oversight

Social Security: Congress Should Consider Revising the Government Pension Offset 'Loophole'

Published by the Government Accountability Office on 2003-02-27.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                              United States General Accounting Office

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

For Release on Delivery
Expected at 10:00 a.m. EST
Thursday, February 27, 2003   SOCIAL SECURITY
                              Congress Should Consider
                              Revising the Government
                              Pension Offset "Loophole"
                              Statement of Barbara D. Bovbjerg, Director
                              Education, Workforce, and Income Security Issues




GAO-03-498T
Mr. Chairman and Members of the Subcommittee:

I am pleased to be here today to discuss Social Security’s Government
Pension Offset (GPO) exemption. As you know, the GPO was enacted in
1977 to equalize the treatment of workers covered by Social Security and
those with government pensions not covered by Social Security. In short,
the GPO prevents workers from receiving a full Social Security spousal
benefit on top of a pension earned from government employment not
covered by Social Security.1 However, the law provides an exemption from
the GPO if an individual’s last day of state/local government employment
is in a position that is covered by both Social Security and their state/local
pension system. In these cases, the GPO will not apply, and Social Security
spousal benefits will not be reduced.

Last year, you asked us to (1) assess the extent to which individuals
retiring from jobs not covered by Social Security may be transferring
briefly to covered jobs in order to avoid the GPO, and (2) estimate the
impact of such transfers on the Social Security Trust Fund. To complete
our work, we first reviewed the GPO’s legislative history and government
reports documenting the purpose of the offset and the Social Security
Administration’s (SSA) policies and procedures for administering it. We
also performed limited work with associations, researchers, and
retirement system officials in 28 states.2 Finally, we performed audit work
in Texas and Georgia, two of the states where we identified use of the last-
day exemption. On August 15, 2002, we reported to you on the results of
our work.3 Today I will discuss the findings of our review.

In summary, because no central data exists on use of the GPO exemption
by individuals in approximately 2,300 state and local government
retirement plans nationwide, we could not definitively confirm that this
practice is occurring in states other than Texas and Georgia. In those two
states, 4,819 individuals had performed work in Social Security-covered


1
 Currently the reduction in spousal benefits is two-thirds of the amount of their public
pension.
2
 States were selected either because they were authorized to operate retirement systems
with both covered and noncovered positions or because their state and local government
plans had a mix of covered and noncovered positions, thus offering the greatest potential
for use of the last-day exemption.
3
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 1                                                                         GAO-03-498T
             positions for short periods to qualify for the GPO last-day exemption. In
             Texas, teachers typically worked a single day in nonteaching positions
             covered by Social Security, such as clerical or janitorial positions. In
             Georgia, teachers generally agreed to work for approximately 1 year in
             another teaching position in a school district covered by Social Security.
             Officials in both states indicated that use of the exemption would likely
             continue to grow as awareness increases and it becomes part of
             individuals’ retirement planning. For the cases we identified, increased
             long-term benefit payments from the Social Security Trust Fund could be
             about $4504 million over the long term and would likely rise further if use
             of the exemption grows in the states we visited and spreads to others. SSA
             officials acknowledged that use of the exemption might be possible in
             other state and local government retirement plans that include both those
             positions covered by Social Security and those not.

             The GPO “loophole” raises fairness and equity concerns for those
             receiving a Social Security pension and are currently subject to the
             spousal benefit offset. In the states we visited, individuals with a relatively
             minimal investment of work time and Social Security contributions can
             gain access to potentially many years of full Social Security spousal
             benefits. The last-day exemption could also have a more significant impact
             if the practice grows and begins to be adopted by other states and
             localities. Considering the potential for abuse, our report presented
             options for revising the GPO exemption, such as changing the last-day
             provision to a longer minimum time period or using a proportional
             approach based on the number of working years spent in covered and
             noncovered employment for determining the extent to which the GPO
             applies.


             The Social Security Act requires that most workers be covered by Social
Background   Security benefits. Workers contribute to the program via wage deductions.
             State and local government workers were originally excluded from Social
             Security.

             Starting in the 1950s, state and local governments had the option of
             selecting Social Security coverage for their employees or retaining their



             4
              This estimate was calculated by multiplying the number of last-day cases reported in
             Texas and Georgia (4,819) by SSA data on average annual offset amount ($4,800) and the
             average life expectancy upon receipt of spousal benefits (19.4 years).



             Page 2                                                                    GAO-03-498T
                         noncovered status. In 1983, state and local governments in the Social
                         Security system were prohibited by law from opting out of it. Of the
                         workers in the roughly 2,300 separate state and local retirement plans
                         nationwide, about one-third are not covered by Social Security.

