Social Security: Issues Regarding the Coverage of Public	 
Employees (06-NOV-07, GAO-08-248T).				 
                                                                 
Social Security covers about 96 percent of all U.S. workers; the 
vast majority of the remaining 4 percent are public employees.	 
Although these noncovered workers do not pay Social Security	 
taxes on their government earnings, they may still be eligible	 
for Social Security benefits through their spouses' or their own 
earnings from other covered employment. Social Security has	 
provisions--the Government Pension Offset (GPO) and the Windfall 
Elimination Provision (WEP)--that attempt to take noncovered	 
employment into account when calculating the Social Security	 
benefits for public employees. However, these provisions have	 
been difficult to administer and critics contend that the	 
provisions themselves are often unfair. The Committee asked GAO  
to discuss the issues regarding the coverage of public employees 
under Social Security, the provisions to take noncovered	 
employment into account, and the proposals to modify those	 
provisions.							 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-08-248T					        
    ACCNO:   A77970						        
  TITLE:     Social Security: Issues Regarding the Coverage of Public 
Employees							 
     DATE:   11/06/2007 
  SUBJECT:   Eligibility criteria				 
	     Employee benefit plans				 
	     Employees						 
	     Employment 					 
	     Federal social security programs			 
	     Fringe benefits					 
	     Government employees				 
	     Pay						 
	     Pensions						 
	     Public assistance programs 			 
	     Reporting requirements				 
	     Retirement 					 
	     Social security benefits				 
	     Social security taxes				 
	     Government Pension Offset Exemption		 
	     Windfall Elimination Program			 

******************************************************************
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GAO-08-248T

   

     * [1]d08248t.pdf

          * [2]Background
          * [3]About One-Fourth of Public Employees Are Not Covered by Soci
          * [4]Current Provisions Seek Fairness but Pose Administrative Cha

               * [5]Provisions Are Difficult to Administer
               * [6]Provisions Cause Confusion and Frustration

          * [7]Some Social Security Proposals Would Affect Public Employees

               * [8]Some Proposals Focus on the GPO or the WEP
               * [9]Mandatory Coverage Has Been Proposed

          * [10]Conclusions
          * [11]Matter for Congressional Consideration
          * [12]Contacts and Acknowledgments
          * [13]GAO's Mission
          * [14]Obtaining Copies of GAO Reports and Testimony

               * [15]Order by Mail or Phone

          * [16]To Report Fraud, Waste, and Abuse in Federal Programs
          * [17]Congressional Relations
          * [18]Public Affairs
          * [19]PDF6-Ordering Information-Young-10-25-07.pdf

               * [20]GAO's Mission
               * [21]Obtaining Copies of GAO Reports and Testimony

                    * [22]Order by Mail or Phone

               * [23]To Report Fraud, Waste, and Abuse in Federal Programs
               * [24]Congressional Relations
               * [25]Public Affairs

Testimony

Before the Subcommittee on Social Security, Pensions, and Family Policy,
Committee on Finance, U.S. Senate

United States Government Accountability Office

GAO

For Release on Delivery
Expected at 2:30 EST
Tuesday, November 6, 2007

SOCIAL SECURITY

Issues Regarding the Coverage of Public Employees

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

GAO-08-248T

Mr. Chairman and Members of the Subcommittee:

I am pleased to be here today to discuss the issues regarding Social
Security coverage of public employees and the possible effects of reform.
Social Security covers about 96 percent of all U.S. workers; the vast
majority of the remaining 4 percent who are not covered are public
employees. Moreover, 9 in 10 of the public employees not covered by Social
Security are state and local government workers. Although these noncovered
workers do not pay Social Security taxes on their government earnings,
they may still be eligible for Social Security benefits through their
spouses' or their own earnings from other covered employment. To address
concerns with how noncovered workers are treated compared with covered
workers, Social Security has provisions in place to take noncovered
employment into account when calculating Social Security benefits for
public employees, but the provisions have been difficult to administer.
This situation poses difficult issues of fairness. It has also been a
source of confusion and frustration for the workers these provisions
affect. Thus, some have proposed eliminating these provisions.
Alternatively, as part of Social Security reform, others have proposed
extending mandatory coverage to all state and local government employees
who are not currently covered; under mandatory coverage, the need for
these provisions would be phased out over time.

