Social Security: Coverage of Public Employees and Implications
for Reform (09-JUN-05, GAO-05-786T).
Social Security covers about 96 percent of all U.S. workers; the
vast majority of the rest are state, local, and federal
government employees. While these noncovered workers do not pay
Social Security taxes on their government earnings, they may
still be eligible for Social Security benefits. This poses
difficult issues of fairness, and Social Security has provisions
that attempt to address those issues, but critics contend these
provisions are themselves often unfair. The Subcommittee asked
GAO to discuss Social Security's effects on public employees as
well as the implications of reform proposals.
-------------------------Indexing Terms-------------------------
REPORTNUM: GAO-05-786T
ACCNO: A26219
TITLE: Social Security: Coverage of Public Employees and
Implications for Reform
DATE: 06/09/2005
SUBJECT: Federal social security programs
Pensions
Retirement benefits
Social security benefits
Social security taxes
Government employees
Policy evaluation
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GAO-05-786T
United States Government Accountability Office
GAO Testimony
Before the Subcommittee on Social Security, Committee on Ways and Means,
House of Representatives
For Release on Delivery
Expected at 1:00 p.m. EDT SOCIAL SECURITY
Thursday, June 9, 2005
Coverage of Public Employees and Implications for Reform
Statement of Barbara D. Bovbjerg, Director Education, Workforce, and
Income Security
GAO-05-786T
[IMG]
June 9, 2005
SOCIAL SECURITY
Coverage of Public Employees and Implications for Reform
What GAO Found
Social Security's provisions regarding public employees are rooted in the
fact that about one-fourth of them do not pay Social Security taxes on the
earnings from their government jobs, for various historical reasons. Even
though noncovered employees may have many years of earnings on which they
do not pay Social Security taxes, they can still be eligible for Social
Security benefits based on their spouses' or their own earnings in covered
employment.
To address the issues that arise with noncovered public employees, Social
Security has two provisions-the Government Pension Offset (GPO), which
affects spouse and survivor benefits, and the Windfall Elimination
Provision (WEP), which affects retired worker benefits. Both provisions
reduce Social Security benefits for those who receive noncovered pension
benefits. Both provisions also depend on having complete and accurate
information on receipt of such noncovered pension benefits. However, such
information is not available for many state and local pension plans, even
though it is for federal pension benefits. As a result, the GPO and the
WEP are not applied consistently for all noncovered pension recipients. In
addition to the administrative challenges, these provisions are viewed by
some as confusing and unfair.
In recent years, various Social Security reform proposals that would
affect public employees have been offered. Some proposals specifically
address the GPO and the WEP and would either revise or eliminate them.
Such actions, while they may reduce confusion among affected workers,
would increase the long-range Social Security trust fund deficit and could
create fairness issues for workers who have contributed to Social Security
throughout their working lifetimes. Other proposals would make coverage
mandatory for all state and local government employees. According to
Social Security actuaries, mandatory coverage would reduce the 75-year
actuarial deficit by 11 percent. It could also enhance inflation
protection, pension portability, and dependent benefits for the affected
beneficiaries, in many cases. However, to maintain the same level of
spending for retirement, mandating coverage would increase costs for the
state and local governments that sponsor the plans, and would likely
reduce some pension benefits. Moreover, the GPO and the WEP would still be
needed for many years to come even though they would become obsolete in
the long run.
United States Government Accountability Office
Mr. Chairman and Members of the Subcommittee:
I am pleased to be here today to discuss how Social Security affects
public employees and how reforms may change those effects. Social Security
covers about 96 percent of all U.S. workers; the vast majority of the rest
are state, local, and federal government employees. One option for Social
Security reform is extending coverage to all state and local government
employees who are not currently covered. While these noncovered workers do
not pay Social Security taxes on their government earnings, they may still
be eligible for Social Security benefits. This poses difficult issues of
fairness, and Social Security has provisions that attempt to address those
issues. Still, these provisions have been difficult to administer. They
have also been a source of confusion and frustration for the workers they
affect.
