U.S. GOVERNMENT PRINTING OFFICE

WASHINGTON : 

52–908 CC 1999

THE FUTURE OF SOCIAL SECURITY FOR THIS

GENERATION AND THE NEXT: IMPLICATIONS

OF PROPOSALS AFFECTING FEDERAL, STATE,

AND LOCAL GOVERNMENT EMPLOYEES

HEARING

BEFORE THE

SUBCOMMITTEE ON SOCIAL SECURITY

OF THE

COMMITTEE ON WAYS AND MEANS

HOUSE OF REPRESENTATIVES

ONE HUNDRED FIFTH CONGRESS

SECOND SESSION

MAY 21, 1998

Serial 105–49

Printed for the use of the Committee on Ways and Means

(
ii

COMMITTEE ON WAYS AND MEANS

BILL ARCHER, Texas, Chairman

PHILIP M. CRANE, Illinois

BILL THOMAS, California

E. CLAY SHAW, JR., Florida

NANCY L. JOHNSON, Connecticut

JIM BUNNING, Kentucky

AMO HOUGHTON, New York

WALLY HERGER, California

JIM MCCRERY, Louisiana

DAVE CAMP, Michigan

JIM RAMSTAD, Minnesota

JIM NUSSLE, Iowa

SAM JOHNSON, Texas

JENNIFER DUNN, Washington

MAC COLLINS, Georgia

ROB PORTMAN, Ohio

PHILIP S. ENGLISH, Pennsylvania

JOHN ENSIGN, Nevada

JON CHRISTENSEN, Nebraska

WES WATKINS, Oklahoma

J.D. HAYWORTH, Arizona

JERRY WELLER, Illinois

KENNY HULSHOF, Missouri

CHARLES B. RANGEL, New York

FORTNEY PETE STARK, California

ROBERT T. MATSUI, California

BARBARA B. KENNELLY, Connecticut

WILLIAM J. COYNE, Pennsylvania

SANDER M. LEVIN, Michigan

BENJAMIN L. CARDIN, Maryland

JIM MCDERMOTT, Washington

GERALD D. KLECZKA, Wisconsin

JOHN LEWIS, Georgia

RICHARD E. NEAL, Massachusetts

MICHAEL R. MCNULTY, New York

WILLIAM J. JEFFERSON, Louisiana

JOHN S. TANNER, Tennessee

XAVIER BECERRA, California

KAREN L. THURMAN, Florida

A.L. SINGLETON, Chief of Staff

JANICE MAYS, Minority Chief Counsel

SUBCOMMITTEE ON SOCIAL SECURITY

JIM BUNNING, Kentucky, Chairman

SAM JOHNSON, Texas

MAC COLLINS, Georgia

ROB PORTMAN, Ohio

JON CHRISTENSEN, Nebraska

J.D. HAYWORTH, Arizona

JERRY WELLER, Illinois

KENNY HULSHOF, Missouri

BARBARA B. KENNELLY, Connecticut

RICHARD E. NEAL, Massachusetts

SANDER M. LEVIN, Michigan

JOHN S. TANNER, Tennessee

XAVIER BECERRA, California

Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public hearing records

of the Committee on Ways and Means are also published in electronic form. The printed

hearing record remains the official version. Because electronic submissions are used to

prepare both printed and electronic versions of the hearing record, the process of converting

between various electronic formats may introduce unintentional errors or omissions. Such occurrences are inherent in the current publication process and should diminish as the process

is further refined.
iii

C O N T E N T S

Page

Advisory of May 13, 1998, announcing the hearing ............................................. 2

WITNESSES

U.S. General Accounting Office, Cynthia M. Fagnoni, Director, Income Security Issues, Health, Education, and Human Services Division; accompanied

by John Schaefer, Senior Evaluator; and Frank Mulvey, Assistant Director . 12

Congressional Research Service, Geoffrey Kollmann, Specialist, Social

Legislation, Education and Public Welfare Division ......................................... 22

American Federation of State, County and Municipal Employees, Joseph

Rugola ................................................................................................................... 96

Coalition to Assure Retirement Equity, Robert E. Normandie ............................ 90

Coalition to Preserve Retirement Security, Robert J. Scott ................................. 43

Frank, Hon. Barney, a Representative in Congress from the State of

Massachusetts ...................................................................................................... 11

Jefferson, Hon. William J., a Representative in Congress from the State

of Louisiana .......................................................................................................... 5

Massachusetts Teachers’ Retirement Board, Thomas R. Lussier ........................ 59

National Association of Retired Federal Employees, Bernadine A. Jernigan .... 94

National Fraternal Order of Police, Marty Pfeifer ................................................ 56

Ohio Association of Public School Employees, Joseph Rugola ............................. 96

Public Employees’ Retirement Association, Robert J. Scott ................................. 43

Public Employees’ Retirement System of Nevada, George Pyne ......................... 66

Public Employees Retirement System of Ohio, Richard E. Shumacher .............. 53

Washington Metropolitan Police Department, Marty Pfeifer .............................. 56

SUBMISSIONS FOR THE RECORD

Bixby, Jay W., National Conference on Public Employee Retirement Systems,

letter ...................................................................................................................... 129

California Correctional Peace Officers Association, Donald L. Novey,

statement .............................................................................................................. 105

California State Teachers’ Retirement System, Sacramento, CA, Jennifer

DuCray-Morrill, statement .................................................................................. 107

Council for Government Reform, Arlington, VA, Charles G. Hardin,

statement .............................................................................................................. 111

Deutsch, Eleanor, Brooklyn, NY, letter ................................................................. 112

Doyle, Patrick L., Commonwealth of Kentucky, Division of Social Security,

statement .............................................................................................................. 113

DuCray-Morrill, Jennifer, California State Teachers’ Retirement System,

Sacramento, CA, statement ................................................................................. 107

Dyer, Herbert L., State Teachers Retirement System of Ohio, Columbus,

OH, letter .............................................................................................................. 140

Fierst, Edith U., Chevy Chase, MD, statement .................................................... 114

Graves, Russell, National Conference of State Social Security Administrators,

Oklahoma City, OK, statement ........................................................................... 131

Hardin, Charles G., Council for Government Reform, Arlington, VA,

statement .............................................................................................................. 111

International Association of Fire Fighters, Alfred K. Whitehead, statement ..... 117

Johnson, Tom, National Conference of State Legislatures, letter ....................... 130

Kentucky, Commonwealth of, Division of Social Security, Patrick L. Doyle,

statement .............................................................................................................. 113

Mikulski, Hon. Barbara A., a U.S. Senator from the State of Maryland,

statement .............................................................................................................. 119

Miller, Pat N., Teachers’ Retirement System of Kentucky, Frankfort, KY,

letter ...................................................................................................................... 141
Page

iv

National Association of Police Organizations, Inc., Robert T. Scully,

statement .............................................................................................................. 120

National Committee to Preserve Social Security and Medicare, statement ....... 127

National Conference on Public Employee Retirement Systems, Jay W. Bixby,

letter ...................................................................................................................... 129

National Conference of State Legislatures, Tom Johnson, letter ........................ 130

National Conference of State Social Security Administrators, Oklahoma City,

OK, Russell Graves, statement ........................................................................... 131

National Education Association, statement ........................................................... 133

National Treasury Employees Union, Robert M. Tobias, statement ................... 135

Novey, Donald L., California Correctional Peace Officers Association,

statement .............................................................................................................. 105

O’Hare, Sally D., Palos Heights, IL, statement .................................................... 136

Ohio, State of, Hon. George V. Voinovich, Governor, statement ......................... 137

Sandlin, Hon. Max, a Representative in Congress from the State of Texas,

statement .............................................................................................................. 139

Scully, Robert T., National Association of Police Organizations, Inc.,

statement .............................................................................................................. 120

State Teachers Retirement System of Ohio, Columbus, OH, Herbert L. Dyer,

letter ...................................................................................................................... 140

Teachers’ Retirement System of Kentucky, Frankfort, KY, Pat N. Miller,

letter ...................................................................................................................... 141

Tobias, Robert M., National Treasury Employees Union, statement .................. 135

Voinovich, Hon. George V., Governor, State of Ohio, statement ......................... 137

Whitehead, Alfred K., International Association of Fire Fighters, statement .... 117
(1)

THE FUTURE OF SOCIAL SECURITY FOR THIS

GENERATION AND THE NEXT: IMPLICATIONS OF PROPOSALS AFFECTING FEDERAL, STATE, AND LOCAL GOVERNMENT

EMPLOYEES

THURSDAY MAY 21, 1998

HOUSE OF REPRESENTATIVES, COMMITTEE ON WAYS AND MEANS, SUBCOMMITTEE ON SOCIAL SECURITY, Washington, DC.

The Subcommittee met, pursuant to notice, at 10 a.m., in room

B–318, Rayburn House Office Building, Hon. Jim Bunning (Chairman of the Subcommittee) presiding.

[The advisory announcing the hearing follows:]
2

ADVISORY

FROM THE COMMITTEE ON WAYS AND MEANS

SUBCOMMITTEE ON SOCIAL SECURITY

FOR IMMEDIATE RELEASE CONTACT: (202) 225–9263

May 13, 1998

No. SS–16

Bunning Announces Ninth

Hearing in Series on ‘‘The Future of

Social Security for this Generation and the Next’’

Congressman Jim Bunning (R–KY), Chairman, Subcommittee on Social Security of the Committee on Ways and Means, today announced that the Subcommittee will

hold the ninth in a series of hearings on ‘‘The Future of Social Security for this Generation and the Next.’’ At this hearing, the Subcommittee will examine the implications of proposals affecting Federal, State, and local government employees. These

proposals include extending mandatory Social Security coverage to all newly hired

State and local employees, and altering current law provisions affecting the Social

Security benefits of persons who receive government pensions. The hearing will take

place on Thursday, May 21, 1998, in room B–318 Rayburn House Office Building,

beginning at 10:00 a.m.

In view of the limited time available to hear witnesses, oral testimony will be from invited witnesses only. Witnesses are expected to include Members of Congress, the U.S. General Accounting Office, Federal and State government employee

representatives, and social insurance experts. However, any individual or organization may submit a written statement for consideration by the Committee and for

inclusion in the printed record of the hearing.

BACKGROUND:

Numerous Social Security reform proposals include a provision to extend manda- tory coverage to all newly hired State and local government employees. Social Security coverage has been expanded since Social Security’s beginning. Workers in business and industry, then about 60 percent of the workforce, were the only persons

covered in the initial Social Security Act of 1935. Over time, the program’s coverage

has grown to include the self-employed, nonprofit groups, agricultural and household workers, the Armed Services, Members of Congress, and all other Federal employees hired after 1983.

State and local governments were excluded altogether in the original Social Secu- rity Act of 1935 to avoid raising the possible constitutional questions of whether the

Federal Government could tax State and local governments, and because many

State and local government employees were already covered under other pension

plans. Beginning in 1950, Congress amended the law several times to make participation in Social Security available on a voluntary basis to employees of State and

local governments. In 1983, the State and local government option to terminate Social Security coverage was repealed and all State and local governments participating in the system were required to continue their participation. Beginning July 1,

1991, Social Security coverage was made mandatory for State and local government

workers who do not participate in a retirement system for such employment.

The Social Security Administration estimates that 96 percent of the workforce, in- cluding 70 percent of State and local government workers, is now covered by Social

Security and that about 4.9 million State and local government workers are not cov3

ered by Social Security. Seven States (California, Colorado, Illinois, Louisiana, Massachusetts, Ohio, and Texas) account for over 75 percent of non-covered payroll. Previous surveys have found that police, firefighters, and teachers are more likely to

occupy non-covered positions.

Also impacting Federal, State, and local government employees are two current law provisions that reduce entitlement to Social Security benefits. These provisions,

commonly known as the Government Pension Offset (GPO) and Windfall Elimination Provision (WEP), were enacted in 1977 and 1983, respectively, in an attempt

to provide Social Security benefits which are fair to all workers, whether they work

in non-Social Security-covered government employment or in jobs under Social Security.

Since the enactment of the GPO and WEP, government workers have expressed concern that benefit reductions are imprecise and unfair. Legislative proposals have

been introduced which modify the way benefits would be calculated.

In announcing the hearing, Chairman Bunning stated: ‘‘Most Americans are sur- prised to learn that not all workers are covered by Social Security. To many, covering those State and local government workers not covered under Social Security is

an issue of simple fairness. Yet, changing the retirement systems of many of our

teachers, firefighters, and police forces could have far reaching effects on these

workers and the long-term financing of their retirement plans. These workers have

devoted their careers to us, ensuring the safety and sound education of ourselves

and our children. Their views are very important to this Subcommittee, and we need

to listen and carefully consider what they have to say.’’

FOCUS OF THE HEARING:

The Subcommittee will receive views on proposals to extend mandatory Social Se- curity coverage to all newly hired State and local government employees and altering current law provisions affecting the Social Security benefits of persons who receive government pensions.

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:

Any person or organization wishing to submit a written statement for the printed record of the hearing should submit six (6) single-spaced copies of their statement,

along with an IBM compatible 3.5-inch diskette in WordPerfect 5.1 format, with

their name, address, and hearing date noted on a label, by the close of business,

Thursday, June 4, 1998 , to A.L. Singleton, Chief of Staff, Committee on Ways and

Means, U.S. House of Representatives, 1102 Longworth House Office Building,

Washington, D.C. 20515. If those filing written statements wish to have their statements distributed to the press and interested public at the hearing, they may deliver 200 additional copies for this purpose to the Subcommittee on Social Security

office, room B–316 Rayburn House Office Building, at least one hour before the

hearing begins.

FORMATTING REQUIREMENTS:

Each statement presented for printing to the Committee by a witness, any written statement

or exhibit submitted for the printed record or any written comments in response to a request

for written comments must conform to the guidelines listed below. Any statement or exhibit not

in compliance with these guidelines will not be printed, but will be maintained in the Committee

files for review and use by the Committee.

1. All statements and any accompanying exhibits for printing must be submitted on an IBM

compatible 3.5-inch diskette in WordPerfect 5.1 format, typed in single space and may not exceed a total of 10 pages including attachments. Witnesses are advised that the Committee will

rely on electronic submissions for printing the official hearing record.

2. Copies of whole documents submitted as exhibit material will not be accepted for printing.

Instead, exhibit material should be referenced and quoted or paraphrased. All exhibit material

not meeting these specifications will be maintained in the Committee files for review and use

by the Committee.

3. A witness appearing at a public hearing, or submitting a statement for the record of a public hearing, or submitting written comments in response to a published request for comments
4

by the Committee, must include on his statement or submission a list of all clients, persons,

or organizations on whose behalf the witness appears.

4. A supplemental sheet must accompany each statement listing the name, company, address, telephone and fax numbers where the witness or the designated representative may be reached.

This supplemental sheet will not be included in the printed record.

The above restrictions and limitations apply only to material being submitted for printing. Statements and exhibits or supplementary material submitted solely for distribution to the

Members, the press and the public during the course of a public hearing may be submitted in

other forms.

Note: All Committee advisories and news releases are available on the World

Wide Web at ‘HTTP://WWW.HOUSE.GOV/WAYSlMEANS/’.

The Committee seeks to make its facilities accessible to persons with disabilities.

If you are in need of special accommodations, please call 202–225–1721 or 202–226–

3411 TTD/TTY in advance of the event (four business days notice is requested).

Questions with regard to special accommodation needs in general (including availability of Committee materials in alternative formats) may be directed to the Comorder.

mittee as noted above.

Chairman BUNNING [presiding]. The Subcommittee will come to

f

I want to let all of our people that are going to testify know that there is going to be a vote called very, very shortly on the floor of

the House. So, I’m going to adjourn, because the first two panelists

are Members, and they will be coming back with me, I hope, to testify, and then we will get on with all other testimony. We have a

very long program, a lot of people that wanted to testify today. So

if you’ll bear with us for just a short period of time, we have a journal vote over on the floor, and I’ll be back immediately. So, we’ll

stand in recess until I get back.

[Recess.]

Chairman BUNNING. The Subcommittee will come to order.

I’m going to do my opening statement and when Ms. Kennelly

comes we’ll allow her to do hers even though we may have to interrupt some of our testimony.

Today marks our ninth hearing in a series of the future of Social

Security for this generation and the next. The Subcommittee will

examine the implications of proposals affecting Federal, State, and

local government employees. These proposals including extending

mandatory Social Security coverage to all newly hired State and

local employees and altering current law provisions affecting the

Social Security benefits of persons who receive government pensions.

Most Americans are surprised to learn that not everyone pays

FICA, Federal Insurance Contributions Act, taxes and receives Social Security benefits and believe it’s only fair for State and local

government employees to pay the same FICA taxes that most everyone else does. Perhaps, that is why just about every proposal for

Social Security reform, including the recommendations of the 1994–

96 Social Security Council, includes a provision to extend mandatory coverage to all newly hired State and local government employees.

The Social Security Administration estimates that about 5 million State and local government workers are not covered by Social
5

Security. Seven States—California, Colorado, Illinois, Louisiana,

Massachusetts, Ohio, and Texas—account for more than 75 percent

of these workers. Yet, changing the retirement system of many of

our teachers, firefighters and police force could have a far-reaching

effect on these workers, their employees, and the long-term financing of their respective retirement plans. These workers have devoted their careers to us ensuring our safety and educating our

children. Their views are very important to this Subcommittee, and

we intend to listen carefully to what they have to say.

Also impacting Federal, State, and local government employees

are two current law provisions that reduce entitlement to Social

Security benefits. These provisions commonly known as the GPO,

government pension offset, and WEP, windfall elimination provisions, were enacted in 1977 and 1983, respectively, in an attempt

to provide Social Security benefits which are fair to all workers

whether they work in jobs covered by Social Security or jobs that

are not covered by Social Security.

As we consider major Social Security reform, we have the opportunity to closely examine those current law benefit provisions

which have come under scrutiny. Since the enactment of the GPO

and the WEP, government workers have expressed concern that

benefit reductions are imprecise and unfair. Today, we’ll hear more

details regarding these concerns and the legislative proposals introduced which would modify the way benefits would be calculated.

Let me emphasize that the purpose of this hearing series is to

fully explore all options for Social Security reform so that when the

time comes Members will be able to make informed decisions fair

to all workers and all generations. We seek information. We do not

seek to establish any particular position. Today, we look forward to

hearing the views from all our witnesses, particularly those who

have been or will be personally affected by these proposals.

I reserve time for the Ranking Member, and I will go immediately to our first panel and the gentleman from Louisiana, Mr.

Jefferson, and all Members can submit for the record any opening

statements that they might have.

Mr. Jefferson.

STATEMENT OF HON. WILLIAM J. JEFFERSON, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF LOUISIANA

Mr. JEFFERSON. Thank you very much, Mr. Chairman and Members of the Subcommittee, and I thank you for the bipartisan show

of support this morning by providing me with my own statement,

thank you.

I’m pleased to have the opportunity to testify before the Subcommittee regarding the government pension offset. This issue is

totally separate from the question of whether FICA should apply

to hires or not, because if it were to start today in that direction,

it still wouldn’t fix the issue that we now have which has cropped

up over the years of reliance under another system, so I don’t have

to state a position one way or another on that to talk about this

issue which still needs fixing.

After the 1935 act was established, some of local governments

decided to remain outside of the system as you pointed out. It’s estimated that about 4.9 million State and local government employ6

ees are not covered by Social Security and, as you pointed out,

many of them are in 7 States.

Many of the State and local government employees that are covered by government pension will be unfairly affected by the pension

offset. As you may be aware, the pension offset was originally enacted in response to perceived abuses to the Social Security system

resulting from the Goldfarb decision. The Social Security system

provides that if a spouse who worked and paid into Social Security

died, the benefits were to paid to the surviving spouse as a survivor

benefit. Men were required to prove dependency on their spouses

before they became eligible for Social Security benefits. There was

no such requirement for women. The Goldfarb decision eliminated

this different treatment of men and women. The court, instead, required Social Security to treat men and women equally by paying

benefits to either spouse without regard to dependency. Many of

the men who would benefit from the Goldfarb decision were also

receiving large government pensions. It was believed that these retirees would bankrupt the system receiving government and private pensions in addition to survivor benefits.

To combat this perceived problem, pension offset legislation was

enacted in 1977. The legislation provided for a dollar for dollar reduction of Social Security benefits to spouses or retiring spouses

who received earned benefits from the Federal, State, or local retirement system. The pension offset provisions can affect any retiree who receives a civil pension on Social Security but primarily

affects widows or widowers eligible for survivor benefits.

In 1983, the pension offset was reduced to two-thirds of the public employees survivor benefit. It was believed that one-third of the

pension was equivalent to pension available in the private sector.

The pension offset, which was aimed at higher paid government

employees also applies to public service employees who generally

receive lower pension benefits, and this is the nub of the problem.

These public service employees include secretaries, school cafeteria

workers, teacher aids, teachers, and others who don’t receive high

salaries. The pension offset as applied to this group is punitive, unfairly harsh, and bad policy. While government pensions were tailored to produce benefits that were equal to many combined, private pension and Social Security benefits for upper level government workers, this was not true for low-income workers such as

the employees I mentioned.

