Texas counties. While those results in those counties may be 
interesting, the real question still remains. What did you 
learn from your studies by these large state plans that the 
subcommittee should take into consideration as we move to 
reform the Social Security program?

    Answer: For the most part, public pension plans are reserve 
funded. Under reserve funding, contributions are made toward 
the present value of benefits earned by active employees, 
which, together with investment income, are intended to 
accumulate sufficient assets to cover promised benefits. 
According to the Bureau of the Census, state and local pension 
plans had accumulated assets of more than $1 trillion in 1994. 
Additionally, pension plans allocate these assets among several 
asset classes, including domestic and international stocks, and 
the rate of return on plan assets plays a significant role in 
plan funding. The Bureau of the Census estimates that, in 1994, 
investment income amounted to about 61 percent of total income 
for state and local pension plans. According to a 1997 PPCC 
survey, the annual investment return for responding plans 
averaged 13.7 percent in 1996 and 11.3 percent in the 5-year 
period from 1992 to 1996.
    Social Security, in contrast, is financed mostly on a pay-
as-you-go basis. Under pay-as-you-go financing, the payroll 
taxes of current workers are used to pay the benefits of 
current retirees and program assets are few relative to accrued 
liabilities. Additionally, federal law limits Social Security 
investments to interest-bearing securities of the U.S. 
government or securities guaranteed by the United States. As a 
result, in 1997, investment income amounted to about 9.6 
percent of total income, and the program received an effective 
annual interest rate of 7.5 percent on its investments.
    Extending mandatory coverage to state and local employees 
would involve a trade-off between the higher investment returns 
earned by public retirement systems and the expanded 
portability, inflation protection, and dependent and other 
benefits provided by the Social Security program. Additionally, 
Social Security reform proposals generally include provisions 
for expanding Social Security reserves and investing some of 
the trust funds in additional asset classes. We addressed 
issues related to advanced funding and diversifying Social 
Security investments in Social Security: Different Approaches 
for Addressing Program Solvency (GAO/HEHS-98-33, July 22, 
1998). We also have an assignment under way to address the 
extent to which workers receive their money's worth from Social 
Security.

8. Your testimony indicates that bringing in new hires in 
noncovered systems would only extend the solvency of Social 
Security by 2 years. Yet the damage to noncovered systems by 
this action would be severe. Why was the 2-year factor 
minimized so much in your report?

    Answer: We focused on Social Security's actuarial deficit 
over a 75-year period because that is the measure of financial 
solvency used by Board of Trustees in its annual reports. 
Additionally, we focused on the 10-percent reduction in the 
actuarial deficit attributed to mandatory coverage of state and 
local government employees because that was the method used by 
the 1994-96 Social Security Advisory Council to measure the 
effect of mandatory coverage on that deficit.
    We showed that mandatory coverage would extend Social 
Security's solvency by 2 years, assuming no other adjustments, 
to emphasize the fact that mandatory coverage would resolve 
only a portion of the Social Security financial shortfall and 
must be coupled with other adjustments to fully resolve Social 
Security's actuarial deficit over the 75-year period. Within a 
final package of adjustments designed to fully eliminate Social 
Security's actuarial deficit, extending Social Security to 
state and local employees would eliminate 10 percent of that 
deficit.
      

                                

    Chairman Bunning. I want to thank you for your testimony.
    Our next panel includes Robert Scott, Richard Schumacher, 
and Sergeant Martin Pfeifer, Thomas Lussier--is that right?
    Mr. Lussier. Correct.
    Chairman Bunning. Mr. Scott is the executive director of 
the Public Employees' Retirement Association in Denver, 
Colorado. He will be testifying on behalf of the Coalition to 
Preserve Retirement Security. Mr. Schumacher is the executive 
director of the Public Employees' Retirement System of Ohio. 
Sergeant Pfeifer is with the Washington Metropolitan Police 
Department and a Trustee on the National Board of the Fraternal 
Order of Police. Mr. Lussier is the executive director of the 
Massachusetts Teachers' Retirement Board. And I want to 
recognize my fellow Ways and Means Committee Member, John 
Ensign, to introduce the final witness on this panel.
    Mr. Ensign. Thank you, Mr. Chairman. I also want to thank 
you for holding this hearing and inviting me to be here, and I 
want to especially thank you for allowing one of the experts 
from my home State of Nevada, George Pyne. George is the 
executive officer of the Public Employees' Retirement System of 
Nevada, and he's joining us this morning to share, I think, 
what you'll find is very important testimony.
    I've been a fan of George's and what he's done with the 
State of Nevada. I use it in many, many speeches and talk about 
it as an example of one of the things that could possibly be 
done for the future of Social Security, and because they take 
advantage of that magical thing called compounding, and it's 
something that we should be teaching in our schools, because 
most people don't understand that growing rich slowly over time 
because of compounding really works, and the State of Nevada 
and their retirement system, I think, is a very, very good 
example of how it can be done. So, I appreciate your allowing 
me to introduce Mr. Pyne this morning, and I know that you'll 
be pleased with his testimony.
    Chairman Bunning. Thanks, John. Before we begin this panel, 
I'd like to point out that despite our best attempts we were 
unable to obtain witness representing the 1994-96 Social 
Security Advisory Council. Edith Fierst who served on the 
Advisory Council has provided a statement for the record.
    Mr. Scott, would you please begin.

STATEMENT OF ROBERT J. SCOTT, SECRETARY TREASURER, COALITION TO 
 PRESERVE RETIREMENT SECURITY; AND EXECUTIVE DIRECTOR, PUBLIC 
      EMPLOYEES' RETIREMENT ASSOCIATION, DENVER, COLORADO

    Mr. Scott. Thank you, Mr. Chairman. My name is Bob Scott, 
and, as you said, I'm executive director of the Public 
Employees' Retirement Association. We manage $25 billion in 
assets for almost 200,000 members, retirees, and beneficiaries. 
I'm testifying today as secretary treasurer of the Coalition to 
Preserve Retirement Security, formerly known by the acronym of 
OPPOSE. This coalition represents the interests of some 5 
million public employees and retirees who do not participate in 
Social Security.
    The Coalition to Preserve Retirement Security believes that 
the Social Security system has provided and continues to 
provide an important part of the retirement benefits for the 
majority of American workers, including many of our colleagues 
in public service. We also believe that it is critical that the 
Social Security Program be preserved and strengthened and we 
applaud the bipartisan work now being done by Congress to 
effect changes which will enhance the long-term stability of 
Social Security.
    You are here today to consider one possibility for change. 
This possibility, extending mandatory participation to public 
service positions not now covered, is in terms of the total 
package of possible changes very small. However, it is an issue 
of critical importance to the affected employees and employers.
    I'd like to very briefly suggest to you four reasons--and 
we think they're very strong reasons--why you should focus on 
other possibilities. First, the current structure works and it 
works well. The Amish say, ``If it ain't broke, don't fix it.'' 
I would say, ``If it ain't broke, don't break it.'' In 1990, 
Congress required that all public employees be provided with 
retirement plans that either included participation in Social 
Security or provided comparable security and benefits 
independent of Social Security. In the written materials, I've 
provided you with data showing that existing public plans 
independent of Social Security provide sound, well-funded 
programs which include good retirement, disability, cost of 
living, and survivor benefits at a very reasonable cost to the 
public employer and, thus, to the taxpayer. To radically alter 
these sound, efficient plans by imposing mandatory 
participation would force major plan redesigns and require that 
either employer costs go up, benefits go down, or both.
    Second, the proposal goes against the grain of one of the 
critical foundations of many of the restructuring programs; 
that is to enhance the long-term viability of Social Security. 
While mandatory coverage of new hires would provide a short-
term increase in cash receipts by a small amount--0.2 percent 
of pay--it would increase the long-term liabilities of programs 
just at the time when current projections show that the 
revenues will become insufficient. The current concerns with 
the long-term viability of Social Security are not the result 
of noncoverage of some public workers, and their mandatory 
inclusion cannot help resolve these concerns. In short, we have 
not been a part of the problem, and our inclusion cannot, in 
reality, contribute the solution.
    Third, inclusion of noncovered public workers will, in 
fact, distract from the development of effective ways to 
address the fundamental needs of Social Security. As I noted 
earlier, inclusion would adversely affect 5 million workers and 
retirees and their families as well as thousand of public 
employers. Naturally, this will foster opposition to change on 
their part. As I said at the outset, we support Social Security 
as a general program and want to help develop effective ways to 
ensure its long-term strength. If mandatory participation is 
not an issue, this group can join with you and your colleagues 
to work for positive and effective change.
    Finally, mandatory inclusion would add to the one of the 
fundamental concerns with Social Security as it now exists. At 
its inception, it was possible and practical for Social 
Security to use current workers' earnings to pay for former 
workers' retirement benefits. However, we are all painfully 
aware of the major demographic changes that are still in 
progress and which have made this form of intergenerational 
transfer both inequitable and impractical. We should not add to 
this inequity by creating an even greater future unfunded 
liability. Let's not put more passengers on the Titanic. Let's 
work together to find a way to avoid the iceberg.
    In summary, we want to support effective change to enhance 
the long-term viability of Social Security. In that context, we 
can see no basis to support mandatory coverage of public 
workers who are now covered by sound, well-funded State and 
local plans that should not be replaced, but rather looked to 
as examples. Thank you.
    [The prepared statement follows:]

Statement of Robert J. Scott, Secretary Treasurer, Coalition to 
Preserve Retirement Security; and Executive Director, Public Employees' 
Retirement Association, Denver, Colorado

    My name is Robert J. Scott. I am Secretary/Treasurer of The 
Coalition to Preserve Retirement Security (``CPRS''). CPRS is a 
Colorado Corporation formed by teachers, fire fighters, police 
officers, and other state and local government employees who 
elected not to join the Social Security system. The purpose of 
our organization is to assure the continued financial integrity 
of our members' retirement and health insurance plans by 
resisting efforts to mandate Social Security coverage of public 
employees. Our members are found in Alaska, California, 
Colorado, Connecticut, Illinois, Kentucky, Louisiana, 
Massachusetts, Minnesota, Nevada, Ohio, and Texas. With respect 
to mandatory Social Security coverage, the interests of CPRS 
are identical to those of approximately five million public 
employees throughout the nation who remain outside the Social 
Security system, as well as over one million retirees from 
public retirement plans outside of Social Security.

                               Background

    For many years after the Social Security system was 
created, state and local government employees were not allowed 
to participate in the system. Beginning in the 1950s, state and 
local government employers could elect to have their employees 
covered. Governments which elected in were also permitted to 
opt out again, after notification of the intent to do so, and 
the expiration of a two year waiting period.
    This was the law for about three decades, until, in 1983, 
there was a major revision of the Social Security and Medicare 
laws, triggered primarily by a concern about the long term 
solvency of these two trust funds. Congress decided not to 
require state and local employees who were outside the system 
to be covered, but did end the opt out for public employees who 
had chosen to be covered. An ``anti-windfall'' rule was 
adopted, to ensure that public employees who were covered by 
Social Security and by a public plan did not receive excess 
credit for Social Security purposes.
    In 1986, as part of the Consolidated Omnibus Budget 
Reconciliation Act of 1985 (``COBRA''), Congress determined to 
require participation in the Medicare system on a ``new hires'' 
basis, but chose to leave public employee retirement plans in 
place, and did not change the law with respect to Social 
Security.
    In 1990, Congress enacted a law requiring that all public 
employees not covered by a state or local retirement plan 
meeting specified standards must be covered by Social Security. 
That law, adopted as part of the Omnibus Budget Reconciliation 
Act of 1990 (the ``1990 Act''), ensures that all public 
employees will be covered either under Social Security or under 
a public retirement plan which provides comparable benefits. 
This has proven to be an effective and workable approach. 
Today, about one-third of all state and local government 
employees, about five million people, are outside the Social 
Security system because they are covered by public retirement 
plans. Additional millions are retirees from non-Social 
Security public plans, who are dependent on those plans for 
all, or most, of their retirement income.

                       Background of this Hearing

    Reasonable people differ about the date when serious 
trouble really begins for the Social Security system. Although 
nominally established like a funded pension system, in 
practice, Social Security Trust Fund surpluses have been used 
to reduce operating deficits in other parts of the federal 
budget. There is an obligation for the Treasury to repay these 
``borrowings'' from Social Security, but the federal government 
will not be able to repay these borrowings when the time comes, 
except by creating surpluses in other parts of its budget, or 
by printing money.
    In his 1998 State of the Union address, President Clinton 
proposed a policy of ``save Social Security first,'' by which 
he meant that until such time as the President and Congress 
agree on a method to put Social Security on a sound footing for 
the foreseeable future, all federal budget surpluses must be 
applied to preserve the Social Security system. This proposal 
has enjoyed considerable support on both sides of the aisle in 
Congress.
    When Social Security outlays begin to exceed Social 
Security revenues, this will place an additional burden on the 
federal budget, as Social Security becomes a net importer of 
general federal revenues. If the federal operating budget is in 
a healthy posture, Social Security payments could be made out 
of general federal revenues, gradually repaying the Social 
Security Trust Fund for amounts lent to the federal government 
to cover operating deficits in the past. On the other hand, if 
the federal operating budget is in deficit, then repaying the 
Social Security Trust Fund will be very difficult. Proposals to 
solve the long term Social Security funding problem by 
increasing current Trust Fund revenues are doomed to failure 
unless those Trust Fund surpluses are used in such a way as to 
reduce future demands on the general fund. (In fact, increases 
in current Trust Fund surpluses could actually make the long 
term situation worse, if the current surpluses are not saved 
and additional obligations to pay future benefits are 
incurred.)
    In 1994, the Bipartisan Commission on Entitlement and Tax 
Reform (also known as ``the Kerrey-Danforth Commission'') 
studied the problem of projected short falls in the Social 
Security and Medicare Trust Funds, as well as other mid-term 
and long-term deficit problems. The Commission was unable to 
agree on a set of recommendations, but did valuable work in 
assessing the dimensions of the problem. In an interim report 
published in August, 1994, the Commission projected that with 
no changes in law, by 2010 entitlement spending and interest on 
the natioal debt would consume almost the entire federal 
revenues; by 2020, entitlement spending alone would almost 
equal the federal revenue stream; by 2030, there would not be 
enough revenue to service the federal entitlement obligations, 
even if no money were used for other purposes, including 
payment of interest on the national debt.
    In 1995 and 1996, The Advisory Council on Social Security 
examined the mid-term and long-term solvency of Social Security 
and the Social Security Trust Fund. The Council submitted its 
report in January, 1997. Once again, there was no majority on 
the Council for any single set of recommendations. Three 
different proposals were put forth by different groups of 
members. A majority of the Council recommended mandatory Social 
Security coverage of public employees, although the three labor 
members of the Council opposed this proposal ``because of the 
financial burden that would be placed on workers and employers 
who are already contributing to other public pension systems.''
    These hearings are being held to consider the advantages 
and disadvantages of mandatory Social Security coverage of 
public employees as a partial solution to the long-term funding 
problems of Social Security.

 Mandatory Social Security Coverage is Wrong and Should not be Adopted

1. Public employees are well provided for under their public 
plans; mandatory Social Security coverage will harm public 
employees as well as people who have retired from non-Social 
Security public plans.

    Public plans do an excellent job of providing retirement 
security for their members. Analyses done by public plan 
fiduciaries indicate that public employees of almost any 
description (in terms of salary, length of services, etc.) are 
better protected under their public plan than they would be 
under Social Security. For example, the Public Employees 
Retirement Association (``PERA'') of Colorado produced a study 
(assuming retirement in 1998 at age 62) showing that an 
employee working ten years with a highest average salary of 
$15,000 per year, would receive a Social Security benefit equal 
to 20.6 percent of pay; the PERA employee would receive a 
benefit of 22 percent. For short term employees with higher 
average rates of pay, Social Security benefits are 
proportionately much lower. For example, a ten year employee 
with a highest salary of $60,000 per year would get a benefit 
of 11.8 percent under Social Security; his PERA benefit would 
be 22 percent.
    Longer term employees at all rates of pay have more secure 
retirements under PERA. A fifteen year employee earning a 
highest average salary of $15,000 would receive 28.6 percent of 
pay under Social Security--33 percent under PERA. A twenty year 
$15,000 per year employee would receive 32.4 of pay under 
Social Security--fifty percent of pay under PERA. At thirty 
years of service, this hypothetical, relatively low pay 
($15,000 per year) employee would receive 42.6 percent of pay 
under Social Security, but 75 percent of pay under PERA. At 
forty years of service, the respective numbers are 49.5 percent 
of pay under Social Security; 100 percent for PERA.
    PERA of Colorado is a good plan, but analyses of other 
public plans prove that these plans also do an excellent job 
for their employee-members. A comprehensive study of public 
plans, prepared under the sponsorship of Third Millennium, 
entitled ``Freed From FICA: How Seven States and Localities 
Exempt a Million Employees from Social Security and Provide 
Higher Pension Benefits to Retirees'' (March 1997) (the ``3rd 
Mill Report'') compares the benefits provided under seven large 
public plans with those provided under Social Security. An 
employee retiring after 40 years of work at age 65 with an age 
62 salary of $20,000 would receive an annual pension of $22,153 
from the Public Employee Retirement System (``PERS'') of 
Nevada; $17,722 from the State Teachers' Retirement System 
(``STRS'') of California; $18,609 from PERS of Ohio; $18,609 
from STRS of Ohio; $20,118 from the Los Angeles City Employees' 
Retirement System; and $17,722 from the Maine State Retirement 
System. The average for the seven plans studied was $18,951. 
The Social Security benefit for a worker with the same 
background would be $8,617 for a single worker and $12,926 for 
married workers. As salary levels rise, public plans do an even 
better job for their workers in relation to Social Security.
    Relatively low paid workers need a high return on their 
retirement savings in order to be able to retire with dignity. 
It is small consolation that the percentage return for low paid 
workers is relatively generous under Social Security, if the 
dollar benefits are low. For this reason, low paid workers are 
among those most adamantly opposed to trading all or a 
substantial part of their current retirement benefits for 
Social Security coverage. For example, the School Employees' 
Retirement System of Ohio, with average member compensation of 
less than $15,000 annually, has been a member of CPRS, and a 
strong opponent of mandatory coverage, for almost two decades.
    The Social Security Advisory Council argues at pages 19-20 
of its report that ``over the course of a lifetime, it is 
impossible to tell who will and who will not need [Social 
Security] coverage.'' The Council suggests that Social Security 
may be superior to state or local plans because of the 
inflation proof aspect of Social Security, or because of the 
spousal benefit and other ancillary benefits, or because of 
Social Security's portability.
    These claims are not supported by facts. It is not the 
case, for example, that Social Security benefits are 
guaranteed. At the time of the 1983 reform, Social Security 
benefits were reduced, most importantly, by increasing the 
normal retirement age for Social Security on a phased-in basis. 
More recently, Social Security benefits were made taxable for 
some recipients. Social Security's companion program, Medicare, 
has also been the subject of many cost control measures. 
Current pressures on the funding of Social Security may quite 
possibly result in further benefit reductions.
    Social Security benefits are reduced for earnings of 
beneficiaries above specified levels until the beneficiaries 
reach age 70. Public plan benefits are generally not reduced 
for earnings.
    All of the plans surveyed in the 3rd Mill Report provide 
disability benefits, as do the vast majority of public plans. 
The disability benefit provided by Social Security is hard to 
qualify for. (Generally a worker must be unable to perform any 
substantial gainful activity and the impairment must have 
lasted, or must be expected to last, for at least 12 months.) 
Public plans are often more generous. The average disability 
benefit provided by the seven surveyed plans was $10,440 
annually.
    All of the plans surveyed in the 3rd Mill Report provide 
pre-retirement survivor benefits, as do public plans generally. 
(Six of the seven surveyed plans also provide post-retirement 
survivor benefits.) For children, Social Security's survivor 
benefits cease when the child turns 18. Many public plans 
provide benefits after that age has been reached if the child 
is a full time student. The average survivor benefit paid by 
the seven surveyed plans was $6,960 annually.
    Social Security provides an annual cost-of living 
adjustment for its beneficiaries and so do public plans. The 
seven surveyed plans all provided cost of living adjustments. 
During the period from 1988 to 1992 (when inflation was largely 
under control) these adjustments tended to average slightly 
over three percent per year. (3rd Mill Report, page 16) Public 
plans, in effect, also provide very high pre-retirement cost-
of-living adjustments, because public plan retirement benefits 
are almost always based on the final or highest years of 
compensation (generally a three-year or five-year period is 
used for the benefit computations).
    The greatest advantage of Social Security is supposed to be 
its portability. Social Security benefits are 100 percent 
portable after the 40 qualifying quarters have been earned. 
This is particularly supposed to be an advantage for people who 
move in and out of the work force. But Social Security benefits 
for people who have limited years of service may be low, even 
if those benefits are vested. No refunds are paid by Social 
Security, even to workers who have less than 40 quarters. Most 
public plans provide rapid vesting. All but one of the seven 
surveyed plans in the 3rd Mill study vest in five years, and 
the plan average for all seven plans was 5.71 years. Of course, 
public employees are always 100 percent vested in their own 
contributions and may roll those contributions over into an IRA 
if no better option is available.
    Most public plans afford considerable portability, even 
with regard to employer contributions. Many plans allow 
transfer of credits within the same state. Many plans also have 
buy-in provisions whereby employees may purchase credit in a 
retirement system, often with proceeds from credits earned in 
another retirement system.
    In the future it is highly likely that portability 
provisions will be even better. There is currently pending 
before the Congress the Retirement Account Portability Act of 
1998, which appears to enjoy substantial support. This proposal 
will facilitate roll overs between different kinds of defined 
contribution plans and will also make it easier for workers to 
roll over amounts from their IRAs into employer plans.
    It is also the case that he Social Security system is not 
well designed to meet the needs of certain public employees, 
particularly fire and police. Because of the physical and 
emotional stress caused by their members' work, fire and police 
pension plans generally have generous disability benefits. Also 
fire fighters and police officers retire earlier than most 
other categories of worker, because physical conditioning is 
such an important part of job qualifications. In addition, fire 
fighters particularly have an average life expectancy which is 
significantly below that of the general population (primarily 
because of fire fighter's exposure to hazardous materials). The 
rate of return from Social Security for many fire and police 
workers would be far below average.
    Some studies have also indicated that Social Security may 
have a poor rate of return for minorities. Governments are 
generally strong proponents of equal opportunity and employ 
significant percentages of African American, Hispanic, and 
other minority workers. These employees, like their non-
minority colleagues, receive excellent retirement benefits. 
Many public plans provide several optional retirement packages 
to their employees when they retire, while Social Security 
provides only a life time annuity.
    A January 1998 report by The Heritage Foundation entitled, 
``Social Security's Rate of Return,'' indicates that a low-
income worker (average annual earnings of $12,862) born in 1975 
can expect a life time rate of return of about negative one 
percent, for a net loss of $13,377. A large part of this 
negative rate of return is attributable to the relatively short 
life expectancies of African-Americans. African-American women 
generally have a positive rate of return, but nonetheless 
receive far less than they would obtain from even very 
conservative investments of their Social Security 
contributions. The report concludes that ``Social Security 
taxes impede the inter-generational accumulation of capital 
among African-Americans....''
    Some people make the mistake of thinking that if mandatory 
Social Security coverage is applied on a new hires basis, then 
retirees and current plan participants will not be hurt. This 
is not the case. Public plans provide most of their benefits 
not from employer and employee contributions, but from 
investment earnings on those contributions. For example, in the 
Ohio STRS plan, about two-thirds of all plan benefits are paid 
from plan earnings. Applying Social Security taxes to new hires 
will reduce the capital stream upon which the earnings are 
based. How fast this would happen depends on factors which 
cannot now be determined. The most important of these factors 
is the definition of a ``new hire.'' If the term is defined 
conservatively, employee turnover would occur at a rate of 
about six to seven percent per year. If the COBRA definition of 
a ``new hire'' for Medicare purposes were to be used (many 
people who change jobs even within the same government system 
are considered to be new hires), the turnover rate would be a 
great deal higher, at least during the initial years of the new 
system.
    Ohio STRS has concluded that mandatory coverage of new 
hires would result in the loss of the medical plan which STRS 
now provides to members and retirees. In addition, STRS 
believes that it will be necessary to (1) eliminate death, 
disability and survivor benefits; (2) reduce cost-of-living 
adjustments from 3 percent annually to 1.6 percent; or (3) 
reduce retirement benefit accruals from 2.1 percent to 1.9 
percent for current members, and from 1.47 percent to 1.32 
percent for future members.
    These changes are highly injurious and would fall most 
heavily on those already retired, who would not be in a 
position to easily adjust. Retirees live throughout the nation. 
This means that mandatory coverage, even on a new hires basis, 
would impact people in every state, and would create additional 
burdens for state and local governments throughout the nation, 
especially in those states which are home to large numbers of 
retirees.

2. Mandatory Social Security Coverage of Newly Hired Public 
Workers Will Not Save the Social Security System; Nor Will 
Mandatory Coverage Significantly Reduce the System's Problems.

    The Social Security system is not in short-term trouble. 
Currently surpluses in the Social Security system are being 
used to fund operating deficits else where in the federal 
budget, although there is now wide spread support for stopping 
this practice.
    The Advisory Council on Social Security expresses the 
actuarial deficit over the 75 year period ending in 2070 in 
terms of a percentage of payroll, i.e., 2.17 percent. (Advisory 
Council Report, p. 11) In dollars, the present value of the 
difference between OASDI current assets, plus OASDI tax and 
interest for the 75 year period, minus the present value of 
OASDI obligations is minus two trillion, five hundred and 
twelve billion. (Advisory Council Report, p.198). In cash flow 
terms the Advisory Council expects tax receipts to exceed outgo 
through 2014. Beginning in 2015, Social Security will run a 
small cash deficit, but growing each year, so that the short 
fall for the year 2030 will be $611 billion, and the cumulative 
short fall for the period 2015 through 2030 is estimated at 
$4,512,000,000,000 (about four and one half trillion dollars). 
(Advisory Council Report, p. 192) Estimates of the total long 
term shortfall are in the range of $9 trillion. (There are, of 
course, other unfunded federal liabilities, including Medicare 
and interest on the national debt, as well as other 
entitlements.) But the favorable economic trends which have 
occurred since this report was prepared have almost certainly 
postponed the year when cash flow problems will begin, and 
reduced somewhat the extent of the long term actuarial deficit.
    In their April, 1998 report, the Social Security and 
Medicare Boards of Trustees announced that the OASDI Trust Fund 
would remain viable through 2032 (an improvement of three years 
over previous projections). Also, the Trustees now project that 
Social Security will continue to generate surpluses through 
2013 (an improvement of one year). OASI, by itself, will remain 
viable for several additional years. The Trustees indicated, at 
page seven of their report, that ``key dates are 1 to 4 years 
later than shown in the 1997 report, due in large part to 
better actual and expected economic performance.'' In the 
several weeks since the publication of the Trustees' Report, 
the economic situation has improved still further. On May 5, 
1998, the Congressional Budget Office increased its surplus 
projection for fiscal years 1998 and 1999 from $28 billion, to 
a range of between $73 and $93 billion.
    The Advisory Council estimates that in terms of a 
percentage of payroll, mandatory coverage of new hires, 
beginning January 1, 1998, would save about 0.22 percent, or 
about ten percent of the total actuarial deficit for the period 
1995 through 2070. This is largely because cash from new hire 
taxes would come into the system before the obligation to pay 
out benefits materialized. Of course, the obligation to pay out 
benefits with respect to contributions made before 2070 would 
continue long past that year.
    In order to determine how to repair Social Security, it is 
necessary to understand what is wrong now. Although there may 
be many problems with Social Security, by far the most 
important is that the system has tried to operate on a pay-as-
you-go basis. This approach worked without great strain so long 
as national demographics were favorable, and the pool of 
workers was growing much more rapidly than the pool of 
retirees. This was the case for many decades, but it is no 
longer the case.
    Although there is a large Social Security Trust Fund, which 
will keep Social Security in actuarial balance through about 
2032 (perhaps slightly longer), this trust fund consists of 
money which the federal government has promised to repay to 
itself in the future. When Social Security obligations begin to 
exceed tax revenues, there is no box of money that the 
government can go to in order to make up the short fall. The 
federal government can either print money, thereby fueling 
inflation, or repay the Social Security Trust Fund out of an 
operating surplus in the rest of the federal budget.
    There is a third choice, which is to invest the current 
Trust Fund surplus in assets which may be redeemed later. This 
has not been done in the past, but there is no insurmountable 
obstacle to undertaking such a policy in the future. For 
example, current surpluses could be used to pay down the 
national debt (thereby making it easier to create operating 
surpluses in the future), or by having the federal government 
invest in stocks and bonds, or by the creation of personal 
savings accounts which, in the future, would reduce workers' 
claims on the existing Social Security system. There are 
problems and advantages in connection with all of these 
approaches. But until the federal government faces up to the 
fundamental difficulties of the pay-as-you-go approach, Social 
Security's funding problems can only be solved on a pay-as-you-
go basis, which means, for years in which outgo exceeds 
revenues, that benefits must be cut or taxes must be increased.
    Many ideas have been advanced in connection with funding 
Social Security. Reducing the cost-of-living adjustment 
(``COLA'') for Social Security saves very large amounts of 
money. In December of 1996, The Boskin Commission reported to 
Congress its conclusion that the then current method of 
calculating the Consumer Price Index (``CPI'') over stated the 
rate of inflation by 1.1%. This conclusion was highly 
controversial, but almost everyone agreed that CPI was 
overstated by some factor. On April 16, 1998, The Bureau of 
Labor Statistics announced the last in a series of reductions 
to the CPI. These final changes will take effect on January 1, 
1999, and, together with reductions that have already been 
made, will total .8 of one percent. (It is hard to determine 
whether the Social Security Trustees took any account of these 
CPI reductions in their April, 1998 Report, but it seems 
certain that they took no account of the more recent changes.)
    Small reductions in CPI have enormous effects. The Advisory 
Council estimated that reducing CPI by 0.5 percent, beginning 
in 1998, would save 0.72 percent of payroll, or about a third 
of the entire actuarial shortfall. Even if no changes in CPI 
are legislated, the long term picture is already considerably 
brighter than reported by the Advisory Council a year ago.
    Gradually increasing the normal retirement age also results 
in substantial savings, even if the adjustments are relatively 
minor. Currently the normal retirement age is scheduled to 
increase very gradually beginning in the year 2000. By 2027, 
the normal retirement age will be 67. If the normal retirement 
age were to be raised by two months a year, beginning in 2000, 
capping at age 68 in 2017, the Advisory Council estimates that 
this would save 0.49 percent of payroll.
    Polls show that the only Social Security reform proposal 
which enjoys 50 percent or more popular support is the means 
testing of benefits. Th Concord Coalition suggested phasing out 
benefits for those having income over $40,000 per year, capping 
the reduction at 85 percent of benefits. According to the 
Advisory Council, this would save 1.65 percent of payroll.
    Currently Social Security benefits are free of tax for most 
recipients. Other annuities are 100 percent taxable after the 
beneficiary has recovered his or her basis (after-tax 
contributions) in the annuity. Taxing Social Security benefits 
on the same basis as other income would not be popular, but it 
is difficult to argue that it would not be fair.
    Eliminating the wage base cap would also raise very large 
amounts of money, even though relatively few people would be 
effected. This has already been done with respect to Medicare.
    Mandatory Social Security coverage of new hires will not 
come close to solving Social Security's problems. Even if the 
Advisory Council projection of 0.22 percent of payroll is 
correct, it was based on the assumption that mandatory coverage 
would be imposed January 1, 1998. The earliest legislation is 
expected would be next year, and there is no way state and 
local governments could adjust to mandatory coverage by the 
year 2000, based upon legislation enacted in 1999. Many of 
those who have looked at the problem believe that it would take 
state and local governments four years to adjust to the legal, 
financial, and administrative problems connected with mandatory 
coverage. Moreover, mandatory coverage would be the subject of 
Tenth Amendment litigation, possibly causing more delay, and 
making it uncertain whether revenue from mandatory coverage 
would ever be realized.
    In addition, there would be offsets. Some employee 
contributions to public pension plans are tax deductible, but 
all benefits are taxable (after the worker has recovered his or 
her basis). Employee contributions to Social Security are not 
tax deductible, but all benefits are tax free to most 
recipients. Moreover, state and local governments would have to 
raise taxes to pay their share of OASDI taxes (and perhaps some 
or all of the employees' share as well) and many of these new 
taxes would be deductible for federal income tax purposes.
    Eventually, of course, public employees would draw out 
benefits on the same basis as everyone else. If mandatory 
coverage of new hires were to be imposed relatively soon, 
benefits would come do for newly covered employees would begin 
to come due around 2030, exactly the time when Social Security 
is predicted to be in its greatest crisis, at least on an 
actuarial basis.
    Worst of all, of course, would be for Congress to cover new 
hires, but fail to save the tax revenues. That policy is 
precisely what has created the difficulties that we face today.
    On the other hand, if the government does save the 
surpluses in the Social Security Trust, and if the economy 
continues to prosper, these factors, together with the CPI 
adjustments which have already been announced. will make it 
easier to face whatever is left of the problem. It would be 
worth while to examine these developments before taking more 
radical action.
    Of course, Congress may decide to modify the current 
structure of Social Security not merely to solve the funding 
problem, but to provide better retirement benefits for 
participants. Such action (usually described as privatization) 
might increase costs for Social Security participants in order 
to provide the increase in benefits. But there is no reason why 
public employees should pay these costs; they are already 
funding their own system.

3. Mandatory Social Security Coverage Will Harm Existing Public 
Plan Participants and Retirees and This Proposal Is Not Fair.

    Some people argue that mandatory Social Security coverage 
should be imposed on grounds of fairness. The Advisory Council 
argues, at page 19 of its Report, ``all Americans have an 
obligation to participate [in Social Security], since an 
effective Social Security program helps to reduce public costs 
for relief and assistance, which, in turn, means lower general 
taxes.'' Other people have an instinctive reaction that if 
Social Security is good enough for everyone else, why shouldn't 
public employees participate. It is also argued that, at least 
in percentage terms, Social Security confers a high benefit on 
very low paid workers, and that in the future most other wage 
earners will have to subsidize this benefit. (Until recently, 
almost all participants had a very positive return from Social 
Security in dollar terms.)
    Public retirement plans also reduce public costs for relief 
and assistance in precisely the same way that Social Security 
achieves that effect. Employees covered by public plans are not 
candidates for welfare, SSI, or other forms of public 
assistance. Public plans provide higher dollar benefits in 
proportion to salary and years of service than does Social 
Security. Low income workers depending entirely on Social 
Security for their retirement income are virtually certain to 
need public assistance.
    Moreover, whereas the Social Security funding problem has 
created substantial exposure to the federal government in terms 
of future needs for revenue, there is no exposure to the 
federal government, or to the taxpayers who support that 
government, in connection with public plans, because public 
plans are not insured by the Pension Benefit Guaranty 
Corporation.
    There is some evidence that the Advisory Council was not 
that concerned with questions of fairness. In an April, 1997, 
speech before the National Conference of Public Employee 
Retirement Systems, Edith Fierst, a member of the Council, said 
of the mandatory coverage proposal, ``We did it primarily 
because it would be good for Social Security, not because it 
would be good for the employees. Our interest was that if 
people came into Social Security and began to pay the Social 
Security tax, that helps the Social Security's trust fund, and 
they won't start to draw benefits based on those contributions 
for some years.''
    Whether or not public employees should be in Social 
Security because everyone else is depends to a considerable 
extent on why the nation is having a serious conversation about 
Social Security. If we were writing on a clean slate, with full 
knowledge of the problems Social Security faces, and the 
alternatives to Social Security which could provide greater 
retirement security for the vast majority of beneficiaries, it 
is highly likely that the nation would follow a model that is 
much closer to the public plan model, than to Social Security 
as it exists today. To the extent that Congress determines to 
establish private retirement accounts for Americans, to replace 
all or part of the current Social Security system, it makes no 
sense whatever to move millions of public employees in the 
opposite direction. This can only complicate transition 
problems, and raise the ultimate cost of moving toward a 
privatized system.
    Public employees did not cause the current funding problems 
for Social Security, nor did non-covered public employees 
benefit during the many decades when almost every participant 
came out of the Social Security system a winner. Social 
Security surpluses have helped to disguise deficits in the 
general operating budget of the federal government, primarily 
during the last ten years, and public employees have 
experienced lower federal income taxes (or lower federal debt 
owed to third parties) or exactly the same basis as everyone 
else, including Social Security participants and beneficiaries, 
but no more so. If it is decided to repay the Social Security 
Trust Fund in the future out of general fund surpluses, public 
employees will pay their share of those surpluses through 
federal income taxes and other federal taxes.
    Throughout most of its history, and even today, Social 
Security was an arrangement where everyone won. For example, 
low-wage single workers who turned 65 in 1960 paid life-time 
taxes of $4,000, [employer and employee] and received life-time 
benefits of $30,100, for a positive return of $26,100 [in 1993 
constant dollars] (Steuerle and Bakija, ``Retooling Social 
Security for the 21st Century,'' The Social Security Bulletin, 
1997, #2, at page 47, the ``Bulletin Report''.) High wage 
earners received a more positive return measured in dollars, 
although low-wage workers received a better return measured as 
a percentage of life-time taxes to benefits. But members of 
every group (low, average. and high earners, male and female, 
single and married, one-earner and two-earner couples) that 
turned age 65 in 1960, on average, came out big winners. High 
wage single men (the least favored category) received life-time 
benefits equal to almost four times life-time taxes. Factors 
such as sex (women did better than men) and marital status 
(married one-earner couples received life-time benefits equal 
to eight-and-a-half times life-time contributions) were very 
important in determining how good a deal you received. Social 
Security was not a re-distributional system from high-earner to 
low-earner. Everyone won; high-earners won the most in dollars; 
women and married couples won the most in percentage terms. 
(For purposes of these calculations, high-earners are assumed 
to receive at least the maximum wage subject to Social Security 
tax ($65,400 in 1997); average-earners are assumed to receive 
the Social Security Administration's measure of the average 
national wage ($26,700 in 1997) each year from age 21 to age 
65, and low-wage earners are assumed to receive 45 percent of 
this amount (about $12,000)).
    This pattern continued for workers who reached age 65 in 
1980. Positive returns for 1980 retirees were actually greater 
than those received by their 1960 counterparts measured in 
dollars; measured as a percentage of life-time contributions to 
life-time taxes, however, the 1960 cohort did much better. But 
every category of worker reaching age 65 in 1980 had a 
substantially positive rate of return.
    For the most part, this pattern also continues for those 
who reached age 65 in 1995. For the first time, however, there 
are projected to be losers. Average-income and high-income 
single males who retire in 1995 will, on average, receive less 
in benefits than they and their employers paid in taxes. All 
other categories of workers, including high-earner categories, 
will receive positive rates of return, though not as high, 
measured either in dollars or percentages, as they would have 
received in the past.
    For those reaching age 65 in 2010, most single male workers 
will have a negative rate of return (single male low-earners 
will essentially break even) and single women, other than low-
wage single women, will also lose. Married couples are 
projected to have positive rates of return for this age 
category, with the exception of high-wage two-earner, couples, 
who will experience substantial losses.
    For those reaching age 65 in 2030, exactly the same 
categories are projected to win and lose, although losses will 
be greater, measured in dollars, and positive rates of return 
will be low for most of the categories of winners.
    Social Security has never been a system of income transfer 
from relatively rich to relatively poor, nor will it be such a 
system in the future. To some extent, within members of the 
same generation, Social Security will become a transfer system 
from single to married, especially single-earner married.
    Nor does Social Security pay a benefit that low-wage people 
can live on. The average low-earner retiring at age 65 in 
January 1996 would receive a monthly benefit of $537. (Fast 
Facts and Figures about Social Security, The Social Security 
Administration: 1996, page 16) Any additional support that is 
necessary in paid out of the general fund, in the form of SSI 
benefits. Income taxes of public employees support the general 
fund on the basis as everyone else.
    The average annual salary for a full time state or local 
government employee, nation wide, in October 1995, was $33,464. 
(Statistical Abstract of the United States: 1997: page 326) For 
all full time workers in 1995, the average annual salary was 
$40,367 for men, and $26,547 for women. (Statistical Abstract, 
page 474) (The average of these two amounts is $33,457.) Public 
employees are squarely in the mid-range of all Americans in 
terms of their compensation. If public employees were to be 
brought within the system, there is no way that they would 
``subsidize'' the benefits for any other group.
    For most public employees, their rights in their retirement 
plan represent a substantial portion of their life time 
savings. In 1989, the median American household had a net worth 
of approximately $42,000, much of this tied up in the equity in 
their home. Forty-two thousand dollars is not a large cushion. 
For middle income public employees, the security provided by 
their public retirement plan is all that makes possible a 
retirement with dignity.
    But it will not be possible for public plans to maintain 
their current benefit structure, if mandatory coverage is 
imposed, even for existing plan participants and existing 
retirees. As discussed above, page 5, Ohio STRS has estimated 
that mandatory coverage on a new hires basis would require the 
elimination of health care benefits, and would also require the 
reduction or elimination of cost-of-living adjustments, or 
normal retirement benefits, or the elimination of ancillary 
benefits for plan participants. (These estimates assume a 
relatively restrictive definition of ``new hire;'' If the COBRA 
definition were used, the situation would be much worse.) The 
average Ohio STRS retiree lives 25 years; three years of 
retirement are paid for by employee contributions; six years 
are paid for by employer contributions; sixteen years are paid 
for by earnings on investments.
    Other systems report similar problems. For example, PERA of 
Colorado projects an end to plan improvements for current 
participants and retirees, and new hires would receive a 
combined Social Security and PERA benefit that would be 
slightly less than half of the current PERA benefit.
    At page 20 of its report, the Advisory Council puts forth, 
as one argument for mandatory coverage, that a high proportion 
of state and local government workers will receive Social 
Security benefits because of non-government work which they 
perform, or through their spouses. A Council of Social Security 
experts should very well know, but fail to acknowledge, that 
state and local government workers do not receive any unfair 
advantage from remaining outside of the Social Security system 
for most, or part, of their career. In 1983, as part of the 
overall Social Security reforms enacted in that year, Congress 
adopted an anti-windfall rule, which has the general effect of 
reducing any Social Security benefit that the employee might 
otherwise be entitled to in accordance with a formula based on 
the period of time during which the employee was not covered by 
Social Security. This adjustment is made because Social 
Security is bottom weighted--that is, Social Security tends to 
provide relatively high benefits for workers who have 
relatively low career average earnings. Another rule which is 
applicable to non-covered government workers, known as the 
spousal offset rule, reduces the spousal benefit which would 
otherwise be payable to these workers.

