Social Security: Issues Relating to Noncoverage of Public	 
Employees (01-MAY-03, GAO-03-710T).				 
                                                                 
Social Security covers about 96 percent of all US workers; the	 
vast majority of the rest are state, local, and federal 	 
government employees. While these noncovered workers do not pay  
Social Security taxes on their government earnings, they may	 
still be eligible for Social Security benefits. This poses	 
difficult issues of fairness, and Social Security has provisions 
that attempt to address those issues, but critics contend these  
provisions are themselves often unfair. Congress asked GAO to	 
discuss these provisions as well as the implications of mandatory
coverage for public employees.					 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-03-710T					        
    ACCNO:   A06778						        
  TITLE:     Social Security: Issues Relating to Noncoverage of Public
Employees							 
     DATE:   05/01/2003 
  SUBJECT:   Beneficiaries					 
	     Federal social security programs			 
	     Social security benefits				 
	     Social security taxes				 
	     Government Pension Offset Exemption		 
	     Social Security Program				 
	     Windfall Elimination Program			 

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GAO-03-710T

Testimony Before the Subcommittee on Social Security, Committee on Ways
and Means, House of Representatives

United States General Accounting Office

GAO For Release on Delivery Expected at 10: 00 a. m. EDT Thursday, May 1,
2003 SOCIAL SECURITY

Issues Relating to Noncoverage of Public Employees

Statement of Barbara D. Bovbjerg, Director Education, Workforce, and
Income Security Issues

GAO- 03- 710T

This is a work of the U. S. government and is not subject to copyright
protection in the United States. It may be reproduced and distributed in
its entirety without further permission from GAO. However, because this
work may contain copyrighted images or other material, permission from the
copyright holder may be necessary if you wish to reproduce this material
separately.

Social Security*s provisions regarding public employees are rooted in the
fact that about one- fourth of them do not pay Social Security taxes on
the earnings from their government jobs, for various historical reasons.
Even though noncovered employees may have many years of earnings on which
they do not pay Social Security taxes, they can still be eligible for
Social Security benefits based on their spouses* or their own earnings in
covered

employment. To address the issues that arise with noncovered public
employees, Social Security has two provisions* the Government Pension
Offset (GPO), which affects spouse and survivor benefits, and the Windfall
Elimination Provision (WEP), which affects retired worker benefits. Both
provisions reduce Social Security benefits for those who receive
noncovered pension benefits. Both provisions also depend on having
complete and accurate information on receipt of such noncovered pension
benefits. However, such information is not available for many state and
local pension plans, even though it is for federal pension benefits. As a
result, GPO and WEP are not applied consistently for all noncovered
pension recipients. In addition to the administrative challenges, these
provisions are viewed by some as confusing and unfair, and a number of
proposals have been offered to either revise or eliminate GPO and WEP.
Such actions, while they may reduce confusion among affected workers,
would increase the long- range Social Security trust fund deficit and
could create fairness issues for workers who have contributed to Social
Security throughout their working lifetimes.

Making coverage mandatory has been proposed to help address the program*s
financing problems, and doing so could ultimately eliminate the need for
the GPO and the WEP. According to Social Security actuaries, mandatory
coverage would reduce the 75- year actuarial deficit by 10 percent.
However, to provide for the same level of retirement income,

mandating coverage would increase costs for the state and local
governments that would sponsor the plans. Moreover, GPO and WEP would
still be needed for many years to come even though they would become
obsolete in the long run.

SOCIAL SECURITY

Issues Relating to Noncoverage of Public Employees

www. gao. gov/ cgi- bin/ getrpt? GAO- 03- 710T. To view the full report,
including the scope and methodology, click on the link above. For more
information, contact Barbara D. Bovbjerg at (202) 512- 7215 or bovbjergbj@
gao. gov. Highlights of GAO- 03- 710T, a testimony

before the Subcommittee on Social Security, Committee on Ways and Means,
House of Representatives May 1, 2003