To illustrate the harsh impact of the pension offset, consider a

widow who retired form the Federal Government and received a

civil service annuity of $550 monthly. The full widows benefit is

$385. The current pension offset law reduces the widow’s benefit to

$19 a month—two-thirds of the $550 civil service annuity which is

$367—this is then subtracted from the $385 widows benefit, leaving only $19. The retired worker receives $569 instead of almost

$1,000 otherwise.

Proponents of the pension offset claim that the offset is justified

because survivor benefits were intended to be in lieu of pensions,

however, if this logic was followed across the board, people with

private pension benefits would also be subject to an offset but this

is not the case. While Social Security benefits of spouses or surviving spouses earned in government pensions are reduced by two for
7

every $3 earned, Social Security benefits of spouses or surviving

spouses earning private pensions are not subject to offset at all.

My office has received letters from around the country including

one from a 68-year-old lady, Helen Emery from Fair Oaks, California, who writes to say that ‘‘My government retirement, monthly,

after deductions, is a very modest $988.69. I’m sure you know this

is just a fraction above the poverty level. The government pension

offset benefits will reduce my Social Security benefits and only

allow me an additional $116 per month.’’ These sorts of letters

come from people who work for sheriff’s departments and from people who work for other agencies that I’ve noted in my statement—

I do not have time, apparently, to go through them all.

But I do want to point out that in this Congress I’ve introduced

H.R. 2273. There are 161 or 162 cosponsors on the bill. It’s a bill

that has a great deal of support. Senator Mikulski has introduced

a similar bill in the Senate. It limits the pension offset to those—

person to collect more than $1,200 in overall pension benefits. As

you can see H.R. 2273 has a cap on it, so it doesn’t go to the high

benefit pensioners, but it will affect those small people who were

never, I don’t believe, intended to be affected by the GPO, and it

corrects, I think, an inequity in the system.

So, I would urge the Subcommittee to take up this legislation in

the remaining part of this session and—as it goes about the business of fixing the overall system, making sure that the system is

fair to everyone, that it take into account this issue which is a very

important issue, this many people around the country have a great

deal of interest in. I thank the Subcommittee for listening to me.

I appreciate your giving me the time.

[The prepared statement follows:]

Statement of Hon. William J. Jefferson, a Representative in Congress from

the State of Louisiana

Mr. Chairman and members of the Subcommittee, I am pleased to have the opportunity to testify regarding the Government Pension Offset (Pension Offset).

I thank the Chairman for having a hearing on this pressing issue. Pension Offset

is an important issue to me. It is an important issue for my constituents in Louisiana and it is an important issue for many state and local government employees

across the nation.

As you are aware, state and local government employees were excluded from Social Security coverage when the Social Security System was first established in

1935. These employees were later given the option to enroll in the Social Security

System and in the 1960’s and 1970’s many public employees opted to join in.

Some local governments chose to remain out of the system. Their employees and

spouses planned for retirement according to the rules in effect. It is estimated that

about 4.9 million state and local government employees are not covered by Social

Security. Seven states (California, Colorado, Illinois, Louisiana, Massachusetts, Ohio

and Texas) account for over 75 percent of non-covered payroll.

Many of the state and local government employees that are covered by government pensions will be unfairly affected by the Pension Offset.

As you may be aware, the Pension Offset was originally enacted in response to

the perceived abuses to the Social Security system resulting from the Goldfarb decision.

The Social Security System provides that if a spouse who worked and paid into

Social Security died, the benefits were to be paid to the surviving spouse as a survivor benefit. Men were required to prove dependency on their spouses before they

became eligible for Social Security survivor benefits. There was no such requirement

for women.

The Goldfarb decision eliminated the different treatment of men and women. The

court instead required Social Security to treat men and women equally by paying

benefits to either spouse without regard to dependency.
8

Many of the men who would benefit from the Goldfarb decision were also receiving large government pensions. It was believed that these retirees would bankrupt

the system, receiving large government and private pensions in addition to survivor

benefits.

To combat this perceived problem, Pension Offset legislation was enacted in 1977. The legislation provided for a dollar for dollar reduction of Social Security benefits

to spouses or retiring spouses who received earned benefits from a federal, state or

local retirement system. The Pension Offset provisions can affect any retiree who

receives a civil service pension and Social Security but primarily affects widows or

widowers eligible for survivor benefits. In 1983, the Pension Offset was reduced to two-thirds of the public employer survivor benefit. It was believed that one-third of the pension was equivalent to the

pension available in the private sector.

The Pension Offset aimed at high paid government employees also applies to public service employees who generally receive lower pension benefits. These public

service employees include secretaries, school cafeteria workers, teachers aides and

others low wage government employees. The Pension Offset as applied to this group

is punitive, unfairly harsh and bad policy.

Government pensions were tailored to produce benefits that were equal to many

combined private pension-Social Security policies in the private sector for upper

level government workers. However, this was not true for lower income workers

such as employees who worked as secretaries, school cafeteria workers, teachers

aides and others who generally receive lower pension benefits.

To illustrate the harsh impact of the Pension Offset, consider a widow who retired

from the federal government and receives a civil service annuity of $550 monthly.

The full widow’s benefit is $385. The current Pension Offset law reduces the widow’s

benefit to $19 a month (2⁄3 of the $550 civil service annuity is $367, which is then

subtracted from the $385 widow’s benefit, leaving only $19). The retired worker receives $569 ($550 + $19) per month.

Proponents of the Pension Offset claim that the offset is justified because Survivor

benefits were intended to be in lieu of pensions. However, were this logic followed

across the board, then people with private pension benefits would be subject to the

offset as well. But that is not the case.

While Social Security benefits of spouses or surviving spouses earning government

pensions are reduced by $2 for every $3 earned. Social Security benefits of spouses

or surviving spouses earning private pensions are not subject to offset at all.

If retirees on private pensions do not have Social Security benefits subject to offset, why should retirees who worked in the public service?

The Pension offset has created a problem that cries out for reform. It will cause

tens of thousands of retired government employees, including many former paraprofessionals, custodians or lunch room workers, to live their retirement years at

or near the poverty level.

My office has received numerous calls, all from widows, who are just getting by

and desperately need some relief from the Pension Offset.

The following is a letter we received from Helen J. Emery from Fair Oaks, California.

I am a 68 year old and worked 27 years for the Government. My government retirement monthly after deductions is a ‘‘very’’ modest $988.69. I am sure you know

this is just a fraction above poverty level. The ‘‘windfall’’ benefits law reduced my

social security benefits and only allows me an additional $116.00 per month even

though I alone paid into this Social Security prior to working for the Government.

Effective January 1998, I became a divorced widow and the ‘‘offset’’ effecting my

$724.80 widows Social Security benefits brings my widow’s benefits to zero.

I am hoping and praying that you will continue to fight this very unjust ‘‘offset’’

law.

Millard J. Downing from Wallingford, PA wrote:

I am retired from the Agency for International Development with a $12,000.00 a

year annuity and through employment outside of federal service have become eligible for Social Security, age 62. Upon visiting my local Social Security Office I was

advised that normally I would be eligible for $425.00 month. However, due to the

present Pension Offset and being a federal annuitant, my social security annuity

will be reduced to approximately $207.00 month. I do not consider this reduction

as being a fair game when all deductions for above were made while being employed

outside of federal service.

Patricia C. Cook from Metaire, LA wrote:
9

I get a small pension from the Jefferson Parish Sheriff’s Office ($473.00) and because of this my Soc. Sec. Check is offset by half. I should receive close to $500.00

a month that I put in many years of my life for and it is cut to $243.00. I would

appreciate what ever you can do about this and I hope someone will change the

other off set also. When I paid my personal Soc. Sec. They grabbed; but when it

comes to getting it back, its another story.

During the 104th Congress, I introduced the Government Pension Offset Repeal

Bill, H.R. 2167. I have re-introduced this important legislation in the 105th Congress as H.R. 2273.

The legislation, does not completely repeal the Pension Offset, but provides a

modification to a complete repeal. It will allow pensioners and widows affected by

Pension Offset provisions to receive a minimum $1200 per month before offset provisions could be imposed. The bill has 162 recorded cosponsors. A corresponding Senate bill, sponsored by Senator Barbara A. Mikulski (D–MD), was introduced in November of 1997.

H.R. 2273 has been referred to this committee, and I urge my colleagues to support this legislation.

Mr. Chairman, I urge the Committee to take up this legislation in the remaining

days of the session.

nelly make her opening statement, and we would like to do some

Chairman BUNNING. If you will remain, I’m going to let Ms. Kenf

questions if we can.

Mr. JEFFERSON. Thank you.

Mrs. KENNELLY. Thank you, Mr. Chairman, and thank you for

the courtesy of allowing me to make my statement at this moment.

In 1995, the Social Security Advisory Council recommended that

all newly-hired State and local employees be covered under Social

Security, and I believe today’s hearing is the first forum in which

State and local employees have had the opportunity to express to

us their views on the proposal, and I thank the Chairman for calling this hearing.

As we know, 90 percent of all workers are covered under Social

Security. Only 70 percent of State and local workers are covered

under the program. Workers who are not covered are unevenly distributed among the States. Seven States account for over 75 percent of the noncovered workers. With this unequal distribution, it

is important that we take a careful look at both the impact on individual workers and the financial impact on States and localities.

We need to ask whether the benefits for individuals increase or decrease, and we need to ask whether the cost to States will rise. We

will hear some of those answers today.

We will also be looking at proposals to change the windfall elimination provision and the government pension offset. These provisions were enacted in an effort to assure consistent benefit treatment between those who paid Social Security and those who did

not. It is argued, however, that both of these provisions unfairly reduce Social Security benefits for individuals who have worked in

the government employment.

Several of distinguished colleagues, as Mr. Jefferson has just

done, will testify, and I look forward to hearing that testimony.

Thank you, Mr. Chairman.

Chairman BUNNING. Thank you.

Bill, can I just refer to your bill that you have in, H.R. 2273?

Mr. JEFFERSON. Yes.
10

Chairman BUNNING. How do you pay for the offset or how do you

propose to pay out of the trust funds for the offset or do you just

intend to use the trust funds to pay the offset without any way to

increase the trust funds? Obviously, these people are already on

their own pensions, so they’re already retired.

Mr. JEFFERSON. Yes. The bill doesn’t propose to treat that question, but it presumes that the answer is contained within the overall system. We know it costs additional money, perhaps, $200 million according to some estimates but a little less according to others. It’s a good deal of money, but it is not so much money that

it’s out of bounds to be considered to be done. It leaves a lot of people who had expectations of a different outcome in their retirement

years suffering in their retirement years even though they had a

spouse who worked the entirety of their lives. I don’t have the complete answer to how we would fund it, but we’re coming to grips,

still, with how much it costs. It’s somewhere within the range I’ve

spoken of, I’m confident.

Chairman BUNNING. Are you talking about $200 million out of

the trust funds every year to take care of everyone that’s offset?

Mr. JEFFERSON. Yes.

Chairman BUNNING. In other words, that’s the total cost annually out of the trust funds to take care of 100 percent of the offsets?

Mr. JEFFERSON. Yes. In the context of the bill, the bill limits it

to $1,200.

Chairman BUNNING. In other words, up to $1,200.

Mr. JEFFERSON. That’s right. If you let everybody go it would be

much more, but since we put a cap on it, yes, sir, that is the result.

Chairman BUNNING. We’ll take a look at the bill for sure, and we

may even have a hearing on the bill to see, because that amount

of dollars to take care of the people that are being offset—for lack

of a better word—ought to be looked at, and I guarantee you that

we will take a look at the bill.

Mr. JEFFERSON. Well, I thank you very much for that.

Chairman BUNNING. Barbara, do you have some questions?

Mrs. KENNELLY. Just to follow up——

Chairman BUNNING. You have a friendly question in mind.

[Laughter.]

Mrs. KENNELLY. Yes.

Chairman BUNNING. Not that the Chairman’s wasn’t friendly.

Mrs. KENNELLY. Obviously, we are addressing the issue of saving

of Social Security and reform of Social Security, and it’s becoming

an important issue. While we are discussing reform you would expect that the issue you have raised would be addressed as part of

the bigger reform question.

Mr. JEFFERSON. That’s correct. And as I said starting out, this

is totally different from the question of whether you should start

today requiring everyone to pay into a FICA system. This is a relic

of the old system where people weren’t required to do that. They

made other choices, and that needs to be addressed.

Mrs. KENNELLY. And you want to put that to rest.

Mr. JEFFERSON. Yes.

Mrs. KENNELLY. Thank you, Mr. Jefferson.

Chairman BUNNING. J.D.
11

Mr. HAYWORTH. Thank you, Mr. Chairman. I just want to thank

my colleague from Louisiana, because I’m a cosponsor of his legislation and happy to help out with your testimony this morning in

trying to get copies together.

Mr. JEFFERSON. Thank you, J.D.

Mr. HAYWORTH. Thank you very much. Nothing else, Mr. Chairman.

Chairman BUNNING. Mr. Frank, would you like to begin.

STATEMENT OF HON. BARNEY FRANK, A REPRESENTATIVE IN

CONGRESS FROM THE STATE OF MASSACHUSETTS

Mr. FRANK. Thank you, Mr. Chairman. Thank you for alerting

me to the impending vote when I ran into you and saving me from

coming down. I appreciate the courtesy when we bumped into each

other.

I am a supporter of the legislation sponsored by my colleague

from Louisiana, and I also am a sponsor, myself, of a bill that deals

with the windfall elimination provision. Let me begin by saying the

bill I have introduced has full effects for people whose combined

benefits with the passage of the bill would be $2,000 a month or

less, and it would phase out at $3,000 a month. So, if this is a

windfall for people who are making—trying to live in this society

on $18,000, $19,000 or $20,000, it is not much of a windfall, and

what we have are people who I think are being unfairly picked.

They worked at the jobs at the time they worked at them, and they

qualified for this combination of Social Security and pension and

were then told after their working years, in some cases, or toward

the end of them that they were going to suffer this reduction.

I understand it to have been aimed at people who would be getting a windfall because they made a lot of money in one job and

then just sneaked in the effect under Social Security, and that’s

why there is another piece of legislation our colleague from Texas,

Mr. Sandlin, has which would eliminate the program entirely.

Mine is narrower than that, and while it does affect most of the

people, it does hit most of the people who would be affected by the

formula—I’m told 93 percent—I think that shows, in effect, this is

not a windfall for people who are rolling in dough, because this is

for people with $3,000 or less, and it is only fully applicable for

people who make $2,000 or less.

The Social Security Administration has said it would cost $3.4

billion over the next 5 years. I believe that we have the revenues

to fix this up and essentially we’re talking about people who when

they went to work were told this is what they were going to get,

and it does seem to me particularly when we’re talking about people whose total income is less than $24,000 a year that we ought

to give it to them.

Chairman BUNNING. OK, Mr. Frank. Let me ask you this: Everybody that is covered under the windfall has paid into the Social Security system?

Mr. FRANK. Yes, these are people who worked——

Chairman BUNNING. So, you’re proposing to eliminate the total

windfall in your——

Mr. FRANK. No, actually, Mr. Sandlin has a bill that would repeal it all together which I’d vote for. Mine is a compromise al12

though it does cover most of the people. It would totally eliminate

it for people who make less than $2,000, and it would phase it out

till $3,000, so it’s a complete fix for people under $2,000; partial as

you get close to $3,000, and if you get any more than $3,000 a

month, it doesn’t help you at all.

Chairman BUNNING. Thank you. Barb.

Mrs. KENNELLY. Nothing.

Chairman BUNNING. No questions? Thank you, Mr. Frank for

your testimony.

The second panel, if they would take their place—well, we’re

going to mess up some names here. Cynthia Fagnoni.

Ms. FAGNONI. Fagnoni, right.

Chairman BUNNING. John Schaefer, Frank Mulvey, and Geoffrey

Kollmann. Cynthia is the Director of Income Security Issues at the

General Accounting Office, GAO; Mr. Schaefer, Senior Evaluator,

Income Security Issues at GAO. Frank is the Assistant Director,

Income Security Issues at the GAO, and Mr. Kollmann is the specialist in social legislation, education and public welfare division at

the Congressional Research Service.

Cynthia, if you would begin, we’d appreciate it.

STATEMENT OF CYNTHIA M. FAGNONI, DIRECTOR, INCOME

SECURITY ISSUES, HEALTH, EDUCATION, AND HUMAN

SERVICES DIVISION, U.S. GENERAL ACCOUNTING OFFICE;

ACCOMPANIED BY JOHN SCHAEFER, SENIOR EVALUATOR;

AND FRANK MULVEY, ASSISTANT DIRECTOR

Ms. FAGNONI. Thank you, Mr. Chairman. Good morning, Mr.

Chairman and Members of the Subcommittee. I’m pleased to be

here today——

Chairman BUNNING. Would you please pull it—that’s it, so we

can hear.

Ms. FAGNONI. I’m pleased to be here today to discuss the implications of extending mandatory Social Security coverage to all newly

hired State and local government employees. Currently, the SSA,

Social Security Administration, estimates that about 30 percent, or

5 million of the State and local work force is not covered by Social

Security. As you are aware, Social Security Trust Funds will be exhausted by 2032 according to SSA estimates. To offset a part of

this financial shortfall, the Social Security Advisory Council and

others favor extending mandatory coverage to all newly hired State

and local government workers.

Today, I will focus on three issues associated with mandatory

coverage. These are: The implications of mandating such coverage

for the Social Security Program; the impact of mandatory coverage

on public employers, newly hired employees, and the affected pension plans; and the potential legal and administrative issues that

are associated with implementing mandatory coverage.

My observations are based on work we are currently conducting

for you, Mr. Chairman. Our work shows that in deciding whether

to extend mandatory Social Security coverage to all newly hired

State and local employees, that Congress will need to weigh several

important factors associated with the three issues I’m going to discuss.
13

Regarding the first issue, implications for the Social Security

Program, we found that mandatory coverage would benefit Social

Security in several ways. Specifically, extending mandatory Social

Security coverage to States and localities with noncovered workers

would reduce the trust funds long-term financial shortfall; increase

program participation, and simplify program administration. SSA

estimates that mandatory coverage would reduce Social Security’s

financial shortfall by about 10 percent and extend the program’s

solvency by 2 years. As with most other individual elements aimed

at improving long-term Social Security solvency such as raising the

retirement age, extending coverage would resolve only a part of the

trust fund solvency problem. This point has been well recognized

in various reform packages such as those presented by the Social

Security Advisory Council where a combination of adjustments

were proposed in order to extend the program’s solvency over a 75-

year period.

Mandatory coverage would also increase participation in an important national program and simplify program administration.

SSA estimates that about 95 percent of employees who are not covered by Social Security through their jobs with State and local governments become entitled to Social Security anyway either through

other employment or as spouses or dependents. Individuals with

dual coverage are subject to certain offsets as we’ve heard—the

GPO and the WEP—that reduce their Social Security benefits. The

Congress enacted these benefit reduction provisions to reduce the

unfair advantage that workers who are eligible for pension benefits

might have when they apply for Social Security benefits.

However, in a study we recently completed for you, Mr. Chairman, we found that SSA is often unable to determine whether applicants should be subject to the GPO or WEP. We estimate that

failure to reduce benefits to Federal, State, and local employees has

caused $160 to $355 million in overpayments between 1978 and

1995. Mandatory coverage would reduce such benefit adjustments

by gradually reducing the number of employees in noncovered jobs.

With respect to the second mandatory coverage issue, we have

determined that the impacts on employers, employees, and pension

plans would vary depending on how States and localities respond

to this new requirement. If all newly hired public employees were

to receive Social Security coverage, they would have the income

protections afforded by Social Security. At the same time, they and

their employers would pay the combined Social Security payroll tax

of 12.4 percent. Each State and locality with noncovered workers

would need to decide how to deal with this increase in retirement

costs and benefits. They could absorb the added cost and leave current pension plans unchanged or eliminate plans completely.

From discussions we’ve had with State and local representatives,

we believe States and localities with noncovered workers would

likely adjust their pension plans to reflect Social Security’s costs

and benefits. They could, for example, maintain similar benefits for

current and newly hired employees or provide newly hired employees with benefits similar to those provided through the pension

plans that are already coordinated with Social Security. Both of

these responses would likely increase costs and benefits for newly

hired employees.
14

On the other hand, States and localities could maintain level retirement spending. This may require a reduction in pension benefits. According to pension plan representatives, each of these responses to mandatory coverage would result in reduced contributions to current plans which could affect long-term financing of

these plans.

The third area of impact we have addressed involved legal and administrative issues associated with mandatory coverage. Regarding legal issues, mandating Social Security coverage for State and

local employees could elicit a constitutional challenge. Also, States

and localities have told us that they may require up to 4 years to

redesign pension formulas; legislate changes; adjust budgets, and

disseminate information to employers and employees. Mr. Chairman, this completes my statement this morning. I’d be pleased to answer any questions you or the Members may have. [The prepared statement and atttachment follow:]

Statement of Cynthia M. Fagnoni, Director, Income Security Issues, Health,

Education, and Human Services Division, U.S. General Accounting Office

Mr. Chairman and Members of the Subcommittee:

Thank you for inviting me to testify on extending mandatory Social Security cov- erage to all newly hired state and local government employees. Currently, the Social

Security Administration (SSA) estimates that about 30 percent—or about 5 million

employees—of the state and local workforce is not covered by Social Security. As you

are aware, SSA projects Social Security revenues to fall short of expenditures starting in 2021 and the trust funds to be exhausted by 2032. To offset a part of the

financial shortfall, the 1994–1996 Social Security Advisory Council favored extending mandatory coverage to all newly hired state and local government workers.