4. Mandatory Social Security Coverage Has the Same Adverse 
Effects As Do Unfunded Mandates.

    In recent years Congress has rightly been concerned about 
the effects on state and local governments of imposing costly 
federal requirements on those governments, without providing 
the necessary money. The Unfunded Mandate Reform Act of 1995 
passed over-whelmingly in both the House and the Senate.
    The cost mandatory coverage on a new hires basis would be 
over $100 million in the first year for Ohio, and almost $200 
million for California. When fully phased in, California's 
annual cost would be over $2 billion, and states such as Texas, 
Colorado, Illinois, Massachusetts, and Louisiana would face 
annual costs in the hundreds of millions of dollars. Even 
states like Washington, Florida, Georgia, Connecticut, 
Kentucky, Michigan, and Minnesota, which are not commonly 
thought of as non-Social Security states, would face costs in 
excess of $100 million per year.
    The burden caused by these extra costs would fall most 
heavily on those who can afford it least, such as large cities 
which have substantial low-income populations. In a March 15, 
1998 article, The Washington Post discussed a report by the 
Milton S. Eisenhower Foundation. (See, ``Rejuvenation of 
Cities: Was It Just Cosmetics?,'' page A3) The report concluded 
that ``Most adults in many inner-city neighborhoods are not 
working in a typical week.'' Two-third of children fail to 
achieve basic reading levels. Child poverty. segregation, and 
imprisonment have all risen.
    Buzz Bissinger, author of the recent book, ``A Prayer for 
the City,'' reaches similar conclusions when he discusses the 
energetic reform efforts of Philadelphia Mayor Ed Rendell, 
which he views largely as a failure. Bissinger concludes that 
wide-spread improvement may be possible for New York, because 
immigration keeps the population up, and because that city is 
awash in money from Wall Street. But many other cities, like 
Atlanta, Cleveland, Detroit, Miami, and Newark, among other, 
have no such advantages, and are far less likely to be able to 
re-define themselves in ways that benefit the poorer 
neighborhoods.
    On March 12, 1997, bi-partisan representatives of the 
National Governors' Association testified before a joint 
session of the House and Senate Budget Committees, urging 
Congress not to enact federal tax cuts which would force state 
or local tax hikes. Mandatory Social Security coverage would be 
worse, a federal tax hike which would also force state and 
local tax hikes.
      

                                

    Chairman Bunning. Mr. Schumacher.

STATEMENT OF RICHARD E. SCHUMACHER, EXECUTIVE DIRECTOR, PUBLIC 
              EMPLOYEES RETIREMENT SYSTEM OF OHIO

    Mr. Schumacher. Thank you, Mr. Chairman, Members of the 
Subcommittee. I appreciate the opportunity to give testimony 
this morning.
    The potential extension of mandatory Social Security 
coverage to all or any portion of Ohio's public employees is a 
serious concern to the Public Employees' Retirement System, 
PERS, of Ohio. PERS was established by the Ohio legislature in 
1933. The retirement system is a multiemployer plan covering 
3,700 public employers and 638,000 members and benefit 
recipients. We currently have over $47 billion in assets.
    PERS provides retirement, disability, and survivor 
benefits, also, health care coverage. Our program is a defined 
benefit plan and is prefunded through employee and employer 
contributions. The major source of significant revenue is 
investment income. At our inception, the legislature 
established a social contract with all of Ohio's public 
employees. Fiscally sound prefunding was one of the important 
covenants. The funds are to be available when retirement is 
requested. The 1994-96 Advisory Council of Social Security 
stated, and I quote, ``In the past, efforts to deal with Social 
Security's financial difficulties have generally featured 
cutting benefits and raising tax rates on a pay-as-you-go 
basis. Further, all three plans favored by the Council endorse 
the practice of partial, advanced funding.'' As the baby boomer 
generation begins to retire, heavy pressure will be exerted on 
pay-as-you-go plans, and the results could be disastrous.
    The major difference between a prefunded plan and a pay-as-
you-go plan is investment income. Over 80 percent of the 
benefits paid by PERS come from investment earnings. Mandating 
public employee new hires into Social Security would severely 
affect State and local pension systems. Focusing on new hires 
alone creates the illusion that no one else would be affected. 
That is a false assumption. All systems in Ohio would be faced 
over time with cutting benefits to current, active members and 
retirees. Boards could be faced with harmful choices to reduce 
or eliminate health care. The fiscal impacts on this proposal 
on State and local retirement plans would be significant. Costs 
would be shifted from the Federal Government to State and local 
governments. Remember, over 80 percent of our benefit 
disbursements are paid by investment income. The loss of 
contributions results in fewer funds to invest. This means less 
investment earnings, longer funding periods, and higher 
contribution rates.
    Another tragic consequence is the unfunded mandate that 
would be imposed on State and local governments. The important 
legislation on unfunded mandates that came from the House Ways 
and Means Committee in 1995 is extremely relevant today on the 
issue of mandatory coverage. State and local government 
officials appreciated your actions then and urge that the same 
commitment continue today. If our contribution rate was 
decreased by 12.4 percent for Social Security, we would need an 
additional 6- to 7-percent increase in contributions to provide 
a comparable level of benefits. Who is going to pay the 
increased cost? It will be shared by workers and their 
employers. Workers will get less take home pay, and employer 
costs will increase. Taxpayers will pay more.
    Since 1935, various changes have been enacted to mandate 
large sectors of employees into Social Security, generally, 
driven by the need for additional cash flow to pay benefits. 
Each time, the basis for the change was to, supposedly, 
strengthen the program. Each time, it has failed. Merely 
including more participants does not improve the program's 
long-term stability. It may for a couple of years, but as 
retirements increase, greater and greater resources are needed.
    It is reported that the unfunded liability for Social 
Security is in excess of $9 trillion. Each revision of Social 
Security has focused on raising additional revenue and or 
raising the retirement age. Perhaps, this time, it is prudent 
to focus on liabilities, but the legislative fix looking to 
increase short-term cash flow, requiring newly hired public 
employees to be under the Social Security Program would cause a 
substantial increase in long-term Social Security liabilities 
and in taxpayers' liabilities in the State of Ohio as well as 
many other States and their subdivisions.
    It seems unwise to financially and administratively disrupt 
our plans for the purpose under consideration by this 
Subcommittee. Indeed, requiring newly hired public workers and 
their employers to participate in Social Security would 
constitute a tax increase on millions of Americans.
    Many public plans financed by taxpayers and public workers 
are operating in a sound and prudent fiscal manner. Rather than 
imposing mandatory Social Security, our successes should be 
studied for ideas to use in restructuring Social Security. 
Thank you.
    [The prepared statement follows:]

Statement of Richard E. Schumacher, Executive Director, Public 
Employees Retirement System of Ohio

    The potential extension of mandatory Social Security 
coverage to all or any portion of Ohio's public employees is a 
serious concern to Public Employees Retirement System of Ohio 
(PERS).
    PERS was established by the Ohio Legislature in 1933. 
Benefits were first paid January 1938. The Retirement System is 
a multiemployer plan covering 3,700 public employers (includes 
all departments of state and all levels of local government), 
and 638,000 members and benefit recipients. PERS provides 
retirement, disability and survivor benefits, and health care 
coverage. Our program is a defined benefit plan and is pre-
funded through employee and employer contributions. The major 
source of significant revenue is investment income.
    At our inception, the legislature established a social 
contract with all of Ohio's public employees. Based on that 
contract, steps were taken to secure future benefits. Fiscally 
sound pre-funding was one of the important covenants. The funds 
are collected over a person's working career to be available 
when retirement is requested.
    The 1994-1996 Advisory Council of Social Security, in its 
1997 Report, stated:
    ``In the past, efforts to deal with Social Security's 
financial difficulties have generally featured cutting benefits 
and raising tax rates on a pay-as-you-go basis....''
    ``Historically, Social Security has been financed on a 
current pay-as-you-go basis.... All three plans favored by the 
Council endorse the practice of partial advance funding....''
    As the baby boomer generation begins to retire, heavy 
pressure will be exerted on pay-as-you-go plans and the result 
could be disastrous. All plans have already experienced a large 
drop in the ratio of active workers to retirees to fund 
retirement benefits.
    The major difference between a pre-funded plan and a pay-
as-you-go plan is investment income. Over 80% of the benefits 
paid by PERS come from investment earnings. Currently our 
system collects about 22% of covered payroll in employee and 
employer contributions.
    Mandating public employee new hires into Social Security 
would severely affect state and local pension plans. Focusing 
on new hires alone, creates the illusion that no one else would 
be affected; that is a false assumption. All systems in Ohio 
would be faced over time with cutting benefits to current 
active members and retirees. Boards could be faced with harmful 
choices to reduce or eliminate health care. The fiscal impact 
of this proposal on state and local retirement plans would be 
significant; costs would be shifted from the federal government 
to state and local governments. Reduction of our contributions 
would severely restrict investment income sources. Remember, 
over 80% of our benefit disbursements are paid by investment 
income. The loss of contributions results in fewer funds to 
invest. This means less investment earnings, longer funding 
periods, and higher contribution rates.
    Another tragic consequence is the unfunded mandate that 
would be imposed on state and local governments. The important 
legislation on unfunded mandates that came from the House Ways 
& Means Committee in 1995 is extremely relevant today on the 
issue of mandatory coverage. State and local government 
officials appreciated your actions then and urge that the same 
commitment continue today.
    If our contribution rate was decreased by the 12.4% to fund 
Social Security, we would need an additional 6-7% increase of 
covered payroll to provide comparable benefits. A survey 
indicates a higher average total cost for Social Security 
integrated plans at 26% versus non Social Security covered 
plans of 22%. Who is going to pay for the increased cost? It 
will be shared by workers and their employers. Workers will get 
less take home pay and employers' costs will increase--
taxpayers will pay more.
    Since 1935, various changes have been enacted to mandate 
large sectors of employees into Social Security, generally 
driven by the need for additional cash flow to pay benefits. 
Each time the basis for change was to supposedly strengthen the 
program. Each time it has failed. Merely including more 
participants does not improve the program's long term 
stability. It may for a couple of years, but as retirements 
increase, greater and greater resources are needed.
    It is reported that the unfunded liability for Social 
Security is in excess of $9 trillion. Each revision of Social 
Security has focused on raising additional revenue and/or 
raising the retirement age. Perhaps this time it is prudent to 
focus on the liabilities. The 638,000 members and beneficiaries 
of our system do not cause liabilities for Social Security. But 
the legislative fix--looking to increase the short term cash 
flow--requiring newly hired public employees to be in the 
Social Security program--would cause a substantial increase in 
long term Social Security liabilities and in taxpayer 
liabilities in the state of Ohio as well as many other states 
and their subdivisions.
    It seems unwise to financially and administratively disrupt 
these plans for the purpose under consideration by the 
Subcommittee. Indeed, requiring newly hired public workers and 
their employers to participate in Social Security would 
constitute a tax increase on millions of Americans. Many public 
plans financed by taxpayers and public workers are operating in 
a sound and prudent fiscal manner. Rather than imposing 
mandatory Social Security--a new tax on America--our successes 
should be studied for ideas to use in restructuring Social 
Security.
      

                                

    Chairman Bunning. Sergeant Pfeifer.

 STATEMENT OF MARTY PFEIFER, SERGEANT, WASHINGTON METROPOLITAN 
 POLICE DEPARTMENT; AND DISTRICT OF COLUMBIA TRUSTEE, NATIONAL 
                   FRATERNAL ORDER OF POLICE

    Mr. Pfeifer. Good morning, Mr. Chairman, distinguished 
Members of the House Subcommittee on Social Security. My name 
is Sergeant Marty Pfeifer, and I'm a 26-year veteran with the 
Metropolitan Police Department in Washington, DC and currently 
serve as the elected Trustee from the District of Columbia on 
the National Board of the Fraternal Order of Police which is 
the largest organization of law enforcement professionals in 
the Nation representing over 272,000 members.
    In addition, in 1995, I served as chairman of the District 
of Columbia Retirement Board which provides retirement benefits 
for police officers, fire fighters, teachers, and judges in the 
District of Columbia, none of whom participate in Social 
Security. Since 1996, I have chaired the Investment Committee 
of the board which now manages approximately $5 billion in 
assets.
    I am here this morning to discuss fairness; fairness to 
those officers, public safety officials, and other public 
employees who have chosen not to contribute to Social Security. 
We understand there are proposals being considered that would 
require the inclusion of all public sector employees in the 
Social Security system.
    The Fraternal Order of Police vehemently opposes any Social 
Security reform measures that include mandatory Social Security 
participation. Employees in nine Social Security covered 
jurisdictions represent a sizeable portion of State and local 
government work forces. According to OPPOSE, over 3.9 million 
full-time employees are affected. Social Security coverage 
varies considerably, of course, by employee group, but it 
should be noted that according to the Public Pension 
Coordinating Council, 76 percent of public safety personnel do 
not participate in Social Security.
    If the Federal Government imposes mandatory Social Security 
participation, even if only restricted to new hires, it not 
only comprises severely the financial solvency of existing 
pension and retirement plans, the cost to State, localities, 
and the individual employees would be immense. Both the 
employee and his or her employer would each be required to pay 
an additional 6.2 percent of payroll into Social Security. This 
amount would be in addition to the contribution already paid by 
the employer and the employee into the State or local 
retirement system.
    I cannot overestimate the damage that would be done to 
State and local governments and families of the employees if 
the Federal Government forces them to pay a new tax of 12.4 
percent. Collected data shows that the first year cost to 
employers, local and State governments, of covering newly hired 
employees would be over $771 million. The newly hired employees 
would be responsible for an equal amount making the cost in the 
first year of over $1.5 billion. The total annual cost to 
employers for covering employees not currently covered under 
Social Security would be about $8.5 billion. When the employee 
share is counted, that amount rises to over $17 billion per 
year.
    For example, Mr. Chairman, of the over 240,000 State and 
local employees in the State of Kentucky, more than 61,000, 
many of whom are law enforcement officers do not currently 
participate in Social Security. The annual cost of mandating 
participation is approximately $80.9 million a year.
    Federally mandated participation in Social Security is not 
a minor issue. Such a mandate would adversely affect millions 
of employees and impose billions of dollars in additional cost 
to State and local governments who are trying to stretch every 
dollar. Many retirement and pension plans for public sector 
employees have been specifically designed and refined on the 
assumption that local governments would not be required to 
participate in Social Security. This was a reasonable 
assumption since local governments have never been required to 
pay into the system adopted in 1935 for those who chose to 
participate.
    An important consideration for law enforcement and other 
public safety officers is a much earlier retirement age than 
other more typical government employees. Local and State 
retirement plans take this early retirement into consideration; 
Social Security does not. As this Subcommittee is aware, the 
Advisory Council on Social Security recommended that extended 
to all newly hired State and local government employees as a 
way to raise 10 percent of the money needed to rebalance the 
program. The Council's report failed to address the impact that 
mandatory participation would have on the employers and the 
employees at the State and local levels of government.
    The Fraternal Order of Police understands that reforming 
Social Security is necessary and certain steps need to be taken 
if we are to avoid the expected shortfall in 2030. Sometimes 
these proposals sound good on the surface but after careful 
consideration are revealed to be unsound policies with damaging 
consequences. We believe that mandating the inclusion of all 
public sector employees into the Social Security system falls 
into this category.
    This is about fairness, Mr. Chairman. It is unfair to 
change the rules 63 years later because the Federal Government 
is looking for an easy way to fund Social Security without 
making hard choices. The State and local governments who chose 
not to participate in Social Security did not create this 
problem nor did the nearly 4 million employees who do not pay 
into the system, but all of them would be paying a hefty price 
for their previous decision to create their own retirement 
plans. Destroying the retirement programs of these hard working 
Americans and raiding the budgets of State and local 
governments should not be a part of the Federal Governments 
solution.
    Mr. Chairman, I want to thank you and the Members of the 
Subcommittee for the opportunity to appear here today. I'd be 
pleased to answer any questions.
    [The prepared statement follows:]

Statement of Marty Pfeifer, Sergeant, Washington Metropolitan Police 
Department; and District of Columbia Trustee, National Fraternal Order 
of Police

    Good morning, Mr. Chairman and distinguished Members of the 
House Subcommittee on Social Security. My name is Sergeant 
Marty Pfeifer and I am a 26 year veteran with the Washington 
Metropolitan Police Department and currently serve as the 
elected Trustee from the District of Columbia on the National 
Board of the Fraternal Order of Police, which is the largest 
organization of law enforcement professionals in the nation, 
representing over 272,000 officers.
    In addition, in 1995 I served as Chairman of the District 
of Columbia Retirement Board, which provides retirement 
benefits for law enforcement officers, teachers, fire fighters 
and judges in the District of Columbia--none of whom 
participate in the Social Security system. Since 1996, I have 
chaired the Investment Committee of that Board, managing 
approximately $5 billion in assets.
    I am here this morning to discuss fairness. Fairness to 
those officers, public safety officials and other public 
employees who have chosen not to contribute into the Social 
Security system. We understand that there are proposals being 
considered which would require the inclusion of all public 
sector employees in the Social Security system.
    The Fraternal Order of Police vehemently opposes any Social 
Security reform measures that include mandatory Social Security 
participation.
    Employees in non-Social Security-covered jurisdictions 
represent a sizable portion of the State and local government 
workforce. According to OPPOSE, an organization opposed to 
mandatory Social Security coverage with which the F.O.P. works 
on this issue, over 3.9 million full-time employees are 
affected.
    Social Security coverage varies considerably, of course, by 
employee group, but it should be noted that, according to the 
Public Pension Coordinating Council (PPCC), seventy-six percent 
(76%) of public safety personnel do not participate in Social 
Security.
    If the Federal government imposes mandatory Social Security 
participation, even if only restricted to new hires, it not 
only compromises severely the financial solvency of extent 
pension and retirement plans, the cost to States, localities, 
and the individual employees would be immense. Both the 
employer and his or her employer would each be required to pay 
6.2% of payroll into the Social Security trust fund. This 
amount would be in addition to the contribution already paid by 
the employer and the employee into the State or local 
retirement system.
    I cannot overestimate the damage that would be done to 
State and local governments and the families of the employees 
if the Federal government forces them to pay a new tax of 
12.4%.
    Collected data shows that the first year cost to 
employers--local and State governments--of covering newly hired 
employees would be over $771 million. The newly hired employees 
would be responsible for an equal amount, making the cost of 
the first year coverage over $1.5 billion. The total annual 
cost to employers for covering employees not currently covered 
would is $8.5 billion. When the employees' share is counted, 
that amount rises to over $17 billion per year.
    For example, Mr. Chairman, of the over 240,000 State and 
local employees in the State of Kentucky, more than 61,000--
many of whom are law enforcement officers--do not currently 
participate in Social Security. The annual cost of mandating 
participation is approximately $80.9 million a year.
    Federally mandated participation in Social Security is not 
a minor issue. Such a mandate would adversely affect millions 
of employees and impose billions of dollars in additional costs 
to the State and local governments who are trying to stretch 
every needed dollar at the local level.
    Many retirement and pension plans for the public sector 
employee have been specifically designed and refined on the 
assumption that local governments would not be required to 
participate in the Social Security system. This was a 
reasonable assumption since local governments have never been 
required to pay into the system--adopted in 1935 for those who 
chose to participate. An important consideration for law 
enforcement and other public safety officers is an much earlier 
retirement age than other, more typical, government employees. 
Local and State retirement plans take this early retirement 
into consideration. Social Security does not. In the event 
mandatory participation is imposed, how are public safety 
officers supposed to live between the time that they retire and 
the age at which they qualify to collect Social Security?
    As this Subcommittee is doubtlessly aware, the Advisory 
Council on Social Security recommended that Social Security be 
extended to all newly hired State and local government 
employees as a way to raise ten percent (10%) of the money 
needed to rebalance the program. The Council's report failed to 
address the impact that mandatory participation would have on 
employers and employees at the State an local level of 
government.
    The Fraternal Order of Police understands that reforms in 
the Social Security system are necessary and that certain steps 
need to be taken if we are to avoid the expected budget 
shortfall in 2030. Sometimes, proposals sound good on the 
surface, but after examiniation are revealed to be unsound 
policy with damaging consequences. We believe that mandating 
the inclusion of all public sector employees falls into this 
category.
    This is about fairness, Mr. Chairman. It is unfair to 
change the rules sixty-three years later because the Federal 
government is looking for an easy ways to earn revenue and 
``save'' Social Security without making hard choices. The State 
and local governments who chose not to participate in Social 
Security did not create this problem, nor did the nearly four 
million employees who do not pay into the system. But all of 
them would be paying a hefty price for their previous decision 
to create their own retirement plans. Destroying the retirement 
programs of these hard-working Americans and looting the 
budgets of State and local governments should not be part of 
the Federal government's solution.
    Mr. Chairman, I want to thank you and the members of this 
distinguished Subcommittee for the opportunity to appear before 
you today. I would be pleased to answer any questions.
      

                                

    Chairman Bunning. Thank you.
    Mr. Lussier.

      STATEMENT OF THOMAS R. LUSSIER, EXECUTIVE DIRECTOR, 
            MASSACHUSETTS TEACHERS' RETIREMENT BOARD

    Mr. Lussier. Mr. Chairman, Members of the Subcommittee, my 
name is Tom Lussier. I'm the executive director of the 
Massachusetts Teachers' Retirement System. We administer 
retirement, survivor, and disability benefits for nearly 
110,000 active, inactive, and retired public school teachers 
and administrators. We enrolled our first member on July 1, 
1914.
    It is our opinion that expanding Social Security taxes will 
result in higher costs to all Massachusetts taxpayers; reduced 
benefits for all future Massachusetts teachers; unintended 
reductions in critical public services, and the destruction of 
our current retirement systems. Worse, it is our belief that 
this enormous price, paid by our taxpayers and public servants, 
will produce no appreciable, positive result on behalf of the 
Social Security Program.
    The problems that bring us together for this hearing are 
not dissimilar from those that have been successfully 
confronted by public plans throughout the country. In 1987, 
Massachusetts ultimately faced the reality that a pay-as-you-go 
financing program was irresponsible and threatened the 
stability of our State budget and the retirement security of 
our dedicated public employees. Over a period of time, we have 
adopted and funded actuarially sound funding schedules, and 
we've repealed regressive legalist restrictions on the 
investment of system assets. As a result, the MTRS has seen its 
original 40-year funding schedule reduced by 10 years. Our 
system which in 1987 was less than 40 percent funded, by some 
estimates, is currently more than 85-percent funded.
    In our view, it is totally unreasonable to assume that 
Massachusetts or any other State which finds itself in a 
similar situation will be able to maintain a comprehensive 
benefit program and absorb the additional employer costs 
resulting from forced Social Security coverage. The actuary for 
the Massachusetts Public Employer Retirement Administration 
Commission has reported that the Social Security benefit is 43 
to 75 percent below the Massachusetts superannuation retirement 
benefit depending on salary. Normal cost payments by employers 
in Massachusetts are currently trending downward. In fact, for 
employees hired after July 1, 1996, these costs range between 2 
and 4 percent of salary. The present Social Security employer 
rate is 6.2 percent. Thus, for new employees only, 
Massachusetts government employers would be required to make an 
additional payment under Social Security of between 2.2 and 4.2 
percent of payroll just to pay their Social Security tax.
    Inevitably, the passage of mandatory Social Security 
coverage will result in the repeal of current retirement 
benefits. Although there is a temptation to assume that a 
supplemental retirement program would be developed to bridge 
the gap between the level of Social Security benefits and those 
currently provided by our system, it is pure speculation as to 
what form such a program might take.
    Some have suggested that imposing mandatory Social Security 
coverage on all State and local government employees is a 
simple matter of fairness. Since fairness is a difficult 
quality to evaluate, consider these questions: Massachusetts 
has provided retirement benefits for its public school teachers 
since 1914. Is it fair to undermine that commitment in order to 
ever so slightly improve the short-term cash flow of a pay-as-
you-go Social Security system that will provide our public 
employees reduced benefits at higher costs? The Massachusetts 
legislature has crafted a public retirement program that 
responds to the unique characteristics of vastly different 
jobs, risks, and responsibilities. Is it fair to force the 
abandonment of such a program in order to fund a less secure 
one-size-fits-all program? The implementation of mandatory 
Social Security will increase the cost of providing retirement 
benefits for the Commonwealth and most of its cities and towns. 
Is it fair for the Congress to impose such a tax on our State 
and municipalities? The Unfunded Mandate Reform Act of 1995 
received overwhelming support throughout the Congress. Is it 
fair to be against unfunded Federal mandates except for this 
one?
    In closing, please accept my most sincere best wishes in 
your endeavor to strengthen and prudently fund the Social 
Security Program. Over the years, many of us who have opposed 
mandatory Social Security have been incorrectly seen as anti-
Social Security. The Social Security Program is an American 
treasure, and it must be preserved and strengthened. For nearly 
20 years, my mother's monthly Social Security check was her 
most significant means of support. Her Social Security benefit 
allowed her as it does millions of other Americans the 
opportunity to live independently and with dignity. We owe it 
to her and to countless people like her to preserve and to 
protect the Social Security system. However, I would 
respectfully suggest to you that it would be wrong to honor 
that commitment by causing Massachusetts and other States to 
break their commitments made to their members and to their 
public retirement systems. Thank you, Mr. Chairman.
    [The prepared statement follows:]

Statement of Thomas R. Lussier, Executive Director, Massachusetts 
Teachers' Retirement Board

    My name is Thomas R. Lussier. I am the Executive Director 
of the Massachusetts Teachers' Retirement Board (MTRB), a 
position that I have held since November of 1984. I served as 
the First Deputy Commissioner of the Massachusetts Division of 
Public Employee Retirement Administration during 1983 and 1984 
after having been elected to four terms in the Massachusetts 
House of Representatives. I served as a member of the 
Massachusetts Retirement Law Commission from 1984 through 1987 
and am currently an elected member of the Executive Committee 
of the National Council on Teacher Retirement.
    The MTRB administers retirement, survivor and disability 
benefits for nearly 110,000 active, inactive and retired public 
school teachers and administrators who comprise the membership 
of the Massachusetts Teachers' Retirement System (MTRS). The 
MTRS, originally known as the Massachusetts Teachers' 
Retirement Association, was established by the Massachusetts 
General Court in 1914. Our first member was enrolled on July 1, 
1914. The MTRS is one of the 106 contributory retirement 
systems that serve the public employees of the Commonwealth of 
Massachusetts. Collectively, the Massachusetts public 
retirement community represents nearly half a million 
employees, retirees and beneficiaries who remain outside of the 
Social Security System. The assets of these systems exceed $30 
billion.
    On behalf of the members of the MTRB and our membership, 
let me first fully endorse the very comprehensive testimony 
that has been submitted by Robert J. Scott on behalf of The 
Coalition to Preserve Retirement Security (CPRS). We are active 
members of the CPRS and are proud to be part of such a positive 
effort on behalf of millions of public employees and their 
beneficiaries. To supplement the message of the CPRS, I want to 
specifically express our very serious concerns with regard to 
the negative impact that will most certainly result should 
Congress opt to mandate Social Security coverage on 
Massachusetts public school teachers and administrators. In 
general, our concerns could easily be echoed by the 
administrators and trustees of each of the Commonwealth's other 
105 retirement systems on behalf of their active and retired 
members.
    It is our opinion, that expanding Social Security taxes and 
coverage to Massachusetts teachers and to all other public 
employees will result in higher costs to all Massachusetts 
taxpayers, reduced benefits for all future Massachusetts 
teachers and other public employees, unintended reductions in 
critical public services such as education and public safety, 
and the destruction of our retirement systems as we currently 
know them. Worse, it is our belief that this enormous price, 
paid by our taxpayers and public servants, will produce no 
appreciable positive result on behalf of the Social Security 
program. In fact, the long-term liabilities associated with 
expanding Social Security coverage to all State and local 
government employees will inevitably far exceed the short-term 
gains that can appear to make this alternative attractive.

                            Brief Background

    The Social Security program was established in 1935, 21 
years after the first teacher was enrolled in the MTRS. The 
program covered all private sector employees and specifically 
excluded state and local government employees. Public employees 
not covered by a public retirement system were allowed 
voluntary participation in the Social Security program in 1950; 
those covered by a public retirement system were allowed 
voluntary participation in the program in 1954. Participating 
state and local governmental units could also withdraw from the 
program.
    Since 1983, the Social Security Act has been amended to 
preclude the withdrawal of state and local governmental units; 
to require that all public employees hired after March 31, 1986 
be covered by Medicare health insurance, with matching employer 
and employee contributions; to require as of 1991 that all 
public employees not covered by a state or local retirement 
plan be covered by Social Security or another plan which 
provides comparable retirement benefits; and to implement anti-
windfall provisions to ensure that public employees who also 
had employment that was covered by Social Security did not 
receive excess credit for Social Security purposes.
    Today, approximately five million Americans are outside of 
the Social Security system because they are covered by a public 
retirement plan. Additionally, there are millions of public 
retirees who rely on the financial strength and continuity of 
public plans for their retirement income and security.

 The success of public retirement systems should serve as a model for 
                        Social Security reforms.

    The problems which bring us together for this hearing are 
not dissimilar from those that have been successfully 
confronted by public plans throughout the country. In 1976, a 
special Massachusetts study found:
    ``Under the present pay-as-you-go arrangement, the future 
costs of Massachusetts pension benefits are scheduled to 
increase dramatically from 12.1 percent of state-local employee 
payrolls in fiscal year 1978 to 31.9 percent in fiscal 1993.\1\
---------------------------------------------------------------------------
    \1\ Report of the Funding Advisory Committee and the Retirement Law 
Commission to the Governor and General Court of Massachusetts, October 
1976.
---------------------------------------------------------------------------
    In 1977, one of the first public hearings that I 
participated in as a young state legislator concerned the 
relative merits of abandoning a ``Pay-As-You-Go'' financing 
program for an actuarially sound funding program. At the time, 
numerous groups argued that future funding was unnecessary and 
that valuable state and local tax dollars could be better spent 
on far more immediate needs. In fact, the National Retired 
Teachers Association published a legislative alert which 
reported that ``it would seriously damage the economy of the 
Commonwealth to drain off hundreds of millions of dollars for 
funding. We believe that the interests of present public 
retirees, with an average pension of $4,500 being eroded by 
inflation, take precedence over some hypothetical retiree of 
the 21st century.'' \2\
---------------------------------------------------------------------------
    \2\ Massachusetts Legislative News, NRTA/AARP Newsletter, January 
6, 1977.
---------------------------------------------------------------------------
    As late as June of 1985, the Massachusetts Senate Committee 
on Ways and Means reported:
    ``It is irresponsible for a state or individual to ignore 
the fiscal implications of ballooning payments that must be 
made... Since FY1975, the state's appropriation for pension 
costs (including both state and teachers' pensions) have 
increased by 163.2 percent, which is an average increase of 
about 10.4 percent per year, compounded... pensions have been 
growing about 10 percent faster than the entire state budget.'' 
\3\
---------------------------------------------------------------------------
    \3\ Massachusetts Senate Committee on Ways and Means, Fiscal Year 
1986 Budget Recommendations, June, 1985.
---------------------------------------------------------------------------
    In 1987, Massachusetts ultimately faced the reality that a 
``Pay-As-You-Go'' financing program was fiscally irresponsible 
and threatened the retirement security of all of the 
Commonwealth's dedicated public employees. Over a period of 
time we have adopted and funded actuarially sound funding 
schedules; we have repealed regressive ``Legal List'' 
restrictions on the investment of system assets; we have 
repealed an arbitrary cap on system benefits; and we have 
diligently monitored the potential for abuse, especially in the 
area of disability retirement benefits.
    As a result, the MTRS has seen its original 40 year funding 
schedule reduced by 10 years; our system, which in 1987 was 
less than 40% funded, by some estimates is currently more than 
85% funded. Other Massachusetts systems have totally erased 
their unfunded actuarial liability. We have seen modest 
improvements in benefits; greater opportunities for 
portability; and, as we speak, our Legislature is considering 
legislation to provide teachers with an enhanced benefit based 
on a formula that more properly accounts for years of dedicated 
service.
    In a recent report prepared for the U. S. General 
Accounting Office, the Massachusetts Public Employee Retirement 
Administration Commission wrote:
    ``The Massachusetts experience represents a transition from 
`pay as you go' funding to actuarially sound financing over a 
relatively short period. Present retirees and employees, as 
well as future employees, can be confident that a sound pension 
system will exist guaranteeing their hard-earned benefits. 
Rather than jeopardizing those benefits through forced Social 
Security, the federal government should look to the 
Commonwealth as an example...''

 Massachusetts offers its teachers and other public employees a sound 
 retirement system; mandatory Social Security coverage will result in 
 higher costs to Massachusetts taxpayers, will reduce benefits for all 
     future teachers and other public employees and will result in 
           unintended reductions in critical public services.

    The Massachusetts contributory retirement law (Mass. Gen. 
Laws, Chap. 32), which sets forth the benefits provided by each 
of the Commonwealth's 106 retirement systems, guarantees a 
sound retirement program for all Massachusetts public 
employees. The Social Security Advisory Council implies that 
public employees need Social Security benefits in order to 
offset deficiencies in public retirement plans. The facts don't 
support such a view.
    According to a recent analysis completed by the actuary for 
the Massachusetts Public Employee Retirement Administration 
Commission, the Social Security benefit is 43-75% below the 
Massachusetts superannuation retirement benefit depending on 
salary. The Commission has concluded that ``...replacing the 
Massachusetts benefit structure with the Social Security 
benefit structure substantially diminishes the purchasing power 
of our retirees.'' A closer look at the full program clearly 
supports such a proposition:
     Massachusetts pension benefits are guaranteed. The 
Massachusetts retirement law establishes a contract with each 
member that prevents the reduction of retirement benefits. In a 
1974 advisory opinion, the Massachusetts Supreme Judicial Court 
stated: ``...the `contract' is formed when a person becomes a 
member by entering the employment, and he is entitled to have 
the level of rights and benefits then in force preserved in 
substance in his favor without modification downwards. ...When 
we speak of the level of rights and benefits protected by 25(5) 
we mean the practical effect of the whole complex of 
provisions...'' \4\
---------------------------------------------------------------------------
    \4\ Opinion of the Justices, 364 Mass. 847 (1974-74) Opinion of the 
Justices to the House of Representatives.
---------------------------------------------------------------------------
     A Massachusetts retirement allowance is not 
reduced for post-retirement income from any source other than a 
Massachusetts governmental unit.
     Massachusetts provides both job related and non-
job related disability benefits for members. A Massachusetts 
public employee receives 72% of current salary plus an annuity 
in the case of a job related illness or injury. For 1997, the 
average MTRS job related disability benefit was $32,000; the 
average non-job related disability benefit was $14,000 
annually.
     The Massachusetts retirement law provides pre-
retirement survivor benefits, pre-and post-retirement 
accidental death benefits, and each retiree has the option of 
providing a survivor benefit at the time of retirement. In 
certain instances, additional survivor benefits are available 
to minor children until age 22 if the child is a full-time 
student.
     Although they could be better, Massachusetts 
generally provides cost-of-living adjustments for its retirees 
and survivors. A recently enacted amendment provides for an 
annual cost-of-living adjustment equal to the CPI or 3% 
whichever is lower, payable on the first $12,000 of a member's 
benefit. For teachers, the Massachusetts Legislature is 
currently considering establishing a minimum pension benefit 
for all teachers who retired with a minimum of 25 years of 
service. In a 1997 report entitled, ``Retirement Benefits for 
the 21st Century: An Actuarial Appraisal of Retirement 
Alternatives'' the MTRB called upon the Legislature to enact a 
purchasing power protection plan in order to guarantee the 
long-term financial security of every Massachusetts retired 
teacher. As we get closer to attaining our goal of full 
funding, post-retirement benefit protection will only get 
better.
     Since all Massachusetts public retirement systems 
are governed by a common law, retirement benefits are totally 
portable within the Commonwealth. In addition, since the MTRS 
allows relatively inexpensive purchases of service credit for 
of out-of-state teaching, for certain non-public school 
teaching service, and for military service, our members enjoy 
the benefits of a highly portable system. Should the Congress 
pass the recently introduced Retirement Account Portability Act 
of 1998, important barriers to portablitiy between private and 
public plans will be removed.
     Massachusetts retirement benefits, as is the case 
in virtually all public retirement plans, have been designed to 
meet the unique needs of our membership. Although this is 
particularly true for public safety employees, Massachusetts 
has also provided better benefits at lower retirement ages for 
individuals who are engaged in certain hazardous or high risk 
non-public safety careers. The Massachusetts Legislature is 
currently considering providing enhanced benefits to teachers 
who have served 25 years or more. In the context of education 
reform, many have suggested that it is in the best interest of 
our children to allow teachers to retire before they suffer the 
burnout that frequently comes at the end of a 35 or 40 year 
career.
    In our view, it is totally unreasonable to assume that 
Massachusetts, or any other State which finds itself in a 
similar situation, will be able to maintain such a 
comprehensive benefit program and absorb the additional 
employer cost resulting from forced Social Security coverage. 
Additionally, Massachusetts employees, who currently make 
contributions ranging from 5 to 12% depending on their 
membership date and group classification, can ill afford to pay 
an additional 6.2% for Social Security coverage.
    In the report prepared for the U. S. General Accounting 
Office, the Massachusetts Public Employee Retirement 
Administration Commission wrote:
    ``Normal cost payments by employers in Massachusetts are 
trending downward... Ultimately, for employees hired after 7/1/
96, these costs would range between 2% and 4% of salary. The 
present Social Security employer rate is 6.2%. Thus, for new 
employees only, Massachusetts' governmental employers would be 
required to make an additional payment under Social Security of 
between 2.2% and 4.2% of payroll. Consequently, between $210 
and $410 million would be required to meet these additional 
costs.''
    Inevitably, the passage of mandatory Social Security 
coverage will result in the repeal of our current retirement 
benefits for all future Massachusetts teachers and other public 
employees. Although there is a temptation to assume that a 
supplemental retirement program would be developed to bridge 
the gap between the level of Social Security benefits and those 
currently provided by our system, it is pure speculation as to 
what form such a program might take.
    To illustrate the severity of our concerns, please consider 
the following summaries of three possible outcomes:
    Option 1. Since our anticipated employer normal cost 
contribution for new members is currently less than the Social 
Security tax, it is fair to assume that any supplemental 
program will be designed as a defined contribution plan with no 
employer contribution. Such a program would leave future 
Massachusetts teachers and public employees with no disability 
protection, a significantly higher retirement age, and the 
potential for dramatically lower retirement income.
    Option 2. Since the 106 Massachusetts public retirement 
systems are governed by one law, there is a tremendous amount 
of equality across the broad spectrum of Massachusetts 
governmental units with regard to retirement benefits. All 
employees currently enjoy the total portability of benefits 
amongst our numerous systems. Let us assume that the 
Legislature will opt to allow each governmental unit to respond 
to mandatory Social Security coverage in its own way. 
Portability, one of the goals of the proponents of mandatory 
coverage, will be destroyed and we will have a disjointed 
system of the ``haves'' and the ``have-nots.'' Who will have 
more success recruiting the best public servants--the affluent 
community that offers a rich supplemental retirement program or 
the older urban community that is forced to choose between 
police salaries and police retirement benefits?
    Option 3. Teacher retirement costs are currently the 
responsibility of state government. Let's assume that the 
Commonwealth, faced with the obligation to continue to fund the 
normal cost for current members of the MTRS as well as the 
system's actuarial unfunded liability, establishes a 
supplemental program for all Massachusetts teachers. Is it 
possible that the Legislature would fund any employer 
contribution to the supplemental program and absorb the 6.2% 
Social Security tax? It is our belief that the Legislature 
would opt to do neither. Future teachers would be left with a 
defined contribution plan with no employer contribution from 
the state and every local government would be faced with a 
totally new obligation equal to 6.2% of their teacher payroll. 
Mandatory Social Security coverage will then have resulted in 
the unintentional reduction of critical local services and/or 
will result in a greater tax burden at the local level.

Applying mandatory Social Security coverage to newly hired teachers and 
    other public employees does not advance the cause of fairness; 
       mandatory coverage imposes a significant unfunded mandate.

    Some have suggested that imposing mandatory Social Security 
coverage on all State and local government employees is a 
simple matter of fairness. Arguing that all Americans have an 
obligation to financially support the Social Security system, 
proponents of mandatory Social Security believe that everyone 
should pay his or her fair share.
    First, let me suggest that all Americans, including those 
who are currently exempt from mandatory participation, 
contribute to the Social Security system. As American consumers 
we all participate in the economic activity that allows private 
employers to pay Social Security taxes on behalf of their 
employees. In addition, countless public employees, including 
myself, have contributed to the Social Security system. 
Notwithstanding those contributions, many of us who choose 
public service as our primary career, may never qualify for one 
dollar of Social Security benefits.
    Secondly, fairness is a difficult quality to evaluate. 
Consider these questions:
    Massachusetts has provided retirement benefits for its 
public school teachers since 1914. For 21 years before the 
Social Security system even existed, Massachusetts was 
responsibly fulfilling its obligation to public school 
teachers. For nearly four generations, Massachusetts taxpayers 
and our members have invested in the future of our retirement 
program. Is it fair to undermine that commitment in order to 
ever so slightly improve the short-term cash flow of a pay-as-
you-go Social Security system that will provide our public 
employees reduced benefits at higher costs?
    The Massachusetts Legislature has crafted, and continues to 
enhance, a public retirement program for Massachusetts public 
employees that responds to the unique characteristics of vastly 
different job risks and responsibilities. Is it fair to force 
the abandonment of such a program in order to fund a less 
secure, ``one size fits all'' program?
    The implementation of mandatory Social Security will 
increase the cost of providing retirement benefits for the 
Commonwealth and most of our cities and town. The increased 
cost will result in higher state and local tax burdens, 
significantly reduced retirement protection, critical 
reductions in essential public services or some combination of 
all of the above. Is it fair for the Congress to impose such a 
tax on our State, our cities and our towns? To force lesser 
benefits on dedicated public employees? To unintentionally 
reduce essential local services?
    The Unfunded Mandate Reform Act of 1995 received over-
whelming support throughout the Congress. Congress was properly 
concerned about passing the cost of expensive federal mandates 
onto State and local governments. Is it fair to be against 
unfunded federal mandates... except for this one?
    It has also been suggested that current members of our 
public retirement systems will not be effected by imposing 
mandatory Social Security coverage on new employees. Our 
experience causes us to be concerned about this suggestion as 
well.
    For example: A 43 year old teacher in Springfield, 
Massachusetts, with 18 years of service in the MTRS, seeks and 
receives a promotional opportunity as a vice principal in the 
Hartford, Connecticut school system. Since she's a vested 
member of the MTRS, she leaves her funds on deposit and begins 
her commute to Hartford. After five years of experience in 
Connecticut, she applies for and receives a principalship back 
in Massachusetts. She returns home and works until her ultimate 
retirement.
    Today, this teacher would take a refund of her 
contributions from the Connecticut Teachers' Retirement System, 
purchase her five years of out-of-state service in the MTRS and 
ultimately retire with essentially a career of uninterrupted 
creditable service. Were mandatory Social Security coverage to 
be applied in this instance, how would she be effected? As a 
new employee in Connecticut, she would have contributed to 
Social Security. When she subsequently returns to 
Massachusetts, what is she? If she's deemed to be exempt from 
Social Security because she's a vested member of the MTRS, will 
her five years of Social Security contributions in Connecticut 
ever benefit her? If she's deemed to be a new Massachusetts 
employee and therefore mandated into Social Security, will she 
be able to once again become active in the MTRS? Is it possible 
that she and her employer could be forced to fund current MTRS 
and Social Security contributions? Most importantly, when she 
ultimately retires what level of benefits will she actually be 
entitled to? Will the offset and anti-windfall provisions of 
Social Security negatively impact her ability to combine her 
public pension with Social Security?
    This is one current member who will undoubtedly be effected 
by the adoption of mandatory Social Security. Let us not forget 
that there could be millions like her throughout America.

                               Conclusion

    In closing, please accept my most sincere best wishes in 
your endeavor to strengthen and prudently fund the Social 
Security program. Over the years, many of us who have opposed 
mandatory universal Social Security coverage have been seen as 
anti-Social Security. At times, some have opted to tear down 
the system as a justification for continuing to exclude public 
employees. In my view, such a course is wrong. The Social 
Security program is an American treasure and it must be 
preserved and strengthened.
    My Mother died last August at the age of 83. For nearly 20 
years, her monthly Social Security check was her most 
significant means of support. A Social Security benefit allowed 
her, as it does millions of other Americans, the opportunity to 
live independently and with dignity. We all owe it to countless 
people just like her to preserve and protect the Social 
Security system. However, I would respectfully suggest to you 
that we would be wrong to honor that commitment by causing 
Massachusetts and other States to break the commitments made to 
the members of their public retirement systems.
    Thank you for the opportunity to participate in today's 
hearing.
      

