oversight

Social Security: Direct Mail Solicitations by the Social Security Protection Bureau

Published by the Government Accountability Office on 1990-01-26.

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

                                                                                                 .___ _ _ . .   .-.^----.----_ --   .-_--._
    .J;llrlr;rr~~          I !)!)O
                                                                               $OCIAL SECURITY
                                                                                Direct Mail
                                                                                Solicitations by the
                                                                                Social Security
                                                                                Protection Bureau




1
1     ._______l-__.-...l.--       - --“.- .._-   .I”- ___....___-_----“--   ___.-. -_di-v-----                                         __I_--
     (;A()          IlliI)-w-!)
    United States
    General Accounting Office
    Washington, D.C. 20548

    Human Resources Division

    B-238133

    January 26,199O

    The Honorable Andrew Jacobs,Jr.
    Chairman, Subcommittee on Social
      Security
    Committee on Ways and Means
    House of Representatives
    The Honorable J. J. Pickle
    Chairman, Subcommittee on
      Oversight
    Committee on Ways and Means
    House of Representatives
    This report respondsto your request that we provide information on the
    fund-raising activities of the Social Security Protection Bureau, Your
    concernscentered on activities of the bureau as well as of those of the
    parent organization, the Watson & Hughey Company. In responseto
    these concerns,in this report we present information on

l the Watson & Hughey Company’s income and its organizational links
  with the bureau and other affiliated organizations;
. bureau services;
l bureau operations and their legality under federal laws; and
9 miscellaneousinformation, including the costs incurred by the Social
  Security Administration and actions being consideredor taken by state
  governments against the bureau.
    During the course of our review, we spoke with representatives of the
    U. 5. Postal Service, the Social Security Administration, state govern-
    ments, and consumer interest groups, as well as a number of private
    citizens who had dealt with the bureau. Messrs.Watson and Hughey
    would not agree to a meeting with us, but we did talk with their Wash-
    ington counsel, Michael Kushnick.
    We did our review in accordancewith generally acceptedgovernment
    auditing standards. Our verification of membership fee refunds and
    sweepstakesprizes was limited, however, becausethe bureau did not
    provide all the information we requested.(Seeapp. I for detailed discus-
    sion of objectives, scope,and methodology.)




                                         *.

    Page 1                            GAO/IiRDM-9   So&d Security Protection Bureau




                          .’
  I
  I
  I
  I                      B-222122




                         The Social Security Protection Bureau is the creation of Messrs.Watson
      itson and Hughey   and Hughey-sole partners of the Watson & Hughey Company. Through
      ganization and     direct mail solicitation and charitable fund-raising, the Watson &
      :ome               Hughey Company has developed into a multimillion-dollar business,pro-
                         moting many separate nonprofit organizations. These activities have
                         attracted a considerable amount of adverse publicity becausethe Wat-
                         son BEHughey Company, and not charitable organizations, have received
                         most of the moneys obtained from the general public.
                         In 1984, Messrs.Watson and Hughey created a for-profit corporation-
                         Foxhall Corporation -of which they are the directors and officers. The
                         Foxhall Corporation does businessunder a trade name-the Social
                         Security Protection Bureau.

                         The Social Security Protection Bureau offers members a number of ser-
      reau Services      vices for an initial fee of $7.00. These include assistancein obtaining
                         earnings and benefit information from the Social Security Administra-
                         tion and lobbying efforts in Washington on members’ behalf. Bureau
                         mailings state that each year hundreds of thousands of Americans are
                         not given proper credit for money they paid into Social Security and,
                         therefore, an earnings statement from the Social Security Administra-
                         tion is needed.The mailings also state that representation in Washington
                         is necessaryin order to ensure that memberswill not lose the benefits
                         they are entitled to. In addition, the mailings frequently include a
                         sweepstakesformat to entice potential members.