Today, I would like to focus on the implications of mandating such coverage for

the Social Security program, public employers, newly hired employees, and the affected pension plans. I will also address potential legal and administrative issues

associated with implementing mandatory coverage. My testimony is based on work

we are currently conducting for the Chairman of this Subcommittee.

In summary, our work shows that mandating coverage for all newly hired public

employees would reduce Social Security’s long-term financial shortfall by about 10

percent, increase participation in an important national program, and simplify program administration. The impact on public employers, employees, and pension plans

would depend on how states and localities with noncovered employees would react

to these new coverage provisions. One often-discussed option would be for public employers to modify their pension plans in response to mandatory Social Security coverage. We will focus on this option. For example, many public pension plans currently offer a lower retirement age and higher retirement income benefit than Social

Security. Social Security, on the other hand, offers complete inflation protection, full

benefit portability, and dependent benefits, which are not available in many public

pension plans. Costs would likely increase for those states and localities that wanted

to keep their enhanced benefits for newly hired employees. Alternatively, states and

localities that wanted to maintain level spending for retirement would likely need

to reduce some pension benefits. Regardless, mandating coverage for public employees would present legal and administrative issues that would need to be resolved.

For example, states and localities could require up to 4 years to design, legislate,

and implement changes to current pension plans.

BACKGROUND

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. State

and local government employees were excluded because they had their own retirement systems and there was concern over the question of the federal government’s

right to impose a tax on state governments.

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. SSA esti15

1 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. 2SSA 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.

mates that 96 percent of the workforce, including 70 percent of the state and local

government workforce, is now covered by Social Security.

Social Security provides retirement, disability, and survivor benefits to insured

workers and their dependents. Insured workers are eligible for full retirement benefits at age 65 1 and reduced benefits at age 62. 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 the final year’s wages

for low earners. Social Security’s primary source of revenue is the Old Age, Survivors, and Disability Insurance portion of the payroll tax paid by employers and

employees. The payroll tax is 6.2 percent of earnings each for employers and employees, up to an established maximum.

SSA estimates that 5 million state and local government employees, excluding

students and election workers, are not covered by Social Security. SSA also estimates that annual wages for noncovered employees total about $132.5 billion. Seven

states—California, Colorado, Illinois, Louisiana, Massachusetts, Ohio, and Texas—

account for more than 75 percent of the noncovered payroll. A 1995 survey of public

pension plans found that police, firefighters, and teachers are more likely to occupy

noncovered positions than other employees.

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 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.

As part of our study, we examined nine state and local defined benefit plans covering over 2 million employees. For those plans, employer contributions ranged from

6 to 14.5 percent of payroll and employee contributions ranged from 6.4 to 9.3 percent of payroll. (See the appendix.)

MANDATORY COVERAGE WOULD BENEFIT THE SOCIAL SECURITY PROGRAM

Extending mandatory Social Security coverage to states and localities with noncovered workers would reduce the trust funds’ long-term financial shortfall, increase

program participation, and simplify program administration.

SSA estimates that mandatory coverage would reduce Social Security’s financial

shortfall by about 10 percent—from 2.19 percent of payroll (a present discounted

value of $3.1 trillion) to 1.97 percent of payroll (a present discounted value of $2.9

trillion)—over a 75-year period.2 Figure 1 shows that mandatory coverage would

also extend the program’s solvency by about 2 years, from 2032 to 2034. As with

most other elements of the reform proposals put forward by the 1994–1996 Social

Security Advisory Council, such as raising the retirement age, extending mandatory

coverage to newly hired state and local employees would resolve only a part of the

trust funds’ solvency problem. A combination of adjustments will be needed to extend the program’s solvency over the entire 75-year period.
16

SSA data indicate that revenues from payroll taxes on the newly covered workers,

taxes on their benefits, and interest on the added trust fund balances would substantially exceed additional expenditures throughout the 75-year period. SSA assumes that payroll tax collections for new employees would accelerate early in the

75-year period, while benefits for those employees would not rise significantly until

later in the period.

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 Advisory Council stated that mandatory coverage is basically ‘‘an

issue of fairness.’’ The Advisory Council report stated 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.’’

Mandatory coverage would also simplify program administration in the long run.

SSA’s Office of Research, Evaluation, and Statistics estimates that 95 percent of

noncovered state and local employees become entitled to Social Security as either

workers, spouses, or dependents. SSA’s Office of the Chief Actuary estimates that

50 to 60 percent of noncovered employees will be fully insured by age 62 from covered employment.

The Congress has established the government pension offset and windfall elimination provisions to reduce the unfair advantage that workers who are eligible for

pension benefits based on noncovered employment might have when they apply for

Social Security benefits. The earnings histories for workers with noncovered earnings may appear to qualify them for the higher earnings replacement rates that Social Security assigns to lower earners, when in fact they have substantial income

from public pension plans. With some exceptions, the government pension offset and

windfall elimination provisions require SSA to use revised formulas to calculate benefits for workers with noncovered employment.
17

3Social Security: Better Payment Controls for Benefit Reduction Provisions Could Save Millions (GAO/HEHS–98–76, Apr. 30, 1998). 4Social Security Coverage of State and Local Government Employees, SSA Office of the Inspector General (A–04–95–0613, Dec. 13, 1996).

However, a separate GAO study for the Chairman of this Subcommittee indicates that SSA is often unable to determine whether applicants should be subject to the

government pension offset or windfall elimination provisions.3 We estimate 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, SSA plans to

perform additional computer matches with the Office of Personnel Management and

the Internal Revenue Service (IRS) to get noncovered pension data in order to ensure that these provisions are applied. Mandatory coverage would reduce benefit adjustments by gradually reducing the number of employees in noncovered jobs. Eventually, all state and local employees, with the exception of a few categories of workers, such as students and election workers, would be in covered employment. Additionally, in 1995, SSA asked its Inspector General to undertake a review of state and local government employers’ compliance with Social Security coverage provisions. In December 1996, SSA’s Office of the Inspector General reported that Social Security provisions related to coverage of state and local employees are complex

and difficult to administer.4 The report stated that few resources were devoted to

training state and local officials and ensuring that administration and enforcement

roles and responsibilities are clearly defined. The report concluded that there is a

significant risk of sizeable noncompliance with state and local coverage provisions.

In response, SSA and IRS, which is responsible for collecting Social Security payroll

taxes, initiated an effort to educate employers and ensure compliance with legal requirements for withholding Social Security payroll taxes.

IMPACT OF MANDATORY COVERAGE ON EMPLOYERS, EMPLOYEES, AND THEIR PENSION

PLANS WOULD VARY

If all newly hired public employees were to receive mandated Social Security coverage, they would have the income protection afforded by Social Security. Also, they

and their employers would pay the combined Social Security payroll tax of 12.4 percent of payroll. Each state and locality with noncovered workers would decide how

to respond to the increase in retirement costs and benefits. They could absorb the

added cost and leave current pension plans unchanged or eliminate plans completely. From discussions with state and local representatives, however, we believe

states and localities with noncovered workers would likely adjust their pension

plans to reflect Social Security’s costs and benefits. To illustrate the implications of

mandatory coverage to employers and employees, we examined three possible responses:

—States and localities could maintain similar benefits for current and newly hired

employees. This response would likely result in an increase in total retirement costs

and some additional benefits for many newly hired employees.

—States and localities could examine other pension plans that are already coordinated with Social Security and provide newly hired employees with similar benefits.

This response would also likely increase costs and benefits for newly hired employees.

—States and localities could maintain level retirement spending. This response

could require a reduction in pension benefits.

According to pension plan representatives, each of these responses to mandatory

coverage would result in reduced contributions to current plans, which could affect

long-term financing of the plans.

Maintaining Level Benefits Would Likely Increase Costs

States and localities with noncovered workers could opt to provide newly hired

employees with Social Security and pension benefits that, in total, approximate the

pension benefits of current employees. Studies indicate that such an option could

increase retirement costs by 7 percent of new-employee payroll. Using SSA’s data

and its assumption that mandatory coverage would start January 1, 2000, a 7 percent of payroll increase in retirement costs for newly hired employees would mean

additional costs to states and localities with noncovered workers of about $9.1 billion over the first 5 years.

A 1980 study of the costs of providing Social Security coverage for noncovered

workers provides support for the estimated 7 percent of payroll increase. The Universal Social Security Coverage Study Group developed options for mandatory coverage of employees at all levels of government and analyzed the fiscal effects of each
18

5The study estimate was 5 to 10 percent of payroll. We deducted the 2.9 percent of payroll

Medicare tax since it was mandated for all newly hired state and local employees in 1986, after

the study was completed.

option. The study group used two teams of actuaries to study over 40 pension plans.

The study estimated that costs, including Social Security taxes and pension plan

contributions, would need to increase an average of 2 to 7 percent of payroll to

maintain level benefits for current and newly hired employees.5

The study assumed that most newly hired employees would have salary replace- ment percentages in their first year of retirement that would be comparable to those

provided to current employees. For example, employees retiring before age 62 would

receive a temporary supplemental pension benefit to more closely maintain the benefits of the current plan. Since Social Security benefits are fully indexed for inflation

and many pension plans have limited or no cost-of-living protection, total lifetime

benefits for many newly hired employees would be greater than those provided to

current employees. Existing pension plan disability and survivor benefits were also

adjusted to reflect Social Security disability and survivor benefits. More recent studies by pension plan actuaries in Colorado, Illinois, and Ohio also indicate the cost increase would be in that same range. For example, a December

1997 study for a plan in Ohio indicated that providing retirement and other benefits

for future employees that, when added to Social Security benefits, approximate benefits for current employees would require an increase in contributions of 6 to 7 percent of new-employee payroll. A 1997 study for a pension plan in Illinois indicated

the increased payments necessary to maintain similar total benefits for current and

future employees would be about 6.5 percent of new-employee payroll. The 1980 study stated that the causes of the cost increase cannot be ascribed di- rectly to specific Social Security or pension plan provisions. The study also states,

however, that certain Social Security and pension plan provisions are among the

most important factors contributing to the cost increase. Social Security is fully indexed for cost-of-living increases, is completely portable, and provides substantial

additional benefits for spouses and dependents. In addition, pension plans would

need to provide special supplemental benefits for employees who retire before age

62, especially in police and firefighter plans. The study also found that the magnitude of the cost increase would depend on the pension plan’s current benefits. Cost increases would be less for plans that already provide disability, survivor, and other benefits similar to those provided by

Social Security because those plans would be able to eliminate duplicate benefits.

Matching Pension Benefits of Currently Covered Employees Would Likely Increase

Costs

About 70 percent of the state and local workforce is already covered by Social Se- curity. If coverage is mandated, states and localities with noncovered employees

could decide to provide newly hired employees with pension plan benefits similar

to those provided to currently covered employees. The 1980 study examined this option and concluded that implementation would increase costs by 6 to 14 percent of payroll—or 3 to 11 percent of payroll after eliminating the Medicare tax. The study also found that most pension plans for covered

employees did not provide supplemental retirement benefits for employees who retire before Social Security benefits are available. For most of the examined pension

plans, the present value of lifetime benefits for employees covered by Social Security

would be greater than the value of benefits for current noncovered employees. Our analysis of 1995 Public Pension Coordinating Council data also indicates that retirement costs for states and localities covered by Social Security are higher than

the costs for noncovered states and localities. For the pension plans that responded

to the survey, the average employee cost rate was about 9 percent of pay in covered

plans, including Social Security taxes, and 8 percent of pay in noncovered plans. The

average employer cost rate, excluding the cost of unfunded liabilities, was about 12

percent of payroll for employers in covered plans, including Social Security taxes,

and 8 percent of payroll for employers in noncovered plans. These data also indicate that many employees in covered and noncovered plans, especially police and firefighters, retire before age 65, when covered employees

would be eligible for full Social Security benefits. Our analysis indicates that covered employees who retire before age 65 initially have a lower salary replacement

rate than noncovered employees. The average salary replacement rate with 30 years

of service was 53 percent for members of Social Security covered plans and 64.7 percent for members of noncovered plans.

At age 65, however, Social Security covered employees have a higher total benefit

than noncovered employees. According to the Department of Labor’s 1994 survey,
19

for example, an employee age 65 with 30 years of service, final earnings of $35,000,

and Social Security coverage had 87 percent of earnings replaced—51 percent by a

pension plan and 36 percent by Social Security. The same employee with no Social

Security coverage had 63 percent of earnings replaced by a pension plan. We did

not compare the expected value of total lifetime benefits for covered and noncovered

employees because amounts would vary depending on the benefits offered by each

plan.

Additionally, the extent to which the experience of states and localities with covered employees can be generalized to those with noncovered employees is limited.

According to the 1980 study, most public pension plans that coordinated with Social

Security did so in the 1950s and 1960s when Social Security benefits and payroll

taxes were much smaller. As Social Security benefits grew, pension plan benefits remained basically unchanged. Starting in the 1970s, however, rising pension costs

caused several large state systems to consider reducing their relatively liberal pension benefits. In the 1980s, for example, California created an alternative set of reduced benefits for general employees to, among other things, reduce the state’s retirement costs. Initially, general employees were permitted to select between the

higher costs and benefits of the original plan and the lower costs and benefits of

the revised plan. Subsequently, however, newly hired general employees were limited to the reduced benefits.

Level Retirement Spending Could Mean Reduced Benefits

Several employee, employer, and plan representatives stated that spending increases necessary to maintain level retirement income and other benefits for current

and future members would be difficult to achieve. They indicate that states and localities might decide to maintain current spending levels, which could result in reduced benefits under state and local pension plans for many employees.

A June 1997 actuarial evaluation of an Ohio pension plan examined the impact

on benefits of mandating Social Security coverage for all employees, assuming no

increase in total retirement costs. The study concluded that level spending could be

maintained if (1) salary replacement rates for employees retiring with 30 years of

service were reduced from 60.3 percent to 44.1 percent, (2) current retiree health

benefits were eliminated for both current and future employees, and (3) the funding

period for the plan’s unfunded accrued liability were extended from 27 years to 40

years.

Impact on Pension Plan Finances Is Uncertain

Most states and localities use a reserve funding approach to finance their pension

plans. In reserve funding, employers—and frequently employees—make systematic

contributions toward funding the benefits earned by active employees. These contributions, together with investment income, are intended to accumulate sufficient

assets to cover promised benefits by the time employees retire.

However, many public pension plans have unfunded liabilities. The nine plans

that we examined, for example, have unfunded accrued liabilities ranging from less

than 1 percent to over 30 percent of total liabilities. Unfunded liabilities occur for

a number of reasons. For example, public plans generally use actuarial methods and

assumptions to calculate required contribution rates. Unfunded liabilities can occur

if a plan’s actuarial assumptions do not accurately predict reality. Additionally, retroactive increases in plan benefits can create unfunded liabilities. Unlike private

pension plans, the unfunded liabilities of public pension plans are not regulated by

the federal government. States or localities determine how and when unfunded liabilities will be financed.

Mandatory coverage and the resulting changes to plan benefits for newly hired

employees are likely to result in reduced contributions to the current pension plan.

The impact of reduced contributions on plan finances would depend on the actuarial

method and assumptions used by each plan, the adequacy of current plan funding,

and other factors. For example, plan representatives are concerned that efforts to

provide adequate retirement income benefits for newly hired employees would affect

employers’ willingness or ability to continue amortizing their current plans’ unfunded accrued liabilities.

LEGAL AND OTHER CONSIDERATIONS

Mandatory coverage presents several legal and administrative issues, and states

and localities could require several years to design, legislate, and implement

changes to current pension plans.
20

Legal Considerations

Mandating Social Security coverage for state and local employees could elicit a constitutional challenge. We believe that mandatory coverage is likely to be upheld

under current Supreme Court decisions.

Several employer, employee, and plan representatives with whom we spoke stated that they believe mandatory Social Security coverage would be unconstitutional and

should be challenged in court. However, recent Supreme Court cases have affirmed

the authority of the federal government to enact taxes that affect the states and to

impose federal requirements governing the states’ relations with their employees. A plan representative suggested that the Court might now come to a different conclusion. He pointed out that a case upholding federal authority to apply minimum wage and overtime requirements to the states was a 5 to 4 decision and that

until then, the Court had clearly said that applying such requirements to the states

was unconstitutional. States and localities also point to several recent decisions of

the Court that they see as sympathetic to the concept of state sovereignty. However,

the facts of these cases are generally distinguishable from the situation that would

be presented by mandatory Social Security coverage. Unless the Court were to reverse itself, which it seldom does, mandatory Social Security coverage of state and local employees is likely to be upheld. Current decisions indicate that mandating such coverage is within the authority of the federal

government.

States Would Require Up to 4 Years to Implement Mandatory Coverage

The federal government required approximately 3 years to enact legislation to im- plement a new federal employee pension plan after Social Security coverage was

mandated for federal employees in 1983. According to the 1980 Universal Social Security Coverage Study Group, transition problems for state and local employers

would be different from those faced by the federal government. For example, benefit

provisions vary among the thousands of public employee retirement plans, as do the

characteristics of the employees covered by those plans. Additionally, state governments and many local governments have laws regulating pensions. The study group

estimated that 4 years would be required to redesign pension formulas, legislate

changes, adjust budgets, and disseminate information to employers and employees.

Our discussions with employer, employee, and pension plan representatives also indicate that up to 4 years would be needed to implement a mandatory coverage decision.

Additionally, constitutional provisions or statutes in some states may prevent em- ployers from reducing benefits for employees once they are hired. These states may

need to immediately enact legislation to draw a line between current and future employees until decisions are made concerning the pension benefits for new employees

who would be covered by Social Security. According to the National Conference of

State Legislators, legislators in seven states, including Texas and Nevada, meet only

biennially. Therefore, the initial legislation could require 2 years in those states.

CONCLUDING OBSERVATIONS

In deciding whether to extend mandatory Social Security coverage to all newly

hired state and local employees, the Congress will need to weigh several factors.

First, the Social Security program would benefit from mandatory coverage. The

long-term actuarial deficit would be reduced, and the trust funds’ solvency would

be extended for about 2 years. However, there are other considerations besides this

relatively small contribution to the program’s solvency. Mandatory coverage would

also increase participation in an important national program and simplify program

administration.

The implications for state and local employers, employees, and pension plans

would be determined in part by employers’ responses to Social Security coverage.

States and localities with noncovered workers would likely need to increase total retirement spending to provide future workers with pension benefits that, when combined with Social Security benefits, approximate the benefits provided to current

workers. At the same time, Social Security would provide newly hired employees

with benefits that are not available, or are available to a lesser extent, under current state and local pension plans.

In addition, mandatory coverage would present legal and administrative issues.

States and localities might attempt to halt mandatory Social Security coverage in

court, although such a challenge is unlikely to be upheld. Finally, states and localities could require up to 4 years to implement mandatory coverage.

Mr. Chairman, this concludes my prepared statement. At this time, I will be

happy to answer any questions you or the other Subcommittee Members may have.
f

21

Appendix

Noncovered Employees and their Pension Plans

SSA estimates that about 4 million of the approximately 5 million state and local

employees not covered by Social Security are in the seven states with the largest

number of noncovered workers. (See table I.1.)

Table I.1: States With the Largest Number of Noncovered Workers

State

Number of noncovered employees

(in thousands)

California ............................................................................................................... 1,200

Colorado ................................................................................................................. 200

Illinois .................................................................................................................... 400

Louisiana ............................................................................................................... 300

Massachusetts ...................................................................................................... 400

Ohio ........................................................................................................................ 800

Texas ..................................................................................................................... 700

Total ........................................................................................................ 4,000

Source: Office of the Chief Actuary, SSA.

The nine public pension plans included in our study have about 2 million members. For the most part, members of these plans are not covered by Social Security.

(See table I.2.)

Table I.2: Membership, Contribution Rates, and Assets for Nine Public Pension Plans

Public pension plan Active members

Benefit

recipients

Contribution rate 1 Net assets (in

Employer Employee Total billions)

California State Teachers’ Retirement System .................... 364,000 154,000 12.5% 8.0% 20.5% $74.8

Public Employees’ ...................... 148,000 46,000 11.6 8.01 9.61 9.9

Teachers’ Retirement System of

Illinois ..................................... 137,000 59,000 7.9 8.0 15.9 17.4

Louisiana State Employees’ Retirement System .................... 70,000 27,000 12.0 7.5 19.5 4.3

Massachusetts State Employees’ Retirement System ......... 83,000 42,000 14.5 9.0 23.5 9.6

Massachusetts State Teachers’

Retirement System ................ 69,000 29,000 14.0 9.0 23.0 9.9

State Teachers Retirement System of Ohio ............................. 169,000 89,000 14.0 9.3 23.3 42.4

Public Employees Retirement

System of Ohio ....................... 345,000 146,000 13.3 8.5 21.8 39.8

Teacher Retirement System of

Texas ....................................... 695,000 158,000 6.0 6.4 12.4 62.2

Total ........................................... 2,080,000 750,000 .............. .............. .............. $280.3

1 Employer rate includes contributions toward the plan’s unfunded liability. Employee rate is the rate for

general employees.