                         In addition to paying retirement and disability benefits to covered
                         workers, Social Security also generally pays benefits to spouses of retired,
                         disabled, or deceased workers. If both spouses worked in positions
                         covered by Social Security, each 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. In contrast, until 1977, workers receiving
                         pensions from government positions not covered by Social Security could
                         receive their full pension benefit and their full Social Security spousal
                         benefits as if they were nonworking spouses. At that time, legislation was
                         enacted creating the GPO,5 which prevented workers from receiving a full
                         spousal benefit on top of a pension earned from noncovered government
                         employment.6 However, the law provides an exemption from the GPO if an
                         individual’s last day of state/local employment is in a position that is
                         covered by both Social Security and the state/local government’s pension
                         system.7 In these cases, the GPO will not be applied to the Social Security
                         spousal benefit.


                         While we could not definitively confirm the extent nationwide that
Nationwide Extent of     individuals are transferring positions to avoid the GPO, we found that
Transfers to Avoid the   4,819 individuals in Texas and Georgia had performed work in Social
                         Security-covered positions for short periods to qualify for the GPO last-day
GPO Unknown, but         exemption.8 Use of the exemption may grow further as the practice
Expected to Grow         becomes more rapidly institutionalized and the aging baby-boom
                         generation begins to retire in larger numbers. SSA officials also
                         acknowledged that use of the exemption might be possible in some of the


                         5
                         Public Law 95-216, Section 334 (1977).
                         6
                          Currently, the reduction in spousal benefits is two-thirds of the amount of their public
                         pension.
                         7
                          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).
                         8
                          Technically, individuals could have used this exemption since its passage in 1977.
                         However, nearly all of the transfers we identified in Texas and Georgia occurred in the last
                         several years.



                         Page 3                                                                         GAO-03-498T
                     approximately 2,300 state and local government retirement plans in other
                     states where such plans contain Social Security-covered and noncovered
                     positions.


                     Officials in Texas reported that 4,795 individuals at 31 schools have used
Use of GPO           or plan to use last-day employment to take advantage of the GPO
Exemption in Texas   exemption. In 2002, one-fourth (or 3,521) of all Texas public education
                     retirees took advantage of this exemption.
is Growing
                     In most schools, teachers typically worked a single day in a nonteaching
                     position covered by Social Security to use the exemption.

                     Nearly all positions were nonteaching jobs, including clerical, food
                     service, or maintenance. Most of these employees were paid about $6 per
                     hour. At this rate, the Social Security contributions deducted from their
                     pay would total about $3 for the day. We estimate that the average annual
                     spousal benefit resulting from these last-day transfers would be about
                     $5,200.

                     School officials also reported that individuals are willing to travel to take
                     these jobs—noting one teacher who traveled 800 miles to use the last-day
                     provision. Some schools reported that they charge a processing fee,
                     ranging from $100-$500, to hire these workers. These fees are a significant
                     source of revenue—last year one school district collected over $283,000 in
                     fees.

                     Our work shows that use of the exemption in Texas has increased since
                     1990, which was the earliest use reported to us.

                     In one school district, for example, officials reported that use of the
                     exemption grew from one worker in 1996 to 1,050 in 2002. Another school
                     district that began offering last-day employment in 2002 had received over
                     1,400 applications by June of that year from individuals seeking to use the
                     exemption.

                     Use of the exemption is likely to grow further, according to trends in
                     Texas teacher retirements and information from school officials.

                     There were about 14,000 teacher retirements in 2002, as opposed to 10,000
                     in 2000. At one university we visited, officials have scheduled workdays
                     for imminent retirees, through 2005, to work in covered employment, an
                     indication of the rapid institutionalization of this practice. The GPO

                     Page 4                                                           GAO-03-498T
                         exemption is also becoming part of teachers’ regular retirement planning
                         process as its availability and use is publicized by teaching associations
                         and financial planners (via Web sites, newspapers, seminars, etc.) and by
                         word-of-mouth. One association’s Web site we identified lists the names
                         and telephone numbers of school officials in counties covered by Social
                         Security and how to contact those officials for such work. A financial
                         planner’s Web site we identified indicated that individuals who worked as
                         little as 1 day under a Social Security-covered position to quality for the
                         GPO exemption could earn $150,000 or more in benefits over their
                         lifetime.


                         In Georgia, officials in one district reported that 24 individuals have used
In Georgia, Workers      or plan to use covered employment to take advantage of the GPO
Obtain GPO               exemption. Officials told us that teachers generally agreed to work for
                         approximately 1 year in another teaching position in a school district
Exemption by             covered by Social Security to use the GPO exemption. These officials told
Transferring Positions   us that they expect use of the exemption to increase as awareness of it
                         grows.

                         According to Georgia officials, their need to address a teacher shortage
                         outweighs the risk to individual schools of teachers leaving after 1 year.
                         Officials in fast-growing school systems reported they needed to hire
                         teachers even if they only intended to teach for 1 year. However, some
                         schools reported that they have had teachers leave shortly after being
                         hired. For example, in one district, a teacher signed a 1-year contract to
                         teach but left after 61 days, a time sufficient to avoid the spousal benefit
                         reduction. In some of the applications for school employment we
                         reviewed, individuals explicitly indicated their desire to work in a county
                         covered by Social Security in order to obtain full Social Security spousal
                         benefits.