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, about one-fourth of public employees are not covered by Social
Security for various historical reasons. As a result, these employees do
not pay Social Security taxes on earnings from their noncovered jobs.
Nevertheless, these employees can still be eligible for Social Security
benefits based on their spouses' or their own earnings from covered
employment. Currently, Social Security has two provisions in place that
attempt to ensure these workers' noncovered employment is taken into
consideration when calculating their Social Security benefits: (1) the
Government Pension Offset (GPO), which affects spouse and survivor
benefits, and (2) the Windfall Elimination Provision (WEP), which 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 noncovered earnings and receipt of noncovered pensions.
Implementation of some of our recommendations has improved the
availability and tracking of key information for federal retirees, and we
have estimated that this tracking will save hundreds of millions of
dollars. However, congressional action is still needed to improve access
to information on state and local government pensions.

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

In recent years, various Social Security reforms that would affect public
employees have been proposed. 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. Other proposals would make
Social Security coverage mandatory for all state and local government
employees. In 2005, Social Security actuaries estimated that mandating
coverage 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. Also, the GPO and the WEP
would no longer apply to newly hired public employees and so could be
phased out over time. However, mandatory coverage could increase
retirement costs for state and local governments.

Background

Social Security provides retirement, disability, and survivor benefits to
insured workers and their dependents. Insured workers are eligible for
reduced benefits at age 62, and full retirement benefits between age 65
and 67, depending on the worker's year of birth.^2 Social Security
retirement benefits are based on the worker's age and career earnings, are
fully indexed for price 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. This Social Security tax is 6.2 percent of earnings up to
an established maximum, paid by both employers and employees.

^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.

One of Social Security's most fundamental principles is that benefits
reflect the earnings on which workers have paid Social Security taxes.
Thus, Social Security provides benefits that workers have earned, in part,
due to their contributions and those of their employers. At the same time,
Social Security helps ensure that its beneficiaries have adequate incomes
and do not have to depend on welfare. Toward this end, Social Security's
benefit provisions redistribute income in a variety of ways--from those
with higher lifetime earnings to those with lower ones, from those without
dependents to those with dependents, from single earners and two-earner
couples to one-earner couples, and from those who live shorter lives to
those who live longer. These effects result from the program's focus on
helping ensure adequate incomes. Such effects depend, to a great extent,
on the universal and compulsory nature of the program.

According to the Social Security trustees' 2007 intermediate (or best
estimate) assumptions, Social Security's cash flow is expected to turn
negative in 2017. In addition, all of the accumulated Treasury obligations
held by the trust funds are expected to be exhausted by 2041. Social
Security's long-term financing shortfall stems primarily from the fact
that people are living longer and having fewer children. As a result, the
number of workers paying into the system for each beneficiary has been
falling and is projected to decline from 3.3 today to 2.2 by 2030.
Reductions in promised benefits and/or increases in program revenues will
be needed to restore the long-term solvency and sustainability of the
program.

About One-Fourth of Public Employees Are Not Covered by Social Security

About one-fourth of public employees do not pay Social Security taxes on
the earnings from their government jobs. Historically, Social Security did
not require coverage of government employment because some government
employers had their own retirement systems. In addition, there was concern
over the question of the federal government's right to impose a tax on
state governments. However, the remaining three-fourths of public
employees are now covered by Social Security, as well as virtually all
private sector workers.

The 1935 Social Security Act mandated coverage for most workers in
commerce and industry; at that time, such workers comprised about 60
percent of the workforce. Subsequently, the Congress extended Social
Security coverage to most of the excluded groups, including many state and
local employees, military personnel, members of Congress, and federal
civilian employees hired after January 1, 1984.