Source: State and pension plan financial reports.

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22

Chairman BUNNING. Thank you very much.

Mr. Kollmann.

STATEMENT OF GEOFFREY KOLLMANN, SPECIALIST, SOCIAL

LEGISLATION, EDUCATION AND PUBLIC WELFARE DIVISION,

CONGRESSIONAL RESEARCH SERVICE

Mr. KOLLMANN. Thank you, Mr. Chairman. Mr. Chairman and

Members of the Subcommittee, I was asked to summarize and

briefly discuss issues concerning two provisions of current law that

can reduce or eliminate Social Security benefits payable to government employees. The two provisions are the government pension

offset provision and windfall elimination provision. They affect the

Social Security benefits of persons who also receive a pension from

employment not covered by Social Security—for example, the civil

service retirement system for Federal workers and State and local

government employees whose States have not chosen Social Security coverage and who are participating in retirement plans. The

purpose of both provisions is to prevent what otherwise would be

considered to be an unfair advantage for government compared to

private sector workers.

The first provision, the windfall elimination, reduces the Social

Security benefit, earned as a worker, of the affected individuals by

applying a different formula to the computation of their benefits.

Ordinarily, the Social Security benefit formula applies three progressive factors—90, 32, and 15 percent—to three different levels

or brackets of average monthly covered earnings. However, for a

worker subject to the windfall elimination rules, the 90-percent factor in the first band of a benefit formula is replaced by a factor of

40 percent. The effect is to reduce their benefits by lowering the

amount of the earnings in the first bracket that is converted to

benefits.

The provision includes a guarantee, which is designed to protect

workers with low pensions, that the reduction in benefits caused by

the windfall formula cannot exceed one-half of the noncovered pension. The provision exempts workers who have 30 or more years of

substantial employment covered under Social Security, and lesser

reductions apply to workers with 21 through 29 years of substantial covered employment.

Enacted in 1983, the purpose of this provision was to remove an

unintended advantage that the regular Social Security benefit formula provided to persons who also had pensions from non-Social

Security covered employment. The regular formula was intended to

help workers, who spent their work careers in low-paying jobs, by

providing them with a benefit that replaces a higher proportion of

their earnings than the benefit that’s provided for workers with

high earnings. However, the formula could not differentiate between those who worked in low-paying jobs throughout their careers and other workers who appeared to have been low paid because they worked many years in jobs not covered by Social Security. Those years show up as zeros in the Social Security earnings

records.

Thus, under the old law, workers who were employed for only a

portion of their careers in jobs covered by Social Security, even

highly paid ones, also received the advantage of this weighted for23

mula, because their few years of covered earnings were averaged

over their entire working career to determine the average covered

earnings on which their Social Security benefits were based. The

windfall elimination is intended to remove this advantage for these

workers.

Proponents of the provision say that it is a reasonable means to

prevent payment of overgenerous and unintended benefits to certain workers who otherwise would profit from happenstance, that

is, the mechanics of the Social Security benefit formula. Opponents

of the provision believe it is unfair, because it substantially reduces

a benefit that workers had included in their retirement plans. Others criticize how the provision works. They say the 40-percent factor is arbitrary and is an inaccurate way to determine the actual

windfall when applied to individual cases. For example, they say

it overpenalizes low-paid workers with short careers or with full careers that are fairly evenly split. They also say it is regressive, because the reduction is confined to the first bracket of the benefit

formula and causes a relatively larger reduction in benefits for lowpaid workers.

The second provision, the government pension offset, reduces Social Security benefits’ spousal benefits that is, benefits payable as

a dependent of Social Security—covered workers to persons who receive a pension from government employment that was not covered

by Social Security. It is intended to place spouses whose government employment was not covered by Social Security in approximately the same position as other workers by applying the equivalent of Social Security’s ‘‘dual entitlement’’ rule, which subtracts

100 percent of Social Security worker benefit from any Social Security spousal benefit. To do this, it is assumed that two-thirds of the

government pension is approximately equivalent to a Social Security benefit the spouse would receive as a worker if his or her job

had been covered by Social Security. Thus, the provision attempts

to replicate the Social Security dual entitlement rule by requiring

that two-thirds of the government pension be subtracted from the

Social Security spousal benefit.

As with the windfall elimination provision, critics say that the

GPO is not well understood and that many affected by it are unprepared for smaller Social Security benefits than they had assumed in making retirement plans. They also argue that whatever

its rationale, reducing everyone’s spousal benefit by two-thirds of

the their government pension is an imprecise way to estimate what

the spousal would be, had the government job been covered by Social Security. They say that this procedure has uneven results and

it may be especially disadvantageous for surviving spouses with

low income, particularly women.

Defenders of the government pension offset maintain it is an effective method to curtail what otherwise would be an unfair advantage for government workers. They also point out that Social Security’s dual entitlement rule, which the government pension offset is

designed to replicate, also can reduce the income of already lowincome recipients, and that if this issue is to be addressed, using

other means or programs that more accurately measure need and

apply to the general population would be more appropriate than

changing just the government pension offset provision.
24

Mr. Chairman, this concludes my testimony.

[The prepared statement follows:]

Statement of Geoffrey Kollmann, Specialist, Social Legislation, Education and Public Welfare Division, Congresssional Research Service

Mr. Chairman and Members of the Committee, I was asked to summarize and

briefly discuss issues concerning two provisions of current law that can reduce or

eliminate Social Security benefits payable to government employees. The two provisions are the government pension offset provision and the windfall elimination provision. They affect the Social Security benefits of persons who also receive a pension

from non-Social Security-covered employment, e.g., the federal Civil Service Retirement System (CSRS) and state and local government employees whose states have

not chosen Social Security coverage and who are participating in a retirement plan.

They do not affect government workers whose pensions are based on Social Securitycovered employment, e.g., those with full careers under the Federal Employees Retirement System (FERS). The purpose of both provisions is to prevent what otherwise would be an unfair advantage for government compared to private sector workers.

THE WINDFALL ELIMINATION PROVISION

Enacted in 1983, this provision reduces the Social Security benefit, earned as a worker, of the affected individuals by applying a different formula to the computation of their benefits. Ordinarily, the Social Security benefit formula applies three

progressive factors—90%, 32%, and 15%—to three different levels, or brackets, of

average monthly covered earnings. However, for workers subject to the Windfall

Elimination rules, the 90% factor in the first band of the benefit formula is replaced

by a factor of 40%. The effect is to reduce their benefits by lowering the amount

of their earnings in the first bracket that is converted to benefits. Following is an

example of how the provision works in 1998:

MONTHLY BENEFIT FOR WORKER WITH AVERAGE MONTHLY EARNINGS OF $1,000

Regular formula

90% of first $477 $429.30

32% of $477 through $2,875 167.30

15% over $2,875 00.00

Total 583.90

‘‘Windfall formula’’

40% of first $477 $190.80

32% of $477 through $2,875 167.30

15% over $2,875 00.00

Total 358.10

The provision includes a guarantee (designed to help protect workers with low

pensions) that the reduction in benefits caused by the windfall formula can not exceed one-half of the pension that is based on non Social Security-covered work. The

provision also exempts workers who have 30 or more years of ‘‘substantial’’ employment covered under Social Security (i.e., having earned at least one-quarter of the

Social Security maximum taxable wage base for each year in question). Also, lesser

reductions apply to workers with 21 through 29 years of substantial covered employment.

The purpose of this provision was to remove an unintended advantage that the

regular Social Security benefit formula provided to persons who also had pensions

from non-Social Security-covered employment. The regular formula was intended to

help workers who spent their work careers in low paying jobs, by providing them

with a benefit that replaces a higher proportion of their earnings than the benefit

that is provided for workers with high earnings. However, the formula could not differentiate between those who worked in low-paid jobs throughout their careers and

other workers who appeared to have been low paid because they worked many years

in jobs not covered by Social Security (as earnings in these years do not show up

on Social Security’s records, they are shown as zeros for Social Security benefit purposes). Thus, under the old law, workers who were employed for only a portion of

their careers in jobs covered by Social Security—even highly paid ones—also received the advantage of the ‘‘weighted’’ formula, because their few years of covered

earnings were averaged over their entire working career to determine the average

covered earnings on which their Social Security benefits were based. The Windfall
25

Elimination Provision formula is intended to remove this advantage for these workers.Proponents of the provision say that it is a reasonable means to prevent payment of overgenerous and unintended benefits to certain workers who otherwise would

profit from happenstance, i.e., the mechanics of the Social Security benefit formula.

They maintain that the provision rarely causes hardship because by and large the

people affected are reasonably well off, as most of them also receive government

pensions.

Opponents of the provision believe it is unfair because it substantially reduces a benefit that workers had included in their retirement plans. Others criticize how the

provision works. They say the arbitrary 40% factor in the formula is an inaccurate

way to determine the actual windfall when applied to individual cases. For example,

they say it over-penalizes lower paid workers with short careers, or with full careers

that are fairly evenly split. They also say it is regressive, because the reduction is

confined to the first bracket of the benefit formula and causes a relatively larger

reduction in benefits for low-paid workers.

THE GOVERNMENT PENSION OFFSET PROVISION

Enacted in 1977, this provision reduces Social Security spousal benefits, i.e., bene- fits payable as a dependent of a Social Security-covered worker, to persons who receive a pension from government employment that was not covered by Social Security. The GPO is intended to place retirees whose government employment was not

covered by Social Security and who are eligible for a Social Security spousal benefit

in approximately the same position as other retirees whose jobs were covered by Social Security. Social Security retirees are subject to an offset of spousal benefits according to that program’s ‘‘dual entitlement’’ rule. That rule requires that a Social

Security retirement benefit earned by a worker be subtracted from his or her Social

Security spousal benefit, and the resulting difference, if any, is the amount of the

spousal benefit paid. Thus, workers retired under Social Security may not collect

their own Social Security retirement benefit as well as a full spousal benefit. The

rationale is that a Social Security spousal benefit is based on the concept of ‘‘dependency,’’ and someone who receives his or her own Social Security benefit as a

retired worker is not completely financially dependent on his or her spouse. The GPO replicates the Social Security dual entitlement rule by assuming that two-thirds of the government pension is approximately equivalent to a Social Security retirement benefit the worker would receive if his or her job had been covered

by Social Security. Thus, the GPO requires that two-thirds of the government pension be subtracted from the Social Security spousal benefit, and only the resulting

difference, if any, is paid. (Implicit in this arrangement is the assumption that the

remaining one-third is equivalent to a private pension.). Following is an example of

the way the GPO works. Before the GPO is applied, a couple’s situation could be

like this:

Government Worker’s Benefits

$600 = government pension

$450 = potential spousal benefit (1⁄2 × $900)

Worker’s Spouse’s Benefits

$900 = Social Security worker benefit

After application of the GPO, the couple’s situation would be this:

Government Worker’s Benefits

$600 = government pension

$50 = spousal benefit (2⁄3 × $600 = $400, which subtracted from $450 = $50)

Worker’s Spouse’s Benefits

$900 = Social Security worker benefit

Critics of the GPO say that it is not well understood and that many affected by it are unprepared for a smaller Social Security benefit than they had assumed in

making retirement plans. They also argue that, whatever its rationale, reducing everyone’s spousal benefit by two-thirds of their government pension is an imprecise

way to estimate what the spousal benefit would be had the government job been

covered by Social Security. They say that this procedure has uneven results and

that it may be especially disadvantageous for surviving spouses with low incomes. Defenders of the GPO maintain that it is an effective method to curtail what otherwise would be an unfair advantage for government workers. The provision was

phased in over six years and now has been in the law for 21 years; therefore, they
26

say, there has been ample time for people to adjust their retirement plans. They

also point out that Social Security’s dual entitlement rule, which the GPO is designed to replicate, also can reduce the income of already low-income recipients, and

that if this issue is to be addressed, using other means or programs that more accurately measure need, and apply to the general population, would be more appropriate than changing just the GPO.

ask you both one simple question. In the overall restructuring—or

Chairman BUNNING. Thank you both for your testimony. Let me

f

whatever we come up with as far as Social Security reform is concerned—to make sure that the trust fund remains solvent past the

year 2032—or whenever the deadline is where we can only pay 75

percent of our benefits out—do you both think that this needs to

be addressed in the overall restructuring of the Social Security system? In other words, both the pension offset and the offset for

windfall.

Mr. KOLLMANN. Well, I would point out that the two antiwindfall

measures, as time goes by, and you get out toward that 2032 figure, in many instances they won’t be applicable anymore. For example, Federal workers have been covered mandatorily by Social

Security if they were hired after 1983.

Chairman BUNNING. I am speaking only of those who are uncovered or are subject to the offsets.

Mr. KOLLMANN. Yes, and what I’m saying is that Social Security’s financial problems, of course, are not in the short range since

we have substantial surpluses over the next decade or so, and the

projected date of insolvency being three decades from now, with the

passage of time the effect of changing these provisions won’t have

much of an effect in the out years when Social Security really

starts to face financial problems. Now, if you——

Chairman BUNNING. But it will have—if we do it 3 years from

now, it will have a direct effect on the short term particularly for

those who are getting a major offset in their benefit presently.

Mr. KOLLMANN. That’s correct.

Ms. FAGNONI. On the mandatory coverage issue, as we’ve noted

in our testimony and as you’ve pointed out, the proposals to reform

Social Security when they include this mandatory coverage, are always just one piece of a whole package of reforms, because mandatory coverage alone will not solve the problem. If mandatory coverage were enacted, though, as we mention in our testimony, that

would accelerate the phase out of the WEP and GPO because then

new State and Federal employees would be covered under Social

Security, and, therefore, no longer needs to be subject to the WEP/

GPO.

Chairman BUNNING. Do you both believe that we should address—the offset seemed fair at the time of enactment. Do you

think it is fair now? In other words, we have an awful lot of people

that really get whacked on their Social Security benefits because

of their pension being done by State and local government, not so

much in the Federal Government, but do you think it’s fair and we

should change it?

Ms. FAGNONI. We haven’t examined that issue directly. It’s understandable why the WEP and GPO were enacted because——
27

Chairman BUNNING. Well, I know the reasons at that time.

Ms. FAGNONI. Right, but they would look like a low-income earner when they might not in fact be. One thing I would point out:

The study we did for you that we issued recently—you asked us to

look at how effectively WEP and GPO are being administered by

SSA—and what our report really shows is how difficult those provisions are to administer.

Chairman BUNNING. Well, if we’re blowing $350 million out the

door for mistakes in overpayment, yes, it’s important.

Ms. FAGNONI. So, they’re complicated provisions to administer.

It’s difficult for SSA to, check up to see that they’re applying the

WEP and GPO correctly. So, in that sense, that would be one advantage to at least mandating where these sort of interactions——

Chairman BUNNING. If we mandated coverage, how quickly

would we be able to implement doing away with the offsets? In

other words, it’s going to take some transition time to do it.

Ms. FAGNONI. Yes, because the coverage would just apply to new

workers and the estimate would be that it could take up to a whole

generation of workers of 30 years for it to completely phase out, but

it would depend on what the makeup of the new work force looked

like, how quickly that really would happen.

Chairman BUNNING. Well, obviously, if somebody has been working in local, State, and municipal governments for 40 years and

they’re 62, their transition is going to be very difficult, but somebody who’s just starting in employment in local, State, or municipal

governments, you would have a transition period of 20, 25 years if

they stayed with it.

I appreciate your testimony.

Mrs. Kennelly.

Mrs. KENNELLY. Thank you both. You indicate that the cost to

States would increase if States were to try to provide benefits to

current workers which are equal to the benefits which would be

provided to newly hired workers covered under Social Security, and

I just have a couple of questions to play off that statement. First

of all, as the Chairman and I have been involved with disability

improvements and trying to reform and improve disability benefits,

how would you compare the disability—and I’ll add survivor and

spousal benefits—available to State and local workers to the benefits available under Social Security?

Ms. FAGNONI. Overall, one of the biggest differences seems to be

that most State and local plans provide for disability and survivors

benefits. Many of them do not provide a spousal benefit, so there’s

one difference right there. One of the biggest differences has to do

with how the disability benefits are applied; when somebody becomes eligible. Generally, under State and local plans, they’re tied

to years of service and earnings, so that, for example, one plan, one

of the nine plans we looked at, an individual would not be entitled

to disability benefits until he had worked there for 5 years. Now,

under Social Security, that’s generally true that one would have to

have worked for 5 years, 20 quarters, to be eligible for DI, Disability Insurance, but there are special provisions for workers who are

under the age of 31 who become disabled early in their work years,

and that kind of adjustment is not generally available under the

State and local plans. Studies have indicated that younger, low28

earning workers might not fair as well under the State and local

plans as they might under Social Security, both for the disability

as well as the survivor’s benefits.

Mrs. KENNELLY. Thank you. Another area we’ve been looking at

and continue to look at is benefits for people age 62 to 65. Would

you do the same comparison of replacement rates for 62-to-65-yearold retirees under Social Security and under State and local plans?

Ms. FAGNONI. In terms of replacement rates——

Mrs. KENNELLY. If you don’t have that right——

Ms. FAGNONI. Yes, I’m not sure we have that in terms of the difference. We do know that a number of the State and local plans

provide for earlier retirement than Social Security does, and many

of the plans that have elected to be covered under Social Security

in the past have continued to provide for that supplemental early

retirement benefit to keep people in some kind of retirement income before Social Security retirement eligibility kicks in.

Mrs. KENNELLY. Thank you.

Thank you, Mr. Chairman.

Chairman BUNNING. The gentleman from California.

Mr. BECERRA. Thank you, Mr. Chairman. Can you give me a

sense as to whether you’ve been able to calculate the amount that

Social Security provides to those who are disabled or become disabled, or for the surviving spouse of a Social Security recipient;

what that benefit amounts to, and how that compares to what a

State or local government pension plan might provide?

Ms. FAGNONI. We did not look at that provision specifically from

a disability comparison. We did look more generally at how the disability provisions vary, and one other aspect of disability in State

and local plans is that the provisions vary widely among the plans,

and the definition of disability can vary considerably. Generally, a

major distinction in the disability definition between Social Security and State and local plans is that under Social Security one

must be disabled and unable to have any substantial gainful activity in any kind of job, whereas the State and local disability provisions generally target the disability in terms of whether or not that

individual can continue to work at that specific job. Beyond that,

how disability is defined can vary widely among the different plans.

So, it’s pretty difficult to compare other than to say the provisions

vary considerably.

Mr. KOLLMANN. I would add that Social Security benefits vary by

the person’s earning history, but if you take someone who always

earned an average wage, the disability benefits are computed as if

they were age 65 when they become disabled. Social Security replaces 42 percent of their preretirement earnings for such a worker.

Mr. BECERRA. Do you have any sense of what the State and local

government plans would replace, generally?

Mr. MULVEY. One of the things we are doing for this Subcommittee, as you know, the several counties in Texas have allowed the

unique program, and we are looking specifically as to the disability

survivor and retirement benefits for workers who have various

earnings histories and who become disabled at various times in

their careers and comparing those to Social Security, and we expect

to have that out pretty soon, but that work is still preliminary.
29

Mr. BECERRA. What about the issue of survivor and spousal survivor benefits.?

Mr. MULVEY. We were also looking at that and comparing Social

Security to those Texas plans, but we haven’t finished that work

yet.

Mr. BECERRA. Can you give us a general sense of what you’re

finding?

Mr. MULVEY. We’re still doing the analysis, but, obviously, as

was pointed out earlier, for those working who are low income and

who may be injured earlier in their lives, and so forth, Social Security is probably going to be relatively better for them than the alternative plans.

Mr. BECERRA. What’s the best way to respond to someone who’s

been in a State teacher retirement fund for some time if we should

require that now State and local governments participate in Social

Security? How do you best respond to those folks who’ve been in

the system for a while?

Ms. FAGNONI. Those entities, those bodies that have proposed

mandated coverage as part of the Social Security solvency fix, point

to a couple of things: One that the goal—the original goal of the

Social Security Program was to aim for universal coverage so that

everybody would be covered under one system. There is an issue

that some have raised regarding the fairness—and Mr. Bunning alluded to it in his opening statement. People are surprised to learn

that not everybody’s paying FICA taxes for their careers, so there’s

that element. We’ve got 96 percent of the work force already in Social Security covered jobs, and there may be questions from the

public about why everybody isn’t covered, so there’s that aspect of

it; the goals of the program; the perceived fairness of having what

now end up being a handful of people outside the system. But, on

the other hand——

Mr. BECERRA. For that handful that have contributed and would

not have the opportunity to collect, if we mandated that they go

into a system—from here on in we mandate that people go into the

Social Security system, if you’re saying to them that it’s one or the

other——

Ms. FAGNONI. But it would depend on how the States respond to

the mandatory coverage requirement, and we’ve laid out in our testimony some different possible options or approaches that States

could take. A State could choose to coordinate the existing pension

plan with Social Security to provide a package of benefits that incorporate Social Security features while also maintaining those

pension features. So, it doesn’t at all mean that they would necessarily lose their current pension benefits although that is a possibility. So, States have various options as to how they respond to

this requirement.

Mr. BECERRA. Is there a problem having States respond in various ways and having a system out there that has a myriad of

choices and selections by the various States?