                         Bureau operations have engendereda considerable amount of indigna-
Legality of Bureau       tion and criticism both within and outside the government becausethe
Operations               so-calledbenefits the bureau offers members appear to be of dubious
                         value. For example, those who pay the $7 membership fee are provided
                         assistancein obtaining earnings information from the Social Security
                         Administration. The information, however, is available from the Admin-
                         istration free of charge.
                         Recently, the SenateFinance Subcommittee on Social Security and Fam-
                         ily Policy held hearings on mass mailings to the elderly, concerning
                         Social Security benefits, by various direct mail solicitation firms. Mem-
                         bers of the Congresswere critical of what they consider deceptive mail-
             Y
                         ing practices employed by these firms, such as using organizational
                         names that resemblethose of federal agencies.Members and witnesses
                         criticized these organizations for their fear tactics and their claims of


                         Page 2                             GAO/Iil?DBB-9 Social Security Protection Bureau
                        B-238122




                        having engagedin lobbying efforts in Washington. The Social Security
                        Protection Bureau was one of the organizations singled out in statements
                        presented at these hearings.
                        Nevertheless,to date, it appears that the Social Security Protection
                        Bureau has operated without violating federal legal requirements.
                        Accordingly, no federal agency has taken formal legal action against the
                        bureau. However, the U.S. Postal Service is reviewing bureau activities
                        to seeif the bureau has violated any federal laws prohibiting false rep-
                        resentation or using the mails for running a lottery (such as sweep-
                        stakes). In addition, the bureau’s counsel told us that two state
                        governments have made preliminary inquiries concerning bureau opera-
                        tions within their states.
                        Available information indicates that at least 13 states have taken some
                        form of actions against the parent firm-the Watson & Hughey Com-
                        pany-for its fund-raising operations for nonprofit charities. Actions
                        taken include filing suits, submitting written questions (which attempt
                        to get written answers concerning bureau operations), and filing cease
                        and desist orders against firm mailings.


                        The Social Security Administration reported to us that it has processed
Casts Incurred by the   over 360,000 requests for earnings and benefit information generated by
So&al Security          the Social Security Protection Bureau. It is difficult to say whether these
Administration          requests would have been made had it not been for factors-such as the
                        appeal of possible sweepstakeswinnings or the fear of losing Social
                        Security benefits-engendered by bureau letters.
                        The Social Security Administration incurred administrative costs of
                        about $900,000 to processthe requests generated by the bureau. About
                        $186,000 was spent to send letters to each individual requester. The let-
                        ters sent by the Social Security Administration asked requesters to
                        resubmit their requests on a revised form, copies of which were
                        included, The letter also explained that earnings and benefit information
                        is (1) available without charge and (2) paying for bureau membership is
                        not necessaryto obtain it. The Administration had to send the letters
                        becausethe forms the bureau gave members were outdated.
                        A more detailed discussion of these and related matters is presented in
          Y
                        appendix II. As you requested, we did not obtain written comments on
                        this report. We discussedits contents with officials of the Social Secur-
                        ity Administration and incorporated their commentswhere appropriate.


                        Page 8                             GAO/H&p90-Q Social Security Protection Bureau
-
    -I---   B-238133




-
            As arranged with your office, unless you publicize its contents earlier,
            we plan no further distribution of this report until 30 days from its issue
            date. At that time, we will make copies available to others on request.
            If you have any questions, please call me on (202) 275-6193.Other
            major contributors to this report are listed in appendix III.




            Joseph F. Delfico
            Director, Income Security Issues




            Page 4                             GAO/HRD-90-9 Social Security Protection Bureau
Page 5   GAO/HRD-909 Social Security Protection Bureau
Letter                                                                                                      1

                                                                                                            8




                                                                                                           10
   ivities   of the   Social   Organizational Links                                                        10
                               Financial Information                                                       12
                               Bureau Operations                                                           13
                               Bureau Services                                                             13
                               SweepstakesAwards                                                           16
                               Legal Issues                                                                17
                               Social Security Administration Costs                                        17

Adpendix III                                                                                               20
M&or Contributors to
T&s Report
Table                          Table II. 1: SweepstakesAwards by Category of Finalists                     16

Figure                         Figure 1: Watson & Hughey Companiesand Clients                              11




                               Page 0                           GAO/HRD90-B Social Security Protection Bureau
Page 7   GAO/HRD-90-S Social Security Protection Bureau
A&endix I

qbjectives, Scope,and Methodology


                    The objectives of our review were to respond to questions raised in the
                    February 27, 1988, letter from the Chairman of the Subcommittee on
                    Social Security and the Chairman of the Subcommittee on Oversight,
                    House Ways and MeansCommittee, as modified by subsequentdiscus-
                    sions with the Subcommittee staffs. Overall, we were asked to

                l provide information on (1) the organizational links between the Watson
                  & Hughey Company and other affiliated organizations and (2) the
                  income of the Watson & Hughey operations,
                . determine the servicesthe bureau offered people, and
                l examine whether the bureau has violated federal law.
                    Our review centered on the activities of the bureau. However, because
                    of the Chairmen’s interest, we did somelimited review of the involve-
                    ment of Watson & Hughey with certain nonprofit and charitable
                    organizations.