I hope I can help clarify and provide some perspective on the complex
relationship between Social Security and public employees. Today, I will
discuss Social Security's coverage of public employees, Social Security's
current provisions affecting noncovered public employees, and proposals to
modify those provisions or make coverage mandatory for all public
employees. My testimony is based on a body of work we have published over
the past several years.1
In summary, Social Security does not cover about one-fourth of public
employees, for various historical reasons. As a result, these employees do
not pay Social Security taxes on earnings from their noncovered jobs.
Nevertheless, they can still be eligible for Social Security benefits
based on their spouses' or their own earnings in covered employment.
Currently, Social Security has two provisions to address the resulting
fairness issues. The Government Pension Offset (GPO) affects spouse and
survivor benefits, and the Windfall Elimination Provision (WEP) affects
retired worker benefits. Both provisions reduce Social Security benefits
for those who receive noncovered pension benefits. However, the Social
Security Administration (SSA) cannot effectively and fairly apply these
provisions because it does not have access to complete and accurate
information on receipt of such noncovered pension benefits. Implementation
of some of our recommendations has improved the availability and tracking
of key information for federal retirees, which we estimate will save
hundreds of
1See the list of related GAO products at the end of this statement.
Background
millions of dollars. However, Congressional action is still needed to
improve access to information on state and local government pensions.
In recent years, various Social Security reform proposals that would
affect public employees have been offered. Some proposals specifically
address the GPO and the WEP and would either revise or eliminate them.
While we have not analyzed these proposals, we believe it is important to
consider both the costs and the fairness issues they raise. Still other
proposals would make coverage mandatory for all state and local government
employees. According to Social Security actuaries, doing so for all newly
hired state and local government employees would reduce the 75-year
actuarial deficit by about 11 percent. It could also enhance inflation
protection, pension portability, and dependent benefits for the affected
beneficiaries, in many cases. However, to provide for the same level of
retirement income, it could increase costs for the state and local
governments that would sponsor the plans. Moreover, the GPO and the WEP
would continue to apply for many years to come, even though they would
become obsolete in the long run.
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
not have to depend on welfare. Toward this end, Social Security's benefit
2Beginning with those born in 1938, the age at which full benefits are
payable will increase in gradual steps from age 65 to age 67.
About One-Fourth of Public Employees Are Not Covered by Social Security
provisions redistribute income in a variety of ways-from those with higher
lifetime earnings to those with lower ones, from those without dependents
to those with dependents, from single earners and two-earner couples to
one-earner couples, and from those who don't live very long to those who
do. These effects result from the program's focus on helping ensure
adequate incomes. Such effects depend to a great degree on the universal
and compulsory nature of the program.
According to the Social Security Trustees' 2005 intermediate, or
bestestimate, assumptions, Social Security's cash flow is expected to turn
negative in 2017. In addition, all of the accumulated Treasury obligations
held by the trust funds are expected to be exhausted by 2041. Social
Security's long-term financing shortfall stems primarily from the fact
that people are living longer and having fewer children. As a result, the
number of workers paying into the system for each beneficiary has been
falling and is projected to decline from 3.3 today to about 2 by 2030.
Reductions in promised benefits and/or increases in program revenues will
be needed to restore the long-term solvency and sustainability of the
program.
About one-fourth of public employees do not pay Social Security taxes on
the earnings from their government jobs. Historically, Social Security did
not require coverage of government employment because there was concern
over the question of the federal government's right to impose a tax on
state governments, and some had their own retirement systems. However,
virtually all other workers are now covered, including the remaining
three-fourths of public employees.
The 1935 Social Security Act mandated coverage for most workers in
commerce and industry, which at that time comprised about 60 percent of
the workforce. Subsequently, the Congress extended mandatory Social
Security coverage to most of the excluded groups, including state and
local employees not covered by a public pension plan. The Congress also
extended voluntary coverage to state and local employees covered by public
pension plans. Since 1983, however, public employers have not been
permitted to withdraw from the program once they are covered. Also in
1983, amendments to the Social Security Act extended mandatory coverage to
newly hired federal workers and to all members of the Congress.