Ms. FAGNONI. I would imagine that the question of State choice

might get into some issues of State sovereignty, and basically, they

don’t have a choice in terms of paying the Social Security payroll

tax, but beyond that, they do have choices as to how they manage

their pension plans.
30

Mr. MULVEY. And private companies all have different pension

plans associated with paying Social Security, so you might get variations among States the same as you get variations amongst private employers.

Chairman BUNNING. The gentleman’s time has expired.

Mr. Ensign. No questions?

Mr. Hulshof.

Mr. HULSHOF. Thank you, Mr. Chairman. Ms. Fagnoni, I’m interested in the constitutional implications, and you discussed the fact

that mandating Social Security coverage may present some constitutional issues. Could you highlight these in a little more detail,

please?

Ms. FAGNONI. In talking to State and local officials as we’ve been

doing our work, a number of them have said they question the constitutionality of this. There would be court challenges, and they

based the questions on the issue of State sovereignty; the authority

of the Federal Government to tax States; and the authority of the

Federal Government to regulate State employee activities. But our

General Counsel’s analysis of recent Supreme Court decisions suggest that such challenges would not be upheld; that, in fact, recent

court decisions would appear to us to uphold the Federal Government’s authority to do this type of mandatory coverage.

Mr. HULSHOF. So, other than, perhaps, the resources that would

have to be committed to a court challenge, such a court challenge

is likely to fail, at least on behalf of the Governors or the States?

Ms. FAGNONI. That’s our assessment based on recent Supreme

Court decisions, yes.

Mr. HULSHOF. I want to follow up on what Mr. Becerra was asking about, in particular, mandatory coverage and some of the transition problems and lead time. Now, I know it’s tough because you

mentioned that different States have—some of them—use a reserve

funding approach to finance plans and there are different plans out

there, but could you talk just a little about these transition problems as far as lead time and accomplishing this mandatory coverage if we move in that direction?

Ms. FAGNONI. Assuming mandatory coverage occurs, there would

be a number of activities that would have to occur for the States

to implement this, and some of them would have to be occurring

simultaneously that would be fairly complex, because, first of all,

it would require that the pension plans and the employers take a

look at the plans; determine how they might want to adjust the

plans given that there’s now Social Security coverage in addition.

They would be needing to work with employer and employee

groups, because they would have to both be educated as well as

have some understanding and buy into the proposals. The State

legislatures would have to, ultimately, agree to whatever’s proposed in terms of what happens to the State pension plans, and actuaries would have to come up with cost estimates on what these

new plans would cost. So, there would be a lot of different plan design and political issues that would have to be addressed and

would take some time. To give you some comparison, it took about

3 years for the transition to occur from the CSRS, Civil Service Retirement System, to the FERS Program, Federal Employees Retirement System, for the Federal Government, and for this type of
31

transition at the State and local level would probably even be

somewhat more complex because of all the entities involved.

Mr. HULSHOF. Thanks, Mr. Chairman. I yield back my time.

Chairman BUNNING. Mr. Neal, you do not want to question? OK.

Mr. Portman.

Mr. PORTMAN. Thank you, Mr. Chairman. I’m sorry I couldn’t be

here for all the testimony, but I want to commend the Chairman

for having this hearing; another one in a series of hearings about

Social Security, and this is an important aspect of it, certainly, for

my State of Ohio and for many of us on the panel.

I also have a few questions for our friends at the GAO, Ms.

Fagnoni, particularly. I hear sometimes that if we just make Social

Security mandatory for new hires that it really won’t have any affect on existing plan participants or those folks who have already

retired. I know GAO’s done some studies on this. Can you tell us

what GAO has learned about that?

Ms. FAGNONI. In talking to State and local officials, it is true

that the existing plan could continue for the current workers. They

might be given the option to go into a newly developed plan that

might include Social Security, but I think the issues that people

have raised with us are questions that have to do with the fact that

the contributions would not be as great in the existing plans, what

might happen, and, John, you’ve got an example—we tried to look

for plans where we could make some kind of judgment on how an

existing plan might be affected if a new plan were established.

Mr. SCHAEFER. Basically, we’ve talked not only to the States and

localities that have many noncovered workers, but we’ve also

talked to States and localities that have changed their current pensions plans or considered their current pension plans in ways that

would be, perhaps, similar to how the States and localities with

noncovered workers have to change their plans. There seem to be

two basic issues—there are probably more, but at least two. You

have to figure out a way to finance their unfunded accrued liabilities. Many of these plans have unfunded liabilities that have to be

financed. They are typically financed as a percentage of payroll and

as that closed group of employees—if you closed the current pension plan to new members—as that closed group changes, their

payroll changes, and it becomes an issue of how to finance the unfunded liabilities.

Mr. PORTMAN. For both those who’ve already retired and those

who are within the State system.

Mr. SCHAEFER. Right, but there are ways—the actuaries do an

analysis and they come up with ways to do that, and there are

ways to do that. They could finance, for example, as a percentage

of total payroll not just the payroll of the closed group of employees. But it is an issue, and at the same time you have costs, percentage of total payroll for all covered and noncovered employees.

Mr. PORTMAN. Even those who are now covered under the new

system and paying payroll taxes to the new——

Mr. SCHAEFER. The employer would have——

Mr. PORTMAN. Would it be double?

Mr. SCHAEFER [continuing]. To continue paying the unfunded liability for the current employees as a percentage of payroll. That
32

unfunded liability doesn’t go away because you close the plan to

new members.

The second large problem that could occur—and it depends on

the plan; each plan is different; has different demographics; it uses

different actuarial methods—but a problem that may occur is a liquidity issue. As you close the plan to new members, the contributions go down. You still have people retiring, and those benefits

have to be paid. So, you could have a cash flow problem, especially

in later years, but at least the actuaries have to analyze that and

come up with a way of dealing with it, and that can result in a

change in asset allocations, because you have to go through shorter

term investments that could reduce your investment income in the

out years, so that could be another way of increasing your costs,

in essence. But, again, that will depend on each plan; each plan

will be different. Some actuaries say that’s not a problem; other actuaries say it is. It would be specific to the plan.

Mr. PORTMAN. Thank you. Just a general question: Those of us

who are interested in Social Security reform are looking at models

around the world, and we’ve talked about the Chilean model, for

instance. I’ve been down there a couple times, and you learn a lot

about their system which is very successful for that country, but

there are some different external circumstances when they put that

system into effect, and they have a different approach, generally,

than we would have on a lot of their investment approaches. But

there is something we can learn, I think, from other countries. How

about State and local, particularly, State pension plans? Is there

something we can learn in your studies from the way the State

public plans are working?

Ms. FAGNONI. We have some ongoing work where we’re looking

at some plans that opted out of the Social Security system right before they could no longer opt out and are looking at how those

plans have set up their benefit structures and whether we might

learn something from that. That work is underway right now.

Mr. PORTMAN. Is that something GAO plans to issue a report on?

Mr. MULVEY. Yes, it’s for this Subcommittee. It’s for the Chairman.

Mr. PORTMAN. Chairman Bunning requested it, so you’re going to

do it, right.

Ms. FAGNONI. That’s right.

Mr. PORTMAN. There you go. My time is up. Thank you very

much.

Chairman BUNNING. The big thing about Chile, as you all know,

they had a benevolent dictator that changed the Social Security. If

we had one, we could do it a lot easier too. [Laughter.]

Let me talk to you about the seven major States that have 75

percent of those who are not included. Have you studied the State

plans in those seven States to the point of benefits received in direct proportion to those that—and how many dollars have gone in

from each employee into those, and what return they’ve got on

their dollar compared to the return on the dollars from the Social

Security trust funds?

Ms. FAGNONI. We did not look at that sort of lifetime benefit

comparison specifically.

Mr. SCHAEFER. We have work underway on the, basically——
33

Chairman BUNNING. In other words, you’re not finished yet, and

you are working on that, and you will have that ready for us?

[Laughter.]

Mr. MULVEY. We have a number of studies going on. We have

another one looking specifically at the rate of return issue in a

more broad sense than simply these seven States.

Chairman BUNNING. It would really help when we get into comparisons, and it would help for us to determine whether we think

mandatory requirement is a good thing or bad thing.

I want to let you know that I’m going to submit some questions

in writing to each of you so that you can be prepared to respond

in writing, so that we can move on to the next panel.

[The questions and answers follows:]

Responses of Cynthia M. Fagnoni to Mr. Bunning’s Questions

1. You said that most full-time public employees participate in defined benefit pension plans. Do you have information regarding what the average monthly benefit is

for these workers?

Answer: Most public pension plans base retirement benefits on the employee’s

final average salary over a specified period of time, usually 3 years, and both the

Department of Labor (DOL) and Public Pension Coordinating Council (PPCC) studies estimate employee retirement benefits as a percentage of final average earnings.

Table 1 shows average employee retirement benefits, as a percentage of final earnings, in 1994, for Social Security covered and noncovered state and local government

employees retiring at age 62 with 30 years of service.

Table 1: Average 1994 Retirement Benefits in Defined Benefit Plans for Full-time State and Local Employees

Retiring at Age 62 With 30 Years of Service

Final salary

Employees

covered only

by pension

plan

Employees covered by Social Security

and pension plan

Pension

plan

Social Security 1 Total

$15,000 ............................................................. 62% 50% 37% 87%

$25,000 ............................................................. 62 50 31 81

$35,000 ............................................................. 62 50 27 77

$45,000 ............................................................. 62 50 23 73

$55,000 ............................................................. 62 50 20 70

$65,000 ............................................................. 62 50 17 67

1 Excludes Social Security spousal and dependent benefits.

Source: Employee Benefits in State and Local Governments, 1994, DOL Bureau of Labor Statistics, Bulletin

2477, May 1996.

Follow-up: You cited a DOL study that found that, in addition to retirement benefits,

all members of these plans have a survivor annuity option, 91 percent have disability

benefits, and 62 percent have some cost-of-living increases after retirement. Are the

survivor and disability benefits provided through the basic payroll tax, or is there

an additional charge in some or most of these plans?

Answer: Generally, employer and employee contribution rates for public pension

plans are calculated to finance plan benefits, including disability and survivor benefits. However, the most prevalent type of survivor benefit, joint and survivor annuities, requires the retiree to accept a reduced benefit and provides a percentage of

that reduced benefit to the spouse upon the retiree’s death.

Follow-up: On the basis of your research, if newly hired state and local government

workers were covered under Social Security, would those individuals be better off in

terms of total lifetime benefits, given Social Security’s comprehensive benefit package

(survivors and disability benefits), portability, and inflation protection?

Answer: Should Social Security be mandated, the effect on newly hired employees

would depend on each employee’s circumstances and any changes made to current

pension plans in response to mandatory coverage. It seems certain, however, that

some employees would receive greater lifetime benefits in covered employment. For
34

example, employees who work for several years in noncovered employment but move

to another job before vesting in a noncovered pension plan may be better off with

the fully portable benefits offered by Social Security. Similarly, employees who become fully disabled before qualifying for disability benefits under a noncovered pension plan might be better off with the disability benefits afforded by covered employment.

2. Several plan representatives have told you that the spending increases necessary

to maintain level retirement income and other benefits for current and future members will be difficult. These states and localities might decide to maintain current

spending levels, which could result in reduced benefits. What kind of benefit reductions might plans be faced with if they have no choice but to cut benefits?

Answer: A June 1997 actuarial evaluation of an Ohio pension plan concluded that level spending could be maintained if (1) service retirement benefits are reduced (for

example, salary replacement rates for employees retiring with 30 years of service

would be reduced from 60.3 percent to 44.1 percent), (2) retiree health benefits are

eliminated for both current and future employees, and (3) the funding period of the

plan’s unfunded accrued liability is extended from 27 years to 40 years. The study

also stated that additional benefit reductions might be needed to maintain level

spending if additional investment income is not available to subsidize pension benefits for newly hired employees.

Follow-up: In your research, did you check into the current status of the state budgets

that would be most affected? So many states, like the federal government, are seeing

the benefit of budget surpluses. Could these surpluses assist in paying transition

costs?

Answer: Our review did not include an evaluation of state budgets. However, state and pension plan officials noted that spending for retirement benefits must compete

for funds with spending for education, law enforcement, and other areas. In Ohio,

for example, officials stated that the state is having difficulty finding the additional

funds for education needed to comply with court-ordered changes in school financing. A representative of local government officials in Ohio stated that payroll represents 75 to 80 percent of county budgets, and there is little chance that voters

would approve revenue increases needed to maintain level retirement benefits. He

stated that the more likely options for responding to increased retirement costs were

to decrease the number of employees or reduce benefits under state and local pension plans.

3. You indicate that one option for states and localities with noncovered workers is

to provide newly hired employees with Social Security and pension benefits that, in

total, approximate the pension benefits of current noncovered employees. And that

studies show that such an option could increase retirement costs by 7 percent of newemployee payroll. A 7-percent of payroll increase in retirement costs for newly hired

employees would mean additional costs of about $5.7 billion over the next 5 years.

Is this estimate based on the assumption that all states and localities would select

this option?

Answer: The testimony stated that applying a 7-percent of payroll increase to

newly hired state and local employees would result in additional costs to states and

localities of $9.1 billion over the first 5 years, using Social Security Administration

(SSA) data and assumptions. The statement assumed that the 7-percent of payroll

increase would apply to all states and localities affected by mandatory coverage.

Follow-up: Under this scenario, employees retiring before age 62 would need to

receive a temporary supplemental pension benefit to more closely maintain the benefits of the current plan, correct?

Answer: Yes.

Follow-up: Another option for states and localities, if coverage is mandatory, is to

provide newly hired employees with pension plan benefits similar to those provided

to employees currently covered under Social Security. You point out that retirement

costs for states and localities covered by Social Security are higher than the costs for

noncovered states and localities—9 percent versus 8 percent in terms of average employee cost rate and 12 percent versus 8 percent in terms of average employer cost

rate. Why are these costs so much higher, and given the increased cost, why would

states and localities choose this option?

Answer: As stated in the 1980 study, the cost increase cannot be ascribed to any

specific provisions. A major factor is that Social Security provides additional benefits

that are not provided by most public pension plans. The 1980 study also noted that
35

the extent to which the experience of states and localities with covered employees

can be generalized to that of noncovered employees is limited because many public

pension plans for covered employees were implemented in the 1950s and 1960s

when Social Security payroll taxes were much lower. However, employee groups in

states and localities with both covered and noncovered pension plans might negotiate for revised retirement benefits that are similar to those of employees in covered plans. Additionally, states and localities with noncovered employees might find

it necessary to provide new employees with revised benefits that are similar to those

provided to covered employees in neighboring states and localities to remain competitive in recruiting qualified employees.

Follow-up: In your testimony, you cited a study that showed that most pension plans

for covered employees do not provide supplemental retirement benefits for employees

who retire before Social Security benefits are available. You also indicated that many

employees, especially police and firefighters, retire before age 65. Do most of these police and firefighters try to hang on until age 62—or what happens to these individuals if they must retire earlier than age 62?

Answer: Our analysis of PPCC data indicates that police and firefighters retired,

on average, at age 54 in noncovered plans and age 55 in covered plans. Generally,

state and local employees in covered employment would receive a smaller retirement

benefit than employees in noncovered employment until they reach age 62 and begin

receiving Social Security benefits.

4. You mention that most states and localities use a reserve funding approach to

finance their plans. How does this approach work?

Answer: Under a reserve funding approach, employers—and frequently employees—make systematic contributions toward funding the benefits earned by active

employees. These contributions, together with investment income, are intended to

accumulate sufficient assets to cover promised benefits by the time employees retire.

Follow-up: How many plans have unfunded liabilities?

Answer: We reported in Public Pensions: State and Local Government Contributions to Underfunded Plans (GAO/HEHS–96–56, Mar. 14, 1996) that funding of

state and local pension plans has improved substantially since the 1970s. Still, in

1992, 75 percent of state and local government pension plans in a PPCC survey

were underfunded. A 1997 PPCC survey indicates that plan funding has continued

to improve. The survey report stated that of the plans responding to the question,

51 percent were more than 90-percent funded while only 16 percent were less than

70-percent funded.

Follow-up: How do these unfunded liabilities occur? Are these plans audited? And

how do states determine what corrective action to take?

Answer: Unfunded liabilities occur for a number of reasons. For example, public

plans generally use actuarial methods and assumptions to calculate required contribution rates. Unfunded liabilities can occur if a plan’s actuarial assumptions do

not accurately predict reality. Additionally, retroactive increases in plan benefits can

create unfunded liabilities. We did not review the extent to which public plans are

audited; however, for a variety of reasons, we believe most public pension plans are

audited on a regular basis. A Government Accounting Standards Board official stated, for example, that many states have legal requirements for plan audits. Unlike

private pension plans, the funding requirements of public plans are not regulated

by the federal government. States or localities decide how and when unfunded liabilities will be financed.

Follow-up: Mandatory coverage of newly hired employees would obviously reduce contributions to these funds. What would be the effect on these pension funds?

Answer: The effect of reduced contributions on plan finances would depend on the

actuarial method and assumptions used by each plan, the adequacy of current plan

funding, and other factors. Under certain conditions, for example, reduced contributions could affect a plan’s liquidity over time, which could, in turn, affect its longterm costs. In 1997, a state legislative committee considered closing the state’s defined benefit pension plan to new members and implementing a defined contribution

plan. The employees were already covered by Social Security; however, states and

localities faced with mandatory coverage might consider making a similar change

to their pension plans.

An actuarial analysis found that as the number of employees covered by the plan

decreased, the amount of contributions flowing into the plan would also decrease.

At the same time, the number of members approaching retirement age was increas36

ing, and benefit payments were expected to increase. As a result, external cash flow

would become increasingly negative over time. According to the analysis, the large

negative external cash flow would require that greater and greater proportions of

investment income be used to meet benefit payment requirements. In turn, this

would require the plan to allocate larger proportions of plan assets to cash or loweryielding short-term assets. Once this change in asset allocation occurred, the plan

would find it increasingly difficult to achieve the investment returns assumed in

current actuarial valuations, and costs would increase.

5. In your testimony, you point out SSA estimates that 95 percent of noncovered state

and local employees become entitled to Social Security as workers, spouses, or dependents and that 50 percent to 60 percent of noncovered employees will be fully insured by age 62 from covered employment.

The Congress established the government pension offset (GPO) and windfall elimination provisions (WEP) to reduce the unfair advantage that workers who are eligible

for pension benefits based on noncovered employment might have when they apply

for Social Security benefits.

Yet the administration of these provisions (government pension offset and windfall

elimination provision) is difficult, as you recently reported in a separate study at my

request. Would you briefly discuss the key findings of that study?

Answer: To implement GPO and WEP, SSA needs to know which Social Security

applicants and beneficiaries are or will be receiving pensions earned in noncovered

employment. For state and local employees, however, SSA has no independent information to identify those who receive pensions from noncovered state and local employment. Generally, SSA is limited to reviewing an applicant’s earnings record and

asking questions based on that record. As a result, SSA is often unable to verify

information provided by the applicant or to detect the subsequent receipt of a pension from noncovered employment. This undermines its ability to determine whether

applicants should be subject to WEP or GPO and has led to overpayments. We estimated the extent of overpayments at $160 million to $355 million between 1978 and

1995. In the past, SSA considered obtaining pension payment information directly

from state and local retirement systems; however, legal and administrative concerns

may make this approach impractical. In response to our report, SSA is working with

the Internal Revenue Service (IRS) to revise reporting requirements for pension income. IRS believes that a technical amendment to the tax code is needed to allow

it to obtain the necessary information. With such information, SSA plans to perform

additional computer matches to ensure that GPO and WEP are correctly applied.

1. Under the government pension offset provision (GPO), how was it determined that

two-thirds of a government pension is equivalent to the Social Security benefit the

Responses of Geoffrey Kollmann to Mr. Bunning’s Questions

f

worker would have received if his or her job had been covered by Social Security?

When the GPO was first enacted in 1977, it provided that 100% of the government pension based on employment that was not covered by Social Security was to

be subtracted from any Social Security spousal benefit for which the worker was eligible. Because the purpose of the GPO is to replicate Social Security’s ‘‘dual entitlement’’ rule, under which 100% of a benefit earned as a worker is subtracted from

the spousal benefit, the notion was implicit that 100% of the government pension

is analogous to the Social Security benefit that the worker would have received if

his or her job had been covered by Social Security.

Shortly after enactment, opponents of the GPO intensified their criticism of the

100% offset provision. They pointed out that government pensions typically combine

the purposes of Social Security and staff pension plans designed to supplement Social Security. While a spouse covered under Social Security may have his or spousal

benefit reduced under the dual entitlement rule, the rule takes into account only

the Social Security worker’s benefit, not the income he or she may have from a private pension. To address these concerns, in 1982 the House of Representatives included in a tax bill affecting the Virgin Islands (H.R. 7093) a modification of the

offset provision so that only one-third of the pension would be counted. However,

the proposal was dropped in the conference with the Senate version of the bill.