Social Security covers about 96 percent of all US workers; the vast
majority of the rest are state, local, and federal government employees.
While these noncovered workers do not pay Social Security taxes on their
government earnings, they may still be eligible for Social Security
benefits. This poses

difficult issues of fairness, and Social Security has provisions that
attempt to address those issues, but critics contend these provisions are
themselves often unfair. The

Subcommittee asked GAO to discuss these provisions as well as the
implications of mandatory

coverage for public employees. GAO has previously recommended that the
Internal Revenue Service (IRS) provide for complete and accurate reporting
of noncovered

pensions, but IRS has responded that it lacks the necessary authority from
the Congress. GAO therefore

takes this opportunity to bring the matter to the attention of the
Congress for its consideration. To facilitate complete and accurate
reporting of government pension

income, the Congress should consider giving IRS the authority to collect
this information, which could perhaps be accomplished through a simple
modification to a single form.

Page 1 GAO- 03- 710T

Mr. Chairman and Members of the Subcommittee: I am pleased to be here
today to discuss Social Security provisions affecting public employees.
Social Security covers about 96 percent of all U. S. workers; the vast
majority of the rest are state, local, and federal government employees.
While these noncovered workers do not pay Social Security taxes on their
government earnings, they may still be eligible for Social Security
benefits. This poses difficult issues of fairness, and Social Security has
provisions that attempt to address those issues. However, these provisions
have been difficult to administer. They have also been a source of
confusion and frustration for the workers they affect.

I hope I can help clarify and provide some perspective on the complex
relationship between Social Security and public employees. Today, I will
discuss Social Security*s coverage of public employees, Social Security*s

provisions affecting noncovered public employees, and the potential
implications of mandatory coverage of public employees. My testimony is
based on a body of work we have published over the past several years. 1
In summary, Social Security*s provisions regarding public employees are

rooted in the fact that about one- fourth of them do not pay Social
Security taxes on the earnings from their government jobs, for various
historical reasons. Even though noncovered employees may have many years
of earnings on which they do not pay Social Security taxes, they can still
be eligible for Social Security benefits based on their spouses* or their
own earnings in covered employment. To address the fairness issues that
arise with noncovered public employees, Social Security has two
provisions* the Government Pension Offset (GPO), which affects spouse and
survivor benefits, and the Windfall Elimination Provision (WEP), which
affects

retired worker benefits. Both provisions reduce Social Security benefits
for those who receive noncovered pension benefits, and both provisions
also depend on having complete and accurate information on receipt of such
noncovered pension benefits. However, such information is not available
for many state and local pension plans, even though it is for federal
pension benefits. As a result, GPO and WEP are not applied consistently
for all noncovered pension recipients. We have made recommendations to
improve the availability and tracking of key information, and in the
federal case, the implementation of our

1 See the list of related GAO products at the end of this statement.

Page 2 GAO- 03- 710T

recommendations has saved hundreds of millions of dollars. However,
congressional action appears to be needed in this area with respect to
state and local government pensions. At the same time, a number of
proposals have been offered to either revise or eliminate GPO and WEP.
While we have not analyzed such proposals, we believe it is important to
consider both the costs and fairness issues they raise.

Aside from the issues surrounding GPO and WEP, another aspect of the
relationship between Social Security and public employees is the question
of mandatory coverage. Making coverage mandatory has been proposed to

help address the program*s financing problems. According to Social
Security actuaries, doing so would reduce the 75- year actuarial deficit
by 10 percent. Mandatory coverage could also enhance inflation-
protection, pension portability, and dependent benefits for the affected
beneficiaries, in many cases. However, to provide for the same level of
retirement income, mandatory coverage could increase costs for the state
and local governments that would sponsor the plans. Moreover, the GPO and
WEP would continue to apply for many years to come even though they would
become obsolete in the long run.

Social Security provides retirement, disability, and survivor benefits to
insured workers and their dependents. Insured workers are eligible for
reduced benefits at age 62 and full retirement benefits between age 65 and
67, depending on their year of birth. 2 Social Security retirement
benefits

are based on the worker*s age and career earnings, are fully indexed for
inflation after retirement, and replace a relatively higher proportion of
wages for career low- wage earners. Social Security*s primary source of
revenue is the Old Age, Survivors, and Disability Insurance (OASDI)
portion of the payroll tax paid by employers and employees. The OASDI
payroll tax is 6.2 percent of earnings each for employers and employees,
up to an established maximum.