In 1950, Congress enacted legislation allowing voluntary coverage to state
and local government employees not covered by public pension plans, and in
1955, extended voluntary coverage to those already covered by plans as
well. Initially, public employers could opt in and out of the Social
Security program under these provisions. Since 1983, however, public
employers have not been permitted to withdraw from the program once they
have opted in and their employees are covered. Also, in 1990, Congress
made coverage mandatory for most state and local employees not covered by
public pension plans. Nevertheless, the most recent data from SSA
indicates that in 2005, about 6.8 million state and local government
employees were still not covered by Social Security. Coverage varies
widely across states. In some states, such as New York and Vermont,
virtually all government employees are covered; in other states, such as
Massachusetts and Ohio, less than 5 percent of government employees are
covered. Seven states--California, Colorado, Illinois, Louisiana,
Massachusetts, Ohio, and Texas--account for nearly 70 percent of the
noncovered state and local government payroll.

In addition, SSA estimates that about half a million federal government
employees are not covered. These are civilian employees hired before
January 1, 1984, who continue to be covered under the Civil Service
Retirement System.

Most full-time public employees participate in defined benefit pension
plans. Minimum retirement ages for full benefits vary, but 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 generally 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. State and local government workers also
generally have a survivor annuity option and disability benefits, and many
receive 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. There has
been little movement toward adopting defined contribution plans as the
primary pension plans for state and local workers, but such plans have
become fairly universally available as supplemental voluntary tax-deferred
savings plans.^3

Current Provisions Seek Fairness but Pose Administrative Challenges

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. According to SSA, nearly all noncovered state and
local employees become entitled to Social Security as spouses, dependents,
or workers. However, their noncovered status for the bulk of their
earnings 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, the Congress has enacted two provisions: (1) the Government
Pension Offset (GPO) regarding spouse and survivor benefits, and (2) the
Windfall Elimination Provision (WEP) regarding retired worker benefits.
Both provisions apply only to those beneficiaries who receive pensions
from noncovered employment. However, the provisions have been difficult to
administer because they depend on having complete and accurate information
on noncovered earnings and pensions--information that has proven difficult
to get. Also, the 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. 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.

^3 See GAO, State and Local Government Retiree Benefits: Current Status of
Benefit Structures, Protections, and Fiscal Outlook for Funding Future
Costs, [26]GAO-07-1156 (Washington, D.C.: Sept. 24, 2007).

Under the WEP, enacted in 1983, SSA must use a modified formula to reduce
the Social Security benefits people receive when they have had a lengthy
career in noncovered employment. 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, as the formula replaces a relatively higher proportion of
wages for low earners than for high earners, and those with lengthy
careers in noncovered employment appear on SSA's records as low earners.

Provisions Are Difficult to Administer

To administer the GPO and WEP, SSA needs to know whether beneficiaries
receive pensions from noncovered employment. However, SSA cannot apply
these provisions effectively and fairly because it lacks this information.
In a report we issued in 1998, we recommended that SSA perform additional
computer matches with the Office of Personnel Management to get noncovered
pension data for federal retirees.^4 In response to our recommendation,
SSA performed the first such match in 1999 and planned to continue to
conduct the matches on a recurring basis. We estimated that correcting the
errors identified through such matches will generate hundreds of millions
of dollars in savings.^5 However, SSA still lacks the information it needs
for state and local governments, and therefore, it cannot apply the GPO
and the WEP for state and local government employees to the same extent it
can for federal employees. The resulting disparity in the application of
these two provisions is yet another source of unfairness in the
calculation of Social Security benefits for public employees.

In our testimony before the Subcommittee on Social Security, House
Committee on Ways and Means, in May 2003 and again in June 2005,^6 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, a task that could perhaps be accomplished
through a simple modification to a single form. Earlier versions of the
Social Security Protection Act of 2004 contained such a provision, but
this provision was not included when the final version of the bill was
approved and signed into law.^7 As long as the GPO and WEP remain in
effect, we continue to believe that the IRS should be given the authority
to collect the information that SSA needs on government pension income to
administer these provisions accurately and fairly.

^4See GAO, Social Security: Better Payment Controls for Benefit Reduction
Provisions Could Save Millions, [27]GAO/HEHS-98-76 (Washington, D.C.: Apr.
30, 1998).

^5 In its first match, 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.

^6 GAO, Social Security: Issues Relating to Noncoverage of Public
Employees, [28]GAO-03-710T (Washington, D.C.: May 1, 2003); and GAO,
Social Security: Coverage of Public Employees and Implications for Reform,
[29]GAO-05-786T (Washington, D.C.: June 9, 2005).