P.L. 98–21, The Social Security Amendments of 1983 (the main purpose of which

was to solve Social Security’s financing crisis) provided another opportunity to

amend the offset provision. As proposed by the House, only one-third of the government pension would be counted in computing the offset. The Senate version of the
37

Amendments had no such provision. In conference, a compromise was reached

where two-thirds of the government pension would be counted, and that became

final law. Thus, it does not appear that the determination that two-thirds of a government pension is equivalent to the Social Security benefit the worker would have

received if his or her job had been covered by Social Security was based on particular findings or analyses, but as a byproduct of the myriad legislative bargaining involved with enacting urgent and complex legislation. Follow-up: In the Windfall Elimination Provision (WEP), how was it determined

that the 90% replacement factor in the benefit formula should be reduced to 40%?

Follow-up: In the Windfall Elimination Provision (WEP), how was it determined

that the guarantee that the reduction in a government worker’s Social Security benefit not be more than 50% of the government pension?

The origin of the WEP was a recommendation by the 1982 National Commission

on Social Security Reform (also known as the Greenspan Commission, after its

Chairman), that Congress should modify the computation of benefits for workers

who receive pensions from non-Social Security covered employment. The Commission, which was established to develop proposals to solve Social Security’s looming

financial crisis, and whose recommendations were the basis for the 1983 Social Security Amendments, made no specific recommendation on how this revised computation was to be made. When legislation was crafted to put the Commission’s recommendation into effect, the Senate version of the WEP lowered the Social Security

benefit by substituting a 32% replacement rate for the 90% replacement rate in the

Social Security benefit formula. It also included a guarantee that the reduction in

Social Security under the WEP could not be more than one-third of the non-covered

pension. The House version lowered the Social Security benefit by substituting a

61% replacement rate for the 90% replacement rate in the benefit formula, and

specified that the reduction could not be more than one-half of the non-covered pension. In conference, it appears that it was agreed, in effect, to split the difference.

The House conferees apparently agreed to accept a lower replacement rate (40%),

while the Senate conferees agreed to the guarantee that the reduction could not be

more than one-half of the non-covered pension. There is no indication in the record

that these provisions were based on particular findings or analyses.

2. What does research by the Congressional Research Service (CRS) show about the

formulas used to determine the GPO and the WEP?

Because the GPO and the WEP are based on the premise that non-Social Security

covered government workers should be placed in approximately the same position

as are other workers, CRS has prepared illustrations that show how much of a government pension (i.e., benefits earned under the federal Civil Service Retirement

System) is equivalent to a Social Security benefit. It also tried to assess how well

the two anti-windfall measures work. It concluded that because the illustrations covered a very wide range, it is difficult to generalize. However, the illustrations did

seem to show that for many civil service annuitants the GPO and the WEP are inaccurate. It appears that generally the WEP is appropriate for typical civil service annuitants, but over-penalizes lower-paid workers with short or evenly-split careers,

while under-penalizing workers with long Social Security-covered careers. The GPO

is basically imprecise, but in many cases this has little effect on considerations of

equity. Those likely to be adversely affected by its inaccuracy are surviving spouses

of high-paid workers, and those who may partially escape its intended effect are

shorter-term, lower-paid workers.

3. Are there potential problems regarding proposals that restrict the full application

of the GPO and WEP to higher-income workers?

There are three issues involved in such an approach. One is that by applying a

form of means-testing to Social Security, it could be criticized as weakening the

‘‘earned right’’ nature of the program. Generally, economic circumstances do not affect Social Security benefits. To do so, opponents would argue, would make the system appear more like welfare and therefore erode its public support.

Another issue is how such an approach could accurately measure economic need.

Full means-testing, such as is done in welfare programs like the Supplemental Security Income program, require that recipients submit annually to a full accounting

of income and resources. Bills that have been introduced in Congress whose stated

purpose is to exempt low-income workers from the GPO and WEP do so by exempting those whose combination of Social Security and government pensions are below

a threshold amount. It appears there is a presumption that these two sources of income correlate with low overall income. In fact, using just these two measures of

income often can be a poor indicator of a person’s economic condition. For example,

there could be substantial income from private pensions, assets, royalties, rents, and
38

earnings (subject, of course to the Social Security earnings test). This caution particularly applies with regard to family income. For example, one member of a couple

may have a substantial work history while the other may not. Even if a worker on

whose record the Social Security spousal benefit is based is receiving a maximum

benefit, reflecting a lifetime of very high earnings, the spouse could still receive

higher benefits under this bill if his or her government pension were low (e.g., if

the government service were of short duration). Absent some sort of direct means

test on total income, there are likely to be instances where families with aboveaverage incomes would receive higher benefits. On the other hand, individuals or

families whose incomes consist almost entirely of Social Security and a government

pension could get no relief from these bills even though their total income was considerably below average.

Another issue is fairness. For example, in the research done by CRS mentioned

earlier on the GPO, one conclusion was that ‘‘for short-term, lower-paid government

workers, more (emphasis added) than two-thirds of the CSRS pension should be

counted in computing the offset. Otherwise, it is possible that spouses of high-paid

Social Security-covered workers could receive a higher spousal benefit than they

would receive were their government work covered under Social Security.’’ Thus, in

regard to workers with low earnings histories, the technical analysis of the report

did not agree with the premise that the full application of the GPO and WEP should

not apply to lower-income workers. Put another way, from the viewpoint that the

goal of the anti-windfall measures is to prevent advantages accruing to government

workers that are not available to comparable workers in the private sector, such an

approach could create such an advantage.

This is not to say that there are not instances where the GPO and the WEP have

the effect of lowering income of already low-income beneficiaries. However, the same

effect is produced, often to a larger degree, by Social Security’s ‘‘dual entitlement’’

rules and the weighted benefit formula that apply to the population at large (and

that the GPO and WEP are designed to replicate). A case might be made that, if

the Congress wishes to provide additional benefits to low-income beneficiaries, other

means or programs that more accurately measure need and apply to the general

population might be more appropriate.

1. In your testimony you stated on page 1 that ‘‘Our work shows that mandating covResponses of Cynthia M. Fagnoni to Mr. Portman’s Questions

f

erage for all newly hired public employees would reduce Social Security’s long-term

financial shortfall by about 10 percent . . . .’’

a. Please define ‘‘long-term financial shortfall.’’

Answer: Social Security’s long-term financial shortfall is calculated as the difference between the present value of revenues and expenditures over a 75-year period, after adjusting for trust fund balances. A 75-year period is used to obtain the

full range of financial commitments that will be incurred on behalf of the great majority of current program participants. Table 2 shows the present value of Social Security revenues and expenditures with and without mandatory coverage, over the

75-year period beginning January 1, 1998. The analysis indicates that extending

mandatory coverage to all state and local employees would reduce the program’s

long-term shortfall by 10 percent, from about 2.19 percent of taxable payroll to 1.97

percent of taxable payroll.
39

Table 2: Present Value of Social Security Revenues, Expenditures, Payroll, and Actuarial Balance Over 75

Years With and Without Mandatory Coverage (Dollars in Billions)

Without

mandatory

coverage

With mandatory coverage Change

Beginning trust fund balance ........................................ $655.5 $655.5 $0.0

Present value of total revenues ..................................... 18,413.4 18,934.6 521.2

Present value of total expenditures ............................... 21,983.0 22,274.7 291.7

Revenue minus expenditures ......................................... (3,569.6) (3,340.1) 229.5

Target trust fund balance 1 ............................................ 185.4 192.7 7.3

Actuarial balance ............................................................ ($3,099.5) ($2,877.3) 222.2

Present value of taxable payroll .................................... $141,779.0 $145,878.9 4,099.9

Actuarial balance as a percent of payroll ..................... (2.19) (1.97) 0.22

1The target trust fund balance is an amount equal to the following year’s projected expenditures.

Source: SSA, Office of the Chief Actuary.

b. Please specifically state all economic, demographic, and other assumptions used

in determining a 10-percent reduction in this ‘‘shortfall.’’

Answer: SSA assumed that mandatory coverage would become effective on January 1, 2000, and that the existing noncovered workforce would be replaced by covered employees at a rate similar to that experienced by states and localities affected

by the extension of mandatory Medicare coverage to public employees hired after

March 31, 1986. SSA’s analysis used the intermediate demographic and economic

assumptions detailed in the Board of Trustees’ 1998 annual report. The intermediate assumptions represented the Board’s best estimate of the future course of the

population and the economy. Table 3 shows the ultimate values for the intermediate

assumptions that apply to years after 2023.

Table 3: Ultimate Intermediate Economic and Demographic Assumptions Used in the Board of Trustees’ 1998

Annual Report

Assumption Ultimate

value

Annual percentage change in:

Average wage in covered employment .......................................................................... 4.4

Consumer Price Index .................................................................................................... 3.5

Real wage differential (percent) .................................................................................... 0.9

Unemployment rate (percent) ........................................................................................ 6.0

Annual interest rate (percent) ....................................................................................... 6.3

Total fertility rate (children per woman) ...................................................................... 1.9

Life expectancy at birth in 2075 (combined average for men and women) 1 ............. 81.7

Net annual immigration (thousands) ............................................................................ 900.0

1Life expectancy is assumed to continue improving throughout the projection period.

Source: Social Security Board of Trustees Annual Report for 1998.

c. Can you explain what part of the 10-percent reduction is attributable to reduction

in administrative expenses?

Answer: SSA assumed that mandatory coverage would not affect overall administrative costs over the 75-year period.

d. How will mandatory coverage reduce or simplify program administration?

Answer: Should coverage be mandated, eventually all state and local employees

with the exception of a few categories of workers, such as students and election

workers, would be in covered employment. Over time, this would reduce the number

of potential adjustments under GPO and WEP. Additionally, the SSA Inspector General has reported that Social Security provisions related to the coverage of state and

local employees are complex and difficult to administer and that there is a significant risk of sizable noncompliance with state and local coverage provisions. SSA and

IRS have initiated an effort to educate employers and ensure compliance with legal

requirements for withholding Social Security payroll taxes. Extending coverage to

all newly hired state and local government employees would, over time, greatly reduce or eliminate this problem.
40

2. Other panels that appeared before the subcommittee testified that compound interest is a vital part of their systems’ funding. What increase would be necessary in the

interest rate paid by the U.S. Treasury to SSA to achieve the same 2-year funding

period extension as mandatory coverage for new hires would provide?

Answer: According to SSA’s Office of the Chief Actuary (OACT), if the real annual

interest rate earned by the trust funds is increased by 0.7 percent over the 75-year

period, then the year of exhaustion would be extended an extra 2 years, achieving

the same period of extension as the provision to cover newly hired state and local

government employees beginning in 2000. The increase in annual rates begins in

1998 and is assumed for all bonds held by the trust funds. The ultimate real interest rate would be 3.5 percent, rather than 2.8 percent, as assumed in the 1998

Board of Trustees’ report.

3. As you are aware, mandatory coverage has been extended to other groups over the

decades. Please provide us with evidence of the effect this has had on the reduction

of the shortfall for each of these extensions and the increase in liabilities to Social

Security.

Answer: In addressing cost increases between 1940 and 1971, the 1972 annual report of the Board of Trustees stated that the extension of coverage to new workers

had had an upward effect on both costs and taxable payroll and, in most cases, had

not materially affected program costs as a percentage of taxable payroll. During the

period, however, expanded coverage was not limited to newly hired employees. As

a result, experience through 1971 may not be relevant to an evaluation of the potential financial effect of expanded coverage that is limited to newly hired employees.

Mandatory coverage has been extended to several groups since 1971, including

federal employees hired after December 31, 1983. In recommending the extension

of mandatory coverage to nonprofit and newly hired federal employees, the National

Commission on Social Security Reform estimated a long-range savings of 0.30 percent of payroll. According to a representative of SSA’s OACT, OACT has not estimated actual program income and costs with and without the federal employees

hired after December 31, 1983, or for any other groups that were added.

4. In your testimony you stated:

‘‘For most of the examined pension plans, the present value of lifetime benefits for

employees covered by Social Security would be greater than the value of benefits for

current noncovered employees.’’ (page 8)

‘‘We did not compare the expected value of total lifetime benefits for covered and

noncovered employees because amount would vary depending on the benefits offered

by each plan.’’ (page 9)

These statements are contradictory. What is the factual and financial basis upon

which the conclusion in the first statement was made?

Answer: The statement on page 8 refers to the 1980 study performed by the Universal Social Security Coverage Study Group, which analyzed a large number of

plans in depth. We did not replicate the 1980 study and calculate the expected value

of lifetime benefit offered by current pension plans.

5. In your written testimony, you refer to seven states that have a majority of noncovered workers. Is it true that other states such as Nevada, Alaska, Connecticut, and

Kentucky have significant percentages of workers who are not covered by Social Security? What would the effect on systems that have high percentages of public employees

not covered by Social Security?

Answer: SSA estimates that more than 50 percent of state and local government

employees are not covered by Social Security in Alaska (59 percent), California (51

percent), Colorado (63 percent), Louisiana (71 percent), Maine (54 percent), Massachusetts (86 percent), Nevada (66 percent), and Ohio (92 percent). Other states have

lower percentages of noncovered employees. The effect on the pension plans in these

states would depend on how state and local governments with noncovered employees

respond to the additional costs and benefits associated with Social Security coverage.

6. As a response to a question about how noncovered systems would plan for changes

brought about by mandating coverage, the reply essentially was that it would depend

on the actuarial method used by the plan. To a small extent that is a factor, but the

real issue is how plans would deal with significant reductions in the stream of income necessary to continue the plans as they are now constituted. Please provide

greater detail on how large noncovered plans would be affected costwise and the extent to which current active members and retirees would also be affected.
41

Answer: The effect of reduced contributions on each plan’s finances would depend

on a number of factors. However, reduced contributions to current plans could adversely affect the liquidity and ultimately increase the cost of some plans. In 1997,

for example, a state legislative committee considered closing a defined benefit pension plan to new members and implementing a defined contribution plan. State employees were already covered by Social Security; however, states and localities faced

with mandatory coverage might consider making a similar change to their pension

plans. An analysis of the proposed change stated that as the number of employees

covered by the plan decreased, the amount of contributions flowing into the plan

would also decrease. At the same time, the number of members approaching retirement age was increasing, and benefit payments were expected to increase. As a result, external cash flow would become increasingly negative over time. In turn, this

would require the plan to allocate larger proportions of plan assets to cash or loweryielding short-term assets. Once this change in asset allocation occurred, the plan

would find it increasingly difficult to achieve the investment returns assumed in

current actuarial valuations, and costs would increase.

The implications for current active members depends on how states and localities

respond to the increased costs. According to an analysis by the Public Retirement

Institute, however, most state and local government pension plans are covered by

provisions that would preserve benefits for current employees. The benefit guarantees cover benefit formulas, vesting, purchase of service credit, benefit rights, and

any other provision provided in the pension agreement. The guarantees are enforced

through the courts. According to information provided by the Government Finance

Officers Association, for example, there are implicit or explicit restrictions against

benefit reductions for employees in Alaska, California, Colorado, Louisiana, and Nevada, among others. Employees in states that permit benefit reductions for active

employees would need to rely on the process for changing benefits to safeguard current benefit levels.

7. The Third Millennium Report entitled ‘‘The Consequences of Non-FICA Status on

State and Local Pension Plans’’ clearly states that noncovered employees can expect

a much higher rate of return on contributions and that non-FICA plans are advance

funded. Further, non-FICA plans have a much higher rate of return on their investments. When asked a question during the hearing about what could be learned from

these large state plans, the reply was directed to an ongoing study of three Texas

counties. While those results in those counties may be interesting, the real question

still remains. What did you learn from your studies by these large state plans that

the subcommittee should take into consideration as we move to reform the Social Security program?

Answer: For the most part, public pension plans are reserve funded. Under reserve funding, contributions are made toward the present value of benefits earned

by active employees, which, together with investment income, are intended to accumulate sufficient assets to cover promised benefits. According to the Bureau of the

Census, state and local pension plans had accumulated assets of more than $1 trillion in 1994. Additionally, pension plans allocate these assets among several asset

classes, including domestic and international stocks, and the rate of return on plan

assets plays a significant role in plan funding. The Bureau of the Census estimates

that, in 1994, investment income amounted to about 61 percent of total income for

state and local pension plans. According to a 1997 PPCC survey, the annual investment return for responding plans averaged 13.7 percent in 1996 and 11.3 percent

in the 5-year period from 1992 to 1996.

Social Security, in contrast, is financed mostly on a pay-as-you-go basis. Under

pay-as-you-go financing, the payroll taxes of current workers are used to pay the

benefits of current retirees and program assets are few relative to accrued liabilities.

Additionally, federal law limits Social Security investments to interest-bearing securities of the U.S. government or securities guaranteed by the United States. As a

result, in 1997, investment income amounted to about 9.6 percent of total income,

and the program received an effective annual interest rate of 7.5 percent on its investments.

Extending mandatory coverage to state and local employees would involve a

trade-off between the higher investment returns earned by public retirement systems and the expanded portability, inflation protection, and dependent and other

benefits provided by the Social Security program. Additionally, Social Security reform proposals generally include provisions for expanding Social Security reserves

and investing some of the trust funds in additional asset classes. We addressed

issues related to advanced funding and diversifying Social Security investments in

Social Security: Different Approaches for Addressing Program Solvency (GAO/
42

HEHS–98–33, July 22, 1998). We also have an assignment under way to address

the extent to which workers receive their money’s worth from Social Security.

8. Your testimony indicates that bringing in new hires in noncovered systems would

only extend the solvency of Social Security by 2 years. Yet the damage to noncovered

systems by this action would be severe. Why was the 2-year factor minimized so much

in your report?

Answer: We focused on Social Security’s actuarial deficit over a 75-year period because that is the measure of financial solvency used by Board of Trustees in its annual reports. Additionally, we focused on the 10-percent reduction in the actuarial

deficit attributed to mandatory coverage of state and local government employees

because that was the method used by the 1994–96 Social Security Advisory Council

to measure the effect of mandatory coverage on that deficit.

We showed that mandatory coverage would extend Social Security’s solvency by

2 years, assuming no other adjustments, to emphasize the fact that mandatory coverage would resolve only a portion of the Social Security financial shortfall and must

be coupled with other adjustments to fully resolve Social Security’s actuarial deficit

over the 75-year period. Within a final package of adjustments designed to fully

eliminate Social Security’s actuarial deficit, extending Social Security to state and

local employees would eliminate 10 percent of that deficit.

Chairman B

Our next panel includes Robert Scott, Richard Schumacher, and

UNNING. I want to thank you for your testimony.

f

Sergeant Martin Pfeifer, Thomas Lussier—is that right?

Mr. LUSSIER. Correct.

Chairman BUNNING. Mr. Scott is the executive director of the

Public Employees’ Retirement Association in Denver, Colorado. He

will be testifying on behalf of the Coalition to Preserve Retirement

Security. Mr. Schumacher is the executive director of the Public

Employees’ Retirement System of Ohio. Sergeant Pfeifer is with the

Washington Metropolitan Police Department and a Trustee on the

National Board of the Fraternal Order of Police. Mr. Lussier is the

executive director of the Massachusetts Teachers’ Retirement

Board. And I want to recognize my fellow Ways and Means Committee Member, John Ensign, to introduce the final witness on this

panel.

Mr. ENSIGN. Thank you, Mr. Chairman. I also want to thank you

for holding this hearing and inviting me to be here, and I want to

especially thank you for allowing one of the experts from my home

State of Nevada, George Pyne. George is the executive officer of the

Public Employees’ Retirement System of Nevada, and he’s joining

us this morning to share, I think, what you’ll find is very important

testimony.

I’ve been a fan of George’s and what he’s done with the State of

Nevada. I use it in many, many speeches and talk about it as an

example of one of the things that could possibly be done for the future of Social Security, and because they take advantage of that

magical thing called compounding, and it’s something that we

should be teaching in our schools, because most people don’t understand that growing rich slowly over time because of compounding

really works, and the State of Nevada and their retirement system,

I think, is a very, very good example of how it can be done. So, I

appreciate your allowing me to introduce Mr. Pyne this morning,

and I know that you’ll be pleased with his testimony.

Chairman BUNNING. Thanks, John. Before we begin this panel,

I’d like to point out that despite our best attempts we were unable
43

to obtain witness representing the 1994–96 Social Security Advisory Council. Edith Fierst who served on the Advisory Council has

provided a statement for the record.

Mr. Scott, would you please begin.

STATEMENT OF ROBERT J. SCOTT, SECRETARY TREASURER,

COALITION TO PRESERVE RETIREMENT SECURITY; AND

EXECUTIVE DIRECTOR, PUBLIC EMPLOYEES’ RETIREMENT

ASSOCIATION, DENVER, COLORADO

Mr. SCOTT. Thank you, Mr. Chairman. My name is Bob Scott,

and, as you said, I’m executive director of the Public Employees’

Retirement Association. We manage $25 billion in assets for almost

200,000 members, retirees, and beneficiaries. I’m testifying today

as secretary treasurer of the Coalition to Preserve Retirement Security, formerly known by the acronym of OPPOSE. This coalition

represents the interests of some 5 million public employees and retirees who do not participate in Social Security.

The Coalition to Preserve Retirement Security believes that the

Social Security system has provided and continues to provide an

important part of the retirement benefits for the majority of American workers, including many of our colleagues in public service.

We also believe that it is critical that the Social Security Program

be preserved and strengthened and we applaud the bipartisan work

now being done by Congress to effect changes which will enhance

the long-term stability of Social Security.