                                

    Chairman Bunning. Mr. Pyne.

STATEMENT OF GEORGE PYNE, EXECUTIVE OFFICER, PUBLIC EMPLOYEES' 
                  RETIREMENT SYSTEM OF NEVADA

    Mr. Pyne. Thank you, Mr. Chairman. Mr. Chairman, Members of 
the Subcommittee, my name is George Pyne. I am the executive 
officer of the Public Employees' Retirement System of Nevada. 
By way of background, nearly 100,000 people within the State of 
Nevada are members or recipients of benefits from the Public 
Employees' Retirement System. In a State with under 2 million 
residents, we estimate our retirement system has some financial 
impact on 1 out of every 5 Nevadans.
    Mr. Chairman, I have yet to talk to a member of our system 
who does not have serious reservations about the cost impact 
and threat to retirement security this proposal brings to 
thousands of current and future members of our PERS, Public 
Employees' Retirement System. The numbers speak for themselves.
    Consider that Nevada PERS already provides adequate 
replacement income for career employees at a cost of only 18.45 
percent of payroll. Should we be forced to overlay the cost of 
Social Security on our current plan structure, it is estimated 
Nevada employers and new hires share in the first-year cost of 
$27 million for mandatory coverage. This increases to $157 
million in the 5th year. Given that our present member payroll 
is $2.3 billion this represents a significant increase in the 
amount targeted for payment of retirement benefits. Even if 
Social Security were not a direct overlay on our current 
benefit structure but rather combined with reduced PERS 
benefits, the costs are prohibitive. For regular members of our 
plan the contribution rate needed to maintain current benefit 
levels when combined with Social Security is estimated to go 
from 18.45 percent of payroll to 27.1 percent. In our opinion, 
this shows the relative inefficiency of the pay-as-you-go 
funding structure of Social Security.
    Continuing the scenario of maintaining level benefits at an 
increased cost, let's further explore what this means to the 
average Nevada PERS member: The teacher who teaches our 
children; the police officer that protects our neighborhoods. 
New hires would be burdened with a higher cost for the same 
benefits as their fellow employees. They must also suffer the 
potential consequences of the additional cost to their employer 
who will face difficult decisions about revenues to fund the 
added tax. Does the employer raise taxes to cover the cost or, 
perhaps, cut the very public services the employer is in the 
business of providing or fail to give cost-of-living 
adjustments to employees? We respectfully believe that in 
Nevada, employers would not seek to widen their revenue base by 
raising taxes, so the alternatives would be service reductions 
or no cost-of-living adjustments.
    Mr. Chairman, the impact of a pay reduction is significant 
but also must be viewed as merely the first hit on our members' 
income. As employers seek to fund their half of the added cost, 
other benefits that aren't guaranteed such as health care may 
need to be reduced. This would impose a serious strain on the 
economic stability of the member and upon his standard of 
living, and I must emphasize, for no additional benefits.
    The alternative of cutting services to fund benefits is 
also not likely as Nevada is one of the fastest growing States 
in the nation and as more people come into our State, more 
public services are required, not less. From a timing 
perspective, this unfunded mandate could not come at a worse 
time. As government grows, so too grows the cost of government, 
and it is clear that in Nevada workers will bear the brunt of 
the weight of funding to bring some form of Social Security to 
our retirement system.
    We also must be mindful that significant differences exist 
in the dates of retirement eligibility and other plan features 
for PERS and Social Security and because changes in Social 
Security are beyond the control of the State of Nevada, how 
often would we need to redesign our benefit program and at what 
cost to our employees, employers, and taxpayers if our goal is 
to maintain benefits similar to our current structure.
    Current plan members are rightfully concerned that because 
most benefits come from earnings on investments, reduction of 
contribution income into our present plan will threaten their 
own retirement security as well. New revenue sources would need 
to be found and most likely in the form of higher contribution 
rates.
    Finally, the Nevada legislature may decide on reduced PERS 
benefits and contribution levels for new hires to fund the 
additional Federal tax, but now the bottom line poses a threat 
to their retirement security.
    Mr. Chairman, we recognize the important role Social 
Security plays in the financial security of millions of 
Americans, however, we respectfully suggest that mandatory 
Social Security for State and local government employees will 
not accomplish any of the long-term funding goals of Social 
Security and will create tremendous economic burdens for public 
workers they can ill afford. Thank you, Mr. Chairman.
    [The prepared statement follows:]

Statement of George Pyne, Executive Officer, Public Employees' 
Retirement System of Nevada

    As the Executive Officer of the Public Employees' 
Retirement System of Nevada (PERS), my statement provides the 
Nevada perspective on mandatory Social Security coverage and 
its effect on our members, benefit recipients, employers and 
taxpayers in Nevada. A summary of our plan provisions and 
funding structure will serve as a backdrop to discussions of 
the cost impact and benefit structure differences between PERS 
and Social Security as it exists today.
    The Nevada Legislature established PERS in 1947. At the 
time of PERS' creation, state and local government employees 
were prohibited from participating in Social Security. The 
mission of the system was at that time, and is today, to 
provide a retirement program that meets the income replacement 
needs of Nevada's public employees at retirement. The Nevada 
State Legislature recognized that a pension plan meeting this 
objective also serves to attract and retain qualified employees 
whose training and experience benefit all Nevadans.
    In contrast, Social Security is a program designed as a 
``safety net'' to guarantee a level of income above the poverty 
level. The difference in the objectives of these two programs 
is most noticeable when one considers the higher percentage of 
pre-retirement income that non-FICA pension plans such as 
Nevada replace at retirement.

                    Nevada PERS' Benefits Structure

    Presently, more than 70,000 state and local government 
employees are members of PERS. We have over 19,000 benefit 
recipients receiving various types of allowances from PERS. 
Nevada provides a comprehensive benefit program to its members 
and beneficiaries which includes service retirement, 
disability, and pre-retirement survivor benefits. In a state 
whose population is approximately 1.8 million, we estimate the 
System has some financial impact on 1 out of every 5 Nevadans, 
and infuses over $300 million annually into the Nevada economy.

Service Benefit:

    Prominent features of our plan include 5 year vesting (as 
opposed to 40 quarters under Social Security) and a 2.5% 
multiplier for each year of service up to 30 years. This 
translates into replacement of pre-retirement income of up to 
75 percent. Benefits are calculated using the average of a 
retirees' highest 3 years of earnings, insuring the initial 
benefit amount accounts for recent cost of living increases. 
After retirement, cost of living adjustments from 2%-5% are 
paid annually based upon the number of years a person is 
retired. Therefore, like others in our industry, we take 
exception to the Social Security Advisory Council's suggestion 
that Social Security is superior to state and local pension 
plans.
    Regarding portability, Nevada provides 100% intrastate 
portability amongst Nevada employers, and further allows 
members to purchase up to 5 years service credit without regard 
to previous public service, thereby enhancing their retirement 
benefit.

Public Safety Benefit:

    Our pension plan also recognizes the need for earlier 
retirement eligibility for its police and fire members. A 1987 
study recognized that physical ability declines with age and a 
youthful more vigorous front-line public safety work force is 
needed to protect the public. Social Security provides no 
flexibility to offer early retirement to address this important 
public safety issue.

Disability and Survivor Benefits:

    In addition to service retirement eligibility beginning at 
age 65 with 5 years of service, disability benefits are payable 
to members with 5 or more years of service who become disabled 
from the performance of their job or a comparable job. Survivor 
benefits may be payable for the lifetime of the surviving 
spouse, and until age 23 for dependent children if they remain 
in school.

                     Financing Nevada PERS Benefits

    Our investment program plays an integral role in funding 
the benefits of the System. Unlike Social Security, PERS is 
funded on an actuarial reserve basis. This means contributions 
paid to the System today are set aside and invested to fund 
future benefits. In fact, the great majority of benefits paid 
by PERS come from return on investment. This focus on 
investment performance is amplified by the reduction in the 
ratio of active members to benefit recipients as America ages. 
Without this funding mechanism in place, delivery of benefits 
with certainty into the future is threatened.
    Nevadans can ill afford the financial burden associated 
with mandatory coverage. Nevada is among the fastest growing 
states in the nation with an annual population growth rate of 
over 5%. As population grows, so to grows the need for 
additional public services. Our public employee population is 
increasing at a rate of 4% annually to address this growing 
need for public service. Recent estimates by the System's 
actuary project the first year cost of covering new hires of 
the System under Social Security to be approximately $27 
million. After 5 years, the cumulative cost will increase to 
$157 million and to $384 million after 10 years.
    Considering these costs, overlaying Social Security on our 
current benefit structure results in significantly higher 
actuarially determined contribution rates. Expressed as a 
percentage of payroll, contribution rates for new hires would 
increase from 18.45% and 27.95% to 30.85% and 40.35% for 
regular members and public safety members respectively. 
Obviously this is cost prohibitive.
    By replacing our current benefit structure with one which 
attempts to mirror current PERS benefits but with payments from 
two sources, PERS and Social Security, overall cost is reduced 
but not back to our current contribution rates. Under the 
scenario where benefits remain the same, contribution rates 
still increase to 27.1% for regular members and 40.2% for our 
police/fire members. This shows that Social Security does not 
buy as much replacement income at retirement as does PERS. 
Moreover, employees in this scenario would be taking a 6.2% pay 
cut in the form of a FICA tax contribution just to maintain 
their current benefit levels.
    If our objective is to keep overall plan costs identical to 
current rates and be cost neutral to both the employee and 
employer, as both share in the costs, benefit levels would be 
reduced significantly. It is estimated the service time 
multiplier for new hires would be 1%. For a career employee of 
30 years the resulting benefit would not serve as adequate 
replacement income when combined with Social Security.

                      Impact of Mandatory Coverage

    Mandatory coverage of new hires is likely to have an 
adverse impact on current members of the System as well. Our 
actuarial analysis is not complete. However, it appears the 
lack of new entrants will increase the unfunded liabilities and 
extend the time period in which to fully fund promised 
benefits. Because our System pre-funds benefits, the influx of 
new member contributions is important to maintain a flow of 
funds to be invested that will support future benefits. Our 
actuarial method depends on these contributions to avoid 
underfunding. If the amount of funds are inadequate to support 
the benefit structure, contribution rates for current plan 
members will have to be increased. Benefits for current plan 
members cannot be reduced because Nevada courts have ruled PERS 
benefits to be a property right. The state's contractual 
obligation requires benefits to be maintained or replaced with 
equal or greater benefits.
    An unfunded mandate like Social Security will require a 
drastic redesign of a pension plan that does exactly what it is 
intended to do, provide Nevada's public employees a reasonable 
base income at retirement. PERS Board and the Nevada 
Legislature will face tough choices regarding contribution 
rates, benefit levels, and amortization periods. Additionally, 
the Nevada Legislature must look at services provided to our 
taxpaying public, and perhaps make reductions in those services 
to free up the funds to pay for this costly benefit change. All 
this happens at a time in Nevada where we must increase 
services due to our greatly expanding population base. The 
general funds of every public employer in the state will be 
affected by any increase in the contribution rates.
    No matter how we look at it, individual plan members are 
likely to suffer the most from mandatory coverage. Contribution 
rates will either increase with no real increase in benefits, 
or benefits will diminish for the same overall cost that 
existed prior to mandatory coverage. Other considerations 
involve the additional costs in administration of a second tier 
of benefits for new hires to include pre-retirement counseling, 
record keeping, and benefit determination.
    In summary, we are opposed to mandatory Social Security of 
state and local government employees. It would cause serious 
disruption to our well-founded, well-funded and well-designed 
public employees' retirement system.
      

                                

    Chairman Bunning. Thank you, Mr. Pyne. I'm going to start 
off the questioning with Sergeant Pfeifer, because some of the 
things that he said are really critical. You said that 76 
percent of public personnel do not participate in Social 
Security. Now, you also raised an excellent point which is that 
law enforcement and other public safety officers retire at a 
much earlier age than more typical government employees. I'm 
wondering what happens to those safety officers that are 
covered under Social Security. Do their plans which may be a 
combination of Social Security and an employer pension, pay 
some type of transition benefits until Social Security kicks 
in?
    Mr. Pfeifer. Typically, what happens is the benefits are 
coordinated with Social Security so that the plan will carry 
you a certain number of years. Let's say you retire at age 55, 
they carry you the additional 10 years with your current 
retirement plan at a level--in the good plans which are 
funded--at a higher level. Then, once you get to the age where 
you hit Social Security there will be an offset and Social 
Security will pick up a piece of that, so that the expense to 
the local or the State government will decrease once you hit 65 
and you integrate with Social Security.
    Chairman Bunning. But they will maintain the same level of 
benefits. In others words, say they're getting $1,000, and they 
hit 65, what benefit would they then receive? Would they 
receive more than $1,000 or would they receive the same benefit 
when Social Security is included?
    Mr. Pfeifer. When Social Security kicks in, in some plans, 
and it varies--because all these plans vary according to how 
they're structured--in some plans, the $1,000 would be reduced 
to reflect the contribution provided by Social Security, and 
because you've touched on that, what we're really talking about 
here are replacement rates and how much of your income you're 
going to replace at the time you retire.
    Chairman Bunning. That's right. That's what I'm trying to 
find out.
    Mr. Pfeifer. Individual plans do not always keep pace with 
inflation. They do not have escalators built in like Social 
Security does with the CPI, Consumer Price Indexes. So, some of 
these plans--let's say if you retire at a relatively generous 
benefit at 60 percent of your salary the day you retire. If you 
have no CPI provision in there that continues to keep you up 
with the cost of living and you live 20 years more, and the 
inflation rate is only the current 2.5 or 3 percent today, 
you've lost about 60 percent of your earning capacity if you 
have absolutely no CPI in there. So, what happens is you have 
to go out and get another job to augment that if that's the 
case. If you're fortunate enough to have an escalator in there 
which will keep you up with inflation like Social Security 
does, then you're much better off, and that's one of the 
positive features of Social Security, the fact that you do have 
CPI built into it, so that you're always staying relatively 
current with the cost of living.
    Chairman Bunning. Do you know what the average age of the 
police officers and the safety officers retirement is?
    Mr. Pfeifer. It would vary from State from State. Generally 
speaking, now, it would be somewhere between 50 and 55 years.
    Chairman Bunning. The reason I ask that is I have a police 
officer who happens to be my field representative, and he 
retired very early and became a member of my staff, and now 
he's paying Social Security and will not only get his 
retirement from the police but he will get Social Security 
added on top of that when he becomes old enough to retire from 
public service in the congressional office.
    How does a disability plan--and I'm staying with this 
before I let others inquire--how do the disability plans 
offered police and fire fighters by their State and local 
retirement plans differ from the Social Security Disability 
Program?
    Mr. Pfeifer. Generally speaking, of course, varying from 
locality to locality, State to State, the disability provisions 
vary widely. The disability provision for Social Security 
itself is a very high bar to get over, because you have to be 
almost totally and permanently disabled, and you cannot really 
be employable per se.
    Chairman Bunning. You do have to be permanently disabled.
    Mr. Pfeifer. That's Social Security. Now, in public safety, 
the bar is lowered, because consideration is given to the fact 
that if a officer is injured in the line of duty and is no 
longer fit to perform public safety jobs such as riding a scout 
car on the street, riding the back step of a firetruck, then we 
need to make a provision to compensate the member as much as 
possible and make them whole.
    Chairman Bunning. Do they have percentages of disability 
and things like that?
    Mr. Pfeifer. Percentages of disability vary widely. Again, 
it could vary--some plans--from 20 percent depending on the 
extent of the disability up to about two-thirds disability.
    Chairman Bunning. And that would include of the salary that 
you were making at the time that you were partially or 
permanently disabled?
    Mr. Pfeifer. Of the base salary. Now, the key thing to 
consider when you look at disability is because it is 
disability income, that is not taxable. So, that is tax free, 
so whatever percentage you get, unless you change it today or 
sometime soon, is going to be tax free. If you retire on an 
optional retirement or a standard retirement then you pay taxes 
on that money. So, someone who retires, let's say, on a----
    Chairman Bunning. Except if you live in Kentucky, you 
don't.
    Mr. Pfeifer. I might have to move there. [Laughter.]
    So, if you retire on disability, you pay no Federal tax. In 
most cases, you pay no State tax. If I retired on the same 
amount on a optional retirement, as we call it, I would pay 
Federal tax, and I would be in the 28-percent tax bracket, 
probably, so I'd be paying a significant amount.
    Chairman Bunning. I'm going to submit some questions to 
others that are at the table in writing, and I would appreciate 
your participation.
    [The questions and answers follow:]

Responses of Sgt. Marty Pfeifer to Mr. Bunning's Questions

1) Should mandatory coverage of newly hired employees be 
enacted, potentially resulting in a lowering of retirement 
benefits and/or salaries? What would be the impact on the 
ability for safety officers to recruit new hires?

    No, the National Fraternal Order of Police vehemently 
opposes any Social Security reform measures that include 
mandatory participation of public employees, newly hired or 
otherwise.
    The answer for this is simple; it is a question of fairness 
to those law enforcement officers, public safety officials and 
other public employees who have chosen not to participate in 
the Social Security system. All are much better served, in 
terms of benefits and retirement income, than they would have 
been or would be, if the Federal government mandated Social 
Security participation. To do so endangers the plans and the 
retirements of employees currently in other public pension 
systems and may jeopardize the ability of local law enforcement 
to fulfill their public safety mission.
    Social Security coverage varies considerably by employee 
group, but according to the Public Pension Coordinating Council 
(PPCC), seventy six percent (76%) of public safety personnel do 
not participate in the Social Security program. These employees 
represent a sizable portion of the State and local government 
workforce, approximately 3.9 million full-time employees.
    If the Federal government imposes mandatory Social Security 
participation, even if restricted to new hires (a term which 
does not have a clear definition), it not only compromises 
severely the financial solvency of existing pension and 
retirement plans, but does not consider the immense cost to 
States, localities, and the individual employees. Both the 
employee and his or her employer would each be required to pay 
6.2% of payroll into the Social Security trust fund. This 
amount would be in addition to the contribution already paid by 
the employer and the employee into the State or local 
retirement system.
    I cannot overstate the damage that would be done to State 
and local governments and the families of the employees if the 
Federal government forces them to pay a new tax of 12.4%.
    Collected data shows that the first year cost to 
employers--local and State governments--of covering newly hired 
employees would be over $771 million. The newly hired employees 
would be responsible for an equal amount, making the cost of 
the first year of coverage over $1.5 billion. The total annual 
cost to employers for covering employees not currently covered 
under Social Security would be $8.5 billion. When the 
employees' share is counted, that amount rises to over $17 
billion per year.
    For example, of the over 240,000 State and local employees 
in the State of Kentucky, more than 61,000--many of whom are 
law enforcement officers--do not currently participate in 
Social Security. The annual cost of mandating participation 
would be approximately $80.9 million a year.
    Federally mandated participation in Social Security is not 
a minor issue. Such a mandate would adversely affect millions 
of employees and impose billions of dollars in additional costs 
to State and local governments who are trying to stretch every 
dollar at the local level.
    In real terms, this means that local and State government 
officials would be under tremendous pressure to change these 
pension systems, pitting the public safety officers against 
elected officials--something that no one wants. Even if the 
current pension systems, which would be extremely difficult to 
change, were maintained a Social Security tax on employees and 
their government employers would negatively impact public 
safety operations. The added financial burden at the local and 
State level could result in layoffs, reduced pay or other 
benefits, no cost-of-living increases and could reduce 
purchases of necessary equipment and technology, or even a 
combination of these consequences. Too many law enforcement 
agencies in our nation are forced to ``make do'' as it is, and 
adding this new unfunded Federal mandate would inflict greater 
hardship on the State and local governments budgetary concerns.
    Also of great concern to our membership is States who can 
change their pension systems without going through the 
collective bargaining process. Facing public pressure against 
tax increases, the legislatures in these States would likely 
change them, making them much less beneficial to public safety 
employees. State and local government pension contributions to 
these systems are likely to be reduced, probably dollar for 
dollar for allocation to Social Security taxes.
    Congress and the Administration should carefully weigh any 
proposal that would cut the take-home pay of public safety 
officers--even if just the new hires--by 6.2%, the additional 
amount they would have to pay out under the mandatory 
participation plan. Would we retain or recruit the best 
officers if current pension systems are severely curtailed--
reducing substantially or eliminating the much-needed 
provisions relating to early retirement, line-of-duty 
disability and early death benefits--so that the total 
percentage of both the employing agency and employee 
contributions remain about the same, once Social Security taxes 
are factored in? Would we get the very best officers if the 
employing agency also reduces the future pay raises or freezes 
cost-of-living or other increases, in order to pay its portion 
of the new Social Security tax? The answer is obviously not.
    Imposition of this tax would negatively affect government 
expenditures on policing innovations, technology and crime-
fighting equipment. It could severely curtail current public 
safety pension systems, giving employees in these plans, police 
and firefighters, much less protection than they have now. A 
new, mandatory tax for Social Security will hurt efforts to 
recruit and retain the best of public safety officers possible.
    The Advisory Council on Social Security recommended that 
Social Security be extended to all newly hired State and local 
government employees as a way to raise ten percent (10%) of the 
money needed to rebalance the program, without defining the 
term ``new hire.'' The Council's report also failed to address 
the impact that mandatory participation would have on employers 
and employees at the State and local level of government.
    Many retirement and pension plans for public sector 
employees have been specifically designed and refined on the 
assumption that local governments would not be required to 
participate in the Social Security system. This was a 
reasonable assumption since local governments have never been 
required to pay into the system, which was adopted in 1935 for 
those who chose to participate.
    Also of great concern to law enforcement officers are the 
very limited disability, death and early retirement benefits of 
Social Security as compared to current pension systems for 
public safety officers. Simply put, the Social Security system 
is not designed to meet the needs of law enforcement officers 
and other public safety employees.
    Active law enforcement officers are typically younger 
people. The physical and psychological stress of the job and 
inherent danger of police work often result in early 
retirement, and, on no few occasions a job-related disability 
is part of the reason. In the past fifty years, State and local 
governments have developed pension systems which acknowledge 
and incorporate the very different needs of police, fire and 
other public safety professionals. These systems take into 
account that law enforcement officers often undergo a career 
change in middle age, usually in their late forties to early 
fifties. In many police departments, a large percentage of law 
enforcement officers will be sufficiently disabled at all ages 
for varying lengths of time and thus be unable to perform their 
official duties. Therefore, the governments which employ these 
officers have recognized that public safety officers need 
certain protections and benefits which reflect the unique 
nature of their jobs.
    Social Security, on the other hand, provides no comparable 
disability retirement benefits for public safety professionals. 
Social Security requires that an employee be completely unable 
to perform any substantial and gainful employment. This means 
that a person unable to perform regular and continuous duties 
as a law enforcement officer, who would, under current local 
and State plans, receive some disability benefit to supplement 
a subsequent career at a lower salary, would receive nothing 
under Social Security.
    Additionally, there are others who will not be able to 
continue performing the duties of a law enforcement officer 
after reaching middle age (some departments even institute 
mandatory retirement ages), because of the physical rigors and 
psychological demands of police work. Such retirements are 
``early'' for other careers, but nor for the public safety 
professional. They would receive NO Social Security benefits.
    Also of particular concern to public safety professionals 
is the much lower death benefits provided by Social Security. 
Most current retirement death benefits pay between fifty and 
seventy-five percent (50-75%) of an officer's salary.

2) Comments on the GAO Testimony

    We found the arguments advanced by GAO to be unpersuasive 
in making the case for mandatory coverage. They acknowledge the 
existence of a ``cross over point,'' about 2050, after which 
the cost of benefits paid to the public employees will exceed 
the amount received in taxes.
    They contend that mandatory participation is a matter of 
``fairness.'' We would strongly disagree, especially on the 
following points made by GAO in their testimony:
    Many public employees in non-covered systems receive Social 
Security benefits as a result of other covered service.
     This is false. In 1983, Congress adopted the so-
called ``windfall elimination provision'' and ``government 
pension offset'' (for spousal benefits), which were expressly 
designed to prevent public employees from receiving benefits 
that are out of proportion to their contributions. In fact, 
both adopted provisions unfairly overpenalize employees who 
participate in government pension plans in lieu of Social 
Security. GAO argues--in the very same testimony--that it is 
difficult to administer the ``windfall elimination provision'' 
and ``government pension offset.'' It estimated that total 
overpayments ranged from $160 to $355 million.
    Mandatory participation would be fair because Social 
Security reduces the need for public assistance to the elderly.
     Public plans also relieve society from the need to 
provide assistance to the elderly, and do so more effectively 
than Social Security, whose beneficiaries do need SSI (funded 
out of general revenues) because Social Security benefits are 
not great enough to support them.
    The GAO report also fails to address the special needs of 
law enforcement and other public safety officers addressed 
above.

3) Just as each of you want to protect your citizens' 
retirement income security, we too have a responsibility for 
all Americans. Finding a solution that works and is fair isn't 
going to be easy.

    The Fraternal Order of Police appreciates the complexity of 
this issue and shares the Subcommittee's commitment to 
fairness.
    We strongly believe that requiring public pensions be 
scrapped in favor of Social Security coverage, which is less 
suited to the needs of many public employees, especially public 
safety officers, is unfair. Unfair and, in the long run, will 
have negligible impact on the Social Security system.
    In short, we do not see any compelling reason why a 
Federally mandated program which has managed itself into 
periodic solvency crises is superior to local and State plans 
designed to meet the special needs of the public employee. 
Every indication is that these employees are better served by 
their own plans and would lose a great deal of benefits if 
forced into Social Security. If fairness is really an issue, 
then why penalize individuals by forcing them to lose their 
greater benefits in order to pay for the Social Security 
behemoth?
    The Social Security program is an important source of 
future retirement protection for millions of Americans, and it 
requires a long-term solution, not the short-term politically 
palatable fixes that have been tried in the past. Public 
pension plans like those in California, Colorado, 
Massachusetts, Nevada, Louisiana, Ohio, Texas and other States 
can provide models for reform.
    Mandating participation in Social Security is not the right 
solution, nor does it represent meaningful reform. The GAO 
testimony and their final report reflects that bringing in new 
hires would extend solvency for only two years--a minimal 
impact at best.
    In addition, State and local plans which are not covered by 
Social Security would sustain severe financial damage if they 
are now required to participate. This would result in less 
benefits for not only the ``new hires'' whose participation 
would be mandatory, but for current members and retirees in a 
number of the States. Existing systems would be required to 
alter their asset allocation models, resulting in lower yields 
therefore accelerating financial impact.
    If this is about fairness, Mr. Chairman, we believe it is 
unfair to change the rules sixty-three years later because the 
Federal government is looking for an easy way to fund Social 
Security without making hard choices. The State and local 
governments who chose not to participate in Social Security did 
not create this problem, nor did the nearly four million 
employees who do not pay into the system. But all of them would 
be paying a hefty price for their previous decision to create 
their own retirement plans. Destroying the retirement programs 
of these hard-working Americans and raiding the budgets of 
State and local governments should not be part of the Federal 
government's solution.

4) Your plans are also going to be impacted by demographics. 
How are your State Legislators or Retirement Boards focusing on 
this issue and what actions are they considering? Do you expect 
you will see benefit cuts in the future, even without mandatory 
coverage?

    Demographics are only one factor in considering the 
financial health of a plan. Many other factors such as 
investment guidelines, which are often determined by statute, 
asset allocation, and benefits structure all have a direct 
impact on a plans' ability to deliver on benefits promised.
    The vast majority of plans that cover public safety 
employees are ``defined benefit'' plans. These ``DB'' plans 
that are fully funded and have well constructed investment 
programs allow for changing demographics within the plan 
structure. Asset liability and strategic asset studies 
performed every three to five years ensure that appropriate 
changes are made in a timely fashion.
    Plans that are underfunded such as Social Security face 
serious problems in delivering the benefits promised to the 
participants and beneficiaries of their respective plans. These 
structural problems that have gone unaddressed for decades 
require immediate attention.
    Often, the ways chosen to address these structural problems 
are to reduce benefits, increase funding or terminate the plan. 
In the case of Social Security, a combination of increased 
funding and some modification of benefits would be the most 
appropriate remedy.
    Given that the life expectancy of both men and women has 
increased significantly since Social Security was created over 
sixty years ago, it would seem appropriate to increase the 
normal retirement age (NRA) before qualifying to receive 
certain benefits. Although this is technically a reduction in 
benefits, if Americans are given sufficient time to plan and 
invest, I believe this is a reasonable option.
    A more aggressive investment approach would also be a way 
to improve the financial stability of Social Security. This 
means allowing the investment of Social Security assets in 
capital markets that until now has not been permitted. 
Increased investment returns over an extended period of time 
dramatically improves the financial health of any plan.
    The Federal Government as the Plan Sponsor also has a duty 
to educate the public about the benefits that Social Security 
can provide and the risk associated with more aggressive 
investment vehicles such as stocks and corporate bonds. 
Americans should know that they must plan and carefully invest 
to accomplish their individual retirement goals.
    Unfortunately, for many Americans, Social Security is their 
only retirement plan. Some form of ``forced savings'' must be 
made mandatory for every worker so they have a variety of ways 
to fund their retirement years. Social Security was never 
intended to be the only source retirement benefits for 
Americans. Personal Savings Accounts, 401 Ks and IRAs are all 
appropriate vehicles to accomplish this goal.
    In conclusion, if reasonable modifications are made to 
Social Security such as increasing the Normal Retirement Age, 
improved investment performance, and a requirement for all 
Americans to participate in some form of ``Forced Savings'' 
program in addition to Social Security, I believe it that 
Social Security can be made solvent without a significant 
reduction in benefits.
    Every American must be aware that they are responsible for 
retirement planning and that early planning combined with an 
effective investment program will provide sufficient income 
during their golden years.
      

                                

Responses of George Pyne to Mr. Bunning's Questions

1. You mention that the majority of your benefits paid by your 
system come from return on investment of your retirement fund. 
Who manages that fund and how is the fund invested currently?

    The PERS investment program is designed to generate 
earnings to fund the System's benefits while minimizing 
investment risk. By establishing a well-diversified portfolio, 
PERS has strengthened control over the achievement of those 
objectives. Through the prudent person standard, the Retirement 
Board has established investment objectives and policies which 
recognize future funding requirements based on current 
membership demographics.
    The investment objective of PERS is to:
     produce a total return from investments which, 
over the long term, exceeds the rate of inflation (CPI) by 3% 
by capturing market returns within each asset class;
     invest so the short-term volatility of the returns 
will not cause PERS to alter its long-term investment program;
     structure an investment program which is 
sufficiently uncomplicated to control PERS' ability to 
consistently meet return and risk objectives, and
     maintain an investment program which operates in 
compliance with the Public Pension Principles
    PERS' investment portfolio is managed by external 
investment firms in compliance with the above objectives. PERS 
employs a number of institutional investment firms to manage 
its assets. Each of these firms is charged with a specific 
style mandate and market benchmark. Currently 19 firms manage 
23 portfolios for the System. A list of assets managed by each 
firm follows the response to this question.
    One of the key determinants of risk and return is asset 
allocation. PERS employs a ``conservative'' asset mix which is 
designed to provide stable returns through a variety of market 
environments. Our target asset allocation is:
[GRAPHIC] [TIFF OMITTED] T2908.001



                     Nevada PERS Investment Managers
------------------------------------------------------------------------
                                                              Asset Size
                                                             in Millions
                                  Hired        Mandate        of Dollars
                                                                (8/98)
------------------------------------------------------------------------
Alliance Capital...............     1986  S&P 500 Index....        $ 815
  .............................     1996  Value Index......        $ 337
  .............................     1998  Growth Equity....        $ 388
Atlanta Capital................     1998  Growth Equity....        $ 277
Axe-Houghton...................     1987  Intl. Equity             $ 792
                                           Index.
Bank of New York...............     1997  Securities         ...........
                                           Lending.
  .............................     1997  STIF Fund........          $ 9
Barclays Global Inv............     1986  S&P 500 Index....        $ 817
Baring Asset Management........     1997  Intl. Bonds......        $ 456
Bradford & Marzec..............     1997  Active Bonds.....        $ 513
Brinson Partners...............     1990  Intl. Bonds......        $ 661
Dresdner RCM...................     1997  Active Bonds.....        $ 631
Invesco Realty Advisors........     1992  Real Estate......        $ 390
J&W Seligman...................     1998  Value Equity       ...........
                                           Funded 9/98.
L&B Real Estate................     1989  Real Estate......        $ 255
Loomis, Sayles--Detroit........     1994  Value Equity.....        $ 328
Nicholas Applegate.............     1976  Active Bonds.....       $1,059
Pathway Capital................     1986  Alternative              $ 106
                                           Investments.
Patterson Capital..............     1987  Active Bonds.....        $ 540
Payden & Rygel.................     1997  Active Bonds.....        $ 555
PM Realty Advisors.............     1986  Real Estate......        $ 296
  .............................     1991  Mortgages........          $ 4
State Street Research..........     1987  Active Bonds.....       $1,067
Callan Associates..............     1983  Investment         ...........
                                           Consultant.
------------------------------------------------------------------------
TOTAL PERS FUND................  .......  .................      $10,296
------------------------------------------------------------------------


2. Nevada, like a number of other States, cannot reduce 
benefits for current plan members because Nevada courts have 
ruled retirement benefits to be a property right. In addition, 
your State's population base is expanding. How would these 
factors influence decisions of your State Legislators, should 
mandatory coverage be enacted for newly hired employees?

    Public pension benefits as property rights and Nevada's 
expanding population are two of several factors that would 
influence decisions of Nevada lawmakers if mandatory coverage 
of newly hired state and local government employees is enacted.
    Nevada courts adopted the legal theory that its public 
employees have a contractual (or vested) right to retirement 
benefits which can not be diminished unless replaced by 
benefits of equal or greater value. The courts have further 
ruled that members of our system vest in the benefit structure 
in place at their time of hire.
    Given the above legal framework, the benefits of members 
hired prior to the effective date of mandatory coverage cannot 
be diminished or impaired. Unfortunately, the cost to maintain 
their present benefit package is likely to increase if 
mandatory coverage of new hires is enacted. This effect is 
based on our financing structure, which anticipates future 
members of the system will share with current members in the 
payment of the System's accumulated liabilities. Currently, 
that payment is approximately 3.6% of payroll for regular 
members and 6.02% for police and fire members. Future members 
will not contribute towards the current System's unfunded 
liability if they are mandated under Social Security because 
they would participate in a new plan that is coordinated with 
Social Security. The lack of new hires coming into the plan 
will result in higher contribution rates, both for the 
employees and public employers, because an ever-diminishing 
group will be contributing to the system.
    Additionally, due to the funding inefficiency of Social 
Security ($1 invested in PERS provides a much greater return 
than $1 invested in Social Security) benefit equality cannot be 
sustained without significant additional cost to the people of 
the State. To serve as an illustration of this point, consider 
the following ramifications for newly hired employees if they 
are mandated under Social Security:
     Maintain Current Benefit Levels:
    If the goal of the Nevada Legislature is to maintain 
current benefit levels when PERS benefits are combined with 
Social Security contribution rates would increase from 18.75% 
to 27.1% of payroll for regular members.\1\
---------------------------------------------------------------------------
    \1\ A significant cost to a state whose payroll is approximately 
$2.3 billion.
---------------------------------------------------------------------------
     Maintain Current Cost Levels:
    If the Legislature wanted to retain current budgetary 
pension costs only 6.05% would be available for PERS funding. 
This results in a service multiplier of between .7% to .9% (our 
current multiplier is 2.5%) and a drastic reduction in income 
replacement levels when PERS is combined with Social Security.
    New hires will be faced with substantially higher costs for 
benefits similar to current employees, or lower benefits for 
the same cost. In either instance there is little or no room 
for them to participate in payment of the System's liabilities.
    The problem is further exacerbated by Nevada's expanding 
population base. Our actuarial projections anticipate an 
accelerated growth rate for our system which translates into 
lower contribution rates. The positive result of this growth is 
negated if new hires are mandated under Social Security.

3. GAO did a great deal of work, as you heard in Ms. Fagnoni's 
testimony, analyzing State and local retirement systems. Her 
staff met with many of your representatives. I want to give you 
the opportunity to comment on her testimony or GAO's responses 
to the questions that were asked of them. Do any of you have 
any comment you would like to make in response to the GAO 
testimony?

    It is clear from the GAO report that the principal 
motivation behind Social Security reform is to address Social 
Security's financial shortfall. The GAO estimates that 
mandatory coverage would extend the trust fund's solvency by 2 
years. This ``so-called benefit,'' however, would come at a 
tremendous cost to taxpayers, employers, and employees in their 
respective states and local jurisdictions--and eventually to 
Social Security when benefits come due.
    To say as the GAO report does on page 21 under Conclusions 
that ``the implications for mandatory coverage are mixed'' 
downplays the serious disruption mandatory coverage will bring 
to the taxpayers, public employees and public employers of 
Nevada. First, consider the impact on contribution rates. In 
order to provide the same retirement package for new employees 
as current employees, retirement costs would not just 
``increase'' they would rise to a cost prohibitive level. In 
our plan that cost is approximately 9% of payroll! There is 
also no mention in the GAO report of the psychological and 
emotional impact on thousands of public employees who will be 
forced away from the financial security of our present plan to 
the financial insecurity of Social Security and its extremely 
inefficient means of funding benefits. Neither does it consider 
one fundamental principle behind the establishment of our 
pension plan, to attract and retain qualified public servants. 
How does a Social Security benefit incent an individual to 
choose public sector employment? The answer is: it does not.
    The GAO report seems to dismiss all of this by further 
concluding that ``Social Security would provide future 
employees with benefits that are not available, or are 
available to a lesser extent, under current state and local 
pension plans.'' This implies that Social Security provides 
better benefits than public pension plans, which is clearly not 
the case.
    Nevada PERS provides a comprehensive program of service, 
disability, and survivor benefits to its members and 
beneficiaries. Our examination shows that overall we provide a 
superior benefit package which includes five year vesting, 
intrastate portability, high income replacement ratios, and 
funded cost-of-living increases to all benefit recipients 
ranging from 2%-5% compounded annually. Nevada's program 
provides more comprehensive benefits and provides more 
retirement income at a lower cost than does Social Security. 
Nevada's pension system also addresses the unique needs of the 
public safety sector such as earlier retirement, an element of 
coverage sorely lacking in the Social Security system. This 
will be discussed in great detail below.
    The GAO reported cited the 1994-1996 Social Security 
Advisory Council's conclusion that mandating new hires under 
Social Security is ``an issue of fairness.'' It is their 
contention that those of us who do not contribute to Social 
Security often receive benefits from periods of covered 
employment or as a dependent of a covered worker and that 
somehow this isn't ``fair.'' This position ignores that, as 
covered workers, these individuals did participate in Social 
Security and are subject to the Windfall Elimination Provision 
(WEP), just as beneficiaries are subject to the Government 
Pension Offset (GPO). These programs address the issue of 
``fairness'' as addressed by the Social Security Advisory 
Council.
    If the Social Security Administration finds it difficult to 
determine whether someone is subject to the WEP or GPO, less 
drastic measures (than mandating Social Security coverage) 
could be taken to address this problem. One suggestion is to 
revise Form 1099R to include a code which indicates a retiree's 
income is from a governmental pension plan. This would help 
identify those individuals subject to offset.
    There are other issues of ``fairness'' that weren't 
addressed in the GAO report. At the time of Nevada PERS 
creation in 1947, public employees were prohibited from 
participation in Social Security. Today, Nevada enjoys a 
financially sound retirement program that guarantees an 
adequate pension at retirement for its public employees. It is 
fundamentally unfair for the federal government to force upon 
our state an unfunded mandate resulting in either the same 
benefits at greater cost, or reduced benefits for Nevada's 
public employees. I question the fairness of Congress imposing 
such taxes on states, cities, and towns, whose local services 
would be reduced and whose public employees would likely incur 
benefit cuts.
    Regarding issues concerning the public safety sector, the 
Nevada Legislature determined it is the public policy of the 
State of Nevada to allow early retirement for police officers 
and firemen as compared to miscellaneous government employees. 
This policy is founded on the need to have a younger more 
physically agile workforce to meet the demands placed on our 
public safety occupations. Social Security contains no such 
program. Is it fair to take this benefit away from our public 
safety employees when early retirement is the legislated policy 
of the State of Nevada? Moreover, many Social Security reform 
proposals would extend the normal retirement age past the age 
67 threshold.
    Policy decisions related to survivor benefits and 
disability retirement for all of Nevada's public employees have 
also been addressed by the Nevada Legislature. It is simply a 
matter of ``fairness'' that the rules are not now changed in 
the middle of the game to the detriment of all Nevadans.

4. Just as each of you want to protect your citizens' 
retirement income security, we too have that responsibility for 
all Americans. Finding a solution that works and is fair to 
each generation of Americans isn't going to be easy.
    As you have well pointed out, many of your plans replace a 
higher percentage of pay than does Social Security. GAO, at my 
request, is taking a look at certain local plans in more detail 
to assess what Congress might learn from these plans as we 
consider Social Security reform. Based on the success of so 
many of your State and local retirement plans, what lessons can 
we learn from your plans that might work in a solution for 
Social Security?

    The most important lesson that can be learned from public 
pension plans is that investments should play a key role in 
funding the benefits for Social Security. Unlike Social 
Security, public pension plans are funded on an actuarial 
reserve basis. This means the investment return on 
contributions paid to the system is used to fund future 
benefits. In fact, the great majority of benefits paid by 
public plans comes from return on investments.
    I would suggest that a new Social Security System could 
look much like today's public pension fund with a well-
diversified portfolio designed to generate earnings needed to 
fund future benefits while minimizing risk. An independent 
board (or boards--to diversify control of the asset base) could 
be established to manage the assets of the fund which would 
include a mix of equity and fixed income securities. The boards 
would establish investment objectives and policies with an eye 
on future plan liabilities. They would act as fiduciaries for 
the benefit of Social Security participants.
    Public pension plan boards have other functions as well. In 
addition to investment policy they also formulate 
administrative policy and recommend plan design changes to 
their respective state legislators. By keeping abreast of both 
economic and demographic changes over time, public plan boards 
are responsive to the needs of their members and beneficiaries. 
I believe it beneficial if an independent board(s) for Social 
Security had similar authority.

5. Your plans are also going to be impacted by demographics. 
How are your State Legislators or Retirement Boards focusing on 
this issue and what actions are they considering? Do you expect 
you will see benefit cuts in the future, even without mandatory 
coverage?

    Our State Legislature and Retirement Board are very mindful 
of changes in plan demographics. From our perspective, 
demographics are those elements intrinsic to our plan 
population; including the ratio of active members to retirees, 
mortality experience, average entry age, average retirement 
age, etc. The System performs an actuarial valuation each year 
and a comprehensive experience study every three to five years, 
to keep abreast of changes in plan demographics. Based on these 
reviews, assumptions for future plan experience are modified 
and contribution rates adjusted to maintain the fiscal 
integrity of our plan.
    This process, coupled with benefits that are funded on an 
actuarial reserve basis works well over time. Demographic 
changes are evaluated frequently and considered in funding the 
system on the actuarial reserve basis. As I indicated earlier 
however, mandatory coverage would change all this and cause a 
significant disruption to the well-founded structure of our 
pension plan.
    Again, thank you for the opportunity to respond to your 
questions regarding mandatory Social Security coverage.