                         Use of the GPO exemption might be possible in other plans nationwide.
Transfers to Avoid the   SSA officials told us that some of the approximately 2,300 state and local
GPO May be Possible      government retirement plans—where such plans contain Social Security-
                         covered and noncovered positions—may offer individuals the opportunity
Nationwide               to use the GPO exemption. Officials representing state and local
                         government retirement plans in other states across the country also told
                         us that their plans allow covered and noncovered Social Security
                         positions, making it possible for workers to avoid the GPO by transferring
                         from one type of position to the other. For example:



                         Page 5                                                           GAO-03-498T
                       •   An official in a midwestern state whose plan covers all state government
                           employees, told us that it is possible for law enforcement personnel
                           (noncovered) to take a covered job in the state insurance bureau
                           (covered) just before retiring.

                       •   In a southern state with a statewide retirement plan for school employees,
                           teachers and other school professionals (noncovered) can potentially
                           transfer to a job in the school cafeteria (covered) to avoid the GPO.

                       •   A retirement system official from a north central state reported hearing of
                           a few cases where teachers had taken advantage of the exemption by
                           transferring to jobs in other school districts covered by Social Security.

                       •   Finally, in a western state with a statewide retirement plan, workers could
                           move from one government agency (noncovered) to a position in another
                           agency (covered).

                           The transfers to avoid the GPO we identified in Texas and Georgia could
Cost of Transfers to       increase long-term benefit payments from the Social Security Trust Fund
the Social Security        by about $450 million.9 We calculated this figure by multiplying the number
                           of last-day cases reported in Texas and Georgia (4,819) by SSA data on the
Trust Fund is              average annual offset amount ($4,800) and the average retirees life
Growing, but Options       expectancy upon receipt of spousal benefits (19.4 years). We believe that
                           these estimated payments would likely increase as use of the exemption
Exist to Address           grows.
Potential Abuse
                           Our prior report identified two options for addressing potential abuses of
                           the GPO exemption. The first option, as proposed in H.R. 743, is to change
                           the last-day provision to a longer minimum time period. This option would
                           require only small changes to administer and would be less burdensome
                           than other methods for SSA to administer. Also, this option has precedent.
                           Legislation in 1987 required federal employees transferring between two
                           federal retirement systems, the Civil Service Retirement System (CSRS)
                           and Federal Employees Retirement System (FERS), to remain in FERS for
                           5 years before they were exempt from the GPO. We found that most of the
                           jobs in Texas last for about 1 day, so extending the time period might
                           eliminate many of the exemption users in Texas.




                           9
                            This estimate may over/under estimate costs due to the use of averages, the exclusion of
                           inflation/cost-of-living/net present value adjustments, lost investment earnings by the Trust
                           Funds, and other factors that may affect the receipt of spousal benefits.



                           Page 6                                                                         GAO-03-498T
              The second option our report identified is to use a proportional approach
              to determine the extent to which the GPO applies. Under this option,
              employees who have spent a certain proportion of their working career in
              a position covered by Social Security could be exempt from the GPO. This
              option may represent a more calibrated approach to determining benefits
              for individuals who have made contributions to the Social Security system
              for an extended period of their working years. However, SSA has noted
              that using a proportional approach would take time to design and would
              be administratively burdensome to implement, given the lack of complete
              and reliable data on noncovered Social Security employment.


              The GPO “loophole” raises fairness and equity concerns for those
Conclusions   receiving a Social Security pension and currently subject to an offset of
              their spousal Social Security benefits. The exemption allows a select group
              of individuals with a relatively small investment of work time and only
              minimal Social Security contributions to gain access to potentially many
              years of full Social Security spousal benefits. The practice of providing full
              spousal benefits to individuals who receive government pensions but who
              made only nominal contributions to the Social Security system also runs
              counter to the nation’s efforts to address the solvency and sustainability of
              the Social Security program.

              Based on the number of people reported to be using the loophole in Texas
              and Georgia this year, the exemption could cost the Trust Fund hundreds
              of millions of dollars. While this currently represents a relatively small
              percentage of the Social Security Trust Fund, costs could increase
              significantly if the practice grows and begins to be adopted by other states
              and localities.

              Considering the potential for abuse of the last-day exemption and the
              likelihood for its increased use, we believe timely action is needed.
              Accordingly, our August 2002 report includes a Matter for Congressional
              consideration that the last-day GPO exemption be revised to provide for a
              longer minimum time period. This action would provide an immediate
              “fix” to address possible abuses of the GPO exemption identified in our
              review.

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




              Page 7                                                           GAO-03-498T
                    For information regarding this testimony, please contact Barbara D.
GAO Contributions   Bovbjerg, Director, Education, Workforce, and Income Security Issues, on
and                 (202) 512-7215. Individuals who made key contributions to this testimony
                    include Daniel Bertoni, Patrick DiBattista, Patricia M. Bundy, Jamila L.
Acknowledgments     Jones, Daniel A. Schwimer, Anthony J. Wysocki, and Jill D. Yost.




                    Page 8                                                       GAO-03-498T
Related GAO Products


             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.




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             Page 9                                                       GAO-03-498T