One of Social Security*s most fundamental principles is that benefits
reflect the earnings on which workers have paid taxes. Social Security
provides benefits that workers have earned to some degree because of

their contributions and those of their employers. At the same time, Social
Security helps ensure that its beneficiaries have adequate incomes and do

2 Beginning with those born in 1938, the age at which full benefits are
payable will increase in gradual steps from age 65 to age 67. Background

Page 3 GAO- 03- 710T

not have to depend on welfare. Toward this end, Social Security*s benefit
provisions redistribute income in a variety of ways* from those with
higher lifetime earnings to those with lower ones, from those without
dependents to those with dependents, from single earners and two- earner
couples to one- earner couples, and from those who do not live very long
to those who do. These effects result from the program*s focus on helping

ensure adequate incomes. Such effects depend to a great degree on the
universal and compulsory nature of the program.

According to the Social Security trustees* 2003 intermediate, or
bestestimate, assumptions, Social Security*s cash flow is expected to turn
negative in 2018. In addition, all of the accumulated Treasury obligations
held by the trust funds are expected to be exhausted by 2042. Social
Security*s long- term financing shortfall stems primarily from the fact
that people are living longer. As a result, the number of workers paying
into the system for each beneficiary has been falling and is projected to
decline from 3.3 today to about 2 by 2030. Reductions in promised benefits
and/ or increases in program revenues will be needed to restore the long-
term solvency and sustainability of the program.

About one- fourth of public employees do not pay Social Security taxes on
the earnings from their government jobs. Historically, Social Security did
not require coverage of government employees because they had their own
retirement systems, and there was concern over the question of the federal
government*s right to impose a tax on state governments. However,
virtually all other workers are now covered, including the remaining
three- fourths of public employees.

The 1935 Social Security Act mandated coverage for most workers in
commerce and industry, which at that time comprised about 60 percent of
the workforce. Subsequently, the Congress extended mandatory Social

Security coverage to most of the excluded groups, including state and
local employees not covered by a public pension plan. The Congress also
extended voluntary coverage to state and local employees covered by public
pension plans. Since 1983, however, public employers have not been
permitted to withdraw from the program once they are covered.

Also, in 1983, the Congress extended mandatory coverage to newly hired
federal workers.

The Social Security Administration (SSA) estimates that 5.25 million state
and local government employees, excluding students and election workers,
are not covered by Social Security. SSA also estimates that About One-
Fourth of

Public Employees Are Not Covered by Social Security

Page 4 GAO- 03- 710T

annual wages for these noncovered employees totaled about $171 billion in
2002. In addition, 1 million federal employees hired before 1984 are also
not covered. Seven states* California, Colorado, Illinois, Louisiana,
Massachusetts, Ohio, and Texas* account for more than 75 percent of the
noncovered payroll.

Most full- time public employees participate in defined benefit pension
plans. Minimum retirement ages for full benefits vary; however, many state
and local employees can retire with full benefits at age 55 with 30 years
of service. Retirement benefits also vary, but they are usually based on a

specified benefit rate for each year of service and the member*s final
average salary over a specified time period, usually 3 years. For example,
plans with a 2- percent rate replace 60 percent of a member*s final
average salary after 30 years of service. In addition to retirement
benefits, a 1994 U. S. Department of Labor survey found that all members
have a survivor annuity option, 91 percent have disability benefits, and
62 percent receive

some cost- of- living increases after retirement. In addition, in recent
years, the number of defined- contribution plans, such as 401( k) plans
and the Thrift Savings Plan for federal employees, has been growing and
becoming a relatively more common way for employers to offer pension
plans; public employers are no exception to this trend.

Even though noncovered employees may have many years of earnings on which
they do not pay Social Security taxes, they can still be eligible for
Social Security benefits based on their spouses* or their own earnings in
covered employment. SSA estimates that 95 percent of noncovered state and
local employees become entitled to Social Security as workers,

spouses, or dependents. Their noncovered status complicates the program*s
ability to target benefits in the ways it is intended to do.