            Sincerely,
                                                George Pyne
                                                  Executive Officer
      

                                

    Chairman Bunning. Mr. Portman--excuse me, Mr. Neal, first.
    Mr. Neal. Thank you, Mr. Chairman. I have a question for 
Mr. Lussier. First, I want to thank Mr. Lussier for that wisdom 
he imparted as a son of Massachusetts to the Subcommittee; a 
former member of the legislature and you've guys have done a 
terrific job.
    Mr. Lussier. Thank you.
    Mr. Neal. In your testimony, Tom, you spoke of what would 
happen in terms of higher State and local costs if this 
alteration was made in the Social Security initiative. Would 
you elaborate on that?
    Mr. Lussier. Sure. In order, simply, to provide Social 
Security--based on the employer costs for a new member of our 
system being on average somewhere between 2 and 4 percent, we 
could see right on the surface that to go from that number, 2 
or 4 to 6, is an increase before we even talk about building 
any kind of a supplemental as been suggested as a possibility. 
As a result, we would suggest that what would most likely 
happen is that we would end up with some form of a defined 
contribution plan that would be totally funded by employees and 
would ultimately provide lower benefits to the employees. We 
also suggest that because of the unique responsibility that the 
State has assumed for our system for teachers, that there is a 
huge possibility that the State, obviously, maintaining its 
commitment to the existing teacher population might opt to 
provide some sort of a supplemental program, but we think it's 
more than likely that the Social Security tax component of that 
would be shifted back to the local cities and towns which would 
be a total increase of 6.2 percent on cities and towns for 
teacher costs which they have never borne since the teacher 
system was established and since it has always been an 
obligation of the Commonwealth. So, that we think that the 
effect at the local level could be two pronged. It could be 
higher costs to provide the benefits that are provided through 
our many local systems in Massachusetts for their own employees 
plus the addition of the cost for teachers being shifted from 
the State to the locals as the State views this as an 
opportunity to get out from under that new obligation.
    Mr. Neal. Given Proposition 2.5 back in Massachusetts.
    Mr. Lussier. That's right. Given the local----
    Mr. Neal. You didn't vote for that legislature, did you?
    Mr. Lussier. No, not at all. [Laughter.]
    In fact I had a rather contentious election over that one.
    Given the limitations on local tax levies and the 
improbability of voters voting to raise those levy limits to 
fund this kind of a benefit, I think you would see that that 
extra cost would come out of essential services. It would come 
out of public safety; it would come out of education, and the 
other services that are provided based on our local property 
tax base.
    Mr. Neal. Thanks, Tom.
    Thanks, Mr. Chairman.
    Chairman Bunning. Mr. Portman.
    Mr. Portman. Thank you, Mr. Chairman, and thanks for the 
testimony from around the country and from our safety officers. 
Mr. Schumacher, good to see you again from my State of Ohio. I 
have a lot of questions, and I also would ask the Chairman if I 
could submit some for the record.
    Chairman Bunning. Without objection.
    [The questions and answers follow:]

Responses of Richard E. Shumacher to Mr. Portman's Questions

1. You mention that over 80% of the benefits paid by your plan 
come from investment earnings and that your system collects 
about 22% of covered payroll in employee and employer 
contributions. Who oversees the investments of the fund and how 
is the fund invested?

    Answer: The Ohio legislature created the Public Employees 
Retirement System (PERS) in 1933. The legislation provides that 
the funds of the system are invested by the system for the 
exclusive benefit of its members and beneficiaries.
    The investment duties of the board are set by statute. 
Until 1997 the system operated under a legal list of 
investments. Since 1997 investments are made subject to the 
prudent person standard. The System's internal professional 
investment staff manages the investment activities. About 8% of 
the assets in international investments are managed through 
external managers. The funds are invested in U.S. equities, 
U.S. fixed income, real estate, and international equities. The 
board's investment policy provides for an allocation of the 
various asset classes. The asset allocation is calculated to 
determine the optimal mix of asset classes to provide the 
necessary long-term returns needed to fund the accruing long-
term projected liabilities. Portfolio risk is a part of this 
consideration. The current asset allocation target is U.S. 
equity, 35%; international equity, 18%; U.S. fixed income, 35%; 
real estate, 11%; and cash, 1%.

Follow-up question. Mandatory coverage of newly hired State and 
local employees would likely result in a lowering of receipts 
to that fund. What impacts do you see that having in the State 
of Ohio?

    Follow-up answer: As previously pointed out, over 80% of 
the benefit payments for PERS are financed by investment 
earnings. Mandatory coverage of newly hired state and local 
employees would divert the cash flow from the retirement system 
to Social Security. If we reduce the flow of funds available 
for investment, we will reduce investment earnings. For our 
pension plan to continue the same benefit payouts with such 
reduction, employee and/or employer rates would have to be 
increased by 6-7% of covered payroll. The rate increases are an 
unfunded mandate on state and local governments to maintain the 
status quo of the benefit payment. The increased rates would 
not produce any additional retirement or ancillary benefits. 
The reduction in investment income requires higher contribution 
rates to provide the same benefit.

2. GAO did a great deal of work, as you heard in Ms. Fagnoni's 
testimony, analyzing State and local retirement systems. Her 
staff met with many of your representatives. I want to give you 
the opportunity to comment on her testimony or GAO's responses 
to the questions that were asked of them. Do any of you have 
any comment you would like to make in response to the GAO 
testimony?

    Answer: I commend the Government Accounting Office (GAO) 
for doing a thorough job in researching and writing the 
Implications of Extending Mandatory Coverage to State and Local 
Employees.
    Perhaps the most striking information is the similarity 
between their cost analysis and that of the individual state 
and local government pension plans of the increased cost for 
moving Social Security uncovered employees into the mandatory 
coverage. Our actuary has indicated that there would be a five 
to seven percent cost increase to cover the individuals in 
Social Security and to maintain our current level of benefits. 
The GAO publication indicates that it would be a seven percent 
increase in cost. In most cases, this increased cost would be 
spent with the individuals receiving the same total benefits as 
they are currently receiving under the individual state and 
local government plans. It is noted in the report that the 
inclusion of state and local government pension plans is 
estimated to extend the Social Security Administration solvency 
by only two years.
    It appears that the major emphasis in the move to mandatory 
Social Security coverage is on the short-term cash flow 
increases. We are unable to discern from the report what 
increased long-term liabilities for those employees being 
mandated in would add to future payouts. In her comments, Ms. 
Fagnoni stated ``As with most other elements of the reform 
proposals put forward by the 1994-1996 Social Security Advisory 
Council, such as raising the retirement age, extending 
mandatory coverage to newly hired state and local employees 
would resolve only a part of the trust funds' solvency 
problem.'' This is an indication that mandatory coverage of new 
hires may not be a wise solution for the funding problem. It 
could be that the future short-term cash inflow is increased, 
but that future liabilities are increased by a greater degree. 
A review of promised benefits versus the sources of income 
(contribution rates and other income) shall be made to 
determine that assets are adequate to provide for the benefit 
payout stream. If assets are inadequate to meet the stream of 
payments, a fundamental flaw exists and adding more people will 
not provide long-term stability or solvency.

3. Just as each of you want to protect your citizens' 
retirement income security, we too have that responsibility for 
all Americans. Finding a solution that works and is fair to 
each generation of Americans isn't going to be easy.
    As you have well pointed out, many of your plans replace a 
higher percentage of pay than does Social Security. GAO, at my 
request, is taking a look at certain local plans in more detail 
to assess what Congress might learn from these plans as we 
consider Social Security reform. Based on the success of so 
many of your State and local retirement plans, what lessons can 
we learn from your plans that might work in a solution for 
Social Security?

    Answer: Social Security is a major factor in the lives of 
many older citizens of our country. It needs to be viable and 
financially sound. There are two distinctively different 
philosophies for funding pension benefits, pay-as-you-go and 
pre-funding. Under the pay-as-you-go scenario, current 
contributions collected are used to meet current benefit 
payments. The long-term effect is the need for greater and 
greater current contributions to meet rising expenditures. To 
cover benefit payments for an aging population, extreme 
pressure is put on increasing inflows.
    Using a pre-funding philosophy, contributions are collected 
and invested. This technique adds a second source of funding. 
Therefore, the contributions are not the only source of funds 
to meet payouts. Accumulating assets over a person's working 
career to provide old age benefits is a good example of 
maintaining generational equity. When the Ohio legislature 
created PERS, it delegated the funding of benefits and 
investment of assets to the retirement system. The state of 
Ohio, itself, is not involved in the investment of retirement 
system assets. The basic position is that rates charged to 
provide benefits must generate sufficient assets to cover the 
liabilities as they come due. It is imperative that today's 
collections grown through investment earnings, meet tomorrow's 
liabilities.

4. Your plans are also going to be impacted by demographics. 
How are your State Legislators or Retirement Boards focusing on 
this issue and what actions are they considering? Do you expect 
you will see benefit cuts in the future, even without mandatory 
coverage?

    Answer: The retirement board focuses on demographics during 
each annual actuarial review. Once every five years a review is 
done which is the basis for changing assumptions to reflect 
demographic trends. Liabilities are due over the long-term, 
therefore, the funding criteria mirrors this long-term period. 
By beginning with a sound funding policy, year-to-year changes 
are minimal. For example, the pending retirements of the baby 
boomer generation are not cause for alarm in our system. The 
impact will be an increase in cash outflows which will come 
from the assets accumulated for this purpose.
    Absent mandatory Social Security, we do not expect any 
benefit cuts. However, if there is mandatory coverage, our 
system will be unable to continue its current ancillary benefit 
structure.

5. How are your contribution rates for employees determined so 
that funds are available to pay promised benefits?

    Answer: The retirement board establishes contribution rates 
on the basis of actuarial studies. The actuarial studies are 
performed to determine the future liabilities for benefits 
established by state statutes. The studies, among other 
factors, take into consideration the demographics of plan 
members. Also developed are economic assumptions, i.e., market 
returns, wage inflation, etc. The result of this effort is a 
rate structure that will fund retirement benefits over working 
careers.
    It should be noted that the employee and employer 
contribution rates for PERS have been stable over the last 25 
years. While the rates have not increased, there have been 
benefit enhancements added.

6. What benefit programs do the contributions support?

    Answer: Besides the vested retirement benefits (age and 
service retirement, disability, survivor benefits), PERS 
provides non-vested health care coverage to its retirants and 
beneficiaries. Through varying techniques, we can provide a 
health care coverage program funded by employer contributions 
which are included in the current rate structure. If mandatory 
Social Security coverage were forced upon this system, because 
of the reduction in our funding base, this ancillary program 
would need to be severely curtailed or abandoned.
    Cost of living increases (equal to the CPI change but not 
to exceed three percent) of pension payments are funded under 
the current rate structure. Again, reductions in our coverage 
base could require a reduction in the cost of living allowance 
payments. The overriding discipline for PERS is that adequate 
funds must be generated to meet the promised liabilities.
      

                                

    Mr. Portman. Let me, just begin by making a comment and 
then ask a couple of questions of the Ohio system and feel free 
to chime in from other States or from the other safety officer 
plans. My general comment is that we've got a Social Security 
system that needs reform, and I'm for reform as is the 
Chairman, that's why we're having these hearings, and, yet, I 
think it would be an irresponsible thing to simply get an 
infusion of funds, immediate funds, by taking employees who are 
currently in systems that work--that are prefunded; that invest 
in the market; that do all of the things that many of us think 
we ought to be doing in Social Security--and throwing them into 
Social Security without any promise, frankly, that Social 
Security's going to do those things.
    So, I have real concerns about the proposals that we've 
seen both from the Advisory Committee, Senator Moynihan's 
proposal, and so on, because I think that they are probably 
going in the wrong direction. In fact, we need more flexibility 
in our plans. I'm a big proponent of more flexibility in our 
pension plans as well through the private sector. In any case, 
that's kind of the perspective I bring to this which probably 
doesn't surprise anyone on the panel.
    I also happen to be from Ohio where we have a system that 
works, and that's where I want Mr. Schumacher, to spell it out 
a little more, because in your testimony you didn't have time 
to get into some of Ohio's plan. I think it's important for 
people to understand that the contribution rate is about 23.3 
percent of payroll now. Is that correct, when you include the 
employer contribution and the employee contribution?
    Mr. Schumacher. Mr. Chairman, Mr. Portman, it's 21.8 
percent.
    Mr. Portman. So, it's a relatively high percentage. We're 
not saying the reason our State employees and teachers and so 
on don't want to get into the Federal plan is because they are 
concerned about paying more payroll taxes. It's more in terms 
of how the plan works, the benefits, and the soundness of it 
fiscally. The funds are invested. Can you tell us a little more 
about how those funds are invested?
    Mr. Schumacher. Yes, the State legislature has given the 
retirement systems in Ohio a prudent person rule and the 
individual boards set up an asset allocation program with a 
very keen sense of the risk of the portfolio and the 
maximization of return. The return on investments is a major 
income stream for the----
    Chairman Bunning. Could you pull the mike to you so that 
the recorder can hear you better. Thank you.
    Mr. Schumacher. The income stream is a major source of 
earnings for the State of Ohio and that funds a great deal of 
our benefits. Yesterday, I did review with our board 
terminations in the State of Ohio in our pension plan for the 
month of April. The individuals who were terminated over 
various working careers and retirement careers had paid in, 
including interest furnished by earnings, of about $4 million. 
The payout by the system for those individuals over their 
retirement years was $28 million.
    Mr. Portman. That's a successful plan. Again, I think when 
you look at the short-term benefit of including mandatory 
coverage, it's obvious, but in the longer term, you will not 
see benefits to Social Security and it's because these folks 
are going to retire also, and they're going to be a strain on 
the system eventually. So I think it's a short-term fix that 
isn't a responsible, structural change in Social Security that 
we would really need.
    Let me just ask you quickly on the taxation. How are those 
benefits taxed?
    Mr. Schumacher. The benefits are taxed under the Internal 
Revenue Code 100 percent.
    Mr. Portman. Fully taxed for Social Security.
    Mr. Schumacher. Fully taxed.
    Mr. Portman. And how about at the State level.
    Mr. Schumacher. The same taxation applies at the local 
level with the exception that survivor benefits are not taxed 
in the State of Ohio.
    Mr. Portman. One other question I have on the plan. You 
mentioned briefly that it covers more than just retirement 
income, and if you could talk a little, particularly, on the 
health care side, what it provides and what the impact on the 
health care benefits were there to be mandatory coverage?
    Mr. Schumacher. Yes, health care in Ohio is not a mandated 
benefit. It is a benefit that is provided to be given at the 
option of the retirement board. Currently, we provide for two 
PPOs and various health care--Medicare, HMOs--and this is done 
at zero cost to the original retirement and at a contributing 
cost for the spouse under the age of 65 of $60 a month; over 
age 65, of $20 a month.
    Mr. Portman. Again, an attractive plan and it's working. I 
would just make a general comment that probably we could learn 
something at the national level from some of these State plans 
as we asked GAO earlier.
    I would make one other comment which is that the Unfunded 
Mandate Relief Act did not go through this Subcommittee. I wish 
it had, but this Subcommittee is very interested in that issue 
and has used that discipline that we got 3 years ago through 
that act. It actually came through the government--then called 
the Government Operations Committee, now, Government Reform and 
Oversight Committee, but it is certainly the intent of this 
Congress, this majority in Congress, not to impose unfunded 
mandates. That's another good point that I, frankly, hadn't 
thought through until I heard your testimonies this morning. 
Thank you all for your testimony. Thank you, Mr. Chairman.
    Chairman Bunning. Mr. Collins.
    Mr. Collins. Thank you, Mr. Chairman. As a followup to Mr. 
Portman, Mr. Schumacher, noticing that the contributions are 
equivalent to 23 percent--at least 14 and then matching from 
the employer--how does the actual retirement check from your 
plan compare to an equal worker of same time, same salary range 
under Social Security?
    Mr. Schumacher. The basic annuity formula is 2.1 percent 
per year of employment. A person with 30 years of employment 
can retire at any age on a straight life benefit of 63 percent 
of their final average salary; that's the average of the 
highest 3 years of income. If they wish, they can take a joint 
survivor benefit or they can take a benefit over other lives 
and as much of 100 percent of what they receive to their spouse 
or to the beneficiary.
    Mr. Collins. How would that compare to a worker earning 
equal pay on their Social Security check that you would know?
    Mr. Schumacher. I do not know the answer to that question.
    Mr. Collins. Yes, sir.
    Mr. Scott. I think if you take an average worker who earns 
$35,000 a year, under our system that worker would get 75 
percent of pay after 30 years of service. So, that's somewhere 
in the neighborhood of $25,000, $26,000, $27,000, $28,000. 
Social Security ceiling is in the neighborhood of $12,000, I 
believe, now.
    Mr. Collins. Quite a bit of difference. Mr. Scott, you 
mentioned that most State and local plans offer considerable 
portability.
    Mr. Scott. That's correct.
    Mr. Collins. How does this work and what is your outlook 
for increased portability?
    Mr. Scott. Well, I think portability is probably one of the 
big issues that our industry--whether it's private sector 
retirement or public--has to deal with. I mean, it's weak 
across the whole environment, and, of course, Social Security 
provides complete portability. We've been working on that, and 
we've put in place, for example, interest on refunds several 
years ago; we allow people to buy into the system. If they come 
in and they've got some money, they buy into the system for 
public or private sector service. We also have what we call a 
hybrid; that is if you come to PERA, Public Employees 
Retirement Association, and you work for, say, 5 or 10 years 
and you walk out of the system, we will give you your money 
back, which is at 8 percent, plus we'll match that; give you 2 
percent of the employer contribution and then interest at 80 
percent of our assumed rate which gives you 8 percent interest. 
So, on your money you would be taking 32 percent return on that 
money as you walk out the door. The unfortunate part of that is 
that most younger people take it and it's gone. As people have 
more years of service, they generally will take it and roll it 
over which you've allowed them to do through the Tax Codes.
    Now, if you leave the money with PERA--and this is an 
encouragement to do so--we will, when you retire, give you your 
8 percent plus 50 percent match of 4 percent, and then we'll 
annuitize that because you don't have the full defined benefit. 
And, so that calculation actually gives you a better benefit 
than the defined benefit does until you reach 20 years of 
service, and that annuitized amount is protected completely for 
cost of living; it gives you access to our retirement health 
care. So, we think we're making some strides there, and, of 
course, the big argument is defined benefit versus defined 
contribution, but that's the way we deal with it.
    Mr. Collins. OK, very good. Thank you, Mr. Chairman.
    Chairman Bunning. Thank you. I have just one more question 
I'd like to ask all the panel. Mr. Pyne, I'd like for you to 
start us off. As you know there are many options being 
considered for the Social Security reform. One option being put 
forth by both Democrats and Republicans alike is to create 
personal retirement savings accounts. If Social Security were 
to be reconfigured to include such accounts, would State and 
local employees want to participate?
    Mr. Pyne. First of all, I think what's admirable about that 
is at least the dialog has to do with advanced funding and 
recognizing the fact that you need to build wealth and the way 
to do it, not unlike our plans, is to use the power of 
compounding and the investment markets and advance fund 
benefits. What you're really doing there, then, is you're 
becoming more like us in the public sector because that's 
exactly what we do is advance fund benefits. Now, we do it on a 
defined benefits basis not so much on a personal retirement 
account type of a basis, but, at the same time, we're already 
there, so it would just seem, from my perspective, that we're 
sort of where I think Social Security needs to go. So, it's not 
advantageous for us to be moved into that type of an 
environment. So, I think we're just fine right where we are. 
Our public employees can participate in 457 plans and plans of 
that sort which essentially have the same features, I think, of 
these personal retirement accounts.
    Chairman Bunning. Would anyone else in the panel like to 
comment about it?
    Mr. Pfeifer. Mr. Chairman, I think, from my personal 
perspective, that would be a very positive innovation, and the 
reason I say that is because, as I understand it, the way 
Social Security is invested, you're invested, basically, in 
long-term fixed income instruments of the U.S. Government. Now, 
in a diversified retirement plan such as mine and such as the 
others sitting around this table, we not only buy fixed income 
from the United States, we buy U.S. equities, international 
equities, and a variety of other investment instruments that 
improve the performance of those funds and improve the 
investment returns so that you're able to grow the money over 
time and payout a very generous benefit, hopefully, at the end 
of the time, because you have so much time to deal with.
    The only downside I would see with that is the personal 
retirement savings accounts, just as with the defined 
contribution plans, there's a certain responsibility that the 
employer--in this case, I assume it would be the Federal 
Government would have--to educate the individuals who 
participate in that particular option to make sure they know 
some of the basics of investing so they invest the money 
prudently and get what they expect. Obviously, certain 
individuals would be adverse to risk; certain individuals would 
be willing to take more risk, so I think that's something that 
would have to be very carefully looked at, but I think that 
would be a very positive innovation.
    Chairman Bunning. Anyone else? I thank the panel for their 
participation, and we look forward to dealing with you again. 
We may submit questions in writing for you to answer for the 
record. Thank you.
    [The questions and answers follow:]

Responses of Robert J. Scott to Mr. Bunning's Questions

You make the point that public plans do a good job providing 
for retirement security for their members. For example, in 
Colorado, a 15-year employee earning a high of $15,000 would 
receive 28.6% of pay under Social Security when he retired, as 
opposed to 33% under the Colorado plan. You also challenge the 
Social Security Advisory Council's assertion that Social 
Security's protection is superior to State and local plans over 
the course of a lifetime. Would you provide more detail as to 
how you reach this conclusion?

    It is well established that most public plans provide a 
strong retirement benefit for their employees at virtually all 
levels of compensation and all periods of covered service. (We 
have enclosed copies of a study done by Third Millennium on 
this subject, but there is a great deal of other evidence that 
supports this point as well.) These better benefits are 
possible because of the greater investment return on public 
pension plan contributions compared to Social Security.
    Those who try to argue that Social Security provides better 
protection over the course of a lifetime generally argue that 
Social Security provides better ancillary benefits, such as 
survivor benefits and disability benefits, and Social Security 
also provides better portability. Also, Social Security 
benefits are adjusted for the cost-of-living.
    In our written testimony to the Social Security 
Subcommittee (pages 3-4) we covered this topic at length. 
Ancillary benefits of public plans are generally better than 
those provided by Social Security. Not only are dollar benefits 
generally higher, but public plan disability benefits may be 
easier to qualify for. Disability benefits for public safety 
workers, such as fire and police officers, are superior in 
public plans to benefits provided by Social Security. Social 
Security survivor benefits for children cut off at age 18. 
Public plan benefits often extend through college, if the 
surviving child is a full-time student.
    Public plans also provide cost-of-living adjustments for 
retired workers. In general, the post retirement cost-of-living 
adjustment is comparable to the Social Security adjustment, 
except for periods of unusually high inflation. (See, for 
example, the Third Millennium study, page 16) Public plans 
account for inflation that occurs during a career by basing 
benefits on an employee's high three or five year compensation, 
or on his final three or five years of compensation.
    The portability issue is discussed in response to question 
two.

You mention that most State and local plans offer considerable 
portability. How does this work and what is your outlook for 
increased portability in the future?

    Some people argue that Social Security's greatest advantage 
is that it is completely portable. It is true that all workers 
who accumulate the required 40 quarters are entitled to some 
benefit under current law, although many workers who are in and 
out of the work force during their careers may receive only a 
very low benefit measured in dollars. (Those workers having 
fewer than 40 quarters receive no monthly retirement benefit 
and no refund of contributions paid.) It is not true, however, 
that workers are guaranteed a specific benefit through Social 
Security. Unlike public and private plans, where an employee is 
vested in a specific ``accrued benefit,'' Social Security 
benefits may be modified by Congress in ways that are either 
beneficial or adverse to workers, and those workers have no 
contractual protection. Benefits in the Social Security 
program, and other entitlement programs, such as Medicare, have 
been modified in the past to reduce benefits for current and 
future participants
    Public plan participants are always 100 percent vested in 
their own contributions, and interest at a reasonable rate is 
added. Most public plans use rapid vesting schedules for 
qualifying for a monthly retirement benefit. Generally the 
vesting requirement is five years; see Third Millennium study, 
page 14. Employees are always free to roll over their vested 
account balance into an IRA, in lieu of any monthly benefit 
from the public retirement system.
    Colorado PERA is a defined benefit plan that really is a 
hybrid because it includes some of the attractive portability 
features of a defined contribution plan. Employees who 
terminate PERA-covered employment before retirement age may 
elect a refund that includes their own contributions (8 percent 
of salary) plus interest, and a 25 percent match on that 
amount. The employee may elect instead to leave the account in 
PERA and receive at retirement a refund that includes 
additional accumulated interest plus a 50 percent match, or a 
lifetime monthly benefit. The lifetime monthly benefit, if 
elected, is the greater of the benefit based on the defined 
benefit formula (2.5 percent of high-three-year salary per year 
of service) or a money purchase benefit calculated by 
annuitizing the employee contributions plus interest and a 50 
percent match. PERA will propose state legislation in 1999 that 
would increase the matching levels from 25%/50% to 50%/100%.
    Colorado's hybrid features recognize that many employees 
covered by PERA will not retire in a job covered by PERA. These 
employees have good choices that they can make at termination 
that will enable them to build up a sufficient retirement 
income, in or out of PERA. The State Teachers' Retirement 
System of Ohio has a similar hybrid feature in its defined 
benefit plan.
    PERA's Board of Trustees would also like to propose to the 
Colorado Legislature that a small portion of future employer 
contributions be allocated as a partial match to voluntary 
contributions that employees make to their own 401(k), 457 
plan, or 403(b) plan accounts. This may start in 2001, unless 
Social Security for new hires is mandated, in which case it may 
not be possible at all.
    Public employees in any state can continue earning service 
credit if they transfer from one job to another within the same 
system. Some retirement systems within the same state allow 
service years to be carried into the new system under 
reciprocity agreements. In addition, most states permit 
employees to ``buy in'' past service credits into their 
retirement plan, often by using money accumulated in a previous 
employer's plan. According to a survey of 105 plans conducted 
by the Public Retirement Institute, about 92 percent of 
statewide public pension plans allow the purchase of service 
credits.
    Colorado PERA for example allows any employee with at least 
one year of earned PERA service to buy other years earned 
through prior public or private sector service, provided they 
are not currently vested for benefits in the previous 
employer's plan. For employees hired in 1999 or later, federal 
law limits the number of private sector years that can be 
purchased to five years. The five year cap is not expected to 
be a problem for most employees, but Colorado would support an 
increase or elimination of the cap, if proposed in Congress.
    H.R. 3788, the ``Retirement Security for the 21st Century 
Act,'' by Reps. Portman and Cardin, would enhance the ability 
of all public employees to purchase service. The bill would 
allow rollovers from IRC section 457 and 403(b) plans into 
public defined benefit plans to purchase service. Currently, 
rollovers to purchase service are only allowed from 401(a) or 
401(k) plans, pursuant to federal law. As a result, employees 
usually purchase service credits in their public plan with 
after-tax moneys.

3. In your testimony, you discuss the importance of how ``new 
hire'' would be defined, if mandatory coverage for new hires 
were to be enacted. Would you provide more detail as to why 
this definition is important and what the impacts are?

    The definition of the term ``new hire'' will have a 
substantial effect on the turnover rate. The most important 
issue is whether or not the term ``new hire' will refer only to 
employees who are not employed by the state or local government 
in any capacity on the date when Social Security coverage for 
new hires becomes effective, or whether it will also apply to 
employees who change jobs within a system, in other words, 
lateral transfers.
    The resolution of this question will affect the short-term 
cost of mandatory Social Security coverage to government 
employers. It will also have effects on pension plan assets; 
the greater the number of new hires, the lower the amount of 
new money which is contributed to the pension plan. In 
addition, there may be a ``lock in'' effect for some employees 
who may be reluctant to change jobs if such a change would 
result in having to pay the Social Security tax.

4. GAO did a great deal of work, as you heard in Ms. Fagnoni's 
testimony, analyzing State and local retirement systems. Her 
staff met with many of your representatives. I want to give you 
the opportunity to comment on her testimony or GAO's responses 
to the questions that were asked of them. Do any of you have 
any comment you would like to make in response to the GAO 
testimony?

    We were pleased to see that the GAO report acknowledges the 
existence of a cross over point, after which the cost of 
benefits paid to public employees will exceed the amount 
received in taxes. GAO estimated the cross over point to be 
2050. (Page 9 of the report)
    We were also pleased to see GAO acknowledge (page 20) that 
administrative problems would require at least a four year lead 
time for public employers to adjust to a system of mandatory 
coverage for new hires.
    We found the arguments which GAO discussed in favor of 
mandatory coverage to be unpersuasive. GAO discussed the so-
called ``fairness'' issue, for the most quoting or referring to 
arguments made by others. This issue of fairness is discussed 
at great length in my written testimony, pages 7-10.
    It is hard to believe, at this point in time, that anyone 
knowledgeable can argue that mandatory coverage is fair simply 
because many public employees in non-covered systems receive 
Social Security benefits as a result of other covered service. 
The windfall elimination provision adopted in 1983 and the 
government pension offset (for spousal benefits), which were 
expressly designed to prevent public employees from receiving 
benefits that are out of proportion to their contributions, 
should dispose of this point once and for all. But the argument 
appears at page 10 of the GAO report.
    GAO also quotes others as arguing that mandatory coverage 
would be fair because Social Security reduces the need for 
public assistance to the elderly, or because the parents of 
public employees may receive Social Security benefits. But 
public plans also relieve society from the need to provide 
assistance to the elderly, and may do this more effectively 
than Social Security, some of whose beneficiaries do need SSI 
(funded out of general revenues) because Social Security 
benefits are not great enough to support them. If the parents 
of public employees receive Social Security, it is presumably 
because those parents made Social Security contributions. 
Moreover, the children of public employees will generally make 
Social Security contributions, even through their parents 
receive no benefits or reduced benefits.
    The GAO also argued that it is difficult to administer the 
Windfall Elimination Provision and the Government Pension 
Offset, and ``estimated ... total overpayments to be between 
$160 million and $355 million over the period 1978 to 1995.'' 
In the context of the Social Security funding deficit, as well 
as the harm that would be done to public plans by mandatory 
coverage, the amounts cited are trivial. The report noted that 
additional data matches by SSA, with cooperation from non-
covered retirement systems, will be implemented to improve 
administration of the WEP and GPO reductions. The GAO also 
believes that there is a significant risk that some state and 
local employees will not be covered under either a public plan 
or by Social Security, as required by OBRA 1990. From our 
experience, there is no significant risk of noncoverage. SSA, 
the IRS, and state and local officials have developed manuals 
and other programs to help make sure every employee is covered 
under an approved plan. This is no reason to mandate Social 
Security coverage for state and local workers.
    As for the financial benefits of mandatory coverage, GAO 
largely relies on the estimates of others that mandatory 
coverage would solve about 10 percent of Social Security's 
actuarial problem. If true, this is because contributions will 
be received throughout the 75-year period, while many of the 
liabilities accruing because of those contributions will not 
have been paid. In any event, if contributions are not saved, 
rather than used to fund operating costs of the government, 
mandatory coverage will not help Social Security at all, except 
perhaps during a relatively brief period when no benefits are 
being paid.

5. Just as each of you want to protect your citizens' 
retirement income security, we too have that responsibility for 
all Americans. Finding a solution that works and is fair to 
each generation of Americans isn't going to be easy.
    As you have well pointed out, many of your plans replace a 
higher percentage of pay than does Social Security. GAO, at my 
request, is taking a look at certain local plans in more detail 
to assess what Congress might learn from these plans as we 
consider Social Security reform. Based on the success of so 
many of your State and local retirement plans, what lessons can 
we learn from your plans that might work in a solution for 
Social Security?

    CPRS takes no position on whether on not Social Security 
should be subject to structural reform, or what the nature of 
that reform should be if it occur. Of course we are willing to 
share our experience in devising and funding our retirement 
plans, for whatever relevance that experience may have.
    Colorado PERA, like most public plans, is a defined benefit 
plan. Plan contributions are pooled for investment purposes, 
allowing for great diversity of investment and eliminating the 
possibility that a particular employee could be adversely 
effected by poor investment choices. Also, while public plans 
generally provide rapid vesting, there are some plan 
forfeitures of employer contributions by short term employees, 
and these forfeitures help meet the funding requirements of the 
plan.
    Unlike Social Security, however, state and local retirement 
plans are funded. Most benefits, and many plan improvements, 
are paid for out of investment earnings on contributions. In my 
written testimony, I pointed out that STRS of Ohio estimated 
that the average retired employee lived for 26 years after 
retirement. Three years of benefits are paid for out of 
employee contributions, six years are paid for out of employee 
contributions, seventeen years of retirement benefits are paid 
for out of investment earnings on contributions.
    Earlier I pointed out that Colorado PERA and most other 
public plans do an excellent job of providing ancillary 
benefits and cost-of-living adjustments for retired workers. 
Many of these benefits are paid for out of earnings on 
investments.
    It is important to be aware that ancillary benefits and 
cost-of-living adjustments are easier to provide because of the 
defined benefit structure of most public plans. Most proposals 
for restructuring Social Security envision private individual 
accounts, in which retirement benefits are based on the amount 
in the account at retirement. It would certainly be possible to 
provide ancillary benefits and cost-of-living adjustments under 
such a structure, but it would be difficult if most of the 
funds are contained in individual accounts.
    If there were no pooling of investment and risk, ancillary 
benefits would have to be provided out of the employee's 
individual account, probably by some form of insurance. This 
would reduce the value of the employee's retirement account and 
would require regulation of the insurance providers to deal 
with such issues as adverse selection.
    Cost-of-living adjustments could be purchased as part of an 
annuity, but there would be no way for the retiree to achieve 
cost-of-living adjustments, or other plan improvements, from 
favorable post-retirement investment experience. Public plans, 
with their large pool of assets and defined benefit structure, 
are able periodically to provide plan improvements for retirees 
and current plan participants out of favorable investment 
experience. At the same time, contribution rates for many 
public plans have been reduced slightly over the last decade.
    It is well worth noting that women face special problems 
under an individual account system. Many women go in and out of 
the work force, reducing lifetime contributions to a retirement 
plan. Also women generally live longer than men, meaning the 
proceeds of a defined contribution account would have to last 
them longer.
    People who go in and out of the work force also see their 
benefits reduced under Social Security and defined benefit 
public plans, but probably not to the same extent as would be 
the case in a defined contribution plan. Moreover, Social 
Security and most public plan benefits are provided in the form 
of a lifetime annuity, and are adjusted for inflation pre-and 
post-retirement. These factors tend to mitigate the effects of 
having a shorter career. Colorado PERA encourages its members 
to contribute on a voluntary basis to defined contribution 
plans, to foster increased portability and to help supplement 
their basic income during retirement.

6. Your plans are also going to be impacted by demographics. 
How are your State Legislators or Retirement Boards focusing on 
this issue and what actions are they considering? Do you expect 
you will see benefit cuts in the future, even without mandatory 
coverage?

    Colorado PERA and other public plans are funded on an 
actuarially sound basis. Contributions are fairly level as a 
percentage of payroll. This level-cost funding helps assure 
over the long term that benefits promised will be paid when 
they become due. PERA's trustees and independent consulting 
actuary compare actuarial experience against assumptions every 
year, and actuarial assumptions about mortality, salary 
increases, turnover, etc., are usually adjusted every five 
years based on significant changes in trends. Public plans use 
reasonable assumptions about the rate of investment return in 
funding plan liabilities; the average assumption is about 8 
percent per year.
    Public plans and private plans have recognized for years 
that the ratio of active employees to benefit recipients has 
decreased, and will continue to do so. In contrast to Social 
Security, no benefit reductions or contribution rate increases 
are expected to be necessary to pay benefits. In the absence of 
mandatory Social Security, Colorado PERA will be able to pay 
plan benefits that are provided by Colorado statute without 
contribution rate increases. Over the years, as progress has 
been made in amortizing unfunded actuarial accrued liabilities, 
plan benefit provisions have been improved at times.
    On behalf of all the members of the Coalition to Preserve 
Retirement Security, thanks again for the opportunity to 
provide information to the Subcommittee on this important 
issue.
      

                                

    The final panel we'll hear from testimony: Robert 
Normandie? Normandie--oh, I can see it better out there, OK. 
Ms. Jergen, is that fair?
    Ms. Jernigan. Jernigan.
    Chairman Bunning. Jernigan. And Joseph Rugola.
    Mr. Rugola. Very good, Mr. Chairman. Thank you.
    Chairman Bunning. OK. Robert is chairman of the Coalition 
to Assure Retirement Equity. Ms. Jernigan is a chapter member 
of the National Association of Retired Federal Employees, and 
Joseph is the international vice president of the American 
Federation of State, County, and Municipal Employees and is the 
executive director of the Ohio--what is this, Rob?
    Mr. Portman. You represent greater Ohio, so I thought it 
was appropriate. [Laughter.]
    Chairman Bunning. OK--and is the executive director of the 
Ohio Association of Public School Employees.
    Mr. Normandie, go ahead.

 STATEMENT OF ROBERT E. NORMANDIE, CHAIR, COALITION TO ASSURE 
                       RETIREMENT EQUITY

    Mr. Normandie. Mr. Chairman and Members of the 
Subcommittee, I'm Robert Normandie, legislative researcher for 
the National Association of Retired Federal Employees. However, 
I'm here today testifying as chair of the Coalition to Assure 
Retirement Equity, CARE; a coalition of 41 organizations 
representing millions of Federal, State, and local government 
retirees and employees.
    CARE was formed in 1991 to specifically address the Social 
Security government pension offset, GPO, which had been enacted 
as part of the Social Security amendments in 1977. Since 
December 1982 when the law went into effect, some 271,000 
Federal, State, and local retirees have been affected by the 
GPO.
    The GPO has particularly affected the economic well-being 
of thousands of women by severely reducing or eliminating their 
Social Security widow's benefits. I personally have heard from 
hundreds over the past several years, and their stories have a 
lot of similarities. Many worked in lower-level jobs and 
receive moderate pensions and may have worked part time or full 
time after raising their children. When they go to the Social 
Security office to apply for benefits, usually as widows, they 
are shocked and dismayed to find out about the GPO. The widows' 
benefit they expected to receive is drastically reduced or 
eliminated, and they really do not know how they are going to 
survive on a pension that barely pays the rent. The reaction of 
everyone is the same: They all feel they have been penalized 
because they worked for the government. If they had worked in 
the private sector, say for IBM, they could receive a company 
pension and still get their husbands' Social Security. In 
addition, if they had also worked in the private sector and 
earned enough Social Security credits, they find that their own 
Social Security benefit is reduced by 50 percent or more by the 
windfall elimination provision.
    The WEP, enacted as part of the 1983 Social Security 
amendments, has affected some 356,000 government retirees since 
1986. The GPO and WEP were a part of the 1977 and 1983 
congressional efforts to curtail the costs of the Social 
Security Program in the context of long-term solvency. The GPO 
applied Social Security's dual entitlement provision to all 
government pension programs that covered workers not covered by 
Social Security. Initially, this meant Social Security spouse 
benefits would be offset by 100 percent of the non-Social 
Security covered government pension. This was changed to two-
thirds in 1983 on the basis that one-third of the pension was 
equivalent to a private sector pension.
    The Social Security Subcommittee in a 1996 information 
paper on GPO and the WEP said, ``There is nothing magical about 
the two-thirds figure, and it is the source of much 
controversy. In fact, there is tremendous variance in the 
actual individual equivalent depending on length of government 
career and average salary.'' The paper also quoted a 1990 
Congressional Research Service analysis that stated Social 
Security was the equivalent of 51 percent of the civil service 
benefit of an average retiree in 1990 which would support at 
least a one-half offset rather than two-thirds. The House, in 
fact, had passed a provision that would have reduced the offset 
to one-third. This occurred just prior to Congress' reduction 
of the offset from 100 percent to two-thirds.
    This same Congressional Research Service analysis concluded 
by stating, ``The part of the CSRS, Civil Service Retirement 
System, benefit, that can be considered to be the equivalent of 
Social Security covers a very wide range depending on the 
circumstances of each individual. Because of this variability, 
all inclusive conclusions about the generosity and fairness of 
CSRS benefits and the general equity of the two Social Security 
antiwindfall measures, GPO and WEP, are probably inappropriate. 
The various illustrations indicate, however, that the 
antiwindfall measures miss the mark considerably for many civil 
service retirement system annuitants.
    In summary, the GPO and WEP have had a devastating effect 
on the retirement incomes of many Federal, State, and local 
government retirees. It is hoped, Mr. Chairman, that your 
Subcommittee will seriously consider changes to the GPO and WEP 
provisions of the Social Security Act to provide a more 
equitable solution. Thank you.
    [The prepared statement follows:]

Statement of Robert E. Normandie, Chair, Coalition to Assure Retirement 
Equity

    Mr. Chairman and members of the Subcommittee, I am Robert 
E. Normandie, legislative researcher for the National 
Association of Retired Federal Employees. I am here today 
testifying as Chair of the Coalition to Assure Retirement 
Equity (CARE), a coalition of 41 organizations representing 
millions of federal, state and local government retirees and 
employees.
    CARE was formed in 1991 to specifically address the Social 
Security Government Pension Offset (GPO) which had been enacted 
as part of the Social Security Amendments of 1977. Since 
December of 1982, when the law went into effect, some 271,000 
federal, state and local retirees have been affected by the 
GPO.
    At the time of formation of the coalition a House bill to 
repeal the GPO had been introduced and bills to either repeal 
or amend the GPO have continued to be introduced in each 
subsequent Congress. The Windfall Elimination Provision (WEP) 
bill introduced by Rep. Barney Frank last year is the first 
such bill, to my knowledge, that has addressed the WEP.
    The GPO has particularly affected the economic well being 
of thousands of women by severely reducing or eliminating their 
Social Security widow's benefits. I personally have heard from 
hundreds of women over the past several years and their stories 
have a lot of similarities. Many worked in lower level jobs and 
receive moderate pensions and may have worked part time, or 
full time, after raising their children.
    When they go to the Social Security office to apply for 
benefits, usually as widows, they are shocked and dismayed to 
find out about the GPO. The widow's benefit they expected to 
receive is drastically reduced or eliminated, and they really 
do not know how they are going to survive on a pension that 
barely pays the rent.
    The reaction of every one is the same. They all feel they 
have been penalized because they worked for the government. If 
they had worked in the private sector, say for IBM, they could 
receive a company pension and still get their husband's Social 
Security.
    In addition, if they had also worked in the private sector 
and earned enough Social Security credits they find that their 
own Social Security benefit is reduced by 50% or more by the 
WEP. The WEP, enacted as part of the 1983 Social Security 
Amendments, has affected some 356,000 government retirees since 
1986.
    The GPO and WEP were part of the 1977 and 1983 
Congressional efforts to curtail the costs of the Social 
Security program in the context of long term solvency. The GPO 
applied Social Security's dual entitlement provision to all 
government pension programs that covered workers not covered by 
Social Security. Initially this meant Social Security spouse 
benefits would be offset by 100% of the non-Social Security 
covered government pension. This was changed to two-thirds in 
1983 on the basis that one-third of the pension is equivalent 
to a private sector pension.
    The Social Security Subcommittee in a 1996 information 
paper on GPO and WEP said ``there is nothing magical about the 
two-thirds figure, and it is the source of much controversy. In 
fact, there is tremendous variance in the actual individual 
equivalent depending on length of government career and average 
salary.'' The paper quoted a 1990 Congressional Research 
Service (CRS) analysis that stated Social Security was the 
equivalent of 51% of the civil service benefit of an average 
retiree in 1990 which would support at least a one-half offset 
rather than two-thirds. The House, in fact, had passed a 
provision that would have reduced the offset to one-third. This 
occurred just prior to Congress' reduction of the offset from 
100% to two-thirds.
    This same CRS analysis concluded by stating, ``the part of 
the CSRS [Civil Service Retirement System] benefit that can be 
considered to be the equivalent of Social Security covers a 
very wide range, depending on the circumstances of each 
individual. Because of this variability, all-inclusive 
conclusions about the generosity and fairness of CSRS benefits, 
and the general equity of the two Social Security anti-windfall 
measures [GPO and WEP], are probably inappropriate. The various 
illustrations indicate, however, that the anti-windfall 
measures miss the mark considerably for many CSRS annuitants.''
    In addition to proposals to reduce the GPO to one-third or 
one-half, one House bill in a prior Congress would have 
eliminated the offset for retirees whose combined monthly 
government pension and spousal Social Security benefits were 
below $300. For those with combined pensions and Social 
Security between $300 and $900 the bill would have increased 
the offset rate gradually to the full two-thirds.
    CARE has supported Rep. William Jefferson's GPO bills that 
would eliminate the offset for any government retiree whose 
combined monthly pension and spousal Social Security benefits 
are $1,200 or less. If the combined amount is over $1,200 then 
only that amount over the $1,200 would be subject to the two-
thirds offset. Rep. Jefferson's bill has 161 cosponsors which 
indicates a fair amount of support.
    Rep. Frank's bill would eliminate the WEP for any 
government retiree who has combined monthly pension and Social 
Security spousal benefits of $2,000 or less. For those with 
combined amounts between $2,000 and $3,000 the WEP is phased 
in. This bill would increase the Social Security benefits of 
about 93% of those who are currently affected by the WEP.
    Realizing the inequity of the WEP, Dr. Robert J. Meyers, 
former Chief Actuary of the Social Security Administration, has 
proposed that the percentage in the ``guarantee'' be reduced 
from 50% to 20%. The ``guarantee'' is that the reduction in 
benefits resulting from applying the WEP formula can be no more 
than 50% of the government annuity. This only helps people with 
extremely small government pensions. Social Security estimates 
that 90,000 government retirees would see an increase in their 
benefits under Dr. Meyers' proposal.
    In summary, the GPO and WEP has had a devastating effect on 
the retirement incomes of many federal, state and local 
government retirees. It is hoped, Mr. Chairman, that your 
Subcommittee will seriously consider changes to the GPO and WEP 
provisions of the Social Security Act to provide a more 
equitable solution.
      