SSA estimates that in 2004 nearly 5 million state and local government
employees, excluding students and election workers, are not covered by
Social Security. In addition, about three-quarters of a million federal
employees hired before 1984 are also not covered. Seven states-California,
Colorado, Illinois, Louisiana, Massachusetts, Ohio, and Texas-account for
71 percent of the noncovered payroll.
Most full-time public employees participate in defined benefit pension
plans. Minimum retirement ages for full benefits vary. However, many state
and local employees can retire with full benefits at age 55 with 30 years
of service. Retirement benefits also vary, but they are usually based on a
specified benefit rate for each year of service and the member's final
average salary over a specified time period, usually 3 years. For example,
plans with a 2 percent rate replace 60 percent of a member's final average
salary after 30 years of service. In addition to retirement benefits,
members generally have a survivor annuity option and disability benefits,
and many receive some cost-of-living increases after retirement. In
addition, in recent years, the number of defined contribution plans, such
as 401(k) plans and the Thrift Savings Plan for federal employees, has
been growing, and such plans are becoming a relatively more common way for
employers to offer pension plans; public employers are no exception to
this trend.
Even though noncovered employees may have many years of earnings on which
they do not pay Social Security taxes, they can still be eligible for
Social Security benefits based on their spouses' or their own earnings in
covered employment. SSA estimates that nearly all noncovered state and
local employees become entitled to Social Security as workers, spouses, or
dependents. However, their noncovered status complicates the program's
ability to target benefits in the ways it is intended to do.
To address the fairness issues that arise with noncovered public
employees, Social Security has two provisions-the Government Pension
Offset, to address spouse and survivor benefits, and the Windfall
Elimination Provision, to address retired worker benefits. Both provisions
depend on having complete and accurate information that has proven
difficult to get. Also, both provisions are a source of confusion and
frustration for public employees and retirees.
Under the GPO provision, enacted in 1977, SSA must reduce Social Security
benefits for those receiving noncovered government pensions when their
entitlement to Social Security is based on another person's (usually a
spouse's) Social Security coverage. Their Social Security benefits are to
be reduced by two-thirds of the amount of their government pension. Under
the WEP, enacted in 1983, SSA must use a
Current Provisions Seek Fairness but Pose Administrative Challenges
modified formula to calculate the Social Security benefits people earn
when they have had a limited career in covered employment. This formula
reduces the amount of payable benefits.
Regarding the GPO, spouse and survivor benefits were intended to provide
some Social Security protection to spouses with limited working careers.
The GPO provision reduces spouse and survivor benefits to persons who do
not meet this limited working career criterion because they worked long
enough in noncovered employment to earn their own pension.
Regarding the WEP, the Congress was concerned that the design of the
Social Security benefit formula provided unintended windfall benefits to
workers who had spent most of their careers in noncovered employment. The
formula replaces a higher portion of preretirement Social Security covered
earnings when people have low average lifetime earnings than it does when
people have higher average lifetime earnings. People who work exclusively,
or have lengthy careers, in noncovered employment appear on SSA's earnings
records as having no covered earnings or a low average of covered lifetime
earnings. As a result, people with this type of earnings history benefit
from the advantage given to people with low average lifetime earnings when
in fact their total (covered plus noncovered) lifetime earnings were
higher than they appear to be for purposes of calculating Social Security
benefits.
Both the GPO and the WEP apply only to those beneficiaries who receive
pensions from noncovered employment. To administer these provisions, SSA
needs to know whether beneficiaries receive such noncovered pensions.
However, SSA cannot apply these provisions effectively and fairly because
it lacks this information, according to our past work.3 In response to our
recommendation, SSA performed additional computer matches with the Office
of Personnel Management to get noncovered pension data for federal
retirees. These computer matches detected payment errors; we estimate that
correcting these errors will generate hundreds of millions of dollars in
savings.4 However, SSA still lacks the
3See GAO, Social Security: Better Payment Controls for Benefit Reduction
Provisions Could Save Millions, GAO/HEHS-98-76 (Washington, D.C.: Apr. 30,
1998).
