oversight

Social Security: Issues Relating to Noncoverage of Public Employees

Published by the Government Accountability Office on 2003-05-01.

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. 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.
                                               May 1, 2003


                                               SOCIAL SECURITY

                                               Issues Relating to Noncoverage of Public
Highlights of GAO-03-710T, a testimony         Employees
before the Subcommittee on Social
Security, Committee on Ways and Means,
House of Representatives




Social Security covers about 96                Social Security’s provisions regarding public employees are rooted in the
percent of all US workers; the vast            fact that about one-fourth of them do not pay Social Security taxes on the
majority of the rest are state, local,         earnings from their government jobs, for various historical reasons. Even
and federal government employees.              though noncovered employees may have many years of earnings on which
While these noncovered workers                 they do not pay Social Security taxes, they can still be eligible for Social
do not pay Social Security taxes on
their government earnings, they
                                               Security benefits based on their spouses’ or their own earnings in covered
may still be eligible for Social               employment.
Security benefits. This poses
difficult issues of fairness, and              To address the issues that arise with noncovered public employees, Social
Social Security has provisions that            Security has two provisions—the Government Pension Offset (GPO), which
attempt to address those issues,               affects spouse and survivor benefits, and the Windfall Elimination Provision
but critics contend these provisions           (WEP), which affects retired worker benefits. Both provisions reduce Social
are themselves often unfair. The               Security benefits for those who receive noncovered pension benefits. Both
Subcommittee asked GAO to                      provisions also depend on having complete and accurate information on
discuss these provisions as well as            receipt of such noncovered pension benefits. However, such information is
the implications of mandatory                  not available for many state and local pension plans, even though it is for
coverage for public employees.
                                               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
GAO has previously recommended                 eliminate GPO and WEP. Such actions, while they may reduce confusion
that the Internal Revenue Service              among affected workers, would increase the long-range Social Security trust
(IRS) provide for complete and                 fund deficit and could create fairness issues for workers who have
accurate reporting of noncovered               contributed to Social Security throughout their working lifetimes.
pensions, but IRS has responded
that it lacks the necessary authority          Making coverage mandatory has been proposed to help address the
from the Congress. GAO therefore               program’s financing problems, and doing so could ultimately eliminate the
takes this opportunity to bring the
                                               need for the GPO and the WEP. According to Social Security actuaries,
matter to the attention of the
Congress for its consideration. To             mandatory coverage would reduce the 75-year actuarial deficit by 10
facilitate complete and accurate               percent. However, to provide for the same level of retirement income,
reporting of government pension                mandating coverage would increase costs for the state and local
income, the Congress should                    governments that would sponsor the plans. Moreover, GPO and WEP would
consider giving IRS the authority to           still be needed for many years to come even though they would become
collect this information, which                obsolete in the long run.
could perhaps be accomplished
through a simple modification to a
single form.




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.
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 1                                                               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
Background   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.



             Page 2                                                                        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 best-
                        estimate, 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
About One-Fourth of     the earnings from their government jobs. Historically, Social Security did
Public Employees Are    not require coverage of government employees because they had their
                        own retirement systems, and there was concern over the question of the
Not Covered by Social   federal government’s right to impose a tax on state governments.
Security                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

                        Page 3                                                          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
Provisions Seek     employees, Social Security has two provisions—GPO, which addresses
Fairness but Pose   spouse and survivor benefits and WEP, which addresses retired worker
                    benefits. Both provisions depend on having complete and accurate
Administrative      information that has proven difficult to get. Also, both provisions are a
Challenges          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

                    Page 4                                                          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 5                                                                     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 6                                                                        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 7                                                          GAO-03-710T
                     Aside from the issues surrounding GPO and WEP, another aspect of the
Mandatory Coverage   relationship between Social Security and public employees is the question
Has Been Proposed    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 inflation-
                     protection 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.



                     Page 8                                                                        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
Conclusions     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
Matter for      income, the Congress should consider giving IRS the authority to collect
Congressional   this information, which could perhaps be accomplished through a simple
                modification to a single form.
Consideration
                Mr. Chairman, this concludes my statement, I would be happy to respond
                to any questions you or other members of the Subcommittee may have.




                Page 9                                                           GAO-03-710T
                    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 and Ken Stockbridge.
Acknowledgments




                    Page 10                                                      GAO-03-710T
Related GAO Products


             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.




(130268)
             Page 11                                                      GAO-03-710T