                                

Coalition to Assure Retirement Equity Members

American Federation of Government Employees
American Federation of State, County, and Municipal Employees
American Federation of Teachers
American Foreign Service Association
American Postal Workers Union
Employees For Full Offset Repeal Today (Denver, Co.)
Federally Employed Women
Federal Managers Association
Gray Panthers
Illinois Retired Teachers Association
International Association of Fire Fighters
International Federation of Professional and Technical Engineers
International Union of Electronic, Electrical, Salaried, Machine & 
Furniture Workers
Louisiana Retired State Employee's Association
Mailhandlers Div. of Laborers' International Union of North America
Massachusetts Pension Not Posies Coalition
National Air Traffic Controllers Association
National Association of Air Traffic Specialists
National Association of Governmental Employees
National Association of Letter Carriers
National Association of Police Organizations
National Association of Postal Supervisors
National Association of Postmasters of the U.S.
National Association of Retired Federal Employees
National Committee to Preserve Social Security and Medicare
National Council of Senior Citizens
National Council on Teacher Retirement
National Education Association
National Federation of Federal Employees
National League of Postmasters
National Rural Letter Carriers Association
National Treasury Employees Union
Older Women's League
Patent Office Professional Association
Professional Managers Association
Public Employee Department--AFL-CIO
Retired State, County and Municipal Employees Association of 
Massachusetts
School Employee Retirees of Ohio, Inc.
Senior Executives Association
Social Security Managers Association
Women's Institute For A Secure Retirement
      

                                

    Chairman Bunning. Thank you very much.
    Ms. Jernigan.

 STATEMENT OF BERNADINE A. JERNIGAN, CHAPTER MEMBER, NATIONAL 
            ASSOCIATION OF RETIRED FEDERAL EMPLOYEES

    Ms. Jernigan. Mr. Chairman, Members of the Subcommittee, my 
name is Bernadine Jernigan. I'm a member of the Vienna, 
Virginia, Chapter of the National Association of Retired 
Federal Employees. I'm 73 years old and have worked both for 
the Federal Government and in the private sector. I am 
currently----
    Chairman Bunning. Pardon me, Ms. Jernigan, would you please 
pull that right up to you, so we can all hear a little better? 
Thank you.
    Ms. Jernigan. I am currently employed 2 days a week as a 
secretary/receptionist in a small business firm. I first 
started working in the private sector in 1943. In 1946, at the 
end of World War II, I married a marine. Military families 
transfer every few years making it difficult for wives to 
develop a long-term career. Also, my generation of women were 
professional homemakers, not usually a high salaried position.
    Despite these complications, while raising my family, I 
earned the quarters needed to become eligible for Social 
Security benefits at age 62. My husband served in Korea and 
when that conflict ended he returned home and was hired by the 
Central Intelligence Agency. We were stationed overseas several 
times during the next 15 years, and when 3 of our 5 children 
were in college at the same time I went to work to help pay the 
college expenses. At that time, I was 49 years old and found it 
difficult to find a good paying position in my previous 
profession. I was hired by the CIA, but it was at a lower paid 
GS position.
    After working 13 years, I retired under the Civil Service 
Retirement System. My husband had also retired, and he went to 
work in the private sector. At age 65, he began receiving his 
full Social Security benefits. At age 62, I filed for my own 
Social Security benefits, but continued to work in my 2 day a 
week job continuing to pay into the Social Security system. The 
Social Security office told me that I would receive a check for 
$152 a month, but my first check was for $32. I had been hit by 
the windfall elimination provision and took an initial 
deduction because of being age 62. All together, I lost almost 
75 percent of my benefits.
    My husband died in 1993, and the government pension offset 
stepped in and reduced my already reduced benefits--I'm sorry. 
Instead of receiving full widows benefits, I receive about one-
third of that amount because of my years as a government 
employee. No one in the private sector has two-thirds of his 
pension taken away.
    Current government employees who retire under the new 
Federal Employees Retirement System, FERS, are not affected by 
the GPO. I could have also been exempt, but I was never 
informed that if I had worked three more weeks I could have 
transferred to FERS and been exempt from the GPO. I continue to 
work at age 73 and have approximately $50 in Social Security 
taxes withheld from my pay each and every month. I have been 
told I will never see this money, but I must continue to pay 
it.
    GPO and government pension offset and windfall elimination 
are laws that discriminate against some government employees. 
Those of us affected by these unjust laws are not asking for 
benefits we have not paid for or earned. We ask that the system 
be made fair. Why are some, especially widows, less entitled 
than others. We simply ask that these two laws be repealed. 
Each time I receive a cost-of-living adjustment in my small 
annuity, my Social Security benefits are reduced. It's not easy 
to live on income below the national poverty level.
    In 1997, I received a letter from the Social Security 
Administration claiming that they had overpaid me $600. My 
requests for clarification were ignored, and they just refused 
to answer my questions. A visit to the local Social Security 
office ended in a confrontation when the clerk accused me of 
being responsible for the overpayment, and it was all my fault, 
and she ushered me out the back door.
    After nearly 30 years of working and paying into Social 
Security, I receive $156. This is after the deductions of 
$43.80 for Medicare, $16 for the overpayment, and a $280 
offset. Without windfall and government pension offset, I 
should be receiving close to $500 in widows benefits. It's 
excruciatingly painful to suffer the loss of $280 of my 
promised benefits each and every month of my life.
    Why are government employees being punished? Where is the 
fairness in these two pieces of legislation? Why must we 
continue to fight for the benefits we were promised and have 
already paid for? Are we going to our graves fighting these 
discriminations? Thank you.
    [The prepared statement follows:]

Statement of Bernadine A. Jernigan, Chapter Member, National 
Association of Retired Federal Employees

    My name is Bernadine A. Jernigan and I am a member of the 
Vienna, Virginia chapter of the National Association of Retired 
Federal Employees. I am 73 years old and have worked both for 
the federal government and in the private sector. I am 
currently employed two days a week as a secretary/receptionist 
in a small business firm.
    I first started working for the federal government in 1943. 
In 1946, at the end of World War II, I married a marine. 
Military families transfer every few years making it difficult 
for wives to develop a long-term career. Also, my generation of 
women were professional homemakers, not usually a high-salaried 
position. Despite these complications, while raising my family, 
I earned the quarters needed to become eligible for Social 
Security benefits at age 62.
    My husband served in Korea and when that conflict ended he 
returned home and was hired by the Central Intelligence Agency 
(CIA). We were stationed overseas several times during the next 
fifteen years. When three of our five children were in college 
at the same time I went to work to help pay the college 
expenses. At that time I was 49 years old and found it 
difficult to find a good paying job in my previous profession.
    I was hired by the CIA but it was in a lower paid GS 
position. After working thirteen years I retired under the 
Civil Service Retirement System. My husband had also retired 
and he went to work in the private sector. At age 65 he began 
receiving his full Social Security benefits.
    At age 62 I filed for my own Social Security benefits but 
continued to work in my two day a week job, continuing to pay 
into the Social Security system. The Social Security office 
told me that I would receive $152 a month but my first check 
was for only $39. I had been hit by the Windfall Elimination 
Provision (WEP), and took an additional reduction because of 
being age 62. Altogether I lost almost 75% of my benefits.
    My husband died in 1993 and the Government Pension Offset 
(GPO) stepped in and reduced my already reduced benefits. 
Instead of receiving a full widow's benefit, I receive about 
one-third of that amount because of my years as a government 
employee. No one in the private sector has two-thirds of his 
pension taken away. Current government employees who retire 
under the new Federal Employees Retirement System (FERS) are 
not affected by GPO. I could have been exempt also but I was 
never informed that if I had worked three more weeks I could 
have transferred to FERS and been exempt from the GPO.
    I am continuing to work at age 73 and have approximately 
$50 in Social Security taxes withheld from my pay each and 
every month. I have been told I will never see this money again 
but I must continue to pay it.
    GPO and WEP are laws that discriminate against some 
government employees. Those of us affected by these unjust laws 
are not asking for benefits we have not paid for or earned. We 
ask that the system be made fair. Why are some (especially 
widows) less entitled than others? We simply ask that these two 
laws be repealed. Each time I receive a cost-of-living 
adjustment in my small annuity my Social Security benefits are 
reduced. It is not easy to live on an income below the national 
poverty level.
    In 1997 I received a letter from the Social Security 
Administration claiming that they had overpaid me $600. My 
requests for clarification were ignored and they just refused 
to answer my questions. A visit to the local Social Security 
office ended in a confrontation when the clerk accused me of 
being responsible for the overpayment, that it was all my 
fault.
    After nearly 30 years of working and paying into Social 
Security I receive only $156. Without WEP and GPO I should be 
receiving about $500 in widow's benefits. It is excrutiatingly 
painful to suffer the loss of $350 of my promised benefits each 
and every month of my life.
    Why are government employees being punished? Where is the 
fairness in this WEP and GPO legislation? Why must we continue 
to fight for the benefits we were promised and have already 
paid for? Are we going to our graves fighting this 
discrimination?
      

                                

    Chairman Bunning. Thank you for your testimony.
    Mr. Rugola.

   STATEMENT OF JOSEPH RUGOLA, INTERNATIONAL VICE PRESIDENT, 
 AMERICAN FEDERATION OF STATE, COUNTY, AND MUNICIPAL EMPLOYEES 
(AFSCME); AND EXECUTIVE DIRECTOR, LOCAL 4, OHIO ASSOCIATION OF 
                PUBLIC SCHOOL EMPLOYEES (OAPSE)

    Mr. Rugola. Mr. Chairman and Members of the Subcommittee, 
I'm Joseph Rugola, international vice president of the American 
Federation of State, County, and Municipal Employees and 
Executive Director of the Ohio Association of Public School 
Employees, OAPSE, Local 4 of AFSCME.
    I appreciate the opportunity to be here today to share our 
experiences with the government pension offset, a Federal law 
that's had a devastating affect on thousands of our members. I 
would also like to express AFSCME's opposition to mandatory 
Social Security coverage for public employees who do not 
currently participate in the system. In the interest of time, I 
will submit my written testimony which includes further 
information in opposition to mandatory Social Security 
coverage.
    My local union known as OAPSE represents nearly 40,000 
workers in school districts throughout Ohio. Ohio is a State 
that does not participate in Social Security for its public 
employees. Our OAPSE members are covered instead under SERS, 
the Ohio School Employees Retirement System, which is a defined 
benefit pension plan. While our members can't receive Social 
Security benefits based on their earnings in public service, 
they can receive benefits as the spouse or widow of a Social 
Security covered worker. Unfortunately, the government pension 
offset demands that they reduce these Social Security benefits 
by two-thirds of the amount of the public pension.
    Currently, the average SERS pension is less than $500 a 
month. These relatively low pensions reflect the lower paying 
job categories and work patterns of school district employees 
who are predominantly women. Our members are school cafeteria 
workers, crossing guards, bus drivers, custodians, classroom 
aids, and secretaries. Many retire after a full-length career 
as school district employees, but they may have worked only a 
30-hour week, a pattern we call ``short hours.'' Others may 
have had less than a full career, say 15 or 20 years in their 
school district following divorce or child rearing. Most of 
these women began their careers expecting to retire with both a 
pubic pension and a Social Security spouse benefit. It's a 
shock when they realize that they will not receive a much 
needed portion of their expected retirement income.
    We recognize that private sector workers cannot receive 
full Social Security benefits from their own work plus full 
benefits from a spouse. This rule for dually eligible Social 
Security beneficiaries is supposed to be the basis for the GPO, 
but the situations really are not comparable. To start with, 
school district employers in Ohio contribute 13.5 percent of 
payroll to SERS. The worker share is more than 8 percent. The 
total of these contributions, 21.5 percent, is nearly double 
the combined employer-employee contribution under Social 
Security. These rates are typical for public pensions in non-
Social Security jurisdictions.
    The GPO law assumes that the public plan contributions that 
exceed Social Security rates are the equivalent of 
contributions to a private pension plan. This reasoning 
precipitated the 1983 offset revision which reduced the 
original 100-percent offset to the current two-thirds, but even 
the two-thirds calculation is very imprecise and not very fair.
    Consider the fact that most private pension plans do not 
require any contributions from any workers. They're financed 
completely by the employer. Nevertheless, when the workers 
retire, they get their full pension benefit plus their full 
Social Security benefit with no offset of any kind. Meanwhile, 
our members pay on both the front and the back end. To make 
matters worse, their entire pension benefit is subject to 
Federal income taxes while Social Security benefits are tax 
free for most retirees.
    To see how much the GPO can hurt, take a look at two of the 
members of our retiree organization. Due to time limitations 
they will have to represent the many, many calls and letters 
that OAPSE regularly receives from GPO victims. Take Shirley 
Milburn of Windsor, Ohio, for example. Her SERS pension check 
is $405 a month. Her husband's monthly Social Security benefit 
is $786 a month. Normally, she could expect to receive a 
spousal benefit equal to half his benefit or $393 a month. 
Instead, the GPO reduces it to only $121 a month giving her a 
total retirement benefit, pension plus Social Security, of only 
$526 a month, and from that amount she must still deduct her 
Medicare part B premium of $43.
    Another example is Donna Stevenson, an OAPSE member who 
retired to Lake Park, Georgia. Her SERS pension is $534 a 
month, and her husband receives $827 a month from Social 
Security. Instead of getting a spousal benefit of $413, Donna's 
benefit from Social Security is only $55 a month. When she 
deducts her Medicare premium, she's left with a monthly check 
of $12.
    When the GPO was first enacted, it was meant to target 
people receiving multiple government pensions, some of whom had 
higher incomes in retirement than they had while working. Our 
members just don't fit the image of these so-called double and 
triple dippers. Congress could not have had them in mind when 
the GPO was passed. That's why AFSCME strongly supports H.R. 
2273, the GPO reform bill, sponsored by Congressman Jefferson.
    The Jefferson bill would permit the public pensioners who 
were not covered by Social Security to keep as much as $1,200 a 
month in combined pensions and Social Security spousal widow's 
benefits before the two-thirds offset is imposed. We believe 
this will protect thousands of low-pension women who badly need 
their Social Security benefits to keep them out of poverty. 
It's a targeted approach to GPO reform, and it makes good 
sense.
    If H.R. 2273 were in effect today, Shirley Milburn would be 
a lot better off. She could keep her SERS pension check of $405 
a month plus her entire Social Security spouse benefit. This 
would give her a combined monthly benefit of $798. Donna 
Stevenson would be in much better shape too.
    We urge the Members of the Subcommittee to give careful 
consideration to H.R. 2273. Shirley and Donna and thousands 
more like them are counting on your support. Thank you, Mr. 
Chairman.
    [The prepared statement follows:]

Statement of Joseph Rugola, International Vice President, American 
Federation of State, County, and Municipal Employees (AFSCME); and 
Executive Director, Local 4, Ohio Association of Public School 
Employees (OAPSE)

    Good morning, Mr. Chairman and Members of the Subcommittee. 
I am Joseph Rugola, International Vice President of the 
American Federation of State, County and Municipal Employees 
(AFSCME) and Executive Director of AFSCME Local 4--the Ohio 
Association of Public School Employees (OAPSE). I appreciate 
the opportunity to be here today in order to express AFSCMEs 
opposition to mandatory Social Security coverage for public 
employees who do not currently participate in the system. We 
would also like to share our experiences with the Government 
Pension Offset (GPO), a federal law thats had a devastating 
effect on so many of our members.
    My local union, known as ``OAPSE,'' represents nearly 
40,000 workers in school districts throughout Ohio. Ohio is a 
state that does not participate in Social Security for its 
public employees. Our OAPSE members are covered, instead, under 
SERS--Ohios School Employees Retirement System--which is a 
defined benefit pension plan.
    While our members cant receive Social Security benefits 
based on their earnings in public service, they can receive 
benefits as the spouse or widow of a Social Security-covered 
worker. Unfortunately, the Government Pension Offset demands 
that they reduce these Social Security benefits by two-thirds 
of the amount of their public pension.
    Currently, the average SERS pension is less than $500 a 
month. These relatively low pensions reflect the lower-paying 
job categories and work patterns of school district employees, 
who are predominantly women. Our members are school cafeteria 
workers, crossing guards, bus drivers and custodians. Many 
retire after a full-length career as school district employees, 
but they may have worked only a 30-hour week--a pattern we call 
``short-hours.'' Others may have had less than a full career--
say 15 or 20 years in their school district following divorce 
or child rearing.
    Most of these women began their careers expecting to retire 
with both a public pension and a Social Security spouse 
benefit. Its a shock when they realize that they will not 
receive a much-needed portion of their expected retirement 
income.
    We recognize that private-sector workers cannot receive 
full Social Security benefits from their own work plus full 
benefits from a spouse. This rule for dually-eligible Social 
Security beneficiaries is supposed to be the basis for the GPO. 
But the situations really are not comparable. To start, school 
district employers in Ohio contribute 13.5 percent of payroll 
to SERS. The workers share is more than 8 percent. The total of 
these contributions--21.5 percent--is nearly double the 
combined employer-employee contribution under Social Security. 
These rates are typical for public pensions in non-Social 
Security jurisdictions.
    The GPO law assumes that the public-plan contributions that 
exceed Social Security rates are the equivalent of 
contributions to a private pension plan. This reasoning 
precipitated the 1983 offset revision, which reduced the 
original 100 percent offset to the current two-thirds. But even 
the two-thirds calculation is very imprecise and not very fair.
    Consider the fact that most private pension plans do not 
require any contributions from workers. Theyre financed 
completely by the employer. Nevertheless, when the workers 
retire they get their full pension benefit plus their full 
Social Security benefit, with no offset of any kind. Meanwhile, 
our members pay on both the front and back ends. To make 
matters worse, their entire pension benefit is subject to 
federal income taxes, while Social Security benefits are tax-
free for most retirees.
    To see how much the GPO can hurt, take a look at two of the 
members of our retiree organization. Due to time limitations, 
they will have to represent the many, many calls and letters 
that OAPSE regularly receives from GPO victims.
    Take Shirley Milburn of Windsor, Ohio, for example. Her 
SERS pension check is $405 a month. Her husbands monthly Social 
Security benefit is $786.30. Normally, she could expect to 
receive a spousal benefit equal to half his benefit, or 
$393.15. Instead, the GPO reduces it to only $121.80, giving 
her a total retirement benefit--pension plus Social Security--
of only $526.80 a month. And from that amount, she must still 
deduct her Medicare Part B premium of $43.80.
    Another example is Donna Stevenson, an OAPSE member who 
retired to Lake Park, Georgia. Her SERS pension is $534.39 a 
month and her husband receives $827.60 a month from Social 
Security. Instead of getting a spousal benefit of $413.80, 
Donnas benefit from Social Security is only $55.80. When she 
deducts her Medicare premium, shes left with a monthly check of 
only $12.
    Its my understanding that when the GPO was first enacted, 
it was meant to target people receiving multiple government 
pensions, some of whom had higher incomes in retirement than 
they had while working. Our members just dont fit the image of 
these so-called ``double and triple dippers.'' Clearly, 
Congress did not have them in mind when the GPO was passed.
    Thats why AFSCME strongly supports H.R. 2273, the GPO 
reform bill sponsored by Louisiana Congressman William 
Jefferson. The Jefferson bill would permit public pensioners 
who were not covered by Social Security to keep as much as 
$1,200 a month in combined pension and Social Security spouse 
or widows benefits before the two-thirds offset is imposed. We 
believe this will protect thousands of low-pension women who 
badly need their Social Security benefits to keep them out of 
poverty. Its a targeted approach to GPO reform and it makes 
good sense.
    If H.R. 2273 were in effect today, Shirley Milburn would be 
a lot better off. She could keep her SERS pension check of 
$405.00 a month, plus her entire Social Security spouse benefit 
of $393.15. This would give her a combined monthly benefit of 
$798.15--well within the bills $1,200 limit.
    Donna Stevenson would also be in much better shape. Shed 
receive a total monthly benefit of $948.19 and could put a few 
of her financial worries to rest.
    We urge the Members of the Social Security Subcommittee to 
give careful consideration to H.R. 2273. Shirley and Donna--and 
thousands more like them--desperately need your support.
    Just as we oppose the punishing effects of the Government 
Pension Offset, AFSCME opposes any action to mandate Social 
Security participation for state or local governments that do 
not currently provide Social Security coverage to their public 
employees. Nearly 25 percent of public employees are not 
covered by Social Security. About the same percentage of AFSCME 
members are in this category. But these individuals do not lack 
pension protection. Nearly all are covered by state or local 
defined benefit pension plans.
    Furthermore, the Omnibus Budget Reconciliation Act (OBRA) 
of 1990 has already ensured that any temporary, part-time or 
seasonal employee not covered by one of these public plans be 
covered under Social Security. So, already there is basic 
pension protection for all American workers--private and 
public-sector. There is no need to mandate Social Security 
coverage in an effort to protect workers interests.
    Public employees and their employers have been given ample 
opportunity to come under Social Security. Most have 
voluntarily done so. Those still outside the system clearly 
prefer their own state or local pension plans. The vast 
majority of these plans are healthy and actuarially sound. Most 
of them have been in existence longer than Social Security and 
were designed to function without it. They have excellent 
records for providing disability protection and retirement 
security to their participants.
    Mandated Social Security coverage could have serious 
implications for public employees, their employers, and their 
pension plans, even if the coverage applies only to future 
hires.
    Employees (i.e., future hires) would be required to pay 6.2 
percent of their paychecks in FICA tax, even though most are 
already making substantial contributions to their public 
employee pension plans. Unlike the private sector--where plans 
are usually financed entirely by employers--contributions by 
public workers in non-Social Security jurisdictions typically 
range from 8 to 10 percent of pay. Adding the Social Security 
payroll tax would create an unaffordable burden for millions of 
these workers, most of whom have lower-to middle-incomes.
    Employers would also be required to contribute 6.2 percent 
of payroll to Social Security, on top of the contributions they 
now make to fund their own pension plans (typically 13 to 15 
percent of payroll). Many of the states most affected, such as 
California and Massachusetts, have only recently pulled 
themselves out of deep fiscal crises and simply cannot afford 
to meet this new expenditure. If forced to do so, the result 
could be a loss of jobs and public services.
    Faced with a requirement to pay the Social Security payroll 
tax on behalf of employees, governments would most likely try 
to create new pension plan tiers for new hires that would 
integrate Social Security with supplemental public pensions. 
This could result in reduced benefits, increased employee 
contributions and changes in retirement ages. Benefit 
structures for future retirees could be drastically altered.
    It could also destabilize public pension funds for todays 
workers and retirees. Benefits in existing public pension plans 
rely heavily on a funds investment earnings. If some of these 
investments are cut off and the proceeds diverted to new plans, 
it could spell serious trouble for AFSCME members and other 
public employees.
    The result could be the inability of pension plans to pay 
promised benefits to current participants, unless taxes are 
raised to fund much higher employer contributions. In addition 
to reductions in basic benefits, plans would be forced to look 
seriously at other types of cuts--in already small cost-of-
living adjustments or retiree health care coverage, for 
example.
    AFSCME believes that mandatory coverage would create havoc 
for public retirees, while providing only limited relief for 
Social Security. After all, an influx of new funds might help 
with a quick fix, but eventually the new participants will be 
eligible to collect benefits. At that point, they might create 
new problems for Social Security.
    In closing, we would like to emphasize AFSCMEs strong 
support for strengthening Social Security--our nations great 
system of income protection that touches the lives of most 
American workers, including 75 percent of AFSCME members.
    AFSCME opposition to mandatory coverage is not based on a 
belief that Social Security doesnt work. We think it does a 
remarkable job of providing basic security and shielding 
participants from potential poverty. Rather, we oppose 
mandatory coverage because it will cause serious problems for a 
group of workers and retirees who have never been part of that 
system.
    For the majority who do participate in Social Security, we 
advocate maintaining the systems current social insurance 
structure, while making the moderate changes necessary to 
ensure the systems long-term solvency.
    Thank you.
      

                                

    Chairman Bunning. Thank you very much for your testimony. 
Ms. Jernigan, thank you for being here and sharing your story 
with us. I am very sorry to hear of your experience at the 
Social Security office. I wish some representatives of Social 
Security were here--I don't think they are--so they could--we 
hear those stories quite frequently. In fact, I would say 75 
percent of all calls to my office in my district are on Social 
Security problems, and so it is not an unusual occurrence. To 
be ushered out the back door might be an unusual occurrence. We 
understand your frustration, and we want to do something about 
it. I don't know if Mr. Jefferson's bill is the exact way to do 
it, but it would be a start in the right direction.
    Let me ask Mr. Normandie, you indicated that CARE has 
supported Congressman Jefferson's proposal that would eliminate 
the government pension offset and the $1,200 threshold would 
be--anything less that, they could get to the $1,200 threshold. 
You also mentioned Congressman Frank's bill on the windfall 
elimination provision and a separate proposal by Dr. Robert 
Myer. Does CARE support either the Frank bill or the Myer 
proposal?
    Mr. Normandie. CARE doesn't really have a position on the 
Frank bill, because we were formed as a coalition for the 
government pension offset, and we really haven't developed a 
policy yet on that or on Dr. Myers' proposal.
    Chairman Bunning. Joseph, you mentioned that you also 
support 2273, because it would protect thousands of low-pension 
women who need their benefits to keep them out of poverty. Are 
you saying that the overall policy, it makes better sense to 
target the government pension offset as opposed to rebuilding 
it all together?
    Mr. Rugola. Our goal, when we began the debate years ago, 
Mr. Chairman, was to have the GPO reversed. It's our opinion--
--
    Chairman Bunning. Completely eliminated.
    Mr. Rugola. Completely eliminated. But the fact of the 
matter is that in the 20 years I've been with OAPSE, for me, 
this issue's become as much of a women's poverty question as it 
is a retirement or pension question. We just have thousands of 
people who are at or near the poverty line, and our objective 
ought to be, we think, to take care of that problem first. I 
think the GPO is unfair. I pay into Social Security. I'm 
looking forward to drawing my benefit. I'm also going to be the 
recipient of a private pension plan. I don't have an offset.
     I think the GPO is unfair, and it ought to be repealed, 
but the fact of the matter is that the real tragedy is for the 
overwhelming number of women. Of our members, we calculate 
about 70 percent of them at some point will be affected by the 
GPO, and since our membership is almost 70 percent women, we're 
talking about tens of thousands of women who really will be at 
the edge of poverty or in poverty during retirement. The cap in 
Congressman Jefferson's bill, we think, is a reasonable place 
to begin work on this: It at least alleviates the poverty 
aspect of the GPO.
    Chairman Bunning. Mr. Portman.
    Mr. Portman. Thank you, Mr. Chairman, and I appreciate the 
testimony on both the issues. I have one general question that 
I just thought of as you were responding to Mr. Bunning. One of 
the unfairness aspects of this is the fact that with private 
pension savings there's no offset. I don't know what you're 
private pension is--are you in a 457 plan or 403 plan?
    Mr. Rugola. We're in a defined benefit pension plan which 
falls under neither one of those categories, actually, but 
our----
    Mr. Portman. It's a public sector----
    Mr. Rugola. No, the plan under which I will draw a benefit 
is a private pension plan.
    Mr. Portman. OK.
    Mr. Rugola. Our members are covered, of course, under the 
School Employee Retirement System which is a defined benefit 
public plan.
    Mr. Portman. OK. I guess my question is you've made the 
analogy, really, between the two and drawn the unfairness 
argument out of that saying that if you are in a private plan 
you don't have an offset. If you're in a government plan you do 
have an offset. There also are, of course, options for 
government employees to get into private plans like the 457 
plan; not a private plan but a defined contribution plan or a 
403(b) plan, and, as you know, I've got legislation to greatly 
expand that and to be able to permit rollovers--and I'll make a 
pitch for my legislation here. Actually, it will help this 
situation.
    Chairman Bunning. Rob, there's nobody here listening to----
    Mr. Portman. OK, nobody's listening?
    Chairman Bunning. You have to sell it to the rest of the 
Subcommittee.
    Mr. Portman. I got to get you and Mac on it, but it's 
actually helps in this situation because it will give 
government employees a lot more options in terms of providing 
for their retirement savings without having to worry about all 
this. Is that correct? In other words, the 457 plans, 403(b) 
plans would not result in any kind of offset.
    Mr. Rugola. Right, that portion of it. That's my 
understanding of how it would work, but, you know, the point 
you're making, Congressman, is an excellent one in terms of how 
the income aspect of this, the poverty aspect of this plays 
out. Our average salary in our union for active workers is just 
over $15,000 a year. Even for our full-time workers who are 
mostly women--secretaries and classroom aids in the schools--
the average salary is barely over $20,000 a year.
    The question will be how much of their--particularly, those 
who are trying to raise a family on their own--how much of 
their income will be able to be devoted to a private pension 
plan? They really suffer on both ends. They wouldn't be able to 
take advantage of the kind of options that you're talking 
about, because the disposable income question comes into play, 
and then when they do retire, if they're affected by the 
offset, they're penalized at that point during retirement.
    Mr. Portman. I understand that it would be difficult for 
some people, particularly young families, to put that money 
aside. I also think it's in their interest, particularly if we 
can get this legislation passed, because you have more options 
in terms of rollover; more options in terms of buying service 
credits with those assets out of those plans that you want to, 
and, of course, we raise the contributions and allow the plans 
just to be more of a backstop to the Social Security and the 
State retirement plans. So, I understand what you're saying, 
though, there still will be a group of people who are unlikely 
to take advantage of that. I think more education is necessary 
on both fronts.
    Let me ask you another question with regard to the fairness 
issue, and, again, understanding this is a $5 billion question, 
I think, with regard to the repeal; $5.5 billion, I guess, with 
regard to the windfall elimination. Is there more education 
that could take place? You've all essentially said people are 
shocked when they find out this is true. Are we doing a good 
enough job, and are the State plans doing a good enough job to 
explain to people the situations so that there is at least more 
planning and less of that shock?
    Mr. Rugola. The answer to that question, I think, is that 
the State plans are doing everything that they can. I think 
there's a limit to how much people can do to prepare themselves 
for the effect of the GPO when they're already low-income 
workers. The fact of the matter is as we've heard earlier today 
from a couple of other witnesses, what our folks are asking for 
here is not a benefit that hasn't been earned. Most of the 
widows, most of the women affected by the GPO are the spouses 
of men who worked, and under any circumstances would be 
entitled to half of that Social Security benefit. So, I think 
it's problematic in that regard. Our people know, believe me. 
I'm not a pension expert, but I'm more of an expert than I want 
to be on the misery that's been caused by the GPO, because I 
have to face too many people everyday and explain to them what 
the effect of this is going to be on their retirement security.
    Mr. Portman. Has your group, the international group, spent 
some time looking at how we could target something like H.R. 
2273 to the situation that you talk about; not just to women 
although you mentioned low-income, fixed-income widows is where 
you see most of that misery you talk about, but is there a way 
to come up with some income targets in a context like this more 
general legislation, H.R. 2273, that you all have looked at?
    Mr. Rugola. To my knowledge, the cap itself is really the 
only rational and effective way to deal with it. It's a $1,200 
limit which, I might add since you asked Congressman, it's kind 
of interesting because I was here testifying a few years ago on 
the offset. I had a side conversation with Congressman Kasich 
and he suggested that there might be a lot more understanding 
if there were a cap involved because Congress when it passed 
the GPO, in the first place, it was aimed at these huge 
pensioners who were double and triple dippers. His point to me 
was folks would understand a lot more readily what you're 
trying to get at which is the poverty question.
    Mr. Portman. If we could target them more.
    Mr. Rugola. If it was targeted at lower income.
    Mr. Portman. And getting it done in the context of Social 
Security reform.
    Mr. Rugola. Yes. We don't know of any better way to do it 
than the income cap that's in Congressman Jefferson's bill.
    Mr. Portman. Thank you, Mr. Chairman.
    Chairman Bunning. Thank you.
    Mr. Collins.
    Mr. Collins. Just one brief question, Mr. Chairman. Going 
back to the question we asked Mr. Scott about portability. If a 
person retires from a government job under the government 
retirement program and is not entered into the Social Security 
system, and then they go to work in the private sector and come 
under the Social Security guidelines, would it be feasible for 
the government retirement program to be portable whereby any 
deduction that would be the same or equal to Social Security, 
instead of being deposited to the Social Security account for 
that individual, is then deposited directly to the same 
retirement account but the worker would not be eligible until 
he or she retired from the second job.
    Mr. Rugola. Congressman Collins, now you're getting into 
some technical areas of retirement that I'm just not well-
versed enough on to answer, and I'm reluctant to get into those 
kind of discussions, because it takes a retirement system 
person to answer that question, and I'm a union person, not a 
retirement system person.
    Mr. Collins. Well, the money follows the person, and it 
goes into the same retirement account only they would not be 
eligible for the increased benefit until such time as eligible 
for retirement again.
    Mr. Rugola. I understand the concept you're describing. In 
your question, you use the word ``feasibility,'' and that part 
of it is--the feasibility aspect is something that----
    Mr. Collins. How would that affect the offset and such?
    Mr. Rugola. I think the offset----
    Mr. Collins. Do you think we'd have just one retirement 
system? One retirement plan for that individual, no matter if 
it was public or private, one retirement plan for all of us.
    Mr. Rugola. Well, on the question of whether public 
employees ought to be mandated into the system, we're opposed 
to that for a number of reasons.
    Mr. Collins. Yes, but once they retire from the public and 
go into the private sector for employment, then they have to 
come under the Social Security.
    Mr. Rugola. They do if they qualify.
    Mr. Collins. So, if Social Security deductions and matching 
by the employer normally being directed to the Social Security 
Trust Fund were directed instead to that same retirement 
program they are already participating in and drawing benefits 
from, and as long as the benefits wouldn't change until the 
time they became eligible for retirement again they wouldn't be 
double dipping or wouldn't have two retirement systems; they'd 
still have just one.
    Mr. Rugola. If I understand your question correctly, what's 
problematic is the objective. First of all, many of our people 
who are covered by SERS, by our public plan, have either come 
late in their career to the public schools or they were 
employed previously in the private sector and then have come to 
public sector work. I'm not sure about the feasibility of post-
public sector careers in that----
    Mr. Collins. You would be in a prospective basis. It would 
not be retroactive to anyone; it would be prospective.
    Mr. Rugola. Right, I understand that piece of it, as I 
said. I'm just not----
    Mr. Collins. I just thought I throw it out for discussion. 
Thank you, Mr. Chairman.
    Chairman Bunning. I want to thank the panel. Often, it's 
impossible for us, on the Subcommittee, to cover every issue 
that we are interested in during the hearing. Therefore, we may 
submit additional questions in writing for you to answer for 
the record. I would like to thank all of our witnesses for your 
extensive and thoughtful testimony. I have learned and I think 
the panel has learned a great deal today on things that we have 
dealt with.
    Chairman Bunning. The Subcommittee stands adjourned.
    [Whereupon, at 12:35 p.m., the hearing was adjourned 
subject to the call of the Chair.]
    [Submissions for the record follow:]

Statement of Donald L. Novey, President, California Correctional Peace 
Officers Association

Should Social Security be expanded to cover all newly hired state and 
local employees?

    My name is Don Novey. I am the president of the California 
Correctional Peace Officers Association which represents 27,000 
state employees who work the toughest beat in California. I 
suppose you could characterize these dedicated men and women as 
working class, but their work is in a class of its own.
    Their noble function in our society is extraordinary; the 
sacrifices they routinely make carrying out their duties--
sacrifices that are sometimes taken for granted--are a portrait 
of their courage, commitment to service, and professionalism. I 
am proud to be associated with these special Americans who put 
their lives on the line every day they go to work.
    Let me briefly describe the conditions correctional 
officers commonly face at work. They are routinely ``gassed'' 
by inmates throwing urine and feces. They are exposed to life-
threatening diseases like tuberculosis, hepatitis, and AIDS. 
They are often assaulted with deadly handmade weapons. In fact, 
in California alone, correctional officers endure about 1,500 
assaults each year. Sometimes these attacks are fatal. 
Everyday--24 hours a day--they ``walk the line,'' armed only 
with a side-handle baton, among some of the toughest, most 
violent inmates in the world.
    The stress behind prison walls is suffocating and 
unrelenting. Only about one in five felony convictions in 
California actually results in prison time which means that 
only the worst of the worst are sent to state prison. Thus 
unlike other law enforcement professionals, correctional peace 
officers face the state's most violent criminals all day every 
working day. A reporter who toured Folsom Prison wrote: ``There 
is no denying a palpable tension suffuses the atmosphere. The 
idea of spending a half-hour here seems unpleasant; the specter 
of years seems unbearable.''
    To magnify the ``palpable tension,'' prisons in California 
are operating at an alarming 201% capacity, holding over twice 
the number of inmates for which they were designed. At the same 
time that our prison population is exploding, budget cuts and 
staff shortages are reducing the ratio of officers to inmates 
to dangerously low levels.
    With this background, I would now like to turn to the issue 
at hand. I am perplexed and disappointed by the proposal to 
include all currently uncovered newly hired state and local 
employees in Social Security. I also must question the findings 
of the Report of the Advisory Council on Social Security, which 
report has been given significant consideration by this 
subcommittee.
    The council's report, which is two volumes and 750 pages, 
devotes roughly one-half page to this issue. Given my 
perspective of the issue and the many questions that were 
apparently not discussed, I can come to only one conclusion: 
that the Advisory Council's recommendation to expand Social 
Security to include newly hired state and local employees has 
not been given sufficient thought.
    Consequently, I want to commend and to thank Chairman 
Bunning for devoting an entire hearing to focus on this 
troubling proposal. I believe that after careful consideration, 
level heads will prevail and most of us will agree that 
burdening correctional officers, police, and other hard-
working, essential public servants would be enormously unfair.
    In the report's brief half-page coverage of this issue, 
three potential flaws are suggested. First, bringing state and 
local employees into Social Security may raise Constitutional 
issues. Secondly, while there may be a short-term influx of 
revenue, it is questionable whether or not it would sustain 
sufficient benefits to be paid out in the future. Finally, the 
added financial burden on workers and taxpayer-funded, public 
employers already contributing to public pension systems would 
be unjust. We strongly concur with these concerns and I will 
expound on them throughout the course of my remarks.
    At this point, we would like to respond to what appears to 
be the only argument offered in the council's report in favor 
of expanding Social Security to state and local employees. The 
report states that it is a question of fairness. We completely 
agree that it is a question of fairness, but we emphatically 
disagree with the report's apparent conclusion that the current 
system is unfair to other working Americans who contribute to 
Social Security. Let's examine the question of fairness.
    Is it fair to raid the paychecks of devoted public servants 
who already make tremendous personal sacrifices, whose 
stressful occupations place extreme demands upon them while 
they are notoriously underpaid? Is it fair to impose a double 
tax on the families of public safety officers and other state 
employees? Because states have limited and defined budgets, the 
``employers'' portion of the Social Security tax would be paid 
by the state from its payroll funding which means the 
employees' tax as well as the matching employers' contribution 
would be paid from a single source.
    Is it fair to destroy well-established, highly effective 
retirement systems that are designed, under an existing set of 
rules, to accommodate the specific needs of state and local 
employees? On the basis of this issue alone, three members of 
the Advisory Council opposed the ``inclusion of currently 
uncovered state and local employees because of the financial 
burden that would be placed on workers and employers who are 
already contributing to other public pension systems.'' The 
fact is, the new tax would be more than a ``financial burden.'' 
It would result in an immediate deterioration of state 
employees' existing retirement systems. Additionally, it would 
remove an enormous infusion of contributions into private 
investments which would be damaging to the economy in general.
    Is it fair to punish the working class, many of whom can 
least afford it, to pay for over forty-years of irresponsible 
fiscal policies of the federal government? The state and local 
governments and especially their dedicated employees did not 
create the financial mess Social Security is now facing. We 
should not have to pay for it.
    Is it fair to impose a new payroll tax on states and 
counties which would inevitably result in cuts to or the 
elimination of important programs as well as a reduction in 
already dangerously thin staffing levels for correctional 
facilities? Is it fair or wise to add to the extreme danger 
levels and unrelenting job-related stress of correctional 
officers and our police by taking urgently needed funds for 
training, safety equipment, technological advancements and 
sending the money to Washington?
    Is it fair or wise to place side by side two young 
correctional officers, one a ``newly hired,'' who are required 
to perform the same duties, face equal risks, make comparable 
sacrifices, but who receive different benefits. It may not have 
an impact at first, but as the years pass and resentment 
builds, compounded by the daily tension and stress that comes 
with the job, loyalty may weaken or professionalism may be 
compromised. Worst case, in an instant these two officers could 
be faced with a life and death decision. At best, this 
situation would damage morale in an environment that can ill 
afford such an atmosphere.
    Can any of us honestly and sincerely answer any of these 
questions ``yes?'' I seriously doubt it. So if, as the 
council's report suggests, the proposal is simply a question of 
fairness, let us answer it now. Clearly it is not fair to 
mandatorily cover all newly hired state and local employees. 
Still, we can take the question of fairness a step further. Let 
us review it from the perspective of all other workers who are 
paying into Social Security.
    Who in our society have chosen to be correctional or police 
officers? These are high-stress, dangerous, underpaid jobs that 
most citizens will not do. Yet they want it done; they expect 
it to be done; and they expect it to be done professionally by 
qualified, well-trained, highly-skilled individuals. They want 
emergency services readily available. They want their police to 
be well equipped. At a time of need, they want their fire-
fighters at their door in an instant. They also want computers 
in their children's classrooms, the best teachers, and a wide 
range of educational and extracurricular activities and 
programs.
    Is it reasonable to believe that private sector employees 
would begrudge a small percentage of underpaid, overworked 
public servants having their own retirement system? Would these 
same citizens answer ``yes'' to the fairness issue questions 
cited above? I strongly believe that they would NOT on both 
counts. Furthermore, I firmly suggest that Americans paying 
into Social Security who are given the perspective of all sides 
of the issue would gratefully acknowledge the sacrifices of the 
devoted, conscientious, hard-working public servants who are 
now being targeted for this onerous tax.
    Perhaps, instead of an issue of ``fairness,'' the true 
reason for proposing an expansion of Social Security to newly 
hired state and local employees is because it seems an easy fix 
to bolster the long-term projections for Social Security. The 
intensity and political nature of the larger debate over Social 
Security should not tempt us to make this particular change 
without reviewing it on its own merits.
    Ironically, this quick fix may backfire. It is quite 
possible that Social Security will lose money by forcing public 
safety officers into the system. First of all, public safety 
officers retire at a younger age--and for good reason. In 
consequence of the intense nature of their employment as well 
as the obvious occupational hazards, public safety officers 
commonly retire between the ages of fifty and fifty-five. In 
addition, public safety officers are not protected by age 
discrimination. They can be forced into retirement at age 
fifty-five. The state benefits operationally by having a 
younger, healthier work force. Consequently, many public safety 
officers would require 12-14 years of benefits beyond that of 
their private sector counterparts. Public safety officers are 
also more likely to end careers or retire prematurely as a 
result of disabilities. They are more likely to suffer from a 
wide range of physical and/or psychological problems. This 
means they would be paying into Social Security for a shorter 
period and receiving benefits for a much longer period.
    In addition to the fairness question and the economics of 
the issue, a legal question looms. The legislative history of 
the Social Security Act indicates that public employees were 
excluded because Congress was concerned about the 
Constitutionality of imposing a federal tax on or to dictate 
the affairs of state governments. This could seemingly present 
numerous hurdles, and if the inevitable Constitutional 
challenge determines that states would not be required to match 
the Social Security tax as does private sector employers, the 
economic feasibility argument eluded to above would render 
itself a foregone conclusion.
    The council's report states that: ``In light of several 
Supreme Court decisions dealing with Federal/State 
relationships in the area of labor law, it is now generally 
thought that there is no Constitutional barrier to compulsory 
coverage.'' However, it is not ``generally thought'' that the 
Constitutional issue in this matter has been decided. It is 
ambiguous and open for debate.
    We urge you to carefully contemplate the full ramifications 
of forcing state-employed public safety officers into Social 
Security. Raiding the paychecks of devoted public servants is 
morally wrong. Looting the budgets of already strapped states 
and counties to bail out an inefficient, wasteful federal 
government would be reprehensible. Destroying a retirement 
system that should be emulated and replicated would be 
indefensible. The Constitutional argument remains unanswered. 
Inequitable benefits' packages would destroy morale. Perhaps 
most disturbing, after creating undue hardships for thousands 
of families for many years, Social Security could find its 
coffers just as empty several generations into the future.
    Thank you for this opportunity to express our opinion. We 
hope you will seriously consider our concerns.
      