To address the fairness issues that arise with noncovered public
employees, Social Security has two provisions* GPO, which addresses spouse
and survivor benefits and WEP, which addresses retired worker benefits.
Both provisions depend on having complete and accurate information that
has proven difficult to get. Also, both provisions are a source of
confusion and frustration for public employees and retirees. As a result,
proposals have been offered to revise or eliminate both provisions.

Under the GPO provision, enacted in 1977, SSA must reduce Social Security
benefits for those receiving noncovered government pensions when their
entitlement to Social Security is based on another person*s (usually their
spouse*s) Social Security coverage. Their Social Security Provisions Seek

Fairness but Pose Administrative Challenges

Page 5 GAO- 03- 710T

benefits are to be reduced by two- thirds of the amount of their
government pension. Under the WEP, enacted in 1983, SSA must use a
modified formula to calculate the Social Security benefits people earn
when they have had a limited career in covered employment. This formula
reduces the amount of payable benefits.

Regarding GPO, spouse and survivor benefits were intended to provide some
Social Security protection to spouses with limited working careers. The
GPO provision reduces spouse and survivor benefits to persons who do not
meet this limited working career criterion because they worked long enough
in noncovered employment to earn their own pension.

Regarding WEP, the Congress was concerned that the design of the Social
Security benefit formula provided unintended windfall benefits to workers
who spent most of their careers in noncovered employment. The formula
replaces a higher portion of preretirement Social Security- covered
earnings when people have low average lifetime earnings than it does when
people have higher average lifetime earnings. People who work exclusively,
or have lengthy careers, in noncovered employment appear on SSA*s earnings
records as having no covered earnings or a low average of covered lifetime
earnings. As a result, people with this type of earnings

history benefit from the advantage given to people with low average
lifetime earnings when in fact their total (covered plus noncovered)
lifetime earnings were higher than they appear to be for purposes of
calculating Social Security benefits. Both GPO and WEP apply only to those
beneficiaries who receive

pensions from noncovered employment. To administer these provisions, SSA
needs to know whether beneficiaries receive such noncovered pensions.
However, our prior work found that SSA lacks payment controls and is often
unable to determine whether applicants should be subject to GPO or WEP
because it has not developed any independent source of noncovered pension
information. 3 In that report, we estimated that failure to reduce
benefits for federal, state, and local employees caused $160

million to $355 million in overpayments between 1978 and 1995. In response
to our recommendation, SSA performed additional computer matches with the
Office of Personnel Management to get noncovered

3 See U. S. General Accounting Office, Social Security: Better Payment
Controls for Benefit Reduction Provisions Could Save Millions, GAO/ HEHS-
98- 76 (Washington, D. C.: Apr. 30, 1998).

Page 6 GAO- 03- 710T

pension data for federal retirees in order to ensure that these provisions
are applied. These computer matches detected payment errors; correcting
these errors will generate hundreds of millions of dollars in savings,
according to our estimates. 4 Also, in that report, we recommended that
SSA work with the Internal

Revenue Service (IRS) to revise the reporting of pension information on
IRS Form 1099R, so that SSA would be able to identify people receiving a
pension from noncovered employment, especially in state and local
governments. However, IRS does not believe it can make the recommended
change without new legislative authority. Given that one of our
recommendations was implemented but not the other, SSA now has

better access to information for federal employees but not for state and
local employees. As a result, SSA cannot apply GPO and WEP for state and
local government employees to the same degree that it does for federal
employees. To address issues such as these, the President*s budget
proposes *to increase Social Security payment accuracy by giving SSA the
ability to independently verify whether beneficiaries have pension income
from employment not covered by Social Security.*

In addition to facing administrative challenges, GPO and WEP have also
faced criticism regarding their design in the law. For example, GPO does
not apply if an individual*s last day of state/ local employment is in a
position that is covered by Social Security. 5 This GPO *loophole* raises
fairness and equity concerns. 6 In the states we visited for a previous
report, individuals with a relatively minimal investment of work time and
Social Security contributions gained access to potentially many years of
full Social Security spousal benefits. To address this issue, the House

4 SSA performed the first such match in 1999 and advised that it willl be
done on a recurring basis in the future. SSA identified about 14, 600
people whose benefits should have been calculated using WEP*s modified
formula. We estimate that detecting these payment errors

will generate $207.9 million in lifetime benefit reduction for this
cohort. We further estimate each year*s match will generate about $57
million in lifetime benefit reductions for each new cohort.