                    We attempted to meet with the two principals-Jerry C. Watson and
                    Byron C. Hughey-but they would not agree to meet with us. We did,
                    however, talk with their Washington counsel,Michael G. Kushnick of
                    Rose,Schmidt, Hasley & DiSalle. Through him, we submitted a detailed
                    list of questions to Messrs.Watson and Hughey.
                    We were given information on bureau activities. We were, however,
                    denied any information that would give an indication of the extent of
                    (1) mailings to the general public or (2) revenuesbeing realized. This
                    denied information included balance sheets and income and expense
                    statements, frequency and specific numbers of direct mailings to the
                    public, and number of respondentsto bureau solicitations.
                    Concerning bureau activities, we attempted to verify that people
                    (1) requesting refunds of their membership fees actually received them
                    and (2) reported to have won sweepstakesprizes actually received them.
                    This attempted verification was hampered by two factors: first, the lim-
                    ited amount of information on such people provided by Messrs.Watson
                    and Hughey and, second,the difficulty of making telephone contact
                    with the people that Watson and Hughey had identified.

                    We spoke with officials of the Social Security Administration and the
                    Office of Inspector General, Department of Health and Human Services.
            Y
                    At our request, the Social Security Administration gathered information
                    on the costs it had incurred in responding to requests for individual
                    earnings and benefit information that were generated by the bureau.


                    Page 8                             GAO/HRD-90-9 Social Security Protection Bureau
.
    bpendlxI
    Objectives, Scope, and Methodology




    During the course of our review, we discussedthe activities of the
    bureau with representatives of the U.S. Postal Service. We also spoke
    with representatives of consumer interest groups and state governments
    to determine what (1) complaints had been received from the public and
    (2) possible actions were being considered against the bureau.
    We searchedthe literature for articles concerning either the Watson &
    Hughey Company or the Foxhall Corporation, that is, the Social Security
    Protection Bureau. We attempted to speak with attorney generals’
    offices in those states that we had reason to believe were considering
    legal actions. Staffers in these offices were reluctant to discussthe spe-
    cific actions they had taken or were planning to take; at times, they
    stated they could not answer our questions.
    In addition, we reviewed existing laws and proposed legislation applica-
    ble to the activities of the bureau. We also had discussionswith the gen-
    eral counsel of the Department of Health and Human Services,as well as
    other concernedgovernment agencies,on the legality of bureau
    activities.




    Page 9                                   GAO/HI&D-SO-SSocial Security Protection Bureau




                              j



                                         :                                 ,“/   _‘I
  .&jendix II
ip’:i
  Abivities of the Social Security
 pr’otection Bureau
                         Information on the organization, finances, and operations of the Social
                         Security Protection Bureau is presented below. This is followed by dis-
                         cussionsof the servicesoffered to participants, sweepstakesofferings,
                         legal issues,and the estimated costs that the Social Security Administra-
                         tion incurred becauseof bureau activities.

     /
                         The Watson & Hughey Company is a partnership existing under Virginia
 Or’ anizational Links   partnership laws. The partnership was formed on December30, 1981,
   g                     for purposes such as direct mail solicitation and charitable fund-raising.
                         The Watson & Hughey Company has entered into a number of contracts
                         with nonprofit organizations. Watson & Hughey make the initial contact
                         with a nonprofit organization on the basis of organization need for some
                         publicity and initial funding to launch a nationwide charitable contribu-
                         tion drive. Watson & Hughey is subsequently reimbursed for (1) the ini-
                         tial expensesof such campaigns, including costs associatedwith the
                         direct mail solicitation of donations from the public, and (2) rental of its
                         mailing lists. Watson & Hughey is also reimbursed for management
                         services.
                         Headquartered at 510 King Street (Suite 515), Alexandria, Virginia
                         (22314), Watson & Hughey has registered to act as a fund-raiser in all
                         states that require such registration. Becauseit is not a taxable entity,
                         taxes on Watson & Hughey earnings are paid by the partners, Messrs.
                         Watson and Hughey, individually. Together, they directly control two
                         other entities-the Foxhall Corporation and the Washington List Com-
                         pany (see fig. 1).