                                

Statement of Jennifer DuCray-Morrill, Deputy Chief Executive Officer--
Government Affairs & Program Development, State Teachers' Retirement 
System, State of California

    My name is Jennifer DuCray-Morrill. I am Deputy Chief 
Executive Officer--Government Affairs & Program Development of 
the California State Teachers' Retirement System (CalSTRS). 
CalSTRS has 518,000 active and retired teacher members and 
currently pays retirement, disability, and survivors' benefits 
to some 154,000 recipients. CalSTRS pays out $238 million each 
month in retirement, disability, and survivors' benefits, 
totaling $2.9 billion annually.
    We very much appreciate the opportunity to present our 
views to the Subcommittee on the issue of imposing mandatory 
Social Security coverage on newly-hired State and local 
government workers.
    Before describing the specific impact that mandatory 
coverage would have on CalSTRS, its active members, and its 
retirees, I would like to respond to a number of points raised 
at the hearing, particularly by the General Accounting Office 
(GAO) in its testimony.
    There can be no serious question that the true driving 
force behind proposals to impose mandatory coverage of new 
State and local government workers is a new source of revenue 
for the Federal government. The Federal government would be 
requiring State and local governments to bear a significant 
additional cost burden in order to help bolster the solvency of 
the Social Security trust fund.
    However, as the GAO recognizes in its testimony, while new 
Federal revenue may be the driving force behind mandatory State 
and local coverage proposals, revenue is not itself an 
appropriate justification for imposing mandatory coverage. As 
the GAO notes: ``While Social Security's solvency problems have 
triggered an analysis of the impact of mandatory coverage on 
[Social Security] program revenues and expenditures, the 
inclusion of such coverage in a comprehensive reform package 
would need to be grounded in other considerations.'' (U.S. 
General Accounting Office, ``Mandating Coverage for State and 
Local Employees,'' Testimony before the Subcommittee on Social 
Security, House Committee on Ways and Means (GAO/T-HEHS-98-127) 
(May 21, 1998), at p. 4).
    In searching for an appropriate policy justification, GAO 
points to the 1994-96 Social Security Advisory Council 
statement that mandatory coverage is ``basically `an issue of 
fairness.' '' (Id., at pp. 4-5). GAO then quotes the Advisory 
Council report to the effect 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.'' (Id., at p. 5).
    It is important to examine in detail just how this 
``fairness'' consideration balances out.
    As a threshold matter, the Advisory Council's asserted 
rationale of equitably sharing the burden of Social Security as 
a social welfare program does not ring true as applied to State 
and local governments already struggling with the cost burdens 
of Medicaid, welfare, and other social safety net 
responsibilities which the Federal government has passed down 
to the States. Mandatory coverage threatens a significant 
payroll cost increase for State and local governments. It seems 
quite difficult to justify this additional cost burden on the 
ground that State and local governments--and State and local 
taxpayers--are not now bearing their fair share of social 
safety net responsibilities. Moreover, State and local 
governments have only two responses available to such an 
additional cost burden coming from the Federal government--
raising taxes or cutting spending on other essential government 
services.
    More fundamentally, by imposing mandatory coverage the 
Federal government would be seeking to carry out its commitment 
to the participants in the Social Security system by forcing 
State and local governments to cast aside the commitment they 
have made to their workforce and the participants in their 
retirement systems. State and local governments would be asked 
to largely dismantle for the future their successful retirement 
systems that have served millions of participants for decades, 
in order to solve a Federal problem that these State and local 
governments had no hand in creating.
    States like California--which has pre-funded the CalSTRS 
teacher retirement program to pay out almost $3 billion in 
benefits each year--would be asked to cast aside these decades 
of successfully providing retirement benefits to generations of 
workers, in order to force the future membership into a pay-as-
you-go Social Security system that will provide these State and 
local government employees with reduced benefits at higher cost 
to State and local governments. It is not without clear irony 
that, at the same time mandatory coverage proposals are being 
discussed that would force States to largely dismantle 
successful pre-funded retirement systems in order to help pay 
for the inadequacies of the pay-as-you-go Social Security 
system, State and local government retirement systems are being 
examined by GAO and others as a model for how a pre-funded 
retirement plan can be achieved and managed in the government 
context.
    If mandatory coverage is imposed, State and local 
governments would lose flexibility to tailor retirement 
benefits to the unique work histories of the broad range of 
occupations necessary for the diverse State and local services, 
giving way to the ``one-size-fits-all'' approach of Social 
Security. State and local governments would lose the 
flexibility to manage retirement costs directly, with such 
costs now largely being thrust upon them from the Federal 
government.
    On the employee side, while the GAO testimony notes that 
mandatory coverage will ``increase participation in an 
important national program,'' the testimony produces no 
conclusive evidence that overall retirement benefits of new 
State and local government workers will be sustained, let alone 
improved, under any reasonable cost scenario for State and 
local governments. Indeed, as described below, actuarial 
studies undertaken for our system show that the current CalSTRS 
plan produces a much greater benefit than a plan coordinated 
with Social Security for the same level of contribution. 
Certainly the 364,000 active members of CalSTRS have not been 
clamoring to shift into Social Security.
    This should not be surprising since the new State and local 
government workers mandated into Social Security would be 
expected to receive less in Social Security benefits than they 
contribute. The solvency problem facing the Social Security 
trust fund is a later-term problem when the Baby Boomers begin 
to retire en masse. The retirements shortly afterward by the 
new State and local workers mandated into Social Security will 
only exacerbate the problem unless these State and local 
workers forced into Social Security in fact will receive less 
in benefits than they contributed. Somehow, the ``fairness'' 
rationale failed to surface vis-a-vis State and local 
government workers in the past when the situation was reversed 
and participants drew out more in benefits than they had 
contributed.
    Social Security has been in place for some 63 years as a 
``pay-as-you-go'' system. Employers and employees in one 
generation have paid employment taxes which are used to pay 
current benefits and, in turn, a later generation of employers 
and employees have paid employment taxes which are used to pay 
that preceding generation's employees' benefits. Consequently, 
there is a certain rough justice as to current employers and 
employees participating in the Social Security system.
    It is inequitable to mandate nonparticipating State and 
local governments into Social Security at this late point. This 
legislation is asking the entering generation of State and 
local employees, and the State and local governments which 
employ them, to contribute at a high rate of tax to pay 
benefits for a prior generation of workers, none of whom worked 
for the State and local governments which are being mandated 
into Social Security. Compared to all of the current employers 
in the Social Security system, the upshot of mandating the non-
participating State and local governments into Social Security 
is to provide all current benefits to someone else while 
imposing the current burdens on the mandated State and local 
governments and their employees.
    It might have been ``fair'' to mandate State and local 
governments at the start--everyone would be treated equally, 
but it is unfair to wait until late in the game and then 
mandate coverage.
    State and local governments have designed their retirement 
plans in reliance upon their exclusion from mandatory Social 
Security coverage. Benefits have been structured and trusts 
funded on this basis. State and local tax rates have been 
established which provide adequate sums to fund these 
retirement benefits along with the other expenses of State and 
local governments.
    There is, understandably, a great deal of reluctance on the 
part of voters to increase State and local taxes. All parties, 
including those favoring mandating Social Security coverage for 
State and local government employees, concede that if coverage 
is mandated, benefit costs will increase substantially if State 
and local governments maintain the current level of benefits, 
even taking Social Security benefits into account. The 
alternative, and more likely scenario, is that benefits will be 
cut in order to maintain the current levels of taxation. That 
is unfair to State and local government employees.
    This burden will be particularly hard on teachers who are 
disproportionately the group affected by mandatory Social 
Security coverage. At a time when schools, particularly schools 
in California, are straining to improve educational performance 
in the face of stringent budgetary restrictions, to add the 
cost of mandatory Social Security coverage would be a 
devastating blow.
    In summary, Mr. Chairman, once ``fairness'' is considered 
in all of its aspects--and not just those that favor the 
Federal side--it becomes quite clear that ``fairness'' provides 
no true rationale for mandating new State and local government 
workers into Social Security.
    Let me briefly outline the specific impacts that mandatory 
coverage would have on CalSTRS and its 518,000 active and 
retired participants.

CalSTRS and Other Existing State and Local Retirement Systems in States 
 That Do Not Participate in Social Security Are Successful and Should 
                            Not Be Disrupted

     State and local governments do an excellent job 
managing retirement plans and providing good benefits for their 
employees.
    --The California State Teachers' Retirement System 
(CalSTRS) pays out $238 million each month in retirement, 
disability, and survivors' benefits, for total benefits of $2.9 
billion annually. An average CalSTRS retiree's annual benefit 
at retirement is approximately $18,000.
     State and local government plans are more soundly 
funded than Social Security. State and local plans are sound 
because the necessary employer and employee contributions have 
been actuarially determined and put into trust funds and 
invested in accordance with sound portfolio management 
principles. State and local plans invest in a range of 
securities providing a greater return than the government bonds 
held by the Social Security ``trust fund.''
    --CalSTRS has a strong funding level, with assets 
representing 97% of accrued liabilities.
    --CalSTRS retirees on average receive retirement benefits 
for 26 years. Two years of that payout represent the employee 
contributions, two years represent the employer contributions, 
and 22 years of that payout are funded by investment earnings.
    --CalSTRS's assets totaled more than 22 times benefits paid 
in 1995-96. By contrast, Social Security's assets were less 
than 2 times annual benefits paid, providing much less 
opportunity for investment growth.
     By operating their own retirement systems, State 
and local governments are able to tailor benefits to the work 
histories of the uniquely broad range of occupations of State 
and local workers.
    --Police and fire personnel retire earlier because of the 
physical demands of the job. Judges enter late in their careers 
and serve for a limited period. Teachers often have long, 
steady careers. The ``one-size-fits-all'' approach of Social 
Security determined in Washington provides no such flexibility.
    --State and local government employers are able to manage 
retirement benefits and costs directly--rather than having 
costs thrust upon them by the Federal government--and employee 
groups have input on benefits through the bargaining and State 
legislative processes.
     CalSTRS strongly believes that all of its teacher 
participants should receive comparable benefits for the same 
service and pay. Mandatory Social Security coverage would 
disrupt that equity because new hires likely would receive less 
in benefits under a plan coordinated with Social Security than 
current CalSTRS members receive under the existing plan.

 Mandatory Social Security Coverage for All State and Local New Hires 
Will Have a Harsh Impact on New Employees, Current Participants, State 
    and Local Employers, and the States and Local Retirement Plans 
                               Themselves

     Harsh cost impact or benefit cuts in the case of 
new hires
    --If added to current pension costs, the 12.4% Social 
Security payroll tax cost for new teachers would create a major 
financial burden for California public schools. The average 
additional annual cost for a new hire would be at least $1,600 
each for the employer and the employee.
    --The additional Social Security payroll tax burden 
approaches the normal cost of the current CalSTRS retirement 
plan (15.79%), leaving little room for the design of a 
retirement benefit to supplement Social Security for the new 
hires except in the unlikely event that new State and local 
funding can be found.
    --State and local retirement plans produce substantially 
higher investment returns than Social Security. If Social 
Security is substituted for a large portion of the State and 
local retirement plan benefit, contributions to the State and 
local plan will have to increase to fund the same level of 
benefits. In California actuarial studies indicate that it 
would cost an additional 3% to 6% of payroll to fund a 
supplemental retirement tier that when combined with Social 
Security equates to the retirement benefits currently provided 
by CalSTRS.
    --Actuarial studies show that the current CalSTRS plan 
produces a much greater benefit than a plan coordinated with 
Social Security for the same level of contribution, for 
essentially all combinations of age and service.
    --Mandatory Social Security coverage would substitute an 
unfunded benefit under the pay-as-you-go Social Security system 
for the funded retirement benefit that the new State or local 
worker would have received under the State or local government 
retirement system.
    --Given the fiscal and political difficulties of increasing 
State and local government retirement costs, it seems likely 
that State and local employers would respond to mandatory 
coverage for new hires by cutting benefits under the State and 
local retirement plan rather than increasing contribution 
costs.
     Adverse impact on current participants and 
existing State and local government plans
    --As the GAO testimony notes, ``Mandatory coverage and the 
resulting changes to benefit levels for newly hired employees 
are likely to result in reduced contributions to the current 
pension plan. The impact of reduced contributions on plan 
finances would depend on the actuarial method and assumptions 
used by each plan, the adequacy of current plan funding, and 
other factors.'' (p. 10). Even though CalSTRS is currently 
well-funded, in the future the liabilities for the closed group 
of current participants could exceed assets, creating an 
unfunded liability. A substantial reduction in the 
contributions from new hires would have an adverse impact on 
the pay-down of any unfunded liability of the plan.

  Dubious Benefit for the Social Security Trust Fund Unless State and 
 Local Workers Will Receive Less in Social Security Benefits Than They 
                               Contribute

     Mandating Social Security coverage for State and 
local new hires would provide a short-term cash flow into the 
Social Security trust fund. But the Social Security trust fund 
has no short-term funding or liquidity problem.
     The solvency problem facing the Social Security 
fund is a later-term problem when the Baby Boomers begin to 
retire en masse. The retirements shortly afterward by the new 
State and local workers mandated into Social Security will only 
exacerbate the problem unless these State and local workers 
forced into Social Security in fact will receive less in 
benefits than they contributed.
     The payroll tax contributions of the State and 
local workers mandated into Social Security will merely be 
invested in Federal debt, not growing investments, and hence 
there will be even greater dependence on the future taxing 
resolve of the Federal government when that debt must be cashed 
in to pay benefits.

                               Conclusion

    Mr. Chairman, we would strongly urge you and the other 
Members of the Committee, in examining proposals for mandatory 
coverage of State and local government workers, to look beyond 
the siren call of short-term revenue and to consider the severe 
cost and dislocation that would be imposed on State and local 
governments and their retirement systems that have successfully 
funded retirement benefits for generations of workers in public 
service.
    Thank you for the opportunity to present our views.
      

                                

Statement of Charles G. Hardin, President, Council for Government 
Reform

    Mr. Chairman, thank you for allowing me to testify for the 
record regarding the addition of state and local government 
workers to the Social Security system. I greatly appreciate 
this opportunity to share the views of our 350,000 members with 
the Subcommittee.
    As we are all aware, Social Security is facing its greatest 
crisis. Soon, demographic trends will push our nation's 
retirement income security system into virtual bankruptcy.
    One of the proposed solutions to this problem is to corral 
all newly hired state and local government workers into the 
current Social Security structure.
    I firmly believe that this is the wrong approach. We should 
be looking to build a structure that can withstand the 
demographic storm brewing on the horizon, not adding more 
ballast to a sinking ship.
    In the short run, adding newly hired state and local 
government workers will make Social Security's balance sheet 
look better. But this is only a short-term fix. Soon-to-be-
hired state and local employees have no one to speak for them 
and Congress must take care not to use them for its own 
purposes.
    What will happen when we add these workers to our already 
overburdened retirement income structure? With Social 
Security's current rate of return, our problems will only get 
that much bigger in the long run.
    Right now, state and local government workers who are 
excluded from Social Security are enjoying high returns on 
their retirement investment. The mammoth California Public 
Employees Retirement System (CALPERS) reported a 20.1% rate of 
return during the 12 months ending on June 30, 1997. And the 
Virginia Retirement System returned 20.6% for their pensioners 
during the calendar year of 1997.
    While CGR would much prefer to see individually directed 
retirement investments, these rates of return are very solid 
compared with Social Security's near-negative return rate. 
Privately-run mutual funds hold the same advantages of state or 
local run funds, but they could not be held hostage to 
political considerations as has happened in the past.
    State and local government workers are not workers who are 
in need of rescue by Social Security. In fact, the millions of 
workers in Social Security can only wish they received such 
good return on their investments.
    We should be moving in the opposite direction. We should be 
looking at how these state pension systems protect the 
retirement income security of their members and we should be 
designing a plan to apply these principals to the millions of 
workers who face Social Security shortfalls in their future.
    In addition, by carving out new hires in state and local 
governments, we will essentially be creating a new ``notch.'' 
Newly-hired state and local government employees will look with 
anger and envy at their predecessors' fat retirement savings 
and wonder why Congress consigned them to the miniscule Social 
Security benefit.
    And the simple answer will be: Congress wanted to spend 
their money.
    Fixing Social Security should start with a fundamental 
rethinking of how the program is structured. The old nostrums 
of tax hikes, benefit cuts, and corralling more workers into 
the system have been played out. They don't work and only make 
things worse for future generations.
    I urge the subcommittee to reject any proposal to include 
newly hired state and local government workers in the current 
Social Security plan and to push instead for wider reform that 
will secure the retirement income of current retirees, current 
workers and future workers.
      

                                

                                        Eleanor Deutsch    
                                  Brooklyn, N.Y. 11218-1442
                                                       May 28, 1998

A.L. Singleton
Chief of Staff
Committee on Ways and Means
U.S. House of Representatives
1102 Longworth House Office Building
Washington, D.C. 20515

    Dear Chairperson:

    I would like to take this opportunity to thank the Subcommittee on 
Social Security for giving consideration to individuals like myself to 
take part in these legislative proceedings.
    Those immediately affected by the Government Pension Offset fully 
understand the impact of these proceedings and are very grateful that 
they have finally come to fruition.
    I have suffered for several years financially and because of this 
offset I am being forced to exhaust my lifetime savings. My husband and 
I worked all of our lives and contributed to Social Security and my 
government pension fund for which may I add is a very small amount. 
Anything you can do to change or revise the law will be a personal 
gratification not only to me but to thousands of government workers.
    The Government Pension Offset is a very unfair law and I am sure 
after great deliberation it can be revised to make it right to all 
concern.
    I have two main points to make:
    1) The 1977 Amendments to the Social Security Act was written to 
bring equity to the program and yet the legislation was amended in 
January 1983 by Public Law 97-455 and again in April, 1983 by Public 
Law 98-617, again in November, 1984 by Public Law 98-21 and finally in 
December, 1987 by Public Law 100-203.
    I count four amendments to the original law in 1977 which indicates 
to me that these changes were necessary to correct legislation that was 
either poorly written or unpopular with those individuals later 
exempted and
    2) As an applicant in 1995, I feel that there was no choice given 
to me where I could meet one of the exemptions. My years of dedicated 
service were behind me, I did not belong to an exempted group, there 
was no offer for me to change my pension plan for FERS and my single 
voice could not be heard in Congress.
    For the past several years I could not understand why my benefits 
were decreased by a twothirds formula. As my resources are steadily 
being exhausted I become more and more dependant on my benefits which 
places me in a unfair position of being more reliant on the government 
instead of being self-reliant for myself.
    Can you imagine the thousands and maybe millions of constituents 
depending more on government benefit programs?
    The time is now appropriate for Congress to right a wrong for those 
beneficiaries who have struggled to meet their every day living 
expenses.
    In closing, it is my only wish that we are given and are 
compensated in the future so that life will be much easier in our 
golden years.
    I thank you and your staff for finally giving this the proper 
attention it deserves.

            Sincerely yours,
                                            Eleanor Deutsch
      

                                

Statement of Patrick L. Doyle, Director, Division of Social Security, 
Commonwealth of Kentucky

    These are the comments of the Kentucky Division of Social 
Security on the Subcommittee Social Security's hearing on 
mandatory social security coverage for newly hired employees of 
state and local governments. Brief comments concerning GPO and 
WEP are also included.
    The exception from social security coverage for state and 
local government employees was included in the original version 
of the Social Security Act passed in 1935. This exception is 
the federal government's recognition of its constitutional 
limitation to mandate a social security employer tax on the 
states and their political subdivisions.
    The 1950 amendments to the act, effective January 1, 1951, 
allow a state to enter into a voluntary agreement with the 
federal government permitting the state and its political 
subdivisions to provide social security coverage for their 
employees. This voluntary coverage concept was included in 
Section 218 of the Social Security Act. The Omnibus Budget 
Reconciliation Act of 1990--which requires social security 
coverage for all state and local employees not covered under a 
Section 218 agreement, or state and local employees not 
belonging to a qualified, public retirement system--avoided the 
constitutionality question by retaining the states' and their 
political subdivisions' right to determine if employees will be 
covered under social security or a qualified, public retirement 
system. The new-hire proposal for universal social security 
does not provide for any options to state and local 
governments.
    The Tenth Amendment to the Constitution expressly provides 
that ``the powers not delegated to the United States by the 
Constitution, nor prohibited by it to the States, are reserved 
to the States respectively, or the people.'' After decades of 
erosion, the Tenth Amendment's revival was initiated by the 
United States Supreme Court in 1991 in Gregory v. Ashcroft and 
further strengthened in the landmark New York v. United States 
decision in 1992. The High Court's 1992 ruling included the 
following statement: ``Congress may not simply `commandeer' the 
legislative processes of the States by directly compelling them 
to enact and enforce a federal regulatory program.''
    Aside from the obvious question of constitutionality, the 
imposition of universal social security coverage would cause 
havoc on the organization of many state retirement systems. 
Some Kentucky retirement systems were created prior to 1951 
specifically for certain career employees, such as teachers, 
police and firefighters, when social security coverage was not 
available to public employees. These non-social security 
retirement systems were designed to provide these employees 
with a complete benefit structure of retirement, disability and 
health insurance coverage that was based on the unavailability 
of social security coverage.
    The imposition of the ``new hire'' rule places Kentucky's 
retirement systems in the position of having to review all the 
pension plans for the affected employees. Sound pension policy 
dictates that Kentucky must consider the issue of equity to its 
employees, as well as the reasonableness of the income 
replacement at retirement. If new-hires retain the benefits of 
current pension plans, then they would be entitled to a 
significantly higher level of income replacement at the time of 
retirement (current pension benefits plus social security), at 
a significantly higher cost to the taxpayers. Kentucky cannot 
justify paying higher benefits simply because of the hire date 
of an employee. Kentucky would be forced to either increase the 
benefits of current ``old hires'' in the interest of equity or 
to establish new retirement systems or new tiers for the new 
hires with equivalent total income replacement values. This 
process of creating an entirely new retirement system for a new 
class of employees requires legislative and policy 
considerations that cannot be accomplished with a stroke of a 
pen.
    The economics of establishing a separate system for the new 
hires could undermine the actuarial soundness of the old system 
due to the loss of new members contributing to the system. A 
two-tiered system, while actuarially more sound, would likely 
lead to further legislative pressures to increase benefits or 
to expensive lawsuits brought by either of the employee groups.
    If, and when, the above problems are legally overcome, the 
implementation of the new-hire concept of social security must 
be implemented at significant cost and effort to state and 
local employers. Kentucky's state government and its 216 city 
governments, county governments, boards of education and 
smaller political subdivisions effected by the change would 
incur first year employer contribution costs of an estimated $5 
million. This, of course, must be matched equally by employee 
contributions. (The cost to retirement systems in Kentucky to 
implement the ``new hire'' proposal could possibly exceed the 
amount of ``new-hire'' social security contributions collected 
from Kentucky in the first year.)
    Over and above the financial drain of the social security 
contributions on already very limited resources, all government 
employers would be required to modify their payroll systems to 
accommodate another class of employee. This would be very 
expensive for those governmental employers who have 
computerized payrolls system. One must also factor in the cost 
of training payroll personnel about the modified payroll 
system, maintaining the records of a new employee group and the 
additional withholding and reporting requirements the ``new-
hire'' proposal would mandate.
    It has been said that the ``new-hire'' proposal would ease 
the administrative burden of the social security program for 
the Internal Revenue Service and the Social Security 
Administration. One only has to examine current medicare 
coverage with its new-hire provisions to realize that it is 
very complicated and requires additional and constant 
administration by both the state and local employers and the 
federal agencies.
    In the event this proposal becomes law, Section 218 must 
remain in place to ensure the details of social security 
coverage for the employees continue under all existing Section 
218 Agreements. Each of Kentucky's 1,500 agreements is unique 
to the applicable governmental employer. State and local 
governmental employers also need the avenues Section 218 
provides to allow for social security coverage of veteran 
(``old-hire'') employees, if they so desire, as in current 
medicare-only coverage.
    Congress recognized a basic inequity in the application of 
social security benefits to certain groups of public employees 
without social security coverage when the Government Pension 
Offset and the Windfall Elimination Provision were enacted. The 
GPO and WEP benefit reductions addressed these inequalities. 
Congress may wish to consider simply fine tuning the GPO and 
WEP provisions as this would be far more appropriate and 
efficient than enacting mandatory social security legislation 
that would create a new class of public employees.
      

                                

Statement of Edith U. Fierst, Member, 1994-96 Advisory Council on 
Social Security

                              Introduction

    I very much appreciate this opportunity to present my views 
in writing since unhappily I was not able to accept the 
invitation of your Staff Director, Kim Hildred, to testify in 
person. The views expressed are mine alone; I do not appear on 
behalf of any clients, persons or organizations.

          Reasons for Bringing New Hires Under Social Security

    The members of the 1994-96 Social Security Advisory 
Council, whatever their views on the contentious issue of 
privatization, were unanimous in recommending that all new 
hires by State and local governments be brought under mandatory 
coverage of Social Security. Doing so would cut the long-run 
estimated deficit in the trust fund by 0.25 percent of payroll 
because contributions would start to flow into the trust fund 
promptly after mandatory coverage were enacted, but the 
benefits payable to State and local employees would not become 
due for some years. The trust fund would profit from the time 
lapse between collecting the tax and paying benefits.
    In making this recommendation the members of the Advisory 
Council were mindful of several major advantages that would 
flow to covered employees from being brought under coverage of 
the national retirement system. These include:
    1. Portability. Bringing newly hired State and local 
employees under coverage of Social Security would enable them 
to move from one job to another without sacrificing retirement 
benefits. This missing portability is often very important to 
employees, although little publicized. Traditionally employers 
have thought of the lack of portability of pension plans as a 
way of locking in their labor force, and the attention of 
employee leaders has been focused primarily on those who stay, 
not on those who leave.
    I experienced the pressures created by lack of portability 
when I worked for the Federal Government under the Civil 
Service Retirement System (CSRS). The time came when I wanted 
to leave for other employment, but realized doing so would 
cause me to incur a major financial loss. CSRS offers 
retirement without reduction for early retirement at a younger 
age than does Social Security--at age 55 after 30 years of 
service, at age 62 after 5 years of service--and CSRS indexes 
benefits to the cost of living only for those who have retired 
under the system. Those who leave before retiring must wait to 
age 62 before starting to receive the benefits they have 
earned; they also sacrifice the COLAs that would be payable to 
retirees in the years between leaving government service and 
reaching age 62 Moreover, they lack the protection of survivor 
annuities for their widow(er)s if they die in those interim 
years.
    As a consequence of these and perhaps other disincentives, 
many workers covered by CSRS feel locked in. They become time-
servers, watching the calendar until their earliest possible 
date for retirement. This is not good for either the workers or 
their employers. Many press for abolition of their jobs so they 
can retire at age 50 after 20 years of service, and for a 
number of reasons, their supervisors are often glad to help 
them out. This has entailed considerable cost to the taxpayers.
    Fortunately this problem was solved for future Federal 
employees in 1984 when a new retirement law became effective, 
bringing new Federal hires under Social Security, but analogous 
problems continue to plague employees of the State and local 
governments and the governmental units that employ them. All 
would be happier if retirement benefits were made portable by 
bringing new hires under Social Security.
    2. Cost of living increases. Not only does Social Security 
compute initial benefits under a formula that takes into 
consideration average wage increases before the employee 
reaches retirement age or qualifies for disability or dependent 
benefits, it also guarantees that the purchasing power of 
benefits will be retained through annual cost of living 
increases indexed to price increases. The plans of state and 
local government for public employees rarely, if ever, provide 
full COLAs. Today, we are in a period of relative price 
stability, when cost of living increases may seem to matter 
little, but this stable economy may not last. Without it, the 
security of retirees is at risk, as we have seen so often in 
parts of the world with runway inflation.
    3. Security for dependents. Social Security provides 
monthly benefits for spouses, surviving widows and widowers and 
children at no additional cost to those whose dependents are 
covered. Individual employees do not need to make an election 
to be covered, nor do they pay extra for it. Rather, these 
benefits are the insurance part of Social Security. They have 
substantial value.
    By contrast, under many State and local government plans, 
coverage is optional with the employee, and those who elect 
coverage pay for it through reductions in their own retirement 
benefits.
    I saw how this works when a client came to me while I was 
in the private practice of law. The client was highly educated 
and intelligent, a star at a local think tank. His father, who 
had been a well-respected state government worker, was recently 
deceased. Much to the family's surprise and consternation, the 
father had opted against a survivor annuity for his wife 
because paying for it would have reduced his retirement 
benefits. Suddenly my client's mother was left without income 
after a marriage of 50 years; fortunately in her case the 
children were able and willing to take on the burden of 
supporting their mother. But we all know that is not true for 
everyone.
    Social Security has made lack of protection for surviving 
spouses a non-problem for covered families. For them, the 
desperation that used to beset elderly widows and their 
families is a thing of the past. While many have reason to 
worry because the benefit is too low (something we can and 
should remedy by increasing benefits for survivors of two-
earner couples), no one, not even a divorced spouse after a 
marriage that lasted at least ten years, is excluded.
    Some of those who favor privatization have been spreading a 
myth that while some public plans based on individual accounts 
make these accounts available to young widows, the only benefit 
available to those covered by Social Security is $255 in 
funeral expenses. The truth is that Social Security provides a 
monthly benefit for eligible mothers until the youngest child 
reaches age 16 and an additional benefit for surviving children 
until they reach age 18, or if later, finish high school or 
reach age 19. If the child is disabled before age 22, the 
child's benefits last as long as the child is disabled and the 
eligible caretaker's lasts as long as the child needs care. The 
value of this insurance for the family of an average wage 
worker with two children and a mother of 27 is estimated at 
$307,000.
    Public employees and their families, like everyone else, 
need this coverage. They can get it only if they are covered by 
Social Security.
    4. The Public Pension and Windfall Offsets. Both the public 
pension
    and windfall offsets were designed to protect the Federal 
Government from the obligation to make excessive payments to 
retirees covered under both Social Security and pensions not 
covered by Social Security. They work as follows:
    A. The Public Pension Offset (PPO) reduces benefits payable 
to spouses or survivors by Social Security by two-thirds of the 
benefits earned by that spouse or survivor in a public job not 
covered by Social Security. Thus a Social Security spouse or 
survivor benefit of $300 is reduced to zero if the spouse has 
earned a pension of $450 a month or more in non-covered public 
employment.
    Many retirees do not learn of the public pension offset 
until they are about to retire. Then they are shocked and 
believe they have been cheated by an unfair policy. I'm sure 
you and other Members of Congress hear from them. However, the 
protesters do not understand that the PPO is analogous to the 
dual entitlement rule under which Social Security benefits 
payable to spouses and survivors are reduced by the benefits 
they themselves earned as workers. Indeed, the dual entitlement 
rule demands a total offset, not one that reduces overlapping 
benefits by only two-thirds. The PPO is a smaller offset 
presumably because public pensions substitute for both Social 
Security and private pensions payable to those in private 
employment.
    While the public pension offset might be improved at the 
margins, in view of the dual entitlement rule which reduces 
benefits for those covered under Social Security both as 
workers and spouses (or survivors), it is hard to make the case 
for eliminating it altogether except by bringing public 
employees under coverage of Social Security.
    B. The Windfall Offset reduces the replacement rate of 
Social Security payable to retirees with only short-term 
coverage under Social Security if they also had non-covered 
employment. Its purpose is to restrict the number of employees 
entitled to payment of the highest replacement rate under 
Social Security's progressive formula. Under that formula, a 90 
percent replacement rate is paid for the initial roughly $5500 
a year in earnings (indexed); this high return is designed to 
assure minimum adequacy for persons who worked many years at 
low wages. The high replacement rate was never intended to give 
a windfall to short-term employees with high pay whose lifetime 
covered earnings are low because most of their work was done 
under non-covered plans.
    Before the windfall offset was enacted, persons who had 
worked for many years in exempt public employment sometimes 
received benefits from Social Security as high as those whose 
low-paid lifetime careers were under Social Security. This was 
unfair and unintended. Its cost to Social Security was 
substantial.
    Nevertheless those who are adversely affected by the 
windfall offset are often surprised at retirement age to learn 
about it; they, like those covered by the PPO, may feel cheated 
and outraged.
    Perhaps the windfall offset could be moderated at the 
margins, but I have heard no good arguments for eliminating it 
for employees whose major career was in non-covered public 
employment. The best solution is to bring these employees under 
coverage of Social Security during their years of public 
employment.

                      Attitude of public employees

    Many public employees say they prefer plans offered by 
their State or local government employers to Social Security. 
Frequently they lack understanding of the very real advantages 
of coverage under Social Security outlined above.
    In addition, typically these employees do not understand 
that their large benefit amounts derive from generous 
contributions by their employers rather than from their exempt 
status. They may not realize that private pensions provide 
similar benefits to those also covered by Social Security or 
that they could have the equivalent. Public employers could 
fund separate plans with the amount they now contribute in 
excess of the 6.2 percent of earned income employers are 
required to contribute to Social Security or the 12.4 percent 
employees and employees are required to contribute. If they did 
so, many public employers would provide excellent pension 
plans, making their employees much better off than they are now 
because they would have both Social Security and pensions.
    The recent extraordinary performance of the stock market 
has given ammunition to those who prefer separate coverage 
dependent upon private investment. Investment advisers and 
managers who earn their living by working for the funds of 
these plans are particularly articulate in their defense. Their 
self-interest in these plans should be taken as a caution 
against too much reliance on their views.
    I understand that it is difficult for Members of Congress 
who represent large numbers of uncovered public employees to 
vote to include them when their leaders oppose bringing them 
under Social Security. Nevertheless I believe public employees 
can be persuaded to accept Social Security coverage by a 
combination of the advantages to public employees of Social 
Security coverage listed above and the realization that Social 
Security is not an either/or to special plans for public 
employees.

                      Interest of Public Employers

    Many state and local governments have been overpromising 
future retirement benefits to placate employees who demanded 
pay increases that could not be afforded immediately. These 
governmental units could seize the opportunity of to 
restructure their retirement packages at the time of changeover 
to Social Security, thus solving a big financial crisis which 
awaits them in the future. And they could do this while at the 
same time providing their employees supplemental plans, 
possibly of an individual accounts type that would make 
everyone happy. Inasmuch as the coverage of State and local 
government employees would apply to new hires only, there would 
be time for the governmental units to phase in such coverage 
and absorb any transitional expenses while at the same time, 
initiating supplemental plans for covered public employees.

                              Conclusion: 

    I regret I could not be here to answer your questions, but 
I would be pleased to do so if anyone wishes to contact me.
      

                                

Statement of Alfred K. Whitehead, General President, International 
Association of Fire Fighters

    Mr. Chairman. My name is Alfred K. Whitehead, and I am the 
General President of the International Association of Fire 
Fighters. I greatly appreciate this opportunity to express the 
views of the nation's more than 225,000 professional fire 
fighters and emergency medical personnel on the vitally 
important issue of mandatory Social Security coverage of public 
sector employees.
    The IAFF strongly supports efforts to ensure the future 
solvency of the Social Security system. Thousands of our 
members are counting on Social Security as an important part of 
their retirement security, and we are committed to preserving 
the system for them and their families. We are also committed 
to protecting the retirement security of those fire fighters 
who are currently outside the Social Security system.
    On behalf of both of these groups, the IAFF is adamantly 
opposed to the mandatory coverage of those public employees who 
are not currently part of the Social Security system. Mandatory 
coverage would wreak havoc with the economic security of fire 
fighters who are currently not covered by Social Security, and 
would only produce a short term cosmetic benefit to the Social 
Security system. In the long run, both groups of fire fighters 
would be harmed by mandatory coverage.

                               Background

    When the Social Security system was created in 1935, 
government employees were expressly excluded. It wasn't until 
the 1950s that state and local government agencies were given 
the option to join the system. Even then, fire departments in 
24 states were prohibited from voluntarily joining the Social 
Security. It wasn't until 1994 that all fire fighters had the 
right to vote on whether or not to enroll in Social Security.
    In response to this long-standing arrangement, state and 
local governments that were outside the scope of Social 
Security developed their own retirement systems that took into 
account the unique needs of their employees. These plans have 
been extremely successful in meeting the retirement security 
needs of their members. On the whole, these plans offer higher 
benefits at lower cost than Social Security.
    The ability to tailor retirement plans has been especially 
important to the nation's fire fighters and emergency medical 
personnel. Fire fighters retire at much earlier ages than the 
general population--well before eligibility for Social Security 
benefits. In many cases, fire fighters are legally required to 
retire at a given age, and therefore do not even have the 
option of working until age 62. In addition, fire fighters are 
far more likely than the general population to leave work due 
to a disability.
    This ability to tailor the retirement benefits is the 
primary reason that so many public safety agencies have opted 
to remain outside the Social Security system. While only 30% of 
all public employees are not covered by Social Security, fully 
76% of fire fighters and police officers are not covered. It is 
important to note that the creation of specially tailored 
retirement plans did not come cheaply. In many cases fire 
fighters gave up increased wages and other benefits in exchange 
for better pensions, including disability benefits and survivor 
benefits.

                    Problems with Mandatory Coverage

    There are four distinct problems that the members of my 
organization have with proposals to extend Social Security 
coverage to all public sector employees. First and foremost, it 
would wreak havoc with the specially tailored fire fighter 
pension plans. Even if mandatory coverage is required only for 
new hires, the pension systems that fire fighters helped 
design, and in many cases gave up wage increases to get, could 
not be sustained. The system would collapse, leaving the 
retirement security for thousands of fire fighters in shambles.
    Second, mandatory Social Security coverage would amount to 
a 6.2% income tax on public sector employees. The vast majority 
of these workers are middle-income Americans who are struggling 
to make ends meet. This is precisely the wrong group that our 
nation should be looking to to shoulder more of the current tax 
burden. Consider a fire fighter who is supporting a family of 
four on $32,500 a year. Mandatory Social Security coverage 
would cost that family over $2,000 in increased taxes. Imposing 
a significant new tax on middle-income wage earners is 
counterintuitive and would be counterproductive.
    Third, mandatory Social Security coverage would impose an 
enormous financial burden on the public safety agencies that 
employ our members. This increased cost will necessarily result 
in either reduced services or increased local taxes, or both. 
Many fire department budgets are already stretched to their 
maximum, and it simply will not be possible to sustain further 
budget cuts without jeopardizing public safety.
    Finally, mandatory coverage of public employees will harm 
the Social Security system. While mandatory coverage will bring 
a short term infusion of cash into the system, Congress needs 
to show the courage to resist the quick fix and look at the 
protecting the system in the long run. The millions of workers 
who are brought into the system under mandatory coverage will 
one day begin receiving benefits. Since the amount of 
contributions made by an individual does not equal the benefits 
paid by the system, bringing a sizable new group of employees 
into Social Security is a guaranteed money loser and a 
significant threat to the long-range solvency of the system.

             Arguments Made in Favor of Mandatory Coverage

    Although the true reason for extending Social Security 
coverage to all public employees is undoubtedly the short term 
cash infusion into the system, advocates of the proposal argue 
that the change is justified for two reasons--both of which are 
highly suspect.
    First, they argue that employees need Social Security. 
Because not all employers can be counted on to provide a 
pension, it is the responsibility of the federal government to 
ensure that all workers have some minimal level of retirement 
income. While valid on its face, this argument ignores a 
significant change in the law made in 1990. In that year, 
Congress voted to extend Social Security coverage to any public 
employee who is not covered by a pension plan that is at least 
comparable to Social Security.
    Second, they argue that many public employees who are not 
covered by Social Security nevertheless qualify for benefits 
either because their spouse is covered or because they 
contribute to Social Security in a second job. To the extent 
that either of these situations is inequitable, Congress has 
already addressed the problem with the Spousal Offset and the 
Windfall Offset which reduce Social Security benefits paid to 
any individual who is receiving a pension from employment that 
is not covered by Social Security.

                               Conclusion

    Mr. Chairman, just last week a member of our organization 
testified before another subcommittee of this distinguished 
body. That hearing was called to explore ways that the United 
States government can adequately honor the nation's public 
safety officers for their extraordinary valor. Members of the 
Subcommittee appeared deeply moved as they listened to the 
tales of heroism displayed by fire fighters and law enforcement 
officers who selflessly risked their lives to save the lives of 
others.
    A mere seven days later my organization is appearing before 
you to ask--to plead--that you not recklessly jeopardize the 
retirement income of these same heroes. If Congress truly wants 
to honor its nation's domestic defenders, let it begin by 
preserving their economic security.
    Thank you.
      