Provisions Cause Confusion and Frustration

The GPO and the WEP have been a continuing source of confusion and
frustration for the more than 7.3 million government workers affected.
Critics of the measures contend that the provisions are basically
inaccurate and often unfair. For example, critics of the GPO contend that
the two-thirds reduction is imprecise and could be based on a more
rigorous formula. According to a recent analysis conducted by the
Congressional Research Service, the GPO formula slightly overestimates the
reduction that some individuals (particularly higher earners) would
otherwise receive if they worked in Social Security-covered employment,
and greatly underestimates the reduction that others (particularly lower
earners) would receive.^8 In the case of the WEP, opponents 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.

Some Social Security Proposals Would Affect Public Employees

In recent years, various proposals to change Social Security have been
offered that would affect public employees. Some proposals specifically
address the GPO and the WEP and would either revise or eliminate them.
Other proposals would make Social Security coverage mandatory for all
state and local government employees.

^7 Pub. L. No. 108-203, Section 419(c), provides for disclosure to workers
of the effect of GPO and WEP provisions.

^8 Laura Haltzel, Analysis of How Well the Government Pension Offset (GPO)
Replicates the Social Security Dual-Entitlement Rule (Congressional
Research Service, Washington, D.C.: July 5, 2007). See also Laura Haltzel,
Social Security: The Government Pension Offset (GPO) (Congressional
Research Service, Washington, D.C.: Updated March 9, 2007).

Some Proposals Focus on the GPO or the WEP

A variety of proposals have been offered to either revise or eliminate the
GPO or the WEP. While we have not studied these proposals in detail, I
would like to offer a few observations to keep in mind as you consider
them.

First, repealing these provisions would be costly in an environment where
the Social Security trust funds already face long-term solvency issues.
According to current SSA estimates, eliminating the GPO entirely would
cost $41.7 billion over 10 years and increase the long-range deficit by
about 3 percent. Similarly, SSA estimates that eliminating the WEP would
cost $40.1 billion, also increasing 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 manner similar to how it treats dually
entitled spouses, who qualify for Social Security benefits on both their
own and their spouses' work records. 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 who 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' 2005 estimate, requiring all newly hired
state and local government employees to begin paying into the system would
reduce the 75-year actuarial deficit by about 11 percent.^9 Expanding
coverage to currently noncovered 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, benefit payments would increase as the newly covered workers started
to collect benefits; however, overall, this change would represent a small
net gain for solvency.

^9 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.

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 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."

Another advantage of mandatory Social Security coverage is that it could
improve benefits for the affected workers, but it could also increase
pension costs for state and local governments. The effects on public
employees and employers would depend on how states and localities changed
their noncovered pension plans in response to mandatory coverage.

For example, by gaining coverage, workers would benefit from Social
Security's automatic inflation protection, full benefit portability, and
dependent benefits, which are not available in many public pension plans.
Also, the GPO and the WEP would no longer apply and so could be phased out
over time.

With mandatory coverage, the costs for state and local governments would
likely increase, adding to the fiscal challenges that already lie ahead
for many.^10 If states and localities provided pension benefits that are
similar to the benefits provided employees already covered by Social
Security, studies indicate that their retirement costs could increase by
as much as 11 percent of payroll. Alternatively, states and localities
that wanted to maintain level spending for retirement under mandatory
coverage would likely need to reduce some pension benefits. Thus, while
workers' benefits may be enhanced in some ways by gaining Social Security,
their total contribution rate may increase, and the benefits they receive
under their previously noncovered pension plans may be reduced.

^10 See GAO, State and Local Governments: Persistent Fiscal Challenges
Will Likely Emerge within the Next Decade, [30]GAO-07-1080SP (Washington,
D.C.: July 18, 2007).

Additionally, states and localities could require several years to design,
legislate, and implement changes to current pension plans, and mandating
Social Security coverage for state and local employees could elicit
constitutional challenges. Also, mandatory coverage would not immediately
address the issues and concerns regarding the GPO and the WEP, as these
provisions would continue to apply to existing employees and beneficiaries
for many years to come before eventually becoming obsolete. Finally, state
and local governments would have to administer two different systems-one
for existing noncovered employees and another for newly covered
employees--until the provisions no longer applied to anyone or were
repealed.