                Y




                         Page 10                             GAO/HRD-SS-9 Social Security Protection Bureau
Flgurb 1: Watlron   Hughey Companle8
and @Mtr                                                              Watson 6 Hughey Co.
                                                                           Parternership of
                                                                          Jerry C. Watson
                                                                   and Byron C. Hughey provides
                                                                     direct mail solicitation and
                                                                     other fund-raising services




                                                 Washlngton Llst Co.
                                                  Rents mailing lists




                                                                                                   Social Security
                                                                                                  Protection Bureau
                                                                                             Sells Social Security benefit
                                                                                                information packages
                                                                                                                             I




                                                                               Clients
                                                             Charitable nonprofit organizations that have
                                                                contracted for fund-raising services:

                                                                          Adopt-A-Pet, Inc.
                                                                    American Health Foundation
                                                               American Heart Disease Prevention
                                                                           Foundation, Inc.
                                                            American Institute for Cancer Research, Inc.
                                                                    Cancer Fund of America, Inc.
                                                             Coalition to Stop Government Waste, Inc.
                                                            Committee Against Government Waste, Inc.
                                                             National Emergency Medicine Association
                                                                      Pacific West Cancer Fund
                                                                         Project CURE, Inc.
                                                                     United Cancer Council, Inc.
                                                            The Walker Cancer Research Institute, Inc.




                                       Page 11                                   GAO/HRD-So-9 Social Security Protection Bureau
                          Appendix II
                          Actlvltlea of the Social SeeurSty
                          Protection Bureau




      I


  -

                          The Foxhall Corporation is a for-profit corporation incorporated in Dela-
                          ware on August 7, 1984, and is also located at 510 King Street (Suite
                          515), Alexandria, Virginia (22314). The Foxhall Corporation is autho-
                          rized by its certificate of incorporation “to engagein any lawful act or
                          activity for which corporations may be organized under the General
                          Corporation Act of Delaware.” Its activities include direct mail solicita-
                          tion of products and services,such as those for the Social Security Pro-
                          tection Bureau. The Foxhall Corporation has not engagedin charitable
                          fund-raising.
                          The Foxhall Corporation, said officials of the Virginia State Corporation
                          Commission, began doing businessin Virginia under the trade name-
                          Social Security Protection Bureau- in 1984. In its 1987 report to the
                          state of Virginia, the corporation listed only two officers and directors:
                          president, Byron C. Hughey, and secretary-treasurer, Jerry C. Watson.
                          The Washington List Company is a trade name under which the Watson
                          & Hughey Company operates its mailing list brokerage business.The
                          Washington List Company does not have any legal existence, officers or
                          directors, or separate tax status. Its mailing address is 510 King Street
                          (Suite 515), Alexandria, Virginia (22314).

                          We were unable to obtain information on the financial condition of the
Fil-rancial Information   Social Security Protection Bureau or its financial relationship with other
                          organizations with which Messrs.Watson and Hughey have been
                          involved.

                          On March 24, 1989, we made a formal request for information on the
                          Social Security Protection Bureau to Messrs.Watson and Hughey. The
                          request was made through their legal counsel, Michael Kushnick.
                          Messrs.Watson and Hughey provided someof the information we
                          requested on the Social Security Protection Bureau and its operations.
                          Specific financial information- balance sheets,income and expense
                          statements, cash flow statements, and intraorganizational payments-
                          was, however, denied. Other information-such as volume of solicita-
                          tions and actual revenues generated from the public-were also denied.
                          We were advised by Messrs.Watson and Hughey that the denied infor-
                          mation was considered to be highly proprietary, constituting business
                          and trade secrets.




                          Page 12                             GAO/HRD-90-9 Social Security Protection Bureau
  I

                    Messrs.Watson and Hughey provided the following comments about
Bdreau Operations   bureau operations: A l-year membership costs $7.00. Reduced$5.00
                    rates are offered for additional family memberships. Numerous mem-
                    bers have bought gift memberships for their families and friends. Yearly
   //               renewals are also $7.00, and nearly 25 percent of all paid members have
   c                renewed their memberships for at least an additional year.
  /,
                    The bureau has a no-questions asked, money-back refund policy. During
                    1988, less than one-quarter of 1 percent of all membersrequested
                    refunds. Although we were not given the actual numbers of people who
                    had requested refunds, we were given a limited list of five individuals
                    who had requested and received refund checks during the month of Jan-
                    uary 1989. We attempted to speak with all five, but were only able to
                    speak with two. Both stated that they had received refunds.
                    Bureau promotion stressesverification of Social Security contributions,
                    which is more important to workers than to retirees. Elderly Americans,
                    that is, retirees, are therefore not targeted. Messrs.Watson and Hughey
                    explained that on only three separate occasions,the bureau had used
                    mailing lists of elderly Americans. The bureau calculates the break-even
                    point on its direct mail solicitations to be 37 cents per letter; it claimed
                    that generated gross income per letter was 2 cents for the first list, 18
                    for the second,and 21 for the third of the three lists it used. Therefore,
                    it believes that if elderly Americans were targeted, the bureau would
                    expect to lose considerable sums on such solicitations.