                                

Hon. Barbara A. Mikulski, a U.S. Senator from the State of Maryland

    Mr. Chairman, I want to thank you for having this hearing 
and for permitting me to provide testimony on a very important 
issue, the Government Pension Offset.
    The Pension Offset is an issue that is very important to 
me, very important to my constituents in Maryland and very 
important to government workers and retirees across the nation.
    First, I want to thank Representative Jefferson for his 
leadership in the House of Representatives on Government 
Pension Offset reform. He has introduced important legislation 
which I hope this committee and the House will soon approve.
    I have introduced a similar bill in the Senate, S. 1365 The 
Government Pension Offset Reform Act, to modify this heartless 
rule of government that prevents current workers from enjoying 
the benefits of their hard work in their retirement. I want the 
middle class of this Nation to know that if you worked hard to 
become middle class you should stay middle class when you 
retire.
    As many in this room know, under current law, there is 
something called the Government Pension Offset law. This is a 
harsh and unfair policy. Let me tell you why. If you are a 
retired government worker, and you qualify for a spousal Social 
Security benefit based on your spouse's employment record, you 
may not receive the full amount for which you qualify because 
the Pension Offset law reduces or entirely eliminates a Social 
Security spousal benefit when the surviving spouse is eligible 
for a pension from a local, state or federal government job 
that was not covered by Social Security. This policy only 
applies to government workers not private sector workers.
    Let me give you a hypothetical example of two women I call 
Helen and her sister Phyllis. Helen is a retired Social 
Security benefits counselor who lives in Woodlawn, Maryland. 
Helen currently earns $600 a month from her federal government 
pension. She's also entitled to a $645 a month spousal benefit 
from Social Security based on her deceased husband's hard work 
as an auto mechanic. That's a combined monthly benefit of 
$1,245.
    Phyllis is a retired bank employee also in Woodlawn, 
Maryland. She currently earns a pension of $600 a month from 
the bank. Like Helen, Phyllis is also entitled to a $645 a 
month spousal benefit from Social Security based on her 
husband's employment. He was an auto-mechanic too. In fact, he 
worked at the same shop as Helen's husband.
    So, Phyllis is entitled to a total of $1,245 a month, the 
same as Helen. But, because of the Pension Offset law, Helen's 
spousal benefit is reduced by \2/3\ of her government pension, 
or $400. So instead of $1,245 per month, she will only receive 
$845 per month. This reduction in benefits only happens to 
Helen because she worked for the government. Phyllis will 
receive her full benefits because her pension is a private 
sector pension. I don't think that's right and that's why I 
have introduced my legislation.
    The crucial thing about Government Pension Offset Reform 
Act that I have proposed is that it guarantees a minimum 
benefit of $1,200. So, with this reform to the Pension Offset, 
Helen is guaranteed at least $1,200 per month. Let me tell you 
how it would work.
    Helen's spousal benefit will be reduced only by \2/3\ of 
the amount her combined monthly benefit exceeds $1,200. In her 
case, the amount of the offset would be \2/3\ of $45, or $30. 
That's a big difference from $400 and I think people like our 
federal workers, teachers and our firefighters deserve that big 
difference.
    Why should earning a government pension penalize the 
surviving spouse? If a deceased spouse had a job covered by 
Social Security and paid into the Social Security system, that 
spouse expected his earned Social Security benefits would be 
there for the surviving spouse. Most working men believe this 
and many working women are counting on their spousal benefits. 
But because of this harsh and heartless policy, the spousal 
benefits will not be there, your spouse will not benefit from 
your hard work, and chances are, you won't find out about it 
until your loved one is gone and you really need the money.
    The Government Pension Reform Act guarantees that the 
spouse will at least receive $1,200 in combined benefits. It 
guarantees that Helen will receive the same amount as Phyllis. 
I have introduced this legislation, because these survivors 
deserve better than the reduced monthly benefits that the 
Pension Offset currently allows.
    They deserve to be rewarded for their hard work, not 
penalized for it. Many workers affected by this Offset policy 
are women or clerical workers and bus drivers who are currently 
working and looking forward to a deserved retirement. These are 
people who worked hard as federal employees, school teachers, 
or firefighters.
    Frankly, I would repeal this policy all together. But, I 
realize that budget considerations make that unlikely. As a 
compromise, I hope we can agree that retirees who work hard 
should not have this offset applied until their combined 
monthly benefit exceeds $1,200.
    In the few cases where retirees might have their benefits 
reduced by this policy change, my legislation contains a ``hold 
harmless'' provision that will calculate their pension offset 
by the current method. My legislation would also index the 
minimum amount of $1,200 to inflation so retirees will see 
their minimum benefits increase as the cost of living 
increases.
    Mr. Chairman, I believe that people who work hard and play 
by the rules should not be penalized by arcane, legislative 
technicalities. If the federal government is going to force 
government workers and retirees in Maryland and across the 
country to give up a portion of their spousal benefits, the 
retirees should at least be allowed a livable level of 
benefits.
    Thank you again, Mr. Chairman, for having this hearing on 
this important issue. I hope that as the debate on the future 
of Social Security continues, this issue, and other issues that 
penalize people for hard work will be addressed and will be 
remedied.
      

                                

Statement of Robert T. Scully, Executive Director, National Association 
of Police Organizations, Inc.

                I. Introduction: Background and Overview

    I am Robert Scully, the Executive Director of the National 
Association of Police Organizations, otherwise known as NAPO. I 
am a retired police officer who served for 25 years with the 
Detroit Police Department. I also served as a full-time elected 
officer of the Detroit Police Officers Association and was a 
collective bargaining team member from 1973-92. In addition, I 
was NAPO's elected president from 1983 to 1993.
    NAPO is a national non-profit organization representing 
State and local law enforcement officers. NAPO is a coalition 
of police associations and unions serving to advance the 
interests of law enforcement officers through legislative and 
legal advocacy and educational programs. NAPO represents more 
than 4,000 law enforcement unions and organizations, with over 
220,000 sworn law enforcement officers, 3,000 retired officers, 
and more than 100,000 citizens dedicated to crime control and 
law enforcement.\1\
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    \1\ Many of our statewide `umbrella' groups are composed of 
hundreds of State and local member organizations, whose members are 
also NAPO members.
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    Mandating Social Security taxes on the vast majority of 
public safety officers, primarily law enforcement officers, 
firefighters, and rescue squad workers,\2\ would have serious 
implications and unintended consequences. It would have a 
dramatic and negative impact on the recruitment and retention 
of well-qualified public safety officers and their current 
pension funds. Even mandating that only new hires be included 
in the system would still have serious unintended and possibly 
devastating consequences. Such a Federal mandate would strain 
State and local government budgets and would probably reduce 
current salaries, freeze future pay raises, and curtail or 
eliminate other benefits, such as retiree health insurance, 
retirement pensions, death benefits, and line-of-duty 
disability pay for public safety officers.
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    \2\ For purposes of this statement, I am using the definition ``law 
enforcement officer'' contained in 42 U.S.C. Sec. 3796b(5). That 
provision states: `` `Law enforcement officer' means an individual 
involved in crime and juvenile delinquency control or reduction, or 
enforcement of the laws, including, but not limited to, police, 
corrections, probation, parole, and judicial officers.''
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II. Brief History of the Applicability of Social Security to State and 
                         Local Public Employees

    When established in 1935, the Social Security program 
covered all private sector workers in commerce and industry and 
excluded State and local government employees from Social 
Security coverage. The legislative history of the Social 
Security Act indicates that these employees were excluded 
because most had their own retirement systems and because 
Congress was concerned about the constitutionality of imposing 
a Federal tax on State governments, an issue which has never 
been litigated.
    In 1950, Congress added Section 218 of the Act which 
allowed for voluntary participation in the system by State and 
local employees not covered by public retirement systems. Then, 
in 1954 this provision was amended to permit voluntary 
participation by those State and local employees who were 
covered in a public retirement system, if a State or local 
government agency entered into an agreement with the Federal 
government.
    In 1983, Congress once again amended the 1935 Act, making 
several relevant changes. First, State and local government 
agencies participating in the Social Security system (whose 
employees were voluntarily covered) could no longer exit from 
the system; for these employees, it was no longer voluntary. 
Second, all private sector and government employees hired after 
March 31, 1986, were covered by Medicare health insurance, with 
matching contributions from employer and employees. Third, by 
1991, all State and local government employees not covered by a 
public retirement system were required to be in the Social 
Security system, which is in effect today.
    The Social Security Administration estimates that 4.9 
million State and local government employees are not covered by 
the system (although there may be more than that). Seven 
states, California, Ohio, Texas, Massachusetts, Illinois, 
Colorado, and Louisiana account for a large percentage of the 
non-covered public employee payroll.
    The 1980 ``Report of the Universal Social Security Coverage 
Study Group,'' which lead to the 1983 amendments, stated:
    Unfortunately, in contrast to the case with the Federal 
workforce, the likely costs of requiring Social Security 
coverage for all State and local government workers are 
considerable. Because most existing State and local pension 
plans lack many of the features of Social Security, the new 
coordinated systems would cost many State and local governments 
more than they are paying to operate their noncoordinated 
plans. We should not forget that these increased costs usually 
translate into superior retirement, disability, and survivors 
protection for State and local government employees. 
Nonetheless, in these times of fiscal constraint at all levels 
of government, the Federal legislature should move cautiously 
in imposing new costs on State and local governments. In 
addition, many current State and local government plans are 
pay-as-you-go; hence, imposing the Social Security payroll tax 
. . ``crowds out'' revenue that governments were anticipating 
for paying future benefits based on their existing pension 
plans.\3\ [Emphasis added.]
---------------------------------------------------------------------------
    \3\ Joint Committee Print, Committee on Ways and Means and 
Committee on Post Office and Civil Service, U.S. House of 
Representatives, 9th Cong. 2d Session, March 27, 1980, WMCP: 96-54, 
reprinting ``Report of the Universal Social Security Coverage Study 
Group,'' transmitted by the U.S. Secretary of Health, Education, and 
Welfare on March 24, 1980, pp. xiii-xiv.
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 III. Special Pension Needs of State and Local Public Safety Employees 
 and the Unintended Consequences of Imposing Social Security Taxes on 
                                  Them

    Best estimates by the Public Pension Coordinating Council 
for 1996 (the most recently available data) indicate that 76 
percent of State and local public safety personnel do not pay 
Social Security taxes and are not covered by the system.\4\
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    \4\ This data is from the 1997 Survey of State and Local Government 
Employee Retirement Systems, Government Finance Officers Association, 
Chicago, Illinois. This survey is done for members of the Council, 
which is composed of the National Association of State Retirement 
Administrators, National Conference on Public Employee Retirement 
Systems, National Council on Teacher Retirement, as well as the 
Government Finance Officers Association.

A. Special needs of public safety officers and inadequacy of 
---------------------------------------------------------------------------
Social Security:

    Let me describe the dilemma faced by public safety officers 
when Social Security's very limited disability, death, and 
early retirement benefits are factored in, compared with 
current pension systems. Simply stated, the Social Security 
system was not designed for police officers and firefighters.
    First, being an active police officer is a younger person's 
job. This is due to the special dangers and physical stresses 
of police work, often resulting in a disability or forcing 
police officers into an earlier retirement, as these stresses 
mount. During the last century and especially the last 50 
years, State and local governments have developed pension 
systems which acknowledge that police and firefighter jobs are 
very different than normal careers, with a set of dangers and 
stresses not faced by most other professionals. These systems 
take into account that law enforcement officers and 
firefighters usually must undergo a career change in middle 
age, usually in their late 40s to mid 50s. In many police 
departments, a large percentage of police officers will be 
sufficiently disabled at all ages for varying lengths of time 
and thus be unable to perform their duties as officers. 
Therefore, most governments have recognized that public safety 
officers need certain protections and benefits in recognition 
of the nature of their jobs. I will describe a typical system, 
the City of Detroit Policemen and Firemen Retirement System, 
shortly.
    Social Security provides no comparable disability benefits 
for police officers and firefighters. Social Security requires 
that an employee be unable to perform any substantial and 
gainful employment. This means that an individual unable to 
perform regular and continuous duties as a public safety 
officer, who would now receive some disability benefit to 
supplement a subsequent career at usually a lower salary, would 
receive nothing under Social Security.
    In addition, there are other officers who will not be able 
to continue to keep performing the duties after reaching middle 
age, because of the physical and psychological stresses and 
demands of police work. And therefore they must retire from 
police work and begin another career. Unfortunately, for these 
public safety employees, no Social Security benefits will be 
available, as they start a new career at much less pay.
    Social Security death benefits are much lower than current 
retirement death benefits which often pay anywhere from 50 
percent to 75 percent of an officer's salary.

B. Unintended likely consequences of mandatory Social Security 
taxes and coverage:

    I would like to discuss the impact of imposing Social 
Security taxes on these essential workers. Mandating that 
government agencies and public safety officers each pay 6.2 
percent of pay would have a negative repercussion on the 
retention and recruitment of the highly trained and competent 
law enforcement officers and firefighters--the most qualified 
job candidates possible.
    Let me explain what is likely to happen to the majority of 
police and pension systems and to government expenditures if 
Social Security taxes and coverage are universally mandated.
    There seems to be a presumption that governmental bodies 
can reduce benefits received from current pension plans by the 
same amount that would be received as benefits by public safety 
officers under Social Security. First, let us put aside the 
great disparity between what one receives from a pension plan 
as compared with Social Security.
    As a general proposition, participants in State and local 
government pension systems have a right to receive retirement 
benefits at a defined point in the future. These rights are 
vested by explicit constitutional provisions, statutory 
provisions, common law contractual rights, or a combination of 
the above, in all 50 states.\5\ In many States, public safety 
officer retirement benefit levels cannot be reduced without the 
agreement of both the employer and the employee through 
collective bargaining or a vote of the citizenry. Therefore, a 
vested public pension in the majority of states is a 
contractual or statutory right that can be modified only with 
some difficulty.
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    \5\ A survey of the 50 States, conducted by the National Council on 
Teacher Retirement, disclosed that 6 States have explicit 
constitutional provisions guaranteeing pension rights, 15 States have 
express guarantees in their statutes, 18 States have common law 
contractual rights, and 11 States approach the issue in other ways 
(often through a combination of contractual rights and statutory or 
constitutional provisions). Moore, Cynthia L., Public Pension Plans: 
The State Regulatory Framework, 3rd ed., National Council on Teacher 
Retirement (to be published in 1998).
---------------------------------------------------------------------------
    There would be tremendous pressure by government agencies 
to change these pension systems, pitting public safety officers 
against elected officials--something none of us wants. But let 
us assume that most of these current pension systems, which 
cannot be easily changed, are maintained. A Social Security tax 
on employees and their government employers would negatively 
impact public safety operations and could result in layoffs, 
reduced pay or other benefits, or no cost-of living increases, 
and could reduce purchases of necessary equipment and 
technology, or a combination of these consequences. At the 
outset, this new unfunded Federal mandate would probably 
inflict on State and local governments reduced staffing or, 
worse yet, layoffs, or would cause a several percentage point 
reduction in pay for public safety employees, all based on a 
6.2 percent increase in employee personnel costs for local 
governments.
    Let us focus on a somewhat different scenario. There are 
states, fewer in number, where State governments can change 
their public pension systems without collective bargaining or 
votes of the citizens. Facing public pressure against tax 
increases, the legislatures in these states would likely change 
the current systems to make them much less beneficial to public 
safety workers. State and local government pension 
contributions to these systems are likely to be reduced, 
probably dollar-for-dollar for allocation to Social Security 
taxes.
    Those current police and fire pension systems so affected 
would be severely curtailed. Public safety officers in these 
plans would therefore have much less protection than they do 
now, causing police and firefighting work to become much less 
desirable.
    For all of these scenarios, both Congress and the 
Administration need to ask the following questions: Would we 
retain the best public safety officers we now have if their 
take-home pay is automatically cut by 6.2 percent, which is the 
additional amount that they would have to pay out? Or if Social 
Security taxes are applied only to new hires, would we recruit 
the best public safety officers if their take-home pay is 
automatically reduced by 6.2 percent in taxes? Would we retain 
or recruit the best officers if current pension systems are 
severely curtailed--reducing substantially or eliminating 
excellent early retirement, line-of duty-disability, and early 
death benefits--so that the total percentage of both employing 
agency and employee contributions remain about the same, once 
Social Security taxes are factored in? Would we get the best 
officers if the employing agency also reduces future pay raises 
or freezes cost-of-living or other increases, in order to pay 
its portion of Social Security? I am afraid that the answer to 
all of these questions would be `No!,' given the tight labor 
markets and a variety of career choices.
    In addition, imposing this tax would negatively affect 
government expenditures on the best technology and equipment 
available for law enforcement to fight crime.
    In short, mandatory Social Security taxes on law 
enforcement would hurt efforts to recruit the best qualified 
and competent law enforcement personnel. It would result in a 
pool of less qualified candidates for law enforcement 
positions, with negative implications for public safety.

C. Additional implications if Social Security taxes and 
coverage are imposed on only new hires:

    Even expanding the Social Security system to just new hires 
would cause serious morale problems. It would create a 
different class of public safety officers and could very well 
endanger the trust essential among police officers and 
firefighters depending upon each other in life-threatening 
situations. If Social Security taxes are imposed on just new 
hires, it is likely that State and local governments would 
respond to this added tax burden over time in the same ways and 
with the same negative consequences for public safety officers 
and the public safety.
    Over time, mandatory coverage on new hires would destroy 
the early retirement and disability benefits for public safety 
officers. One might as well abandon many of these individuals 
and their families if Congress mandates Social Security 
coverage and thereby causes the States to replace the current 
pension systems. On the other hand, trying to blend the special 
needs of actuarially funded pension systems with the structure 
of Social Security will create substantial complications and 
costs for benefit design and administration, as well as 
collective bargaining.\6\
---------------------------------------------------------------------------
    \6\ In many States, any government effort to modify current pension 
systems, either to reduce the contributions or benefits, cannot be 
unilaterally undertaken without input from workers, but must be the 
subject of collective bargaining.
---------------------------------------------------------------------------
    There are other financial implications, as well, if Social 
Security is applied to new hires. If State and local 
governments reduce their contributions dollar-for-dollar in new 
Social Security taxes, current pension systems for 
grandfathered employees will eventually be severely impacted, 
as current employees retire with no contributions coming in 
from government agencies and new workers enter the police and 
firefighting forces of this country. In effect, Social Security 
would eventually and inevitably destroy these fire and police 
pension fund systems. I will describe these potential 
consequences shortly while discussing the impact on the Detroit 
police and firefighter pension system.

D. State tax implications of mandatory coverage:

    For these public safety officer pension systems, there are 
tax implications which have not been considered. Current 
retirees receive a benefit which is fully taxed, bringing in 
revenue to governments at all levels, unlike Social Security 
payments which are untaxed below a certain income level. Also, 
closely related, the after-tax income of current public safety 
officers will be reduced by any shift from pre-tax pension 
contributions to after-tax Social Security contributions.

E. Examples of several systems' benefits and probable impact of 
mandatory coverage:

    To illustrate all of these concerns, I have set forth 
several examples of the retirement benefits and line-of-duty 
death and disability benefits available to police officers or 
their families which Social Security cannot even come close to 
matching. (My staff surveyed several police and firefighter 
pension funds in Michigan, Ohio, Florida, and California, and 
the comments by their officials have been integrated into this 
statement.)
    Example One: City of Detroit Policemen and Firemen 
Retirement System.--This Detroit retirement system has 
approximately 5,400 active employee members and 7,800 retirees 
and beneficiaries and over $3 billion in investments from which 
to pay benefits. Line-of-duty disability benefits can amount to 
66.6 percent of final salary for full disabilities. And 
employees can retire after 25 years of service, with a 
retirement set at 62.5 percent of salary, increasing by 2.1 
percent for each year after 25 years until 35 years is reached. 
A line-of-duty death before retirement results in 45.5 percent 
of the average patrolmen's salary.
    Public safety employees are required to contribute 5 
percent of salary until eligible for retirement, and in the 
1995-96 fiscal year, the City of Detroit had a computed 
employer contribution of 25.9 percent.
    In addition, with an annual average salary of $40,000 for 
police officers and firefighters and a total annual payroll 
(before overtime) of approximately $220 million, the City of 
Detroit and public safety officers would have to pay a combined 
total of at least $27.2 million in Social Security taxes, if it 
were made mandatory.
    Even if Social Security applies only to new hires, it would 
be very difficult for the City of Detroit to maintain this 
system of benefits and salaries for its current public safety 
employees, as it is required to do under Michigan's 
constitution (one of 6 state constitutions guaranteeing pension 
rights). One of two events would likely occur:
    First, as other cities have done, Detroit might be tempted 
to create a second tier system for the new hires, to reduce its 
contribution by at least the same amount that it would pay into 
Social Security, 6.2 percent, (if not more). (Presumably this 
would be done through collective bargaining.) As the number of 
new hires increases and there are fewer pre-Social Security 
coverage employees to fund the current system, the system could 
very well develop unfunded liabilities for those employees 
already vested in the current system, eventually reducing the 
amount of funds which can be paid out. There is no way that 
reducing the City's and employees' contributions to the current 
system--dollar-for-dollar of Social Security taxes paid--would 
come close to matching these benefits. Nationally, covering 
only new hires will eventually hurt hundreds of thousands of 
current public safety employees, reducing their death, 
disability, and early retirement benefits, making public safety 
careers much riskier and less desirable financially.
    Or, alternatively, the City may retain the current system 
for new hires. In that case, as in most large American cities, 
Detroit will likely pay the 6.2 percent increase for new hires 
(with the numbers of covered employees increasing every year) 
by taking it from somewhere else, whether from beginning 
salaries, new equipment, salary increases for all employees, or 
retirement health benefits--a particularly vulnerable target, 
or a combination of these. The most immediate consequences of a 
6.2 percent tax would likely be a significant decrease in a 
new-hire's salary and reductions in health insurance for 
retirees or other benefits. Do not have any doubts; this is 
what would happen!
    An official for the Detroit fire and police pension system 
told us during an informal NAPO survey, ``We have 50 years or 
more of success and a history of serving our police officers 
and firemen. Why would the Federal government want to disrupt 
this healthy and fine-tuned system?'' That sentiment was 
mirrored by others. 
    Example Two: Ohio Police and Fire Disability and Pension 
Fund.--The Ohio Police and Fire Disability and Pension Fund 
serves 25,000 members and 15,000 retirees or surviving 
beneficiaries.
    Approximately 25 percent of all police and fire retirements 
are due to full or partial disability occurring in the line-of-
duty, which is not an unusual number. Full disability results 
in payments to the officer at 75 percent of active duty salary 
in this statewide system, and partial disabilities (79 percent 
of police and fire disability retirements overall) results in 
disability awards ranging from 5 percent to 60 percent of 
salary. As compared with this system, Social Security would 
provide no benefits to these individuals, unless they were 
totally unemployable in any line of work. And, even if they 
were so unemployable, the benefit would be a fraction of what 
these officers currently receive in disability pay. In 
addition, line-of-duty death benefits replace all of an 
officer's income and are available for the public safety 
officer's survivors; the Social Security benefit is 
significantly lower.
    Employees contribute 10 percent of their pay, and State 
agencies pay 19.5 percent of pay for police officers and 24 
percent of pay for firemen. To retain the same benefits and to 
impose Social Security would result in employees paying 16.2 
percent of pay and municipalities paying 25.7 percent for 
police and 30.2 percent for firefighters, a heavy burden.
    Also, if Social Security taxes were imposed on all active 
police and fire personnel, then Ohio municipalities would have 
to pay an additional $68.2 million (based on a payroll in FY 
1996 of $1.1 billion) for public safety officers alone.
    As the head of this Ohio pension fund has said, ``Our 
workers will be giving up the certainty of an actuarially 
funded pension for the uncertainty of a pay-as-you go plan with 
an unreachable age for retirement and a very-hard-to-reach 
requirement for eligibility for disability benefits.''
    Example Three: City of Tampa Pension Fund for Firefighters 
and Police Officers.--The Tampa City Pension Fund for 
Firefighters and Police Officers has 1,411 active contributing 
public safety officers and 1,205 retired members and 
beneficiaries, as of October 1997. Officers can receive up to 
65 percent of salary for line-of-duty disabilities, regardless 
of age. They can retire after 20 years at age 46 with a pension 
at 50 percent of salary (increasing for later retirement). For 
a death benefit, a surviving spouse receives 65 percent of the 
member's earned benefit, plus cost-of-living increases.
    The City contributes 7.7 percent of salary, and employees 
contribute 5.75 percent of salary into this retirement system. 
The system is very healthy financially, and its investments, 
mostly in equities, have returned an average annualized return 
to 15 percent, making these benefits possible.
    A pension fund official told us that if Social Security 
taxes were imposed on new police officers and firefighters in 
this system, it would be necessary to continue the current 
system to maintain the same level of benefits, to fill in the 
gaps prior to age 62 or 65. If coverage were made mandatory for 
all public safety officers, based on 1996 payroll figures of 
$66.5 million, the city would pay $4.1 million, and employees 
would pay the same amount, resulting in a significant reduction 
in pay. Yet, even if coverage applied to just new hires, the 
likely consequence of superimposing a 6.2 percent tax on 
employee and employer would be to reduce the number of 
firefighters and police officers serving Tampa's citizens or 
significantly reduced benefits for these employees, or a 
combination of both.
    By contrast, there is the statewide Florida Retirement 
Systems, which includes a system for `special risk' members, 
including all Florida county firefighters and deputy sheriffs. 
Members of this system are also covered by Social Security. 
Employing agency contributions equal a whopping 32.6 percent--
26.4 percent for the pension system and 6.2 percent for Social 
Security. Interestingly, the benefits are not nearly as 
beneficial as Tampa's system. To recover disability, public 
safety officers must be unable to hold any substantial gainful 
employment and officers cannot retire under age 55. Therefore, 
even with a greater outlay of funds, the Florida State system 
cannot provide nearly the same security and benefits essential 
to attract and keep police officers, as does the Tampa system.
    Example Four: City of Los Angeles, The Safety Members' 
Pension Plan.--In the City of Los Angeles, there are over 
12,000 active public safety officers contributing to the Safety 
Member's Pension Plan or an earlier pension plan for those 
hired prior to 1980 (the vast majority of firefighters and 
police officers are in the Safety Members Pension Plan). In 
addition, there are 11,049 individuals receiving a service, 
disability, or survivor pension.
    Public safety officers hired between 1980 and June 30, 
1997, belong to Plan I. Those hired since June 30th are members 
of Plan II. Plan I members can retire at age 50, with a minimum 
of 10 years of service. Plan II members can retire at any age 
with at least 20 years of service. In all other aspects, the 
plans are the same. The amount of the pension will vary from 20 
percent of final average salary after 10 years, to 55 percent 
of salary after 25 years, to 70 percent of salary after 30 
years. Service-connected disabled members receive 30 to 90 
percent of average salary, depending on the degree of 
disability. A service-connected death qualifies a survivor for 
a benefit at 75% of the member's final average salary.
    The active members contribute 8 percent of their salary, 
and the City contributes approximately 15 percent of salary 
(which varies from year to year), for an approximate total of 
23 percent. At the end of FY 1996, the Pension Plan's 
investments were valued at $6 billion, and the rate of return 
for that year was 14.6% percent.\7\
---------------------------------------------------------------------------
    \7\ Section 535 of the City's Charter provides that, should Social 
Security be mandatory, the City will integrate the Social Security 
benefits with the Safety Members Pension Plan, so that benefits are 
``at least equal to the benefit offered by the Safety Members Pension 
Plan prior to such integration.'' (p.678, Charter of the City of Los 
Angeles, Rev. 12-13-90)
---------------------------------------------------------------------------

 IV. Conclusion: Impact of Mandatory Social Security on Public Safety 
                                Officers

    In conclusion, keep in mind these essential points: Social 
Security does not address the special needs of police officers 
and firefighters. First, they and their families need the 
security of service-connected disability and death benefits. 
Social Security benefits do not provide anywhere near the same 
level of benefits, and, in fact, provide no disability benefits 
unless one is totally unable to perform any work, not just 
public safety work.
    Second, Social Security is not appropriate for public 
safety officers who normally retire prior to or around 55 years 
of age, as usually they must, due to the stresses and dangers 
faced every day. Social Security will pay these individuals 
nothing, until they reach 65 (unless they take a reduced 
benefit at age 62).
    Even mandating Social Security taxes on just new police 
officers and firefighters will seriously disrupt compensation 
and benefits for all of them. From our perspective, it makes no 
sense whatsoever to harm a system of pension funds that is 
working well and paying needed benefits to those who protect 
the public safety through public service. Forcing State and 
local governments and employees to pay a combined 12.4 percent 
tax will have major consequences.
    Scaling back and reducing the benefits in the current 
plans, even if done only for new hires, would reduce and could 
potentially eliminate these crucial benefits paid to these 
officers in recognition that they repeatedly put their lives on 
the line and are often disabled at some point in their careers. 
This would be the consequence of reducing employer and employee 
contributions to current pension plans in order to pay Social 
Security taxes.
    For those remaining State and local governments which will 
both pay the 6.2 percent tax and retain their current pension 
systems for everyone, there will still be serious consequences 
to both pay and working conditions. This is because the money 
to pay the tax has to come from somewhere, and raising taxes or 
pay to make up the difference is not politically feasible. As a 
result, first, officers will automatically suffer a minimum de 
facto pay decrease through the newly imposed 6.2 percent tax, 
in order for them to keep their current pension benefits. 
Second, either local governments will reduce the number of 
public safety officers to retain current pay levels and 
benefits, or they will reduce the pay of law enforcement 
officers or freeze future cost-of-living increases. Also, to 
minimize the impact on pay, it is probable that government 
bodies will not provide public safety officers with the 
essential equipment (such as bulletproof vests) and technology 
needed to effectively perform their work.
    Under a mandatory Social Security system, police officers 
and firefighters will pay more taxes for inadequate benefits. 
Their ability, through collective bargaining and the political 
process, to obtain what they need to compensate them for their 
service to us, the public, will be severely weakened. Even if 
limited to new hires, the consequences of mandatory Social 
Security taxes--lowering benefits or salaries and freezing 
cost-of-living increases--will make police and fire safety work 
less financially desirable. If we tamper with the current 
system, we will most assuredly lose some of our better 
candidates and current officers to other professions, in view 
of the fierce competition among police departments and the 
private sector.
    Mandatory Social Security taxes and coverage will hurt, not 
help, 75 percent of the public safety officers not included, in 
addition to millions of other public employees. It will hurt us 
all.

            V. Need for Proposed Legislation to WEP AND GPO

    I would also like to briefly touch on two Social Security 
provisions that the Subcommittee on Social Security will be 
addressing in this hearing. These two provisions, the 
Government Pension Offset (GPO) and Windfall Elimination 
Provision (WEP), affect the way benefits are calculated for 
retirees of Federal, State and local governments, who do not 
pay into Social Security. The GPO was instituted in 1977 and 
later amended in 1983, to set a two-thirds offset for Social 
Security benefits of spouses or surviving spouses earning 
government pensions. The WEP was adopted as part of the Social 
Security Amendments of 1983, which affect an individual's 
Social Security if that person becomes eligible for a Federal, 
State or local government pension after 1985, based on work not 
covered by Social Security.
    In present form, the GPO and WEP unfairly over-penalize 
employees who participate in government pension plans in lieu 
of Social Security. NAPO believes that there must be some 
equity when lawmakers distinguish between pensions earned in 
the private sector and those in the public sector. Currently, 
there is legislation pending in the 105th Congress correcting 
these inequities, which we strongly support.
    As part of the CARE coalition (Coalition to Assure 
Retirement Equity), NAPO has been actively lobbying to ensure 
that the concerns of public employees are met. This legislation 
would not repeal the GPO or WEP but would appropriately amend 
the provisions. I recognize the fiscal and budget 
considerations which would arise from such a repeal. However, I 
also recognize that law enforcement and other government 
employees who do not pay into Social Security should not be 
used as tools to facilitate the solvency of the Social Security 
program. The modified legislative proposals addressing these 
issues are, as follows.
    On July 25, 1997, Congressman William Jefferson (D-LA) 
introduced H.R. 2273 to amend the Government Pension Offset. 
Congressman Jefferson's bill would remove the offset for anyone 
whose combined monthly benefit from a government pension and a 
spouse's Social Security benefit is $1,200 or less. On November 
4, 1997, Senator Barbara Mikulski introduced S.1365, a 
companion bill, with some modifications. Her bill would provide 
for an index adjustment for the $1,200 threshold, due to the 
cost of living. Also, Senator Mikulski's bill would initiate 
the two-thirds offset for anything over $1,200, compared to a 
dollar-for-dollar offset in Congressman Jefferson's bill.
    On September 25, 1997, Congressman Barney Frank (D-MA) 
introduced H.R. 2549 to amend the Windfall Elimination 
Provision. This bill would amend Title II of the Social 
Security Act. Under this bill, individuals whose combined 
monthly government pension and Social Security benefits are 
$2,000 or less would be exempt from the WEP. The WEP would then 
be phased in for amounts between $2,000 and $3,000, and, if 
over $3,000, the full WEP would apply.
    It is estimated that 500,000 government retirees have 
already been affected by the GPO (210,000) and WEP (290,000). 
These provisions will financially impact many more low- to 
middle-income government employees in the future. As stated 
before, many law enforcement employees retire early due to the 
nature of their jobs. Subsequently, many will enter the private 
sector and earn enough credits to qualify for Social Security. 
These individuals will become greatly impacted by the WEP 
formula because of their short, or fairly evenly split careers, 
compared to workers with long-covered Social Security jobs.
    The GPO has a profound effect on the economic security of a 
widow (or widower), who receives a government pension and 
relies on the full payment of their widow's benefit of Social 
Security. The law unfairly offsets a recipient whose pension 
was not covered by Social Security and exempts individuals who 
earned their pension in the private sector. Furthermore, public 
pensions are taxed, while Social Security is not if income 
falls below a certain amount, which adds to the host of 
inequities facing many public sector workers. It should be 
noted again that an estimated 75 percent of law enforcement 
employees do not pay into Social Security.
    Thank you for the opportunity to submit a statement for the 
record.
      

                                

Statement of National Committee to Preserve Social Security and 
Medicare

    Chairman Bunning, Members of the Subcommittee on Social 
Security, we appreciate your holding this hearing to review 
anti-windfall provisions of Social Security law. We welcome 
this opportunity to submit testimony regarding proposed reforms 
to Social Security to lessen any inappropriate adverse impact 
on Government employees who are covered under retirement 
systems which are outside of the Social Security system. On 
behalf of the 5.5 million Members and supporters of the 
National Committee to Preserve Social Security and Medicare we 
appreciate the importance of this series of hearings, and its 
contribution to the unfolding national dialogue.
    We especially appreciate your willingness to include 
testimony in this particular hearing about how the Government 
Pension Offset (GPO) and Windfall Elimination Provisions (WEP) 
of Social Security can unfairly impact low earners. Our 
testimony will focus on these issues, as well as issues related 
to disability coverage of Government annuitants. We will also 
comment on proposals to bring currently non-covered government 
employees into the Social Security System.
    Mr. Chairman, as you know, federal, state, and local 
workers receiving retirement or disability benefits for 
government employment which was not covered by Social Security, 
also may be eligible for Social Security based on their own or 
a spouse's employment. In recent years, Congress has reduced 
Social Security benefits to such individuals, arguing that 
government annuitants frequently received higher Social 
Security benefits in relation to contributions than individuals 
who worked solely under Social Security. Some of these 
reductions are excessive and inequitable.
    For example, 64 year old Mrs. Ruth Shoup of Florida, is a 
victim of a double offset. She is affected by both the GPO and 
WEP. Her late husband, a retired policeman, paid into Social 
Security all of his life. Mrs. Shoup also worked all of her 
life, for about 20 years in the private sector and about 21 
years with the Postal Service. After her husband's death, Mrs. 
Shoup was forced into early retirement due to rheumatoid 
arthritis. When she applied for Social Security widow benefits 
she was told that the offset essentially eliminated any 
benefits to which she might be otherwise entitled. Despite her 
husband's life-long contributions to Social Security and her 
own for about 20 years, she has been told that when she turns 
65 she'll probably only see an extra $50 per month from Social 
Security. She lives on $950 per month after taxes and her 
health insurance premium. When Mrs. Shoup becomes eligible for 
Medicare her $50 per month health coverage, including her 
coverage for prescription drugs, will terminate. After two 
operations on her hands, Mrs. Shoup's medical bills are 
mounting. Ironically, because of the offset and windfall 
elimination, Mrs. Shoup may be eligible for Medicare premium 
assistance when she turns 65.
    Mr. Cornelius Faass, also of Florida, is 67 years old. He 
worked until almost 3 years ago, mostly part time since he 
started his Social Security at age 62. In December of 1995, Mr. 
Faass began receiving a pension from Holland where he worked as 
a Merchant Marine before acquiring U.S. citizenship in 1962. 
The Dutch pension is about $175 to $200 per month depending 
upon the current exchange rate. Since January, because of the 
GPO, SSA has been taking $123 per month from his Social 
Security due to the pension. Mr. Faass was receiving Medicaid 
food stamp assistance of $90 per month until the pension came. 
Then his food stamps were dropped to $77 per month and 
eventually revoked entirely last July. In November, his food 
stamp assistance was reinstated to $32 per month.

                       Government Pension Offset

    Under the Government Pension Offset, a government annuitant 
may receive only that portion of a Social Security spouse or 
widow benefit which exceeds two-thirds of the government 
pension. No one but a government annuitant suffers a loss of 
Social Security due to receipt of a pension. Spouse and 
survivor benefits are not denied to persons receiving other, 
comparable non-Social Security annuities.
    Frequently, the offset totally eliminates a Social Security 
benefit a spouse or widow relied upon receiving. The National 
Committee, a long standing member of the Coalition to Assure 
Retirement Equity (CARE), supports modification of the offset 
to lessen its severity. We commend your colleagues Congressman 
William Jefferson and Senator Barbara Mikulski for introducing 
legislation, H.R. 2273 and S.1365, to alleviate the problem. 
This legislation would protect many low-income women, in 
particular from excessive reductions. We urge you to enact such 
legislation this year and to include the Mikulski language 
which ensures that the proposed $1,200 threshold for the offset 
will be regularly adjusted for inflation, and that also ensure 
no one receives an inadvertent reduction in benefits as a 
result of any change enacted.

                          Windfall Elimination

    Under Windfall Elimination, Social Security Benefits are 
reduced for a worker who personally earns both a government 
pension and a Social Security benefit from separate employment 
unless the worker has 30 or more years of Social Security 
employment. The maximum reduction applies to a worker with 20 
or fewer years of Social Security employment and can be as much 
as half the government pension. Hardest hit by this provision 
are workers with careers roughly evenly divided between covered 
and non-covered employment. Phasing the reduction over more 
years, for example by using a 2.5 percent reduction in the 
first bend point for each year less than 30, would provide a 
more equitable benefit to workers with significant years of 
Social Security employment.
    Because government pension plans provide proportionately 
smaller pensions to short service workers, a worker with a 
divided career has the worst of both worlds. The government 
pension is proportionately less than it would be for a full 
government career and Social Security can be reduced by as much 
as 55.5 percent.
    The 90 percent replacement rate in the first bend point of 
the Social Security benefit determination method was 
deliberately designed to weigh benefits so as to give added 
protection to low and average earners. The Windfall Elimination 
Provision, by its across-the-board reduction to 40 percent of 
the first bend point, regardless of the wage earner's level of 
earnings, frustrates that purpose. The low earner is deprived 
of the protection intended by the law in order to make certain 
no high earner is overcompensated. This unintended penalty on 
low earners and those with lifetime modest wages could be 
minimized by limiting the Social Security windfall reduction to 
a smaller proportion of the pension received from non-Social 
Security covered employment as has been suggested by former 
Social Security Actuary Robert J. Myers.

                         Disability Benefit Gap

    A requirement for Social Security Disability insurance 
benefits is earnings in at least five of the ten years before 
becoming disabled. The purpose of this ``recency of work'' test 
is to limit benefits to persons who are out of the work force 
because of disability. However, only Social Security earnings 
count. Government employment is treated as if the individual 
was unemployed. Workers who move between Social Security 
covered employment and non-Social Security covered employment 
thus can be deprived of disability benefit protection without 
ever having missed a day of work. The recency of work test 
should recognize all employment. Windfall elimination and the 
Social Security disability benefit formula are adequate 
safeguards against excessive benefits.

                         Disability Benefit Cap

    A separate provision of law effectively denies Social 
Security disability benefits to anyone working two jobs, one in 
Social Security covered employment and the second in non-Social 
Security employment. Combined disability benefits are capped at 
80 percent of pre-disability Social Security earnings alone. 
Government earnings are ignored in setting the 80 percent cap, 
but government benefits count against the cap. Total earnings 
should be the basis for the 80 percent cap.
    There is historic precedent for recognizing and protecting 
the worker's total earnings from loss of earnings due to 
disability. When an 80 percent disability benefit cap was 
initially placed on Social Security earnings in the early 
1970s, only earnings on which Social Security FICA taxes had 
been paid were considered. Workers with earnings over the 
taxable wage base had no protection for their higher income 
above the wage base. Within four years, Congress recognized 
this inequity and revised the law. The disability benefit cap 
was re-established as 80 percent of earnings in covered 
employment, thereby protecting the worker's entire income. 
Individuals working two jobs deserve this same recognition of 
total earnings in capping combined disability benefits.

            Moving Non-covered Workers into Social Security

    All of the problems and inequities discussed in this 
testimony would become a thing of the past if Social Security 
were universal as has been consistently advocated by the 
National Committee. Until that goal is achieved, we are 
appreciative of the efforts of this Committee to ensure that 
Social Security reductions imposed on persons with non-covered 
pensions do not go beyond Congress' intent to eliminate only 
inappropriate excess benefits.
      

                                

                          National Conference on Public    
                       Employee Retirement Systems (NCPERS)
                                                       May 26, 1998

The Honorable Jim Bunning, Chairman
Subcommittee on Social Security
Committee on Ways and Means
U.S. House of Representatives

    Dear Chairman Bunning:

    I am writing to you on behalf of The National Conference on Public 
Employee Retirement Systems (NCPERS) to urge you not to support 
legislation that would reform Social Security by mandating coverage for 
public employees. Currently there are several bills that have been 
introduced in the House that are designed to keep Social Security 
solvent. All of these bills have one thing in common, mandatory 
coverage of public employees by the Social Security System. We strongly 
oppose such a provision because it would have a profoundly negative 
affect on our members and their beneficiaries.
    NCPERS is a powerful pension advocacy partnership with 450 fund 
members from all 50 states, representing more than $750 billion in 
assets and more than 5 million public employees and retirees.
    While 80 percent of our members are already covered by the Social 
Security program, we are still opposed to mandatory coverage because we 
believe that it is unfair to those funds who are not currently in the 
system. Many of our members were not allowed to participate in the 
program when Social Security was first introduced. They were then 
forced to start their own retirement plans. Additionally, many of our 
members have retirement funds that pre-date the creation of Social 
Security. Forcing them to join the Social Security program at this 
point would be very costly both for public employees and state and 
local governments for the following reasons:
     It would be costly to retirement programs. Making Social 
Security mandatory would have little impact on the projected funding 
shortfalls of Social Security, however, such a move would greatly 
affect public employees. Public employees currently not covered would 
be required to pay an additional 6.2% in payroll taxes.
     It would be costly to states and localities. As employers, 
states and localities would also be required to pay an additional 6.2% 
in payroll taxes. This would cost California over $2.3 billion 
annually, Ohio $1 billion annually, and hundreds of millions to Texas, 
Illinois, Colorado, Massachusetts and Louisiana.
     It would be disruptive to existing retirement programs. 
Many public employers would be unable to absorb the higher costs. They 
would be required, in addition to the Social Security payroll tax, to 
continue the funding of their respective retirement plans. Many of 
these plans are established constitutionally and to make such a change 
would require legislative action and/or a constitutional amendment.
     It would require the creation of a second tier. A second 
tier of retirement benefits would have to be created for prospective 
employees required to be covered by Social Security.
    NCPERS acknowledges the arguments of proponents of mandatory Social 
Security coverage, that everyone should be covered by Social Security 
to reduce public assistance costs. However, these proponents fail to 
note the existence of properly funded state and local government 
retirement plans also reduce the cost of public relief. They also argue 
that public employees who are not covered by Social Security often get 
benefits from a spouse or through other employment covered by Social 
Security. This issue was already addressed by Congress in the 1983 
``anti-windfall'' legislation that was passed to reduce the Social 
Security benefit of such employees.
    Although we are aware that specific action on this issue will not 
take place for the remainder of this session, a number of hearings are 
already scheduled, as well as the SAVER Summit and other forums for you 
and Congress to begin the process of debate. We feel it is important 
for us to communicate with you our position for what is anticipated to 
be a legislatively charged issue in the next Congress.
    I urge you to oppose any provision to extend mandatory Social 
Security coverage of public employees. Such a law would be detrimental 
to the millions of uncovered public employees and their employers.