5 Exemption due to *The Last Day of Employment* Covered Under Social
Security* State/ Local or Military Service Pensions (SSA*s Program
Operations Manual System, GN 02608.102).

6 See U. S. General Accounting Office, Social Security Administration:
Revision to the Government Pension Offset Exemption Should Be Considered,
GAO- 02- 950 (Washington, D. C.: Aug. 15, 2002).

Page 7 GAO- 03- 710T

recently passed legislation that provides for a longer minimum time period
in covered employment.

At the same time, GPO and WEP have been a source of confusion and
frustration for the roughly 6 million workers and nearly 1 million
beneficiaries they affect. Critics of the measures contend that they are
basically inaccurate and often unfair. For example, some opponents of

WEP argue that the formula adjustment is an arbitrary and inaccurate way
to estimate the value of the windfall and causes a relatively larger
benefit reduction for lower- paid workers. A variety of proposals have
been offered to either revise or eliminate them. While we have not studied
these

proposals in detail, I would like to offer a few observations to keep in
mind as you consider them. First, repealing these provisions would be
costly in an environment where the Social Security trust funds already
face long- term solvency issues. According to SSA and the Congressional
Budget Office (CBO), proposals to reduce the number of beneficiaries
subject to GPO would cost $5 billion or more over the next 10 years and
increase Social Security*s long- range deficit by up to 1 percent.
Eliminating GPO entirely would cost $21 billion over 10 years and increase
the long- range deficit by about 3 percent. Similarly, a proposal that
would reduce the number of beneficiaries subject to WEP would cost $19
billion over 10 years, and eliminating WEP would increase Social
Security*s long- range deficit by 3 percent.

Second, in thinking about the fairness of the provisions and whether or
not to repeal them, it is important to consider both the affected public
employees and all other workers and beneficiaries who pay Social Security
taxes. For example, SSA has described GPO as a way to treat spouses with
noncovered pensions in a fashion similar to how it treats dually entitled
spouses, who qualify for Social Security benefits both on their own work
records and their spouses*. In such cases, each spouse may not receive
both the benefits earned as a worker and the full spousal benefit; rather
the worker receives the higher amount of the two. If GPO were eliminated
or reduced for spouses who had paid little or no Social Security taxes on
their lifetime earnings, it might be reasonable to ask whether the same
should be done for dually entitled spouses who have paid Social Security
on all their earnings. Far more spouses are subject to the dual-
entitlement offset than to GPO; as a result, the costs of

eliminating the dual- entitlement offset would be commensurately greater.

Page 8 GAO- 03- 710T

Aside from the issues surrounding GPO and WEP, another aspect of the
relationship between Social Security and public employees is the question
of mandatory coverage. Making coverage mandatory has been proposed in

the past to help address the program*s financing problems. According to
Social Security actuaries, doing so would reduce the 75- year actuarial
deficit by 10 percent. 7 Mandatory coverage could also enhance
inflationprotection for the affected beneficiaries, improve portability,
and add dependent benefits in many cases. However, to provide for the same
level of retirement income, mandatory coverage could increase costs for
the

state and local governments that would sponsor the plans. Moreover, if
coverage were extended primarily to new state and local employees, GPO and
WEP would continue to apply for many years to come for existing employees
and beneficiaries even though they would become obsolete in the long run.
While Social Security*s solvency problems have triggered an analysis of

the impact of mandatory coverage on program revenues and expenditures, the
inclusion of such coverage in a comprehensive reform package would need to
be grounded in other considerations. In recommending that mandatory
coverage be included in the reform proposals, the 1994- 1996 Social
Security Advisory Council stated that mandatory coverage is basically *an
issue of fairness.* The Advisory Council*s report noted that *an effective
Social Security program helps to reduce public costs for relief and
assistance, which, in turn, means lower general taxes. There is an element
of unfairness in a situation where practically all contribute to Social
Security, while a few benefit both directly and indirectly but are

excused from contributing to the program.* The impact on public employers,
employees, and pension plans would depend on how states and localities
with noncovered employees would react to mandatory coverage. Many public
pension plans currently offer a lower retirement age and higher retirement
income benefit than Social