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 many years to
come unless they were repealed.

As long as the GPO and the WEP remain in effect, it will be important to
administer the provisions as effectively and equitably as possible. SSA
has found it difficult to administer these provisions because they depend
on complete and accurate reporting of government pension income, which is
not currently available. The resulting disparity in the application of
these two provisions is a continuing source of unfairness for Social
Security beneficiaries, both covered and noncovered.

Matter for Congressional Consideration

GAO has previously recommended that the Congress consider giving IRS the
authority to collect the information that SSA needs on government pension
income to administer the GPO and WEP provisions accurately and fairly. GAO
continues to believe that this important issue warrants further
consideration by the Congress.

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

Contacts and Acknowledgments

For further information regarding this testimony, please contact Barbara
D. Bovbjerg, Director, Education, Workforce, and Income Security Issues at
(202) 512-7215 or [email protected]. Contact points for our Offices of
Congressional Relations and Public Affairs may be found on the last page
of this statement. Individuals making key contributions to this testimony
include Michael Collins and Margie Shields.

Related GAO Products

State and Local Government Retiree Benefits: Current Status of Benefit
Structures, Protections, and Fiscal Outlook for Funding Future Costs.
[31]GAO-07-1156 . Washington, D.C.: September 24, 2007.

State and Local Governments: Persistent Fiscal Challenges Will Likely
Emerge within the Next Decade. [32]GAO-07-1080SP . Washington, D.C.: July
18, 2007.

Social Security: Coverage of Public Employees and Implications for Reform.
[33]GAO-05-786T . Washington, D.C.: June 9, 2005.

Social Security Reform: Answers to Key Questions. [34]GAO-05-193SP .
Washington, D.C.: May 2005.

Social Security: Issues Relating to Noncoverage of Public Employees.
[35]GAO-03-710T . Washington, D.C.: May 1, 2003.

Social Security: Congress Should Consider Revising the Government Pension
Offset "Loophole." [36]GAO-03-498T . Washington, D.C.: Feb. 27, 2003.

Social Security Administration: Revision to the Government Pension Offset
Exemption Should Be Considered. [37]GAO-02-950 . Washington, D.C.: Aug.
15, 2002.

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

Social Security: Implications of Extending Mandatory Coverage to State and
Local Employees. [39]GAO/HEHS-98-196 . Washington, D.C.: Aug. 18, 1998.

Social Security: Better Payment Controls for Benefit Reduction Provisions
Could Save Millions. [40]GAO/HEHS-98-76 . Washington, D.C.: April 30,
1998.

Federal Workforce: Effects of Public Pension Offset on Social Security
Benefits of Federal Retirees. [41]GAO/GGD-88-73 . Washington, D.C.: April
27, 1988.

(130820)

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Highlights of [49]GAO-08-248T , testimony before the Subcommittee on
Social Security, Pensions, and Family Policy, Committee on Finance, U.S.
Senate

November 6, 2007

SOCIAL SECURITY

Issues Regarding the Coverage of Public Employees

Social Security covers about 96 percent of all U.S. workers; the vast
majority of the remaining 4 percent are public employees. Although these
noncovered workers do not pay Social Security taxes on their government
earnings, they may still be eligible for Social Security benefits through
their spouses' or their own earnings from other covered employment. Social
Security has provisions--the Government Pension Offset (GPO) and the
Windfall Elimination Provision (WEP)--that attempt to take noncovered
employment into account when calculating the Social Security benefits for
public employees. However, these provisions have been difficult to
administer and critics contend that the provisions themselves are often
unfair.

The Committee asked GAO to discuss the issues regarding the coverage of
public employees under Social Security, the provisions to take noncovered
employment into account, and the proposals to modify those provisions.

[50]What GAO Recommends

GAO has previously recommended that the Congress consider giving the
Internal Revenue Service the authority to collect the information that the
Social Security Administration needs on government pension income to
administer the GPO and WEP provisions accurately and fairly. GAO continues
to believe that this important issue warrants further consideration by the
Congress.