4SSA performed the first such match in 1999 and advised that it will be
done on a recurring basis in the future. SSA identified about 14,600
people whose benefits should have been calculated using WEP's modified
formula. We estimate that detecting these payment errors will generate
$207.9 million in lifetime benefit reduction for this cohort. We further
estimate each year's match will generate about $57 million in lifetime
benefit reductions for each new cohort.
information it needs for state and local governments and therefore it
cannot apply the GPO and the WEP for state and local government employees
to the same degree that it does for federal employees. The resulting
disparity in the application of these two provisions is yet another source
of unfairness in the final outcome.
In our testimony before this committee in May 2003,5 we recommended that
the Congress consider giving the Internal Revenue Service (IRS) the
authority to collect the information that SSA needs on government pension
income, which could perhaps be accomplished through a simple modification
to a single form. Earlier versions of the Social Security Protection Act
of 20046 contained such a provision, but this provision was not included
when the final version of the bill, was approved and signed into law.
In recent years, various Social Security reform proposals that would
affect public employees have been offered. Some proposals specifically
address the GPO and the WEP and would either revise or eliminate them.
Still other proposals would make coverage mandatory for all state and
local government employees.
Some Reform Proposals Would Affect Public Employees
Some Proposals Focus on the GPO or the WEP
The GPO and the WEP have been a source of confusion and frustration for
the more than 6 million workers and 1.1 million beneficiaries they affect.
Critics of the measures contend that they are basically inaccurate and
often unfair. For example, some opponents of the WEP argue that the
formula adjustment is an arbitrary and inaccurate way to estimate the
value of the windfall and causes a relatively larger benefit reduction for
lower-paid workers. In the case of the GPO, critics contend that the
twothirds reduction is imprecise and could be based on a more rigorous
formula. A variety of proposals have been offered to either revise or
eliminate the GPO or the WEP. While we have not studied these proposals in
detail, I would like to offer a few observations to keep in mind as you
consider them.
5GAO, Social Security: Issues Relating to Noncoverage of Public Employees,
GAO-03-710T (Washington, D.C.: May 1, 2003).
6Pub. L. No. 108-203.
First, repealing these provisions would be costly in an environment where
the Social Security trust funds already face long-term solvency issues.
According to the most recent estimates from SSA eliminating the GPO
entirely would cost $32 billion over 10 years and cost 0.06 percent of
taxable payroll, which would increase the long-range deficit by about 3
percent. Similarly, eliminating the WEP would cost nearly $30 billion and
increase Social Security's long-range deficit by 3 percent.
Second, in thinking about the fairness of the provisions and whether or
not to repeal them, it is important to consider both the affected public
employees and all other workers and beneficiaries who pay Social Security
taxes. For example, SSA has described the GPO as a way to treat spouses
with noncovered pensions in a fashion similar to how it treats dually
entitled spouses, who qualify for Social Security benefits on both their
own work records and their spouses'. In such cases, spouses may not
receive both the benefits earned as a worker and the full spousal benefit;
rather they receive the higher amount of the two. If the GPO were
eliminated or reduced for spouses who had paid little or no Social
Security taxes on their lifetime earnings, it might be reasonable to ask
whether the same should be done for dually entitled spouses who have paid
Social Security on all their earnings. Otherwise, such couples would be
worse off than couples that were no longer subject to the GPO. And far
more spouses are subject to the dual entitlement offset than to the GPO;
as a result, the costs of eliminating the dual entitlement offset would be
commensurately greater.
Mandatory Coverage Has Been Proposed
Making coverage mandatory for all state and local government employees has
been proposed to help address the program's financing problems. According
to Social Security actuaries, doing so for all newly hired state and local
government employees would reduce the 75-year actuarial deficit by about
11 percent.7 Covering all the remaining workers increases revenues
relatively quickly and improves solvency for some time, since most of the
newly covered workers would not receive benefits for many years. In the
long run, however, benefit payments would increase as the newly covered
workers started to collect benefits. Overall, this change would still
represent a net gain for solvency, although it would be small.
7SSA 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.