Security. For example, many public employees, especially police and
firefighters, retire before they are eligible for full Social Security
benefits; new plans that include Social Security coverage might provide
special supplemental benefits for those who retire before they could
receive Social Security benefits. Social Security, on the other hand,
offers

7 SSA uses a period of 75 years for evaluating the program*s long- term
actuarial status to obtain the full range of financial commitments that
will be incurred on behalf of current program participants. Mandatory
Coverage

Has Been Proposed

Page 9 GAO- 03- 710T

automatic inflation protection, full benefit portability, and dependent
benefits, which are not available in many public pension plans. Costs
could increase by as much as 11 percent of payroll for those states and
localities, depending on the benefit package of the new plans that would
include Social Security coverage. Alternatively, states and localities
that wanted to maintain level spending for retirement would likely need to
reduce some pension benefits. Additionally, states and localities could
require several years to design, legislate, and implement changes to
current pension plans. Finally, mandating Social Security coverage for
state and local employees could elicit a constitutional challenge.

There are no easy answers to the difficulties of equalizing Social
Security*s treatment of covered and noncovered workers. Any reductions in
GPO or WEP would ultimately come at the expense of other Social Security
beneficiaries and taxpayers. Mandating universal coverage would promise
the eventual elimination of GPO and WEP but at potentially significant
cost to affected state and local governments, and even so GPO and WEP
would continue to apply for some years to come, unless they were repealed.
Whatever the decision, it will be important to administer all elements of
the Social Security program effectively and equitably.

GPO and WEP have proven difficult to administer because they depend on
complete and accurate reporting of government pension income, which is not
currently achieved. The resulting disparities in the application of these
two provisions is yet another source of unfairness in the final outcome.
We have made recommendations to the Internal Revenue Service to provide

for complete and accurate reporting, but it has responded that it lacks
the necessary authority from the Congress. We therefore take this
opportunity to bring the matter to the Subcommittee*s attention for
consideration.

To facilitate complete and accurate reporting of government pension
income, the Congress should consider giving IRS the authority to collect
this information, which could perhaps be accomplished through a simple
modification to a single form.

Mr. Chairman, this concludes my statement, I would be happy to respond to
any questions you or other members of the Subcommittee may have.
Conclusions

Matter for Congressional Consideration

Page 10 GAO- 03- 710T

For information regarding this testimony, please contact Barbara D.
Bovbjerg, Director, Education, Workforce, and Income Security Issues, on
(202) 512- 7215. Individuals who made key contributions to this testimony
include Daniel Bertoni and Ken Stockbridge. GAO Contributions

and Acknowledgments

Page 11 GAO- 03- 710T

Social Security: Congress Should Consider Revising the Government Pension
Offset *Loophole.* GAO- 03- 498T. Washington, D. C.: February 27, 2003.

Social Security Administration: Revision to the Government Pension Offset
Exemption Should Be Considered. GAO- 02- 950. Washington, D. C.: August
15, 2002.

Social Security Reform: Experience of the Alternate Plans in Texas. GAO/
HEHS- 99- 31, Washington, D. C.: February 26, 1999.

Social Security: Implications of Extending Mandatory Coverage to State and
Local Employees. GAO/ HEHS- 98- 196. Washington, D. C.: August 18, 1998.

Social Security: Better Payment Controls for Benefit Reduction Provisions
Could Save Millions. GAO/ HEHS- 98- 76. Washington, D. C.: April 30, 1998.

Federal Workforce: Effects of Public Pension Offset on Social Security
Benefits of Federal Retirees. GAO/ GGD- 88- 73. Washington, D. C.: April
27, 1988. Related GAO Products

(130268)
*** End of document. ***