There are no easy answers to the difficulties of equalizing Social
Security's treatment of covered workers and noncovered public employees.
About one-fourth of public employees--primarily state and local government
workers--are not covered by Social Security and do not pay Social Security
taxes on their government earnings. Nevertheless, these workers may still
be eligible for Social Security benefits through their spouses' or their
own earnings from other covered employment. To address concerns with how
noncovered workers are treated compared with covered workers, Social
Security has provisions in place to take noncovered employment into
account and reduce Social Security benefits for public employees, as
described in the table below.

Provisions Affecting the Calculation of Social Security Benefits for
Public Employees

                        When benefits are affected       How benefits are     
                                                         affected             
The Government       When a public employee's         Benefits are reduced 
Pension Offset (GPO) entitlement to Social Security   by two-thirds of the 
                        is based on another person's     amount of the        
                        (usually a spouse's) coverage.   government pension.  
The Windfall         When a public employee's         Benefits are         
Elimination          entitlement to Social Security   calculated using a   
Provision (WEP)      is based on other covered        modified formula to  
                        employment, but the employee has reduce the amount of 
                        had a lengthy career in          benefits received.   
                        noncovered employment.                                

Source: GAO analysis.

To be administered fairly and accurately, both these provisions require
complete and accurate reporting of government pension income, which is not
currently available. The resulting disparity in the application of the
provisions is a continuing source of confusion and frustration for
affected workers. Thus, various changes that would affect the GPO and WEP
provisions have been proposed, such as:

           o Eliminate the GPO and WEP provisions. This would simplify
           administration and avoid concerns about unfair treatment among
           public employees. However, any reductions in the GPO or the WEP
           would widen Social Security's financial gap and would raise
           concerns about unfair treatment of public employees compared with
           other workers.

           o Extend mandatory coverage. If all newly hired state and local
           government employees who are not currently covered were to become
           covered, the need for the GPO and WEP could be phased out over
           time. In 2005, Social Security actuaries estimated that mandating
           coverage for these employees would reduce the 75-year actuarial
           deficit by about 11 percent. While mandatory coverage could
           enhance retirement benefits for the affected workers, it could
           also result in significant costs to the affected state and local
           governments.

As long as the GPO and the WEP remain in effect, it will be important to
administer the provisions effectively and equitably based on accurate and
complete information on both covered and noncovered employment.

References

Visible links
  26. http://www.gao.gov/cgi-bin/getrpt?GAO-07-1156
  27. http://www.gao.gov/cgi-bin/getrpt?GAO/HEHS-98-76
  28. http://www.gao.gov/cgi-bin/getrpt?GAO-03-710T
  29. http://www.gao.gov/cgi-bin/getrpt?GAO-05-786T
  30. http://www.gao.gov/cgi-bin/getrpt?GAO-07-1080SP
  31. http://www.gao.gov/cgi-bin/getrpt?GAO-07-1156
  32. http://www.gao.gov/cgi-bin/getrpt?GAO-07-1080SP
  33. http://www.gao.gov/cgi-bin/getrpt?GAO-05-786T
  34. http://www.gao.gov/cgi-bin/getrpt?GAO-05-193SP
  35. http://www.gao.gov/cgi-bin/getrpt?GAO-03-710T
  36. http://www.gao.gov/cgi-bin/getrpt?GAO-03-498T
  37. http://www.gao.gov/cgi-bin/getrpt?GAO-02-950
  38. http://www.gao.gov/cgi-bin/getrpt?GAO/HEHS-99-31
  39. http://www.gao.gov/cgi-bin/getrpt?GAO/HEHS-98-196
  40. http://www.gao.gov/cgi-bin/getrpt?GAO/HEHS-98-76
  41. http://www.gao.gov/cgi-bin/getrpt?GAO/GGD-88-73
  42. http://www.gao.gov/
  43. http://www.gao.gov/
  44. http://www.gao.gov/fraudnet/fraudnet.htm
  45. mailto:[email protected]
  46. mailto:[email protected]
  47. mailto:[email protected]
  48. http://www.gao.gov/cgi-bin/getrpt?GAO-08-248T
  49. http://www.gao.gov/cgi-bin/getrpt?GAO-08-248T
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