You are here today to consider one possibility for change. This

possibility, extending mandatory participation to public service positions not now covered, is in terms of the total package of possible

changes very small. However, it is an issue of critical importance

to the affected employees and employers.

I’d like to very briefly suggest to you four reasons—and we think

they’re very strong reasons—why you should focus on other possibilities. First, the current structure works and it works well. The

Amish say, ‘‘If it ain’t broke, don’t fix it.’’ I would say, ‘‘If it ain’t

broke, don’t break it.’’ In 1990, Congress required that all public

employees be provided with retirement plans that either included

participation in Social Security or provided comparable security

and benefits independent of Social Security. In the written materials, I’ve provided you with data showing that existing public

plans independent of Social Security provide sound, well-funded

programs which include good retirement, disability, cost of living,

and survivor benefits at a very reasonable cost to the public employer and, thus, to the taxpayer. To radically alter these sound,

efficient plans by imposing mandatory participation would force

major plan redesigns and require that either employer costs go up,

benefits go down, or both.

Second, the proposal goes against the grain of one of the critical

foundations of many of the restructuring programs; that is to enhance the long-term viability of Social Security. While mandatory

coverage of new hires would provide a short-term increase in cash

receipts by a small amount—0.2 percent of pay—it would increase

the long-term liabilities of programs just at the time when current

projections show that the revenues will become insufficient. The

current concerns with the long-term viability of Social Security are
44

not the result of noncoverage of some public workers, and their

mandatory inclusion cannot help resolve these concerns. In short,

we have not been a part of the problem, and our inclusion cannot,

in reality, contribute the solution.

Third, inclusion of noncovered public workers will, in fact, distract from the development of effective ways to address the fundamental needs of Social Security. As I noted earlier, inclusion

would adversely affect 5 million workers and retirees and their

families as well as thousand of public employers. Naturally, this

will foster opposition to change on their part. As I said at the outset, we support Social Security as a general program and want to

help develop effective ways to ensure its long-term strength. If

mandatory participation is not an issue, this group can join with

you and your colleagues to work for positive and effective change.

Finally, mandatory inclusion would add to the one of the fundamental concerns with Social Security as it now exists. At its inception, it was possible and practical for Social Security to use current workers’ earnings to pay for former workers’ retirement benefits. However, we are all painfully aware of the major demographic

changes that are still in progress and which have made this form

of intergenerational transfer both inequitable and impractical. We

should not add to this inequity by creating an even greater future

unfunded liability. Let’s not put more passengers on the Titanic.

Let’s work together to find a way to avoid the iceberg.

In summary, we want to support effective change to enhance the

long-term viability of Social Security. In that context, we can see

no basis to support mandatory coverage of public workers who are

now covered by sound, well-funded State and local plans that

should not be replaced, but rather looked to as examples. Thank

you.

[The prepared statement follows:]

Statement of Robert J. Scott, Secretary Treasurer, Coalition to Preserve

Retirement Security; and Executive Director, Public Employees’

Retirement Association, Denver, Colorado

My name is Robert J. Scott. I am Secretary/Treasurer of The Coalition to Preserve

Retirement Security (‘‘CPRS’’). CPRS is a Colorado Corporation formed by teachers,

fire fighters, police officers, and other state and local government employees who

elected not to join the Social Security system. The purpose of our organization is

to assure the continued financial integrity of our members’ retirement and health

insurance plans by resisting efforts to mandate Social Security coverage of public

employees. Our members are found in Alaska, California, Colorado, Connecticut, Illinois, Kentucky, Louisiana, Massachusetts, Minnesota, Nevada, Ohio, and Texas.

With respect to mandatory Social Security coverage, the interests of CPRS are identical to those of approximately five million public employees throughout the nation

who remain outside the Social Security system, as well as over one million retirees

from public retirement plans outside of Social Security.

BACKGROUND

For many years after the Social Security system was created, state and local government employees were not allowed to participate in the system. Beginning in the

1950s, state and local government employers could elect to have their employees

covered. Governments which elected in were also permitted to opt out again, after

notification of the intent to do so, and the expiration of a two year waiting period.

This was the law for about three decades, until, in 1983, there was a major revision of the Social Security and Medicare laws, triggered primarily by a concern

about the long term solvency of these two trust funds. Congress decided not to require state and local employees who were outside the system to be covered, but did

end the opt out for public employees who had chosen to be covered. An ‘‘anti45

windfall’’ rule was adopted, to ensure that public employees who were covered by

Social Security and by a public plan did not receive excess credit for Social Security

purposes.

In 1986, as part of the Consolidated Omnibus Budget Reconciliation Act of 1985

(‘‘COBRA’’), Congress determined to require participation in the Medicare system on

a ‘‘new hires’’ basis, but chose to leave public employee retirement plans in place,

and did not change the law with respect to Social Security.

In 1990, Congress enacted a law requiring that all public employees not covered

by a state or local retirement plan meeting specified standards must be covered by

Social Security. That law, adopted as part of the Omnibus Budget Reconciliation Act

of 1990 (the ‘‘1990 Act’’), ensures that all public employees will be covered either

under Social Security or under a public retirement plan which provides comparable

benefits. This has proven to be an effective and workable approach. Today, about

one-third of all state and local government employees, about five million people, are

outside the Social Security system because they are covered by public retirement

plans. Additional millions are retirees from non-Social Security public plans, who

are dependent on those plans for all, or most, of their retirement income.

BACKGROUND OF THIS HEARING

Reasonable people differ about the date when serious trouble really begins for the

Social Security system. Although nominally established like a funded pension system, in practice, Social Security Trust Fund surpluses have been used to reduce operating deficits in other parts of the federal budget. There is an obligation for the

Treasury to repay these ‘‘borrowings’’ from Social Security, but the federal government will not be able to repay these borrowings when the time comes, except by

creating surpluses in other parts of its budget, or by printing money.

In his 1998 State of the Union address, President Clinton proposed a policy of

‘‘save Social Security first,’’ by which he meant that until such time as the President

and Congress agree on a method to put Social Security on a sound footing for the

foreseeable future, all federal budget surpluses must be applied to preserve the Social Security system. This proposal has enjoyed considerable support on both sides

of the aisle in Congress.

When Social Security outlays begin to exceed Social Security revenues, this will

place an additional burden on the federal budget, as Social Security becomes a net

importer of general federal revenues. If the federal operating budget is in a healthy

posture, Social Security payments could be made out of general federal revenues,

gradually repaying the Social Security Trust Fund for amounts lent to the federal

government to cover operating deficits in the past. On the other hand, if the federal

operating budget is in deficit, then repaying the Social Security Trust Fund will be

very difficult. Proposals to solve the long term Social Security funding problem by

increasing current Trust Fund revenues are doomed to failure unless those Trust

Fund surpluses are used in such a way as to reduce future demands on the general

fund. (In fact, increases in current Trust Fund surpluses could actually make the

long term situation worse, if the current surpluses are not saved and additional obligations to pay future benefits are incurred.)

In 1994, the Bipartisan Commission on Entitlement and Tax Reform (also known

as ‘‘the Kerrey-Danforth Commission’’) studied the problem of projected short falls

in the Social Security and Medicare Trust Funds, as well as other mid-term and

long-term deficit problems. The Commission was unable to agree on a set of recommendations, but did valuable work in assessing the dimensions of the problem.

In an interim report published in August, 1994, the Commission projected that with

no changes in law, by 2010 entitlement spending and interest on the natioal debt

would consume almost the entire federal revenues; by 2020, entitlement spending

alone would almost equal the federal revenue stream; by 2030, there would not be

enough revenue to service the federal entitlement obligations, even if no money were

used for other purposes, including payment of interest on the national debt.

In 1995 and 1996, The Advisory Council on Social Security examined the midterm and long-term solvency of Social Security and the Social Security Trust Fund.

The Council submitted its report in January, 1997. Once again, there was no majority on the Council for any single set of recommendations. Three different proposals

were put forth by different groups of members. A majority of the Council recommended mandatory Social Security coverage of public employees, although the

three labor members of the Council opposed this proposal ‘‘because of the financial

burden that would be placed on workers and employers who are already contributing to other public pension systems.’’
46

These hearings are being held to consider the advantages and disadvantages of

mandatory Social Security coverage of public employees as a partial solution to the

long-term funding problems of Social Security.

MANDATORY SOCIAL SECURITY COVERAGE IS WRONG AND SHOULD NOT BE ADOPTED

1. Public employees are well provided for under their public plans; mandatory Social

Security coverage will harm public employees as well as people who have retired

from non-Social Security public plans.

Public plans do an excellent job of providing retirement security for their members. Analyses done by public plan fiduciaries indicate that public employees of almost any description (in terms of salary, length of services, etc.) are better protected

under their public plan than they would be under Social Security. For example, the

Public Employees Retirement Association (‘‘PERA’’) of Colorado produced a study

(assuming retirement in 1998 at age 62) showing that an employee working ten

years with a highest average salary of $15,000 per year, would receive a Social Security benefit equal to 20.6 percent of pay; the PERA employee would receive a benefit of 22 percent. For short term employees with higher average rates of pay, Social

Security benefits are proportionately much lower. For example, a ten year employee

with a highest salary of $60,000 per year would get a benefit of 11.8 percent under

Social Security; his PERA benefit would be 22 percent.

Longer term employees at all rates of pay have more secure retirements under

PERA. A fifteen year employee earning a highest average salary of $15,000 would

receive 28.6 percent of pay under Social Security—33 percent under PERA. A twenty year $15,000 per year employee would receive 32.4 of pay under Social Security—

fifty percent of pay under PERA. At thirty years of service, this hypothetical, relatively low pay ($15,000 per year) employee would receive 42.6 percent of pay under

Social Security, but 75 percent of pay under PERA. At forty years of service, the

respective numbers are 49.5 percent of pay under Social Security; 100 percent for

PERA.

PERA of Colorado is a good plan, but analyses of other public plans prove that

these plans also do an excellent job for their employee-members. A comprehensive

study of public plans, prepared under the sponsorship of Third Millennium, entitled

‘‘Freed From FICA: How Seven States and Localities Exempt a Million Employees

from Social Security and Provide Higher Pension Benefits to Retirees’’ (March 1997)

(the ‘‘3rd Mill Report’’) compares the benefits provided under seven large public

plans with those provided under Social Security. An employee retiring after 40 years

of work at age 65 with an age 62 salary of $20,000 would receive an annual pension

of $22,153 from the Public Employee Retirement System (‘‘PERS’’) of Nevada;

$17,722 from the State Teachers’ Retirement System (‘‘STRS’’) of California; $18,609

from PERS of Ohio; $18,609 from STRS of Ohio; $20,118 from the Los Angeles City

Employees’ Retirement System; and $17,722 from the Maine State Retirement System. The average for the seven plans studied was $18,951. The Social Security benefit for a worker with the same background would be $8,617 for a single worker and

$12,926 for married workers. As salary levels rise, public plans do an even better

job for their workers in relation to Social Security.

Relatively low paid workers need a high return on their retirement savings in

order to be able to retire with dignity. It is small consolation that the percentage

return for low paid workers is relatively generous under Social Security, if the dollar

benefits are low. For this reason, low paid workers are among those most adamantly

opposed to trading all or a substantial part of their current retirement benefits for

Social Security coverage. For example, the School Employees’ Retirement System of

Ohio, with average member compensation of less than $15,000 annually, has been

a member of CPRS, and a strong opponent of mandatory coverage, for almost two

decades.

The Social Security Advisory Council argues at pages 19–20 of its report that

‘‘over the course of a lifetime, it is impossible to tell who will and who will not need

[Social Security] coverage.’’ The Council suggests that Social Security may be superior to state or local plans because of the inflation proof aspect of Social Security,

or because of the spousal benefit and other ancillary benefits, or because of Social

Security’s portability.

These claims are not supported by facts. It is not the case, for example, that Social Security benefits are guaranteed. At the time of the 1983 reform, Social Security benefits were reduced, most importantly, by increasing the normal retirement

age for Social Security on a phased-in basis. More recently, Social Security benefits

were made taxable for some recipients. Social Security’s companion program, Medicare, has also been the subject of many cost control measures. Current pressures
47

on the funding of Social Security may quite possibly result in further benefit reductions.

Social Security benefits are reduced for earnings of beneficiaries above specified levels until the beneficiaries reach age 70. Public plan benefits are generally not reduced for earnings. All of the plans surveyed in the 3rd Mill Report provide disability benefits, as do the vast majority of public plans. The disability benefit provided by Social Security

is hard to qualify for. (Generally a worker must be unable to perform any substantial gainful activity and the impairment must have lasted, or must be expected to

last, for at least 12 months.) Public plans are often more generous. The average disability benefit provided by the seven surveyed plans was $10,440 annually. All of the plans surveyed in the 3rd Mill Report provide pre-retirement survivor benefits, as do public plans generally. (Six of the seven surveyed plans also provide

post-retirement survivor benefits.) For children, Social Security’s survivor benefits

cease when the child turns 18. Many public plans provide benefits after that age

has been reached if the child is a full time student. The average survivor benefit

paid by the seven surveyed plans was $6,960 annually. Social Security provides an annual cost-of living adjustment for its beneficiaries and so do public plans. The seven surveyed plans all provided cost of living adjustments. During the period from 1988 to 1992 (when inflation was largely under control) these adjustments tended to average slightly over three percent per year. (3rd

Mill Report, page 16) Public plans, in effect, also provide very high pre-retirement

cost-of-living adjustments, because public plan retirement benefits are almost always based on the final or highest years of compensation (generally a three-year or

five-year period is used for the benefit computations). The greatest advantage of Social Security is supposed to be its portability. Social Security benefits are 100 percent portable after the 40 qualifying quarters have

been earned. This is particularly supposed to be an advantage for people who move

in and out of the work force. But Social Security benefits for people who have limited years of service may be low, even if those benefits are vested. No refunds are

paid by Social Security, even to workers who have less than 40 quarters. Most public plans provide rapid vesting. All but one of the seven surveyed plans in the 3rd

Mill study vest in five years, and the plan average for all seven plans was 5.71

years. Of course, public employees are always 100 percent vested in their own contributions and may roll those contributions over into an IRA if no better option is

available.

Most public plans afford considerable portability, even with regard to employer contributions. Many plans allow transfer of credits within the same state. Many

plans also have buy-in provisions whereby employees may purchase credit in a retirement system, often with proceeds from credits earned in another retirement system.

In the future it is highly likely that portability provisions will be even better.

There is currently pending before the Congress the Retirement Account Portability

Act of 1998, which appears to enjoy substantial support. This proposal will facilitate

roll overs between different kinds of defined contribution plans and will also make

it easier for workers to roll over amounts from their IRAs into employer plans.

It is also the case that he Social Security system is not well designed to meet the

needs of certain public employees, particularly fire and police. Because of the physical and emotional stress caused by their members’ work, fire and police pension

plans generally have generous disability benefits. Also fire fighters and police officers retire earlier than most other categories of worker, because physical conditioning is such an important part of job qualifications. In addition, fire fighters particularly have an average life expectancy which is significantly below that of the

general population (primarily because of fire fighter’s exposure to hazardous materials). The rate of return from Social Security for many fire and police workers

would be far below average.

Some studies have also indicated that Social Security may have a poor rate of return for minorities. Governments are generally strong proponents of equal opportunity and employ significant percentages of African American, Hispanic, and other

minority workers. These employees, like their non-minority colleagues, receive excellent retirement benefits. Many public plans provide several optional retirement

packages to their employees when they retire, while Social Security provides only

a life time annuity.

A January 1998 report by The Heritage Foundation entitled, ‘‘Social Security’s

Rate of Return,’’ indicates that a low-income worker (average annual earnings of

$12,862) born in 1975 can expect a life time rate of return of about negative one

percent, for a net loss of $13,377. A large part of this negative rate of return is attributable to the relatively short life expectancies of African-Americans. African48

American women generally have a positive rate of return, but nonetheless receive

far less than they would obtain from even very conservative investments of their

Social Security contributions. The report concludes that ‘‘Social Security taxes impede the inter-generational accumulation of capital among African-Americans....’’ Some people make the mistake of thinking that if mandatory Social Security cov- erage is applied on a new hires basis, then retirees and current plan participants

will not be hurt. This is not the case. Public plans provide most of their benefits

not from employer and employee contributions, but from investment earnings on

those contributions. For example, in the Ohio STRS plan, about two-thirds of all

plan benefits are paid from plan earnings. Applying Social Security taxes to new

hires will reduce the capital stream upon which the earnings are based. How fast

this would happen depends on factors which cannot now be determined. The most

important of these factors is the definition of a ‘‘new hire.’’ If the term is defined

conservatively, employee turnover would occur at a rate of about six to seven percent per year. If the COBRA definition of a ‘‘new hire’’ for Medicare purposes were

to be used (many people who change jobs even within the same government system

are considered to be new hires), the turnover rate would be a great deal higher, at

least during the initial years of the new system. Ohio STRS has concluded that mandatory coverage of new hires would result in the loss of the medical plan which STRS now provides to members and retirees. In

addition, STRS believes that it will be necessary to (1) eliminate death, disability

and survivor benefits; (2) reduce cost-of-living adjustments from 3 percent annually

to 1.6 percent; or (3) reduce retirement benefit accruals from 2.1 percent to 1.9 percent for current members, and from 1.47 percent to 1.32 percent for future members.

These changes are highly injurious and would fall most heavily on those already retired, who would not be in a position to easily adjust. Retirees live throughout the

nation. This means that mandatory coverage, even on a new hires basis, would impact people in every state, and would create additional burdens for state and local

governments throughout the nation, especially in those states which are home to

large numbers of retirees.

2. Mandatory Social Security Coverage of Newly Hired Public Workers Will Not Save

the Social Security System; Nor Will Mandatory Coverage Significantly Reduce the

System’s Problems.

The Social Security system is not in short-term trouble. Currently surpluses in the Social Security system are being used to fund operating deficits else where in

the federal budget, although there is now wide spread support for stopping this

practice.

The Advisory Council on Social Security expresses the actuarial deficit over the 75 year period ending in 2070 in terms of a percentage of payroll, i.e., 2.17 percent.

(Advisory Council Report, p. 11) In dollars, the present value of the difference between OASDI current assets, plus OASDI tax and interest for the 75 year period,

minus the present value of OASDI obligations is minus two trillion, five hundred

and twelve billion. (Advisory Council Report, p.198). In cash flow terms the Advisory

Council expects tax receipts to exceed outgo through 2014. Beginning in 2015, Social

Security will run a small cash deficit, but growing each year, so that the short fall

for the year 2030 will be $611 billion, and the cumulative short fall for the period

2015 through 2030 is estimated at $4,512,000,000,000 (about four and one half trillion dollars). (Advisory Council Report, p. 192) Estimates of the total long term

shortfall are in the range of $9 trillion. (There are, of course, other unfunded federal

liabilities, including Medicare and interest on the national debt, as well as other entitlements.) But the favorable economic trends which have occurred since this report

was prepared have almost certainly postponed the year when cash flow problems

will begin, and reduced somewhat the extent of the long term actuarial deficit.

In their April, 1998 report, the Social Security and Medicare Boards of Trustees

announced that the OASDI Trust Fund would remain viable through 2032 (an improvement of three years over previous projections). Also, the Trustees now project

that Social Security will continue to generate surpluses through 2013 (an improvement of one year). OASI, by itself, will remain viable for several additional years.

The Trustees indicated, at page seven of their report, that ‘‘key dates are 1 to 4

years later than shown in the 1997 report, due in large part to better actual and

expected economic performance.’’ In the several weeks since the publication of the

Trustees’ Report, the economic situation has improved still further. On May 5, 1998,

the Congressional Budget Office increased its surplus projection for fiscal years 1998

and 1999 from $28 billion, to a range of between $73 and $93 billion.

The Advisory Council estimates that in terms of a percentage of payroll, mandatory coverage of new hires, beginning January 1, 1998, would save about 0.22 percent, or about ten percent of the total actuarial deficit for the period 1995 through
49

2070. This is largely because cash from new hire taxes would come into the system

before the obligation to pay out benefits materialized. Of course, the obligation to

pay out benefits with respect to contributions made before 2070 would continue long

past that year. In order to determine how to repair Social Security, it is necessary to understand what is wrong now. Although there may be many problems with Social Security, by

far the most important is that the system has tried to operate on a pay-as-you-go

basis. This approach worked without great strain so long as national demographics

were favorable, and the pool of workers was growing much more rapidly than the

pool of retirees. This was the case for many decades, but it is no longer the case. Although there is a large Social Security Trust Fund, which will keep Social Secu- rity in actuarial balance through about 2032 (perhaps slightly longer), this trust

fund consists of money which the federal government has promised to repay to itself

in the future. When Social Security obligations begin to exceed tax revenues, there

is no box of money that the government can go to in order to make up the short

fall. The federal government can either print money, thereby fueling inflation, or

repay the Social Security Trust Fund out of an operating surplus in the rest of the

federal budget. There is a third choice, which is to invest the current Trust Fund surplus in assets which may be redeemed later. This has not been done in the past, but there

is no insurmountable obstacle to undertaking such a policy in the future. For example, current surpluses could be used to pay down the national debt (thereby making

it easier to create operating surpluses in the future), or by having the federal government invest in stocks and bonds, or by the creation of personal savings accounts

which, in the future, would reduce workers’ claims on the existing Social Security

system. There are problems and advantages in connection with all of these approaches. But until the federal government faces up to the fundamental difficulties

of the pay-as-you-go approach, Social Security’s funding problems can only be solved

on a pay-as-you-go basis, which means, for years in which outgo exceeds revenues,

that benefits must be cut or taxes must be increased.