            Sincerely,
                                               Jay W. Bixby
                                                          President
      

                                

              National Conference of State Legislatures    
                                       Washington, DC 20001
                                                       May 20, 1998

The Honorable Jim Bunning, Chairman
Subcommittee on Social Security
Committee on Ways and Means
U.S. House of Representatives

    Dear Chairman Bunning:

    On behalf of the National Conference of State Legislatures I urge 
you to oppose efforts to extend Mandatory Social Security Coverage to 
all newly hired State and local employees.
    The subcommittee's hearing on May 21, 1998, ``The Future of Social 
Security for this Generation and the Next,'' is expected to highlight 
the devastating effects such a change would have on state finances. 
While the number of covered State and local workers has remained 
consistent at 70%, future efforts by the federal government to expand 
mandatory coverage would have severe consequences for states with large 
numbers of uncovered employees and would constitute a tremendous cost 
shift to states. NCSL firmly opposes all efforts by the federal 
government to extend mandatory coverage to additional categories of 
state and local employees.
    In 1991, NCSL opposed final OBRA 1990 regulations and revenue 
procedures mandating full Social Security coverage, including Medicare, 
for public sector employees who are not members of a retirement system. 
The final rule required public employee retirement systems to meet 
minimum contribution and benefit level standards, and also required 
that part-time, seasonal and temporary (PST) employees be immediately 
and fully vested (100 percent) in any employer-sponsored retirement 
arrangement in order to satisfy the rules. The mandate 
disproportionately affected approximately 3.8 million State and local 
employees who were part-time, seasonal and temporary employees--the 
very employees least able to pay the tax increase on their income 
resulting from mandatory coverage.
    NCSL maintains that the U.S. Department of Treasury and the IRS 
went well beyond the intent of OBRA 1990 in their interpretation of the 
law. At the time of the final rule, NCSL feared that the action would 
make it easier for the federal government to become further involved in 
the administration of state and local public plans and to expand 
mandatory Social Security coverage to all state and local public 
employees. Presently, it appears that the Congress intends to consider 
these proposals as possible revenue generators.
    State and local retirement plans do an excellent job of providing 
for the retirement of public employees. Rather than extending the 
unfunded mandate, NCSL urges the Congress and the administration to 
grandfather preexisting state and local retirement plans. In other 
words, public plans in existence prior to the adoption of OBRA 1990 
(November 5, 1990) would be deemed in compliance with the law and 
benefits received from a state or local retirement system would qualify 
as being equivalent to a benefit received under Social Security.
    NCSL opposes any additional involvement of the federal government 
in public pension plans and the expansion of mandatory Social Security 
coverage for public employees of state and local governments who are 
not already covered. NCSL believes that state and local governments 
should be allowed to affiliate their plans with Social Security on a 
voluntary basis.
    We look forward to working with you further on this issue. If our 
staff can be of any assistance to you, please do not hesitate to 
contact Chris Zimmerman, our Federal Budget and Tax Committee Director 
at (202) 624-8668 or Gerri Madrid, our Fiscal Policy Associate at (202) 
624-8670.

            Sincerely,
                                         Tom Johnson, Chair
                              Federal Budget and Taxation Committee
                                      Ohio House of Representatives
      

                                

Statement of Russell Graves, President 1997-98, National Conference of 
State Social Security Administrators

    The National Conference of State Social Security 
Administrators (NCSSSA) represents more than 70,000 state and 
local government employers nationwide. These comments concern a 
major issue that has arisen in recent proposals regarding 
mandated social security coverage for all newly-hired state and 
local government employees.
    It may seem somewhat ironic that the NCSSSA, which has been 
given the statutory authority in all 50 states, including 
several U. S. territories, to serve as the liaison between the 
federal Social Security Administration and the state and local 
units of government, would come out and oppose a proposal for 
universal Social Security coverage. An in depth explanation of 
the respective roles of the State Social Security 
Administrator, the NCSSSA as an organization, and the Social 
Security Administration would be in order, and, as such, 
follows:
    The exception from social security coverage for state and 
local government employees was included in the original version 
of the Social Security Act (HR 7260), approved in 1935. The 
committee reports on the act contain no discussion of the 
exception provision. In the January 22, 1935, hearings of the 
Committee of Ways and Means, however, Dr. E. E. Witte, 
Executive Director of the Committee on Economic Security, was 
quoted as saying:
    ``Government employees are excluded from the tax for 
obvious reasons. The federal government cannot impose a tax on 
the states or the political subdivisions of the states. This is 
a tax measure...''
    The 1950 amendments to the act, effective January 1, 1951, 
allow a state to enter into a voluntary agreement with the 
Social Security Administration and permit the state and its 
political subdivisions to provide social security coverage for 
their employees. Section 218 of the Social Security Act 
includes this voluntary coverage concept.
    The Omnibus Budget Reconciliation Act of 1990 (OBRA 90) 
requires social security coverage for every state and local 
government employee who does not belong to a qualified, public 
retirement plan or not covered by social security under a 
Section 218 agreement. OBRA 90 retains the states' and their 
political subdivisions' right to determine whether employees 
are covered by social security or a public retirement plan that 
provides comparable, but in most cases greater, benefits. 
Although public employers have managed to comply with the 
coverage requirements of OBRA 90, it has only been with 
significant expense and great administrative effort. And though 
the cost is great, every state and local governmental employee 
has some form of retirement protection.
    Aside from the obvious question of constitutionality, the 
imposition of universal social security coverage would cause 
havoc on the organization of many state retirement systems. The 
cost of universal social security to state and local government 
employers would be devastating. States in which there is 
limited Social Security, such as California, Colorado, 
Illinois, Louisiana, Massachusetts, Ohio and Texas, would face 
overwhelming burdens on already strained budgets. Even states 
that already have general social security coverage for their 
public employees (Connecticut, Florida, Kentucky and Michigan 
to name a few) would have thousands of employees impacted and 
millions of tax dollars in costs as universal coverage is 
phased in. Some public retirement systems were created prior to 
1951 specifically for certain career employees, such as 
teachers, police and firefighters, when social security 
coverage was not available to public employees. These non-
social security retirement systems were designed to provide 
their members with a complete benefit structure of retirement, 
disability and survivors coverage that was based on the 
unavailability of social security coverage.
    The imposition of the ``new hire'' rule places public 
retirement systems in the position of having to review all the 
pension plans for their affected employees. Sound pension 
policy dictates that states must consider the issue of equity 
to its employees, as well as the reasonableness of the income 
replacement at retirement. If new-hires retain the benefits of 
current pension plans, then they would be entitled to a 
significantly higher level of income replacement at the time of 
retirement (current pension benefits plus social security), at 
a significantly higher cost to the taxpayers. States cannot 
justify paying higher benefits simply because of the hire date 
of an employee. These states would be forced to either increase 
the benefits of current ``old hires'' in the interest of equity 
or to establish new retirement systems or new tiers for the new 
hires with equivalent total income replacement values. This 
process of creating an entirely new retirement system for a new 
class of employees requires legislative and policy 
considerations that cannot simply be accomplished with a stroke 
of a pen.
    The economics of establishing a separate system for the new 
hires could undermine the actuarial soundness of the old system 
due to the loss of new members contributions to the system. A 
two-tier system would likely lead to further legislative 
pressures to increase benefits or to expensive lawsuits brought 
by either of the employee groups.
    It has been said that the ``new-hire'' proposal would ease 
the administrative burden of the social security program for 
the Internal Revenue Service and the Social Security 
Administration. One only has to examine current medicare 
coverage with its new-hire provisions to realize that it is 
very complicated and requires additional and constant 
administration by both the state and local employers and the 
federal agencies.
    It is somewhat surprising and, perhaps even more alarming, 
that Chairman Bunning was quoted as saying ``...To many, 
covering those State and local government workers not covered 
under Social Security is an issue of simple fairness...''. 
``Simple fairness'' seems like a very frivolous reason to 
change a well established public pension policy for nearly 5.0 
million government workers. In fact, based upon the original 
language in the Social Security Act, which excluded state and 
local government employees from participating in the program, 
quite the opposite would seem to fit under the general category 
of ``simple fairness.''
    Requiring all newly hired state and local government 
employees to participate in the federal program will cause 
financial hardships to the various affected employers. 
Actuarial costs such as the employer's share of retirement 
contributions to the existing plans will be significantly 
increased. This will occur because newly hired employees will, 
in all likelihood, be contributing at an employee contribution 
typically one-half of the non-covered employees. For the next 
fifteen to twenty years, at a minimum, the public plans will 
continue to have to pay retirement benefits to ``old hires'' at 
the rates in effect when they established service credit, 
however, the amount of revenues available to the pension fund 
has now been reduced because of lower ``new-hire'' employee 
contributions.
    This income gap between benefit payout and employee 
contributions paid in could have potentially three disastrous 
effects. First, it may force the pension fund to seek higher 
rates of returns by investing in more volatile and highly 
speculative types of investments. One needs only to recall the 
financial horror stories such as those in one county in a 
western state and others like it to see the results of an 
overly aggressive investment policy. Second, the required 
employer contribution could become so high that, when faced 
with tax caps in some localities and states, the employing 
entity will be forced to choose which types of service will be 
reduced or simply deleted altogether in order to pay the higher 
employer contribution rate, as well as the required matching 
share of the Social Security contributions. Third, situations 
will arise when a ``newly-hired'' employee working side-by-side 
with an ``old-hire,'' faces the unfortunate truth of having to 
work perhaps as many as five or seven more years to enjoy the 
full complement of retirement benefits from both the federal 
and state (or local) governments to which they are entitled. 
This is based upon many non-covered public retirement plans 
which have a ``normal'' retirement age of 60, as compared to an 
ever-escalating age for unreduced Social Security benefits 
(presently up to nearly age 70).
    In the event this proposal becomes law, Section 218 must 
remain in place to ensure that details of social security for 
the employees continue under the existing Section 218 
Agreements. State and local governmental employers also need 
the avenues Section 218 provides to allow for social security 
coverage of veteran (``old-hire'') employees, if they so 
desire, as in current medicare-only coverage.
    Imposition of universal coverage would impair, and in some 
cases severely lessen, retirement security for millions of 
state and local government employees. Government pension plans 
work well for employees because returns on investments allow 
the employees to receive substantially greater benefits than 
would be possible under an incremental approach. Public pension 
funds are invested directly in the economy, thereby creating 
jobs and earning dividends that help fund future retirement 
benefits.
    The NCSSSA requests that serious consideration be given to 
all of the ramifications of universal social security coverage. 
We propose that perhaps an alternative be given to expanding 
certain existing voluntary coverage provisions, such as 
extending the option to divide retirement systems on the basis 
of desire for coverage, to all states (Social Security Act 
Section 218 (d)).
    We believe the human and monetary costs to state and local 
governments of universal social security, at this time, far 
outweigh the benefit of any revenue to be gained by the federal 
government.
    The NCSSSA appreciates the opportunity to express our 
position on this matter of national interest. If you have any 
questions or would require additional information from the 
NCSSSA, please contact me (405) 521-3555.
      

                                

Statement of the National Education Association

    Mr. Chairman and Members of the Subcommittee:
    On behalf of the 2.3 million teachers and other education 
employees who are members of the National Education Association 
(NEA), we would like to thank you for the opportunity to 
address the subcommittee about Social Security reform.
    We would like to address two issues: the government pension 
offset provision and mandatory Social Security coverage. NEA 
strongly supports scaling back the pension offset provision, 
which requires the reduction of Social Security benefits to 
thousands of retirees whose public employer does not 
participate in Social Security, but who are otherwise entitled 
to Social Security benefits based on their spouses' private 
sector employment. The provision's current two-thirds reduction 
in spousal benefits severely limits the retirement benefits of 
retired public employees.
    On the issue of mandatory participation in the Social 
Security program, NEA opposes such a requirement because it 
would weaken current pension plan benefits for public sector 
retirees. It would also impose unfunded mandates on fiscally 
overburdened state and local governments.

                       Government Pension Offset

    When the Social Security system was established in 1935, 
state and local government employees were excluded from 
coverage. In the 1960s, these employees were given the 
opportunity to elect to participate in the Social Security 
system. As a result, public sector employees in 36 states opted 
to enroll in Social Security in the 1960s and 1970s. The 
remaining 13 states and a number of local governments in two 
others chose instead to maintain and enhance their existing 
retirement systems.
    The government pension offset affects government employees 
and retirees in virtually every state, but its impact is most 
acute in 15 states. They are Alaska, California, Colorado, 
Connecticut, Georgia (certain local governments), Illinois, 
Louisiana, Kentucky (certain local governments), Maine, 
Massachusetts, Missouri, Nevada, Ohio, Rhode Island, and Texas. 
Nationwide, more than one-third of teachers and education 
employees and more than one-fifth of other public employees are 
not covered by Social Security.
    In 1977, federal legislation was enacted that required a 
dollar-for-dollar reduction of Social Security spousal benefits 
to public employees and retired public employees who received 
earned benefits from a federal, state, or local retirement 
system. Following a major campaign to repeal the provisions, 
Congress and the President agreed in 1983 to limit the spousal 
benefits reduction to two-thirds of a public employee's 
retirement system benefits. But this remedial step falls well 
short of addressing the inequity of Social Security benefits 
between public and private employees.
    The harshest affects of the offset provision are borne by 
lower-income women. It is estimated that the spousal benefit is 
eliminated entirely in 9 of 10 cases, even though the covered 
spouse paid Social Security taxes for many years, thereby 
earning the right to these benefits. Moreover, these estimates 
do not capture those public employees or retirees who never 
applied for spousal benefits because they were informed they 
were ineligible.
    According to the Congressional Budget Office, the 
government pension offset reduces benefits for some 200,000 
individuals by more than $3,600 a year. Ironically, the loss of 
these benefits may cause these women and men to become eligible 
for more costly assistance, such as food stamps.
    The present system creates a tremendous inequity in the 
distribution of Social Security benefits. The standard for this 
narrow class of individuals--retired public employees who are 
surviving spouses of retirees covered by Social Security--is 
inconsistent with the overall provisions of the Social Security 
Act and does not apply to persons receiving private pension 
benefits. This imbalance exists even though Congress, through 
ERISA standards and tax code provisions, has more direct 
influence over private employers than public employers.

Three Personal Illustrations of How the Offset Provision Harms 
People

     A retired widow who worked as a custodian in the 
Parma, Ohio, public schools receives just $215 a month from the 
Ohio School Employees Retirement System. Her Social Security 
spousal benefit is reduced to $215 a month after applying the 
government pension offset provision.
     A disabled former school employee and widow who 
retired in 1986 receives $403 a month from her school pension. 
That income totally offsets a $216 per month Social Security 
survivor's benefit. Her total income is about 70 percent of the 
federal poverty level.
     A retired widow who worked as a school cook 
receives $233 a month from her school pension. Her Social 
Security widow's benefit is reduced by $155 because of the 
automatic offset. Her combined total income is about 76 percent 
of the federal poverty level.
    NEA supports H.R. 2273, legislation sponsored by 
Representatives William Jefferson (D-LA) and J.D. Hayworth (R-
AZ), that would amend Title II of the Social Security Act to 
protect low-and middle-income public retirees by limiting the 
government pension offset. H.R. 2273 and companion bill S. 
1365, sponsored by Senator Barbara Mikulski (D-MD), would also 
move to restore equity between public and private employees in 
the distribution of Social Security benefits.

                Mandatory Social Security Participation

    NEA believes that requiring state and local employees to 
participate in the Social Security system is unnecessary and 
financially burdensome. A federal mandate for participation 
will not solve the systems' financial difficulties and would 
weaken state and local plans whose benefits are superior to 
those provided by Social Security.
    The 15 states that have opted not to participate in the 
Social Security system have strong plans that provide ancillary 
benefits such as health care, disability and survivor coverage 
and secure portability. These ancillary benefits would have to 
be lowered or eliminated if non-participating pension systems 
are required to pay Social Security.
    Mandatory participation would also create unnecessary and 
burdensome financial burdens for the state and city governments 
involved, as well as hurt active and retired employees. If 
these governments are required to pay the full cost of the FICA 
tax, this could result in diluted benefits to retirees and 
fewer funds available for investment, a large source of income 
for the affected pension plans.
    We urge you to support H.R. 2273, which moves to restore 
eligibility for mostly lower-income survivors of spouses who 
paid into the Social Security system, and to reject mandatory 
Social Security participation. Teachers and other public 
employees who have devoted their working lives to children and 
public service should not have to worry about the security of 
their retirement plans.
      

                                

Statement of Robert M. Tobias, National President, National Treasury 
Employees Union

    Chairman Bunning, Members of the Subcommittee:
    I am Robert M. Tobias, National President of the National 
Treasury Employees Union (NTEU). Thank you very much for 
holding this timely hearing today and for giving us an 
opportunity to present our members' views on the effects of the 
Government Pension Offset (GPO).
    NTEU represents over l60,000 federal employees and 
retirees. Many of our members have already felt the effects of 
the Government Pension Offset. Others are not yet aware of the 
impact this offset could have on their retirement income. 
Federal retirees often first become aware of the existence of 
this offset at the time they first apply for Social Security 
benefits.
    As you know, the Government Pension Offset reduces or 
eliminates the Social Security benefit many federal retirees 
are otherwise eligible for on their spouse's earnings record. 
Under current law, Social Security benefits normally due an 
individual as a spouse or widow of a Social Security recipient, 
are reduced by two-thirds of the amount of the government 
pension.
    For example, if an elderly widow is eligible for a monthly 
pension of $600 as a result of her federal government service, 
two-thirds of that amount, or $400, must be used to offset the 
Social Security spouse's or widow's benefit for which she might 
also be eligible. If she is eligible for a monthly spousal 
Social Security benefit of $500 based on her husband's earnings 
record, the GPO results in her receiving only $l00 per month. 
This is not an isolated example.
    More often than not, this offset disproportionately affects 
those who can least afford to forego this retirement income. 
The effects are particularly devastating to female federal 
employees who are often eligible for only meager federal 
pensions resulting from either interruptions in their careers 
while raising their families or working in lower graded 
positions for most of their careers. Had these individuals 
toiled in the private sector earning private pension benefits 
instead of dedicating their careers to public service, they 
would remain fully eligible to collect their spousal Social 
Security benefits.
    NTEU strongly supports legislation introduced by 
Congressman William Jefferson (D-LA), H.R. 2273. While this 
legislation would not entirely eliminate the GPO, it represents 
a humane step in the right direction by applying the GPO only 
to combined annuity and Social Security spousal benefits that 
exceed $l200 per month. One hundred and sixty two of 
Congressman Jefferson's colleagues apparently agree with him 
and have added their names as cosponsors of his legislation. 
While we urge this Congress to address this important issue and 
pass H.R. 2273, we continue to believe that the GPO unfairly 
penalizes individuals who spend their careers in public service 
and should be repealed.
    I want to share with this Committee the circumstances of 
two particular long-term federal employees who are negatively 
impacted by the Government Pension Offset.
    Mrs. Joan Lonnemann has been a seasonal Internal Revenue 
Service employee at the Cincinnati, Ohio Service Center for 33 
years. Although Mrs. Lonnemann is fully eligible to retire, she 
simply cannot afford to take that chance right now. Her 
husband, who is six years her senior, has already retired and 
currently receives Social Security. She currently receives her 
spousal Social Security benefit, based on her husband's 
earnings record, of $5l2 per month. And, she is entitled to 
continue to receive her spousal Social Security benefit just as 
long as she continues working! If and when Mrs. Lonnemann is 
forced to retire, all but $26 of that benefit will end.
    As absurd as this sounds, these are the facts. If, as 
expected, she receives a monthly annuity for her 33 years of 
public service of approximately $730 per month, her Social 
Security spousal benefit will be reduced by \2/3\ of that 
amount, or $486, leaving her a Social Security spousal benefit 
of $26. She is not entitled to Social Security benefits in her 
own right.
    Surely, the Government Pension Offset was never intended to 
wreak this kind of havoc. Should Mrs. Lonnemann retire and her 
husband predecease her, she would be left to live on $756 per 
month ($730 plus $26 in Social Security spousal benefits). 
Blindly applying a law such as the Government Pension Offset 
without regard to the economic hardship it causes is difficult 
to justify. This is precisely the situation Congressman 
Jefferson looks to rectify by passage of his legislation, H.R. 
2273.
    Another case that has been brought to my attention is that 
of Mr. Oliver Hall of Havertown, Pennsylvania. Mr. Hall worked 
for the federal government as a customs inspector for 35 years 
and was forced to retire after a severe stroke. His retirement 
annuity, based on his long career in public service, is a 
little over $l400 per month. When Mr. Hall's wife retired in 
late l997, he was told he would be eligible for spousal Social 
Security benefits based on her earnings record of $452 per 
month.
    Of course, Mr. Hall is not eligible for this spousal Social 
Security benefit because of the Government Pension Offset. The 
first he learned of this offset, however, was in a letter dated 
December 28, l997 from the Social Security Administration. With 
very little in the way of explanation, Social Security states, 
``We are writing to let you know that you are entitled to 
monthly husband's benefits on claim number....we reduce Social 
Security benefits paid to husbands or wives if they also 
receive a government pension based on their own work...for this 
reason, we cannot pay you.
    As you can imagine, this came as quite a surprise to Mr. 
Hall who has appealed this ruling to the Social Security 
Administration. Mr. Hall is hardly alone in being caught 
unaware of this offset. Many more federal employees will be 
caught similarly unaware and many more--especially women--will 
be forced into poverty as a result of the Government Pension 
Offset.
    Again, thank you for holding this important hearing today 
and for shining some light on an issue that often catches 
federal retirees completely by surprise. We look forward to 
working with you to correct this inequity. Let's begin by 
passing H.R. 2273. Thank you very much.
      

                                

Statement of Sally D. O'Hare, Retired Illinois High School Teacher, 
Palos Heights, Illinois

    Prior to my retirement in June, 1994, at age 64, I had been 
a high school mathematics teacher for 32 years. I taught in the 
private schools for eight years and then taught in the public 
schools for twenty-four years. I paid social security as a 
private school teacher. I also paid social security for 24 
years as a public school teacher on income earned outside of 
the school year, and as a part-time counselor, and other part-
time curriculum assignments.
    I receive a pension from my 24 years as a public school 
teacher. My social security monthly check is reduced 
dramatically by the off-set regulation. If my husband precedes 
me in death, which actuarially is quite likely, I would receive 
none of his social Security benefit as his widow. This is 
identified as a widow's penalty.
    I am currently an independent contractor and have a part-
time marketing job, in education. I must pay federal taxes, 
State taxes, and Social Security taxes on this income. I must 
pay the social security tax as an employer and as an 
independent contractor employee. I pay all of my taxes and no 
income is off the books, nor part of the underground economy. I 
will receive not one dime of the additional Social Security 
taxes I must pay from my current employment. This inequity 
needs to be corrected for those persons, such as my self who 
have fallen through the cracks. You are in a position to 
rectified this injustice for senior citizens, who are retired 
teachers and who elect to stay in the work force. I would 
welcome an opportunity to testify before your committee. Thank 
you for your spirited representation of this matter in our 
behalf.
      

                                

Statement of Hon. George V. Voinovich, Governor, State of Ohio

    Thank you for the opportunity to provide written testimony 
for members of the House Ways and Means Subcommittee on Social 
Security.
    As Governor of the State of Ohio, I strongly oppose the 
imposition by the federal government of mandatory Social 
Security coverage on state and local government employees.
    Mandatory Social Security would be another example of the 
federal government imposing an unfunded mandate on state and 
local governments. If state and local governments raise tax 
revenues to maintain the current benefit structure of existing 
state retirement systems, the funding liability for Social 
Security would shift from the federal government to state and 
local governments.

                      Ohio Public Pension Systems

    State and local government employees originally were 
excluded from the Social Security system and were not permitted 
to join the program voluntarily until 1954. The State of Ohio 
took efforts to ensure that state and local public employees 
also were protected. In fact, the State created the State 
Teachers Retirement System in 1921 to provide financial 
security in retirement for the teachers of Ohio. The Public 
Employees Retirement System (PERS), Ohio's largest retirement 
system, also was formed before the creation of the Social 
Security system. PERS was established by Ohio's legislature in 
1933 to provide needed benefits to qualified members and their 
beneficiaries. These benefits include: survivor, disability, 
lump sum death benefits, and supplemental health care coverage 
for a retiree who is 65 and is eligible for Medicare, in 
addition to retirement income.
    There are now five public employee retirement systems in 
the state of Ohio:
     Public Employees Retirement System of Ohio (PERS)
     State Teachers Retirement System of Ohio (STRS)
     Police and Fireman's Disability and Pension Fund
     School Employees Retirement System (SERS)
     Ohio State Highway Patrol Retirement System
    All of the State's systems were designed to meet the direct 
needs of the occupations served.
    There are over 1.1 million active and retired members in 
Ohio's five retirement systems. Ninety-two percent of the 
State's public employees are not covered by Social Security. As 
the largest retirement systems, PERS is a multiple employer 
plan covering 3,700 state and local government units. PERS 
currently has 637,500 active and inactive members and benefit 
recipients.
    All Ohio retirement systems included a defined benefit plan 
and are pre-funded through employee and employer contributions 
and investments income. The largest source of income of the 
systems is investment return. For example, Ohio law requires 
pension benefits under Ohio's systems to be financed over a 30 
year working career. Benefits under STRS are funded over 27 
years. In PERS, over 70 percent of disbursements come from 
investments. Earnings pay for 17 years of 26 years of expected 
payments under STRS. The concept of financing an employee's 
benefits over a working career provides intergenerational 
equity. It avoids the problem of current pensions being paid 
for by future generations. The systems have funded liabilities 
so that as the ratio of active members to benefit recipients 
decreases, contribution rates will not have to be increased to 
fund the same level of benefits.
    The investment of the state retirements funds provides a 
tremendous amount of capital in the economy of Ohio and the 
nation, unlike Social Security funds which simply support other 
government programs.
    The state and local pension plans were actuarially sound at 
their conception and remain so today. These systems are 
accepted, trusted, fiscally sound and provide excellent 
benefits for their members. There is no need to restructure the 
state and local retirement systems.

                  Impact of Mandatory Social Security

    Mandatory Social Security would result in a drastic 
restructuring or abandonment of many excellent state and local 
retirement programs.
    Financially strong, well-funded state and local retirement 
systems will be reduced to unstable pension systems. Current 
active members and retirees will suffer benefit reductions and 
loss of help with health care costs causing the systems to 
break the social contract we have with our members.
    In Ohio, a response to mandated Social Security for State 
of Ohio employees would rest with the General Assembly to enact 
legislation to change public employee benefits. If the General 
Assembly would choose to take no action to change Ohio statute, 
the added burden of the cost of FICA contributions would rest 
on public employees and employers at a rate of 6.2% for each 
group. Adding the full cost of the FICA tax to the state 
retirements system taxes would create an enormous unfunded 
mandate for the state and localities.
    If the General Assembly would choose to add no new costs to 
employers and employees, future investment fund flows would be 
reduced to make FICA payments. The remaining contributions 
would be used to provide a level of benefits within those 
contribution levels. This approach would necessitate a 
reduction of benefits to public employees. Changes to the 
program could include the elimination of health care for 
participants, including retirees; elimination of death, 
disability or survivor benefits; or reducing cost of living 
adjustments.
    The General Assembly also could take the position that the 
current levels of benefits would be maintained by integrating 
state retirement plan and Social Security benefits. If this 
scenario were adopted, additional costs for the PERS, for 
example, likely would be in the range of six percent to seven 
percent of covered payroll, especially if there were a 
continuation of some meaningful retiree health benefits. 
Without post-retirement health care programs, an enormous 
burden will be shifted to the Medicare and potentially the 
Medicaid programs.
    Under the second and third scenarios, reduced cash flow 
into the systems will result in a lower amount of funds to 
invest. Since investment earning are a vital part of pension 
financing, the reduction will cause a longer funding period (up 
to 40 years in the estimate of STRS).
    In addition, public plan benefits are tailored to specific 
subsets of all workers. Social Security does not address the 
special needs of our uniformed employees. Disability, which 
accounts for 25 percent of Police and Fire retirements, is not 
provided by Social Security unless one is totally unemployable 
for any job. Partial disabilities, which encompass 79 percent 
of Police and Fire disability retirements with awards ranging 
from five percent to 60 percent of salary, are not covered by 
Social Security. Also, the nature of Police and Fire work 
requires early retirement, when Social Security is not yet 
available.
    Increased contribution rates or reduced benefits also could 
hurt the recruiting and retention of public employees. Many 
public employees receive lower pay but better benefits than 
their private sector counterparts. Removing the benefit 
incentive will entice many employees to seek employment in the 
private sector.
    Practically speaking, mandatory Social Security would cause 
employee rates to increase or employee benefits to decrease. 
Public employees are fully and immediately vested in their own 
contributions. This is not the case with Social Security. Ohio 
public employees would be forced to participate in a poorly 
funded system with future benefits at risk. Mandatory Social 
Security taxes likely will cause states, especially Ohio, to 
reduce or eliminate the funding of post retirement health care 
programs--shifting an enormous burden to Medicare programs.
    Any change to state programs would result in significant 
administrative cost increases, as well. The state would need to 
change publications, computer systems, benefit processing, and 
member education efforts, just to name a few.
    History has shown that Social Security calculation of 
benefits and corresponding revenues is faulty. The small 
transition funds received from mandating coverage will not fix 
the basic problems with Social Security, and in the long-run 
the new obligation may offset the added revenue. If the 
benefits for current beneficiaries and current participants 
cannot be fiscally met, then the infusion of more participants 
simply exacerbates the problem. The result will be the 
destruction of secure long-standing state pension funds for 
very little gain and lesser benefits for public employees.

                               Conclusion

    I believe that it would not be prudent to alter the funding 
of Ohio's public employee retirement systems that are solvent, 
stable systems. Mandating that public employees covered by the 
public pension systems in Ohio and other states participate in 
Social Security is flawed public policy. It would cause great 
harm to systems which pre-date social security and cause the 
systems to break promises made to their members for little or 
no material help to Social Security.
    I respectfully urge your opposition to any attempt to 
require state and local employees to participate in Social 
Security. Thank you for your consideration of my concerns.
      

                                

Statement of Hon. Max Sandlin, a Representative in Congress from the 
State of Texas

    Thank you Mr. Chairman and Ranking Member Rangel, for the 
opportunity to testify today on the impact of the Windfall 
Elimination Provision on the Social Security benefits of 
retired government employees. I appreciate the committee 
including both the Government Pension Offset and the Windfall 
Elimination Provision in the debate on the future of Social 
Security.
    I would like to echo the testimony given by my colleagues, 
Mr. Frank and Mr. Jefferson, regarding their respective bills. 
Both bills are worthy of consideration by this committee. I 
have cosponsored the bill by Mr. Jefferson and support full 
Social Security widow's benefits for former government 
employees. I also support the legislation introduced by Mr. 
Frank, which addresses the Windfall Elimination Provision, on 
which I am about to testify.
    Mr. Chairman, just like many of my colleagues on this 
committee, I spend time virtually every weekend traveling 
through my district visiting with my constituents. From every 
corner of the 19 counties in the First Congressional District 
of Texas, I have heard from former local, state and federal 
government employees who have been surprised by the paucity of 
their Social Security benefits due to the Windfall Elimination 
Provision, enacted in 1983.
    One of these constituents happens to be my mother, whose 
suggestions and advice I have learned over many years not to 
ignore. My mother was happy to spend nearly 30 years serving 
society as a public school teacher, a job which simultaneously 
challenged and fulfilled her. However, she never expected that 
her reward for these years of service would be a significant 
reduction in her Social Security benefits. She, like many of 
the 290,000 government retirees affected by this provision, 
feels like the federal government has turned its back on her 
when she needs its help the most--during her retirement years.
    The Windfall Elimination Provision was enacted in 1983 to 
help restore solvency to the program and correct a perceived 
inequity in the treatment of people who had worked both in jobs 
covered by Social Security and jobs exempted from Social 
Security. Mr. Chairman, I understand the history of and the 
rationale for the Windfall Elimination Provision. It may be 
true that due to a flaw in the Social Security formula, prior 
to 1983 some retirees eligible for both Social Security 
benefits and a local, state, or federal government pension 
received a larger-than-justified benefit. I don't think anyone 
in this hearing room wants to be giving undeserved benefits to 
retired government employees who also spent time in the private 
sector. However, I also don't think anyone in this room 
believes we should now punish these teachers, firemen, and 
policemen with Social Security benefits that fail to meet their 
expectations, fail to provide them with a basic standard of 
living, and fail to fulfill the agreement they have made with 
the federal government.
    Some claim that this provision is not particularly onerous 
to many of the affected retirees because the provision 
generally affects only those who are well off and have a 
generous government pension. I assure the members of this 
committee that my mother, for one, is not one of the retirees 
who feel this provision is not particularly onerous. She spent 
much of her life in public service and planned her retirement 
carefully. To have had her Social Security benefits arbitrarily 
and unexpectedly reduced was more than just an insult--it was 
also a lowering of her standard of living in her retirement 
years.
    According to a 1990 CRS report, the Windfall Elimination 
Provision ``is appropriate for typical CSRS annuitants, but 
over-penalizes lower-paid workers with short or fairly evenly 
split careers, and under penalizes workers with long Social 
Security-covered careers.'' I appreciate the work Mr. Frank has 
done on addressing the impact of the Windfall Elimination 
Provision on low income retirees. His bill partially repeals 
the Windfall Elimination Provision for government employees 
with small pensions. I think this may be one very effective way 
of restoring benefits to those who most need them and who may 
be disproportionately affected by this provision.
    However, I have introduced a bill, H.R. 3077, the Social 
Security Benefit Restoration Act, to repeal the Windfall 
Elimination Provision and restore equity and fairness to the 
Social Security benefits of our retired government employees. I 
introduced this bill calling for the complete repeal of the 
Windfall Elimination Provision because I believe the provision 
is unfair to any retired government employee, regardless of his 
or her financial status.
    This bill would put our federal government back in the 
business of providing our retired government employees with the 
retirement security they deserve. I recognize that full repeal 
of the Windfall Elimination Provision would be expensive, and 
we need to debate a reasonable way to pay for this legislation. 
However, this bill would not be creating a new benefit, only 
restoring a benefit that retirees once had. I don't think this 
means the bill should be exempt from pay-go rules, but it does 
mean that it should be part of any debate on Social Security 
reform. As Congress moves forward with reform of the Social 
Security system, Mr. Chairman, I urge you and the members of 
this committee to remember our retired federal, state, and 
local government employees and seriously consider repeal of the 
Windfall Elimination Provision.
    I would like to close, Mr. Chairman, by reading you a 
portion of a letter from a constituent. This constituent 
writes:
    ``From day one of my employment, I was always told that 
someday I would be glad the withholding from my check for 
Social Security would be there for me at retirement. That was 
always in my plan for retirement. Now a significant amount of 
what I was promised is being withheld from my check. Just at a 
time in my life when I am very likely to need extra funds for 
health care and to maintain a fair standard of living it is 
being taken away. This is unfair to us seniors.''
    Thank you Mr. Chairman, Ranking Member Rangel, and members 
of this committee.
      

                                

                   State Teachers Retirement System of Ohio
                                                       May 13, 1998

Mr. A. L. Singleton, Chief of Staff
U. S. House of Representatives
Committee on Ways and Means
1102 Longworth House Office Bldg.
Washington, D. C. 20515

    Dear Mr. Singleton:

    These comments are being submitted on behalf of the State Teachers 
Retirement System of Ohio Board of Trustees and the more than 300,000 
active and retired members of our system for the printed record of the 
Subcommittee on Social Security of the Committee on Ways and Means 
hearing on ``The Future of Social Security for this Generation and the 
Next.''
    Ohio has a long history, predating Social Security, of providing 
retirement and disability security and family income to state and local 
public employees. When Social Security was initiated in the mid-1930s 
by Congressional action, Ohio public employees were not permitted to 
participate. Later, when states were given the option of joining Social 
Security, Ohio voted to remain independent. Ohio public servants were 
already well served. The Ohio public retirement systems were and are 
stable and working well.
    After carefully studying the January 6, 1997 Advisory Council on 
Social Security report and analyzing the actuarial impact both in terms 
of increasing costs and reducing benefits to the members of our system, 
we stand strongly opposed to any proposal that would require mandatory 
participation in Social Security. We respectfully urge your determined 
opposition to any proposal that would mandate coverage for any non-
covered system.
    The soundness of Social Security for the future is a very important 
issue for the nation. However, mandating participation is not the 
solution; it provides no long-term fiscal benefits to Social Security, 
but causes permanent and serious damage to plans like STRS and those 
like us throughout the nation.
    Unlike Social Security which is a pay-as you-go system, STRS is 83% 
reserve funded. Member and employer contributions, along with income 
from investments, provide the reserves needed to finance retirement 
benefits. Investment income provides 65% of the funds for benefit 
payments.
    It would be a serious mistake to believe that those public 
employees who remained in public pension funds would not be adversely 
affected by mandatory coverage for new hires. Faced with the added cost 
of Social Security, it is certain that over time Ohio would be forced 
to change existing public pension plans by adjusting benefits downward 
as well as dropping retiree health care. The impact of reducing 
contributions to public plans by more than half in most systems would 
reduce the capital stream necessary for investment and could force such 
plans to cut back on benefits for all members. There is no way that 
states can deal with an unfunded mandate of such immense proportions.
    In restructuring the Social Security system, we believe that 
consideration should be given to what non-covered systems have done 
well in providing for our members. The area of investments alone 
provides great potential for restructuring Social Security. Simply 
adding more members which has never worked in the past, and which will 
not work now, is not the answer.
    We appreciate the opportunity to comment on this important issue 
and would be pleased to provide further information if that would be 
helpful to you. Thank you for your consideration.

            Respectfully,
                                            Herbert L. Dyer
                                                 Executive Director
      

                                

                    Teachers' Retirement System of Kentucky
                                                       June 3, 1998

Representative Jim Bunning
Chair, House Social Security Subcommittee
2437 Rayburn Building
Washington, D.C. 20515

    Dear Congressman Bunning:

    I wish to comment on the proposal to mandate Social Security 
participation for all new public employees that is under consideration 
in the House Social Security Subcommittee. As you know, the retirement 
benefits of public school teachers and administrators in Kentucky are 
provided exclusively by the Kentucky Teachers' Retirement System which 
has more than 75,000 members.
    The Kentucky General Assembly has acted over a period of years to 
establish an excellent level of benefits for public school teachers. 
While enhancing the recruitment and retention of qualified teachers, 
the benefit program also recognizes that the current demands placed on 
teachers make it beneficial to the State and the teachers to provide 
meaningful benefits at ages several years prior to age 65 or the 
extended ages planned by Social Security.
    Unlike the Social Security program which operates on a pay-as-you-
go basis, the Commonwealth has acted responsibly by funding the cost of 
the program on an actuarial reserve basis from contributions made by 
active members and the State. The June 30, 1997 actuarial valuation by 
an independent actuary reflects that the current total contribution 
rate of 19.81 percent of active member payroll plus reserve funds and 
investment income will be sufficient to pay all benefits earned by 
retired and currently active members. Members contribute 9.855 percent, 
and the State matches the member contribution plus an additional 3.25 
percent to retire the System's unfunded obligations with the 
contributions totaling 22.96 percent, 3.15 percent of which is 
allocated for a comprehensive health insurance plan for retirees. The 
current levels of funding allow the System to maintain reserve trust 
funds that assure the actuarial and financial soundness of KTRS.
    Buck Consultants, the System's Actuary, has stated that if the 
current 22.96 percent contribution rate to KTRS is reduced by 12.4 
percent due to mandated Social Security, the KTRS benefit accrual 
formula per year of service by public school teachers would have to be 
reduced from 2.5 percent to
    less than 1.0 percent. The reallocation of 12.4 percent from the 
KTRS is a distinct possibility since it would be improbable that 
members or the State could contribute an additional 12.4 percent of 
payroll, and the choice would be either large increases in 
contributions or significant reductions in KTRS benefits now available 
to all KTRS members. An illustration identifies the negative impact on 
an average teacher. Under current KTRS laws, a new teacher would 
receive 83 percent of their average salary at age 55 after teaching 33 
years. If the KTRS funding is reduced by 12.4 percent to accommodate 
Social Security coverage, the KTRS benefit for the same new teacher 
would be less than 33 percent at age 55, and they would have to wait at 
least ten years to be eligible to receive Social Security.
    Most would agree with the GAO finding that mandatory coverage would 
benefit the financially troubled Social Security program. The program 
would receive an additional 12.4 percent of salaries of newly hired 
public school teachers and other public employees for a period of 40 
plus years before having to make any payments to most of the teachers 
and other government employees. I understand that the Social Security 
actuaries estimate that the savings resulting from mandatory coverage 
would be hundreds of billions of dollars over the next 75 years, but 
the saving for Social Security would represent funds lost by the newly 
covered employees and their employers, such as the state of Kentucky.
    It appears that the reason such a blatant and unwarranted transfer 
of wealth could even be considered results from too much attention to 
actuarial funding and not enough recognition of the fact that Social 
Security is almost a pure pay-as-you-go system where today's active 
workers support today's retirees. It also appears the reason for this 
proposal is not to protect the retirement benefits of future state and 
local employees, but to use their current contributions to help solve 
the Social Security deficit problem.
    I have read the statements made at the May 21, 1998 meeting of the 
House Social Security Subcommittee by the Executive Directors of three 
state pension plans, Colorado, Ohio and Nevada. The makeup of those 
public pension plans is very similar to that of the Kentucky Teachers' 
Retirement System, and rather than repeat their positions, I submit 
that their findings and recommendations are typical of the public plans 
that would be affected by mandatory Social Security coverage.
    In conclusion, it is the position of the Kentucky Teachers' 
Retirement System that mandatory Social Security coverage would impose 
significant negative impact on Kentucky's teachers who would either 
contribute an additional 6.2 percent for Social Security or have their 
KTRS benefits reduced more than half of the current level. The choice 
of the state of Kentucky would be increase taxes to pay the additional 
6.2 percent employer payment required for Social Security or reduce the 
KTRS benefits. With 12.4 percent of contributions allocated to Social 
Security, the KTRS would lose multimillion of dollars each year due to 
a loss of income from investments, a source of income that funds over 
60 percent of the annuities paid to retirees.
    Congressman Bunning, we ask that you consider the serious 
consequences that mandatory coverage would place on Kentucky's future 
teachers and the necessity of the State having to increase taxes or 
dismantling of a retirement system that has provided meaningful 
benefits to Kentucky's teachers since 1940. We need your help on this 
very important issue.
    Please advise if you would like additional information pertaining 
to the Kentucky Teachers' Retirement System and its members.

            Sincerely,
                                              Pat N. Miller
                                                Executive Secretary

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