                    Messrs.Watson and Hughey told us that the mass mailings have gener-
                    ally been equally divided between those using a sweepstakesformat and
                    those which do not (seep. 16 for a discussion of the sweepstakesfor-
                    mat). We requested specific information on the frequency or dates of all
                    mailings, as well as the number of people mailings were sent to. We also
                    requested that mailings including sweepstakesbe broken out from those
                    that did not. This information was denied to us.


                    The Social Security Protection Bureau offers members certain services
Bhreau Services     for a $7.00 membership fee. The most tangible service appears to be
                    assistancein obtaining Social Security earnings and benefit informa-
                    tion-which Social Security offers to the public for free.
         Y
                    The services offered by the bureau include these:




                    Page 13                             GAO/HRD-90-9 Social Security Protection Bureau
Appendix II
Activities of the Social Security
Protection Bureau




1. Personal gold-embossedplastic Social Security card: The card is
advertised as being durable, almost impossible to alter by anyone, and
acceptedin most places the regular Social Security paper card is. (Wat-
son & Hughey refused to provide us with information on the cost of pro-
ducing these plastic cards.) Lawyers for the bureau stated that
“benefits” of the plastic card include (1) being able to place the paper
card in a safe deposit box for safekeeping and (2) carrying only the
plastic card, making it more difficult for other people to alter and then
use the card.
The actual value of this service to the member appears minimal, There
is little reason for a person to carry a Social Security card. The sole pur-
pose of the card is to provide the recipient with a record of his or her
Social Security number. Further, we were advised that the bureau does
not verify that the Social Security number of the member is, in fact, his
or her Social Security number,

2, Personal statement of Social Security record: Upon request, the Social
Security Administration will provide people with a PersonalizedEarn-
ings and Benefit Estimate Statement. The statement provides-by
year-up-to-date information on a person’s Social Security-covered
earnings and taxes paid, as well as an estimate of monthly benefits
should the person retire, becomedisabled, or die.
The bureau mailings (1) warn that hundreds of thousands of people are
not given proper credit for the money they pay into Social Security and
(2) state that the bureau will help people get statements of their Social
Security records. GAO itself, Mr. Kushnick said, reported that large num-
bers of people do not receive proper credit becauseof errors by Social
Security.
In its mailings, the Social Security Protection Bureau includes the Social
Security Administration request form, SSAform 7004. The bureau asks
potential membersto fill out the forms and return them to the bureau,
The bureau then submits the completed forms to the Social Security
Administration, which will mail the PersonalizedEarnings and Benefit
Estimate Statement to the members.
This is probably the most beneficial service provided by the bureau.
However, the Social Security Administration will provide this informa-
tion free of charge and probably more expeditiously since there is no
third party involved. Again, Messrs.Watson and Hughey refused to tell



Page 14                             GAO/HRD-90-O Social Security Protection Bureau
        Appendix II
        Activitlea of the Sod111Security
        Protection Bureau




        us the number of requests they had received for information on Social
        Security records.
        3, Reward of $600: A reward is offered for information leading to the
        arrest and conviction of any person stealing a member’s card, illegally
        using a member’s number, or fraudulently trying to collect a member’s
        Social Security benefits. We asked whether any such reward had actu-
        ally been given and were told that as of April 10,1989, there had been
        no such awards.
        4. Social Security guide to retirement: This is a handout given to new
        members. It provides somebasic information on Social Security and also
        refers to the “benefits” of Social Security Protection Bureau member-
        ship. We found the guide to be easily understood, but rather general in
        its discussion. It does,however, advise people to call the Social Security
        Administration for more information and lists someof the brochures
        available at Social Security.
        6. Representation in Washington, D. C.: The Washington, D.C., law office
        of Rose,Schmidt, Hasley & DiSalle has been retained to (1) act as the
        lobbying agent for the bureau and (2) monitor proposed legislation relat-
        ing to Social Security benefits. The firm first registered with the House
        of Representativeson November 6, 1986. It reported the following as
        revenues received for its lobbying activities: 1986, $1,600; 1987, $6,000;
        and 1988, $8,350.
        Firm officials stated that as the bureau’s lobbying agent, the firm moni-
        tors, through discussion with congressionalstaff and other means, legis-
        lation such as