In addition to considering solvency effects, the inclusion of mandatory
coverage in a comprehensive reform package would need to be grounded in
other considerations. In recommending that mandatory coverage be included
in the reform proposals, the 1994-1996 Social Security Advisory Council
stated that mandatory coverage is basically "an issue of fairness." Its
report noted that "an effective Social Security program helps to reduce
public costs for relief and assistance, which, in turn, means lower
general taxes. There is an element of unfairness in a situation where
practically all contribute to Social Security, while a few benefit both
directly and indirectly but are excused from contributing to the program."
Moreover, mandatory coverage could improve benefits for the affected
beneficiaries, but it could also increase pension costs for the state and
local governments that would sponsor the plans. The effects on public
employees and employers would depend on how states and localities changed
their noncovered pension plans to conform with mandatory coverage. For
example, Social Security offers automatic inflation protection, full
benefit portability, and dependent benefits, which are not available in
many public pension plans. Creating new pension plans that kept all the
existing benefit provisions but added these new ones would increase the
cost of the total package. Under this scenario, costs could increase by as
much as 11 percent of payroll, depending on the benefit packages of the
new plans. Alternatively, states and localities that wanted to maintain
level spending for retirement would likely need to reduce some pension
benefits. Additionally, states and localities could require several years
to design, legislate, and implement changes to current pension plans.
Mandating Social Security coverage for state and local employees could
also elicit a constitutional challenge. Finally, mandatory coverage would
not immediately address the issues and concerns regarding the GPO and the
WEP. If left unchanged, these provisions would continue to apply for many
years to come for existing employees and beneficiaries. Still, in the long
run, mandatory coverage would make these provisions obsolete.
Conclusions In conclusion, there are no easy answers to the difficulties
of equalizing Social Security's treatment of covered and noncovered
workers. Any reductions in the GPO or the WEP would ultimately come at the
expense of other Social Security beneficiaries and taxpayers. Mandating
universal coverage would promise eventual elimination of the GPO and the
WEP but at potentially significant cost to affected state and local
governments, and even so the GPO and the WEP would continue to apply for
some years to come, unless they were repealed.
Matter for Congressional Consideration
GAO Contributions and Acknowledgments
Whatever the decision, it will be important to administer the program
effectively and equitably. The GPO and the WEP have proven difficult to
administer because they depend on complete and accurate reporting of
government pension income, which is not currently achieved. The resulting
disparity in the application of these two provisions is yet another source
of unfairness in the final outcome. We therefore take this opportunity to
bring the matter back to your attention for further consideration.
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.
For information regarding this testimony, please contact Barbara D.
Bovbjerg, Director, Education, Workforce, and Income Security Issues, on
(202) 512-7215. Individuals who made key contributions to this testimony
include Daniel Bertoni, Ken Stockbridge, and Michael Collins.
Related GAO Products
Social Security Reform: Answers to Key Questions. GAO-05-193SP.
Washington, D.C.: May 2005.
Social Security: Issues Relating to Noncoverage of Public Employees.
GAO-03-710T. Washington, D.C.: May 1, 2003.
Social Security: Congress Should Consider Revising the Government Pension
Offset "Loophole." GAO-03-498T. Washington, D.C.: Feb. 27, 2003.
Social Security Administration: Revision to the Government Pension Offset
Exemption Should Be Considered. GAO-02-950. Washington, D.C.: Aug. 15,
2002.
Social Security Reform: Experience of the Alternate Plans in Texas.
GAO/HEHS-99-31, Washington, D.C.: Feb. 26, 1999.
Social Security: Implications of Extending Mandatory Coverage to State and
Local Employees. GAO/HEHS-98-196. Washington, D.C.: Aug. 18, 1998.
Social Security: Better Payment Controls for Benefit Reduction Provisions
Could Save Millions. GAO/HEHS-98-76. Washington, D.C.: April 30, 1998.
Federal Workforce: Effects of Public Pension Offset on Social Security
Benefits of Federal Retirees. GAO/GGD-88-73. Washington, D.C.: April 27,
1988.
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