    l legislative proposals to create an independent agency for the Social
      Security Administration,
    l protection of cost-of-living adjustments to Social Security benefits,
    l proposed Social Security Notch Adjustment Act,
    . proposed Social Security requirements to send periodic personal earn-
      ings and benefits statements to Social Security participants, and
    . the Deceptive Mailing Prevention Act of 1988.
        We were unable to identify any congressionalcontacts made by the firm.
Y
        Key congressionalstaffers within the Subcommitteesthat authorize
        Social Security legislation and the House and SenateCommittees on
        Aging were not aware, they told us, of any lobbying effort on behalf of
        the Social Security Protection Bureau or any communication from its


        Page 16                            GAO/HRD-90-9 Social Security Protection Bureau
-                                     Appendix II
                                      Activitiee of the Soda1 fkcurity
                                      Protection Bureau




-    1



                                      lobbyist. In addition, during our review, we requested copies of any cor-
                                      respondencebetween the law firm and key congressionalcommittees.
                                      No such correspondencewas provided.

                                      As part of its solicitation, the Social Security Protection Bureau also pro-
    $eepstakes Awards                 motes sweepstakesfor which everyone is eligible, whether or not the $7
                                      membership fee is remitted. Various sweepstakesawards have been
                                      made.
                                      One type of award is a $6,000 cash bonanza sweepstakes.The $5,000
                                      represents the total amount of moneys that would be given away during
                                      the contest. The sweepstakesletter advises the recipients that they are
                                      guaranteed fourth-round finalists who will receive cash awards. The
                                      cash awards can range from $1,000 to 40 cents (minimum prize amount).
                                      There is only one winner of $1,000 in the entire sweepstakesmailing
                                      (see table 11.1).A person is asked to send in $7.00 for a membership or a
                                      blank check with the word VOID printed on it. One postal service official
                                      told us that a person tends to write $7.00 on the check rather than the
                                      word VOID.
        11.1:Sweepcrtaker Awards by
    tigory of Finalists               Category of finalists                  Awards           Amount              Total
                                      Third round                                  1            $1,000            $1,000
                                      Fourth round                                 3               100               300
                                                                                   3                50               150
                                                                                   5                25               125
                                                                                  50                 5               250
                                                                                 175                 1               175
                                      Total                                      237                             $2,000


                                      The remaining $3,000 of the originally advertised $S,OOOO sweepstakes
                                      is divided among those people who return the official cash claim cou-
                                      pons and comply with the official rules.
                                      Messrs.Watson and Hughey told us that the Social Security Protection
                                      Bureau sent out $44,000 in sweepstakeschecksover a recent 12-month
                                      period. They provided us with photocopies of about 400 checksthat had
                                      been sent out to winners (ranging from $100 to $5). All the checkswere
                    Y
                                      endorsed and cancelled.




                                      Page 16                             GAO/HRD99-9 Social Security Protection Bureau
                          Awendlx II
                          Activities of the Social &cur&y
                          Protection Bureau




                          To date, it appears that the Social Security Protection Bureau has oper-
                          ated without violating federal legal requirements. Accordingly, no fed-
                          eral agency has taken formal legal action against the bureau. However,
                          the U.S. Postal Service is reviewing the bureau’s activities to seeif there
                          is any possible violation of federal laws prohibiting false representation
                          or using the mails for running a lottery. We were also advised by the
                          bureau’s counsel that two states have requested somepreliminary infor-
                          mation on the bureau’s activities.
                          At least 13 states-including Hawaii, Illinois, Iowa, Massachusetts,Min-
                          nesota, Missouri, New Hampshire, New York, Pennsylvania, Texas, and
                          Washington-have taken someform of action against the parent com-
                          pany-the Watson & Hughey Company-and the nonprofit and charita-
                          ble organizations with which they are affiliated. These actions have
                          been taken becauseof possible violations of state provisions pertaining
                          to nonprofit organizations and consumer protection.
  ,,,
   I
  I                       The Social Security Administration provides, free of charge, information
SoctialSecurity           that people request about the yearly earnings it has recorded for them.
Abinistration Costs       This information generally can include detailed earnings information,
                          such as earnings by year and by quarter, with names and addressesof
                          reporting employers if it is for program-related purposes. Information is
                          considered to be program related if it is to be used for purposes such as

                      l   determining eligibility for and estimating amounts of Social Security-
                          related benefits,
                      l   verifying accuracy and crediting of earnings records, and
                      l   resolving discrepanciesin information in Social Security records.
                          The Social Security Administration generally chargesfor giving detailed
                          information that is not program related. According to its program oper-
                          ating manual, such information is considered not program related if it is
                          being requested to provide information for
                      . verification of earnings and employment for private pension purposes,
                      . use in civil litigation not related to Social Security, and
                      . use concerning Workers’ Compensation,

          Y
                          In charging for information that is not program related, the agency’s
                          regulations require that full costs,both direct (for example, employees’
                          salaries) and indirect (for example, office overhead) be considered.The



                          Page 17                            GAO/HRKMO-9 Social Security Protection Bureau
        Appendix II
        Activities of the Social Security
        Protection Bureau




-
        Administration either uses a fee schedule designedto cover full costs or
        calculates the full costs of providing the information.
        We asked the Social Security Administration to identify requests for
        earnings information that were generated by the Social Security Protec-
        tion Bureau during fiscal years 1988 and 1989. About 360,000 were
        identified, of which 100,000 were submitted during fiscal year 1988 by
        the bureau on an older version of the request form (SSA-7004).The unit
        cost to the Social Security Administration to processthe older form was
        lower than for the newer form, and the total cost for the 100,000 was
        about $147,000.
        In August 1988, the Social Security Administration announcedthe avail-
        ability of the new PersonalizedEarnings and Benefit Statement. The
        Administration continued to receive the older-version SSA-7004forms
        from the bureau through fiscal year 1989. In February 1989, the Social
        Security Administration began mailing out new forms, along with a
        cover letter from the Commissioner.In this letter, the Commissioner
        asked requesters to resubmit the new forms and said that it was unfor-
        tunate that they were paying the bureau for earnings statements since
        the Social Security Administration provides such information free. The
        letter also pointed out that the bureau was a private company. As of
        July 24,1989, the Social Security Administration had sent copies of the
        new earnings statement form to 260,000 people.

        The Social Security Administration estimates that it required about
        $91,000 in salary costs to stuff the envelopesand prepare the 250,000
        replies for mailing. In addition, the postage cameto about $66,000,
        assuming that all the forms were sent by the presorted bulk rate. To
        these costs,the Social Security Administration’s normal overhead rate
        of 26 percent should be applied. This would bring the total cost of send-
        ing the new forms and cover letters to 260,000 people to about
        $186,000.
        Assuming that all 260,000 of the bureau’s original requests for earnings
        information were subsequently submitted to the Social Security Admin-
        istration, its cost for processingthe 260,000 PersonalizedEarnings and
        Benefit Statements would have amounted to $680,000.
        During fiscal years 1988 and 1989, the bureau generated about 360,000
    Y
        requests for earnings information. It is difficult to determine whether
        people (1)would have requested earnings and benefit information on



        Pege 18                             GAO/HRD-99-9 Social Security Protection Bureau
-
    their own initiative or (2) were motivated by other factors, such as the
    sweepstakesappeal.
    In total, the Social Security Administration could have incurred an esti-
    mated administrative cost of up to $900,000 to honor all of these
    requests. About $185,000 of this cost represented extraordinary
    expensesassociatedwith the Administration’s writing letters to individ-
    ual requesters, (1) explaining that they had spent $7.00 for what they
    could have received free and (2) asking them to submit the new revised
    request forms. At the sametime, the Social Security Protection Bureau
    could have received about $2 million in membership fees from these
    350,000 new members.




    Page 19                            GAO/HRD&9   Social Sedty   Protection Bureau
      ,
      I


      I
                    Roland H. Miller, III, Assistant Director, (301) 965-8925
Hujman Resources    Milan Hudak, Evaluator-in-Charge
Diqision,
Whhington, D.C.
   !
                    Francis M. Doyal
Ofdice of Special
Inqestigations

                    GeorgeH. Bogart




(105109)            Page 20                            GAO/HRD-9@9 Social Security Protection Bureau
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