Many ideas have been advanced in connection with funding Social Security. Re- ducing the cost-of-living adjustment (‘‘COLA’’) for Social Security saves very large

amounts of money. In December of 1996, The Boskin Commission reported to Congress its conclusion that the then current method of calculating the Consumer Price

Index (‘‘CPI’’) over stated the rate of inflation by 1.1%. This conclusion was highly

controversial, but almost everyone agreed that CPI was overstated by some factor.

On April 16, 1998, The Bureau of Labor Statistics announced the last in a series

of reductions to the CPI. These final changes will take effect on January 1, 1999,

and, together with reductions that have already been made, will total .8 of one percent. (It is hard to determine whether the Social Security Trustees took any account

of these CPI reductions in their April, 1998 Report, but it seems certain that they

took no account of the more recent changes.)

Small reductions in CPI have enormous effects. The Advisory Council estimated

that reducing CPI by 0.5 percent, beginning in 1998, would save 0.72 percent of payroll, or about a third of the entire actuarial shortfall. Even if no changes in CPI

are legislated, the long term picture is already considerably brighter than reported

by the Advisory Council a year ago.

Gradually increasing the normal retirement age also results in substantial savings, even if the adjustments are relatively minor. Currently the normal retirement

age is scheduled to increase very gradually beginning in the year 2000. By 2027,

the normal retirement age will be 67. If the normal retirement age were to be raised

by two months a year, beginning in 2000, capping at age 68 in 2017, the Advisory

Council estimates that this would save 0.49 percent of payroll.

Polls show that the only Social Security reform proposal which enjoys 50 percent

or more popular support is the means testing of benefits. Th Concord Coalition suggested phasing out benefits for those having income over $40,000 per year, capping

the reduction at 85 percent of benefits. According to the Advisory Council, this

would save 1.65 percent of payroll.

Currently Social Security benefits are free of tax for most recipients. Other annuities are 100 percent taxable after the beneficiary has recovered his or her basis

(after-tax contributions) in the annuity. Taxing Social Security benefits on the same

basis as other income would not be popular, but it is difficult to argue that it would

not be fair.

Eliminating the wage base cap would also raise very large amounts of money,

even though relatively few people would be effected. This has already been done

with respect to Medicare.

Mandatory Social Security coverage of new hires will not come close to solving Social Security’s problems. Even if the Advisory Council projection of 0.22 percent of
50

payroll is correct, it was based on the assumption that mandatory coverage would

be imposed January 1, 1998. The earliest legislation is expected would be next year,

and there is no way state and local governments could adjust to mandatory coverage

by the year 2000, based upon legislation enacted in 1999. Many of those who have

looked at the problem believe that it would take state and local governments four

years to adjust to the legal, financial, and administrative problems connected with

mandatory coverage. Moreover, mandatory coverage would be the subject of Tenth

Amendment litigation, possibly causing more delay, and making it uncertain whether revenue from mandatory coverage would ever be realized.

In addition, there would be offsets. Some employee contributions to public pension

plans are tax deductible, but all benefits are taxable (after the worker has recovered

his or her basis). Employee contributions to Social Security are not tax deductible,

but all benefits are tax free to most recipients. Moreover, state and local governments would have to raise taxes to pay their share of OASDI taxes (and perhaps

some or all of the employees’ share as well) and many of these new taxes would

be deductible for federal income tax purposes.

Eventually, of course, public employees would draw out benefits on the same basis

as everyone else. If mandatory coverage of new hires were to be imposed relatively

soon, benefits would come do for newly covered employees would begin to come due

around 2030, exactly the time when Social Security is predicted to be in its greatest

crisis, at least on an actuarial basis.

Worst of all, of course, would be for Congress to cover new hires, but fail to save

the tax revenues. That policy is precisely what has created the difficulties that we

face today.

On the other hand, if the government does save the surpluses in the Social Security Trust, and if the economy continues to prosper, these factors, together with the

CPI adjustments which have already been announced. will make it easier to face

whatever is left of the problem. It would be worth while to examine these developments before taking more radical action.

Of course, Congress may decide to modify the current structure of Social Security

not merely to solve the funding problem, but to provide better retirement benefits

for participants. Such action (usually described as privatization) might increase

costs for Social Security participants in order to provide the increase in benefits. But

there is no reason why public employees should pay these costs; they are already

funding their own system.

3. Mandatory Social Security Coverage Will Harm Existing Public Plan Participants

and Retirees and This Proposal Is Not Fair.

Some people argue that mandatory Social Security coverage should be imposed on

grounds of fairness. The Advisory Council argues, at page 19 of its Report, ‘‘all

Americans have an obligation to participate [in Social Security], since an effective

Social Security program helps to reduce public costs for relief and assistance, which,

in turn, means lower general taxes.’’ Other people have an instinctive reaction that

if Social Security is good enough for everyone else, why shouldn’t public employees

participate. It is also argued that, at least in percentage terms, Social Security confers a high benefit on very low paid workers, and that in the future most other wage

earners will have to subsidize this benefit. (Until recently, almost all participants

had a very positive return from Social Security in dollar terms.)

Public retirement plans also reduce public costs for relief and assistance in precisely the same way that Social Security achieves that effect. Employees covered by

public plans are not candidates for welfare, SSI, or other forms of public assistance.

Public plans provide higher dollar benefits in proportion to salary and years of service than does Social Security. Low income workers depending entirely on Social Security for their retirement income are virtually certain to need public assistance.

Moreover, whereas the Social Security funding problem has created substantial

exposure to the federal government in terms of future needs for revenue, there is

no exposure to the federal government, or to the taxpayers who support that government, in connection with public plans, because public plans are not insured by the

Pension Benefit Guaranty Corporation.

There is some evidence that the Advisory Council was not that concerned with

questions of fairness. In an April, 1997, speech before the National Conference of

Public Employee Retirement Systems, Edith Fierst, a member of the Council, said

of the mandatory coverage proposal, ‘‘We did it primarily because it would be good

for Social Security, not because it would be good for the employees. Our interest was

that if people came into Social Security and began to pay the Social Security tax,

that helps the Social Security’s trust fund, and they won’t start to draw benefits

based on those contributions for some years.’’
51

Whether or not public employees should be in Social Security because everyone

else is depends to a considerable extent on why the nation is having a serious conversation about Social Security. If we were writing on a clean slate, with full knowledge of the problems Social Security faces, and the alternatives to Social Security

which could provide greater retirement security for the vast majority of beneficiaries, it is highly likely that the nation would follow a model that is much closer

to the public plan model, than to Social Security as it exists today. To the extent

that Congress determines to establish private retirement accounts for Americans, to

replace all or part of the current Social Security system, it makes no sense whatever

to move millions of public employees in the opposite direction. This can only complicate transition problems, and raise the ultimate cost of moving toward a

privatized system.

Public employees did not cause the current funding problems for Social Security,

nor did non-covered public employees benefit during the many decades when almost

every participant came out of the Social Security system a winner. Social Security

surpluses have helped to disguise deficits in the general operating budget of the federal government, primarily during the last ten years, and public employees have experienced lower federal income taxes (or lower federal debt owed to third parties)

or exactly the same basis as everyone else, including Social Security participants

and beneficiaries, but no more so. If it is decided to repay the Social Security Trust

Fund in the future out of general fund surpluses, public employees will pay their

share of those surpluses through federal income taxes and other federal taxes.

Throughout most of its history, and even today, Social Security was an arrangement where everyone won. For example, low-wage single workers who turned 65 in

1960 paid life-time taxes of $4,000, [employer and employee] and received life-time

benefits of $30,100, for a positive return of $26,100 [in 1993 constant dollars]

(Steuerle and Bakija, ‘‘Retooling Social Security for the 21st Century,’’ The Social

Security Bulletin, 1997, #2, at page 47, the ‘‘Bulletin Report’’.) High wage earners

received a more positive return measured in dollars, although low-wage workers received a better return measured as a percentage of life-time taxes to benefits. But

members of every group (low, average. and high earners, male and female, single

and married, one-earner and two-earner couples) that turned age 65 in 1960, on average, came out big winners. High wage single men (the least favored category) received life-time benefits equal to almost four times life-time taxes. Factors such as

sex (women did better than men) and marital status (married one-earner couples

received life-time benefits equal to eight-and-a-half times life-time contributions)

were very important in determining how good a deal you received. Social Security

was not a re-distributional system from high-earner to low-earner. Everyone won;

high-earners won the most in dollars; women and married couples won the most in

percentage terms. (For purposes of these calculations, high-earners are assumed to

receive at least the maximum wage subject to Social Security tax ($65,400 in 1997);

average-earners are assumed to receive the Social Security Administration’s measure of the average national wage ($26,700 in 1997) each year from age 21 to age

65, and low-wage earners are assumed to receive 45 percent of this amount (about

$12,000)).

This pattern continued for workers who reached age 65 in 1980. Positive returns

for 1980 retirees were actually greater than those received by their 1960 counterparts measured in dollars; measured as a percentage of life-time contributions to

life-time taxes, however, the 1960 cohort did much better. But every category of

worker reaching age 65 in 1980 had a substantially positive rate of return.

For the most part, this pattern also continues for those who reached age 65 in

1995. For the first time, however, there are projected to be losers. Average-income

and high-income single males who retire in 1995 will, on average, receive less in

benefits than they and their employers paid in taxes. All other categories of workers, including high-earner categories, will receive positive rates of return, though

not as high, measured either in dollars or percentages, as they would have received

in the past.

For those reaching age 65 in 2010, most single male workers will have a negative

rate of return (single male low-earners will essentially break even) and single

women, other than low-wage single women, will also lose. Married couples are projected to have positive rates of return for this age category, with the exception of

high-wage two-earner, couples, who will experience substantial losses.

For those reaching age 65 in 2030, exactly the same categories are projected to

win and lose, although losses will be greater, measured in dollars, and positive rates

of return will be low for most of the categories of winners.

Social Security has never been a system of income transfer from relatively rich

to relatively poor, nor will it be such a system in the future. To some extent, within
52

members of the same generation, Social Security will become a transfer system from

single to married, especially single-earner married.

Nor does Social Security pay a benefit that low-wage people can live on. The average low-earner retiring at age 65 in January 1996 would receive a monthly benefit

of $537. (Fast Facts and Figures about Social Security, The Social Security Administration: 1996, page 16) Any additional support that is necessary in paid out of the

general fund, in the form of SSI benefits. Income taxes of public employees support

the general fund on the basis as everyone else.

The average annual salary for a full time state or local government employee, nation wide, in October 1995, was $33,464. (Statistical Abstract of the United States:

1997: page 326) For all full time workers in 1995, the average annual salary was

$40,367 for men, and $26,547 for women. (Statistical Abstract, page 474) (The average of these two amounts is $33,457.) Public employees are squarely in the midrange of all Americans in terms of their compensation. If public employees were to

be brought within the system, there is no way that they would ‘‘subsidize’’ the benefits for any other group.

For most public employees, their rights in their retirement plan represent a substantial portion of their life time savings. In 1989, the median American household

had a net worth of approximately $42,000, much of this tied up in the equity in

their home. Forty-two thousand dollars is not a large cushion. For middle income

public employees, the security provided by their public retirement plan is all that

makes possible a retirement with dignity.

But it will not be possible for public plans to maintain their current benefit structure, if mandatory coverage is imposed, even for existing plan participants and existing retirees. As discussed above, page 5, Ohio STRS has estimated that mandatory coverage on a new hires basis would require the elimination of health care benefits, and would also require the reduction or elimination of cost-of-living adjustments, or normal retirement benefits, or the elimination of ancillary benefits for

plan participants. (These estimates assume a relatively restrictive definition of ‘‘new

hire;’’ If the COBRA definition were used, the situation would be much worse.) The

average Ohio STRS retiree lives 25 years; three years of retirement are paid for by

employee contributions; six years are paid for by employer contributions; sixteen

years are paid for by earnings on investments.

Other systems report similar problems. For example, PERA of Colorado projects

an end to plan improvements for current participants and retirees, and new hires

would receive a combined Social Security and PERA benefit that would be slightly

less than half of the current PERA benefit.

At page 20 of its report, the Advisory Council puts forth, as one argument for

mandatory coverage, that a high proportion of state and local government workers

will receive Social Security benefits because of non-government work which they

perform, or through their spouses. A Council of Social Security experts should very

well know, but fail to acknowledge, that state and local government workers do not

receive any unfair advantage from remaining outside of the Social Security system

for most, or part, of their career. In 1983, as part of the overall Social Security reforms enacted in that year, Congress adopted an anti-windfall rule, which has the

general effect of reducing any Social Security benefit that the employee might otherwise be entitled to in accordance with a formula based on the period of time during

which the employee was not covered by Social Security. This adjustment is made

because Social Security is bottom weighted—that is, Social Security tends to provide

relatively high benefits for workers who have relatively low career average earnings.

Another rule which is applicable to non-covered government workers, known as the

spousal offset rule, reduces the spousal benefit which would otherwise be payable

to these workers.

4. Mandatory Social Security Coverage Has the Same Adverse Effects As Do

Unfunded Mandates.

In recent years Congress has rightly been concerned about the effects on state and

local governments of imposing costly federal requirements on those governments,

without providing the necessary money. The Unfunded Mandate Reform Act of 1995

passed over-whelmingly in both the House and the Senate.

The cost mandatory coverage on a new hires basis would be over $100 million in

the first year for Ohio, and almost $200 million for California. When fully phased

in, California’s annual cost would be over $2 billion, and states such as Texas, Colorado, Illinois, Massachusetts, and Louisiana would face annual costs in the hundreds of millions of dollars. Even states like Washington, Florida, Georgia, Connecticut, Kentucky, Michigan, and Minnesota, which are not commonly thought of as

non-Social Security states, would face costs in excess of $100 million per year.
53

The burden caused by these extra costs would fall most heavily on those who can

afford it least, such as large cities which have substantial low-income populations.

In a March 15, 1998 article, The Washington Post discussed a report by the Milton

S. Eisenhower Foundation. (See, ‘‘Rejuvenation of Cities: Was It Just Cosmetics?,’’

page A3) The report concluded that ‘‘Most adults in many inner-city neighborhoods

are not working in a typical week.’’ Two-third of children fail to achieve basic reading levels. Child poverty. segregation, and imprisonment have all risen.

Buzz Bissinger, author of the recent book, ‘‘A Prayer for the City,’’ reaches similar

conclusions when he discusses the energetic reform efforts of Philadelphia Mayor Ed

Rendell, which he views largely as a failure. Bissinger concludes that wide-spread

improvement may be possible for New York, because immigration keeps the population up, and because that city is awash in money from Wall Street. But many

other cities, like Atlanta, Cleveland, Detroit, Miami, and Newark, among other,

have no such advantages, and are far less likely to be able to re-define themselves

in ways that benefit the poorer neighborhoods.

On March 12, 1997, bi-partisan representatives of the National Governors’ Association testified before a joint session of the House and Senate Budget Committees,

urging Congress not to enact federal tax cuts which would force state or local tax

hikes. Mandatory Social Security coverage would be worse, a federal tax hike which

would also force state and local tax hikes.

STATEMENT OF RICHARD E. SCHUMACHER, EXECUTIVE

Chairman BUNNING. Mr. Schumacher.

f

DIRECTOR, PUBLIC EMPLOYEES RETIREMENT SYSTEM OF

OHIO

Mr. SCHUMACHER. Thank you, Mr. Chairman, Members of the

Subcommittee. I appreciate the opportunity to give testimony this

morning.

The potential extension of mandatory Social Security coverage to

all or any portion of Ohio’s public employees is a serious concern

to the Public Employees’ Retirement System, PERS, of Ohio. PERS

was established by the Ohio legislature in 1933. The retirement

system is a multiemployer plan covering 3,700 public employers

and 638,000 members and benefit recipients. We currently have

over $47 billion in assets.

PERS provides retirement, disability, and survivor benefits, also,

health care coverage. Our program is a defined benefit plan and is

prefunded through employee and employer contributions. The

major source of significant revenue is investment income. At our

inception, the legislature established a social contract with all of

Ohio’s public employees. Fiscally sound prefunding was one of the

important covenants. The funds are to be available when retirement is requested. The 1994–96 Advisory Council of Social Security

stated, and I quote, ‘‘In the past, efforts to deal with Social Security’s financial difficulties have generally featured cutting benefits

and raising tax rates on a pay-as-you-go basis. Further, all three

plans favored by the Council endorse the practice of partial, advanced funding.’’ As the baby boomer generation begins to retire,

heavy pressure will be exerted on pay-as-you-go plans, and the results could be disastrous.

The major difference between a prefunded plan and a pay-as-yougo plan is investment income. Over 80 percent of the benefits paid

by PERS come from investment earnings. Mandating public employee new hires into Social Security would severely affect State

and local pension systems. Focusing on new hires alone creates the
54

illusion that no one else would be affected. That is a false assumption. All systems in Ohio would be faced over time with cutting

benefits to current, active members and retirees. Boards could be

faced with harmful choices to reduce or eliminate health care. The

fiscal impacts on this proposal on State and local retirement plans

would be significant. Costs would be shifted from the Federal Government to State and local governments. Remember, over 80 percent of our benefit disbursements are paid by investment income.

The loss of contributions results in fewer funds to invest. This

means less investment earnings, longer funding periods, and higher contribution rates.

Another tragic consequence is the unfunded mandate that would

be imposed on State and local governments. The important legislation on unfunded mandates that came from the House Ways and

Means Committee in 1995 is extremely relevant today on the issue

of mandatory coverage. State and local government officials appreciated your actions then and urge that the same commitment continue today. If our contribution rate was decreased by 12.4 percent

for Social Security, we would need an additional 6- to 7-percent increase in contributions to provide a comparable level of benefits.

Who is going to pay the increased cost? It will be shared by workers and their employers. Workers will get less take home pay, and

employer costs will increase. Taxpayers will pay more.

Since 1935, various changes have been enacted to mandate large

sectors of employees into Social Security, generally, driven by the

need for additional cash flow to pay benefits. Each time, the basis

for the change was to, supposedly, strengthen the program. Each

time, it has failed. Merely including more participants does not improve the program’s long-term stability. It may for a couple of

years, but as retirements increase, greater and greater resources

are needed.

It is reported that the unfunded liability for Social Security is in

excess of $9 trillion. Each revision of Social Security has focused

on raising additional revenue and or raising the retirement age.

Perhaps, this time, it is prudent to focus on liabilities, but the legislative fix looking to increase short-term cash flow, requiring

newly hired public employees to be under the Social Security Program would cause a substantial increase in long-term Social Security liabilities and in taxpayers’ liabilities in the State of Ohio as

well as many other States and their subdivisions.

It seems unwise to financially and administratively disrupt our

plans for the purpose under consideration by this Subcommittee.

Indeed, requiring newly hired public workers and their employers

to participate in Social Security would constitute a tax increase on

millions of Americans.

Many public plans financed by taxpayers and public workers are

operating in a sound and prudent fiscal manner. Rather than imposing mandatory Social Security, our successes should be studied

for ideas to use in restructuring Social Security. Thank you.

[The prepared statement follows:]
55

Statement of Richard E. Schumacher, Executive Director, Public

Employees Retirement System of Ohio

The potential extension of mandatory Social Security coverage to all or any portion of Ohio’s public employees is a serious concern to Public Employees Retirement

System of Ohio (PERS).

PERS was established by the Ohio Legislature in 1933. Benefits were first paid

January 1938. The Retirement System is a multiemployer plan covering 3,700 public employers (includes all departments of state and all levels of local government),

and 638,000 members and benefit recipients. PERS provides retirement, disability

and survivor benefits, and health care coverage. Our program is a defined benefit

plan and is pre-funded through employee and employer contributions. The major

source of significant revenue is investment income.

At our inception, the legislature established a social contract with all of Ohio’s

public employees. Based on that contract, steps were taken to secure future benefits.

Fiscally sound pre-funding was one of the important covenants. The funds are collected over a person’s working career to be available when retirement is requested.

The 1994–1996 Advisory Council of Social Security, in its 1997 Report, stated:

‘‘In the past, efforts to deal with Social Security’s financial difficulties have generally featured cutting benefits and raising tax rates on a pay-as-you-go basis....’’

‘‘Historically, Social Security has been financed on a current pay-as-you-go basis....

All three plans favored by the Council endorse the practice of partial advance funding....’’

As the baby boomer generation begins to retire, heavy pressure will be exerted

on pay-as-you-go plans and the result could be disastrous. All plans have already

experienced a large drop in the ratio of active workers to retirees to fund retirement

benefits.

The major difference between a pre-funded plan and a pay-as-you-go plan is investment income. Over 80% of the benefits paid by PERS come from investment

earnings. Currently our system collects about 22% of covered payroll in employee

and employer contributions.

Mandating public employee new hires into Social Security would severely affect

state and local pension plans. Focusing on new hires alone, creates the illusion that

no one else would be affected; that is a false assumption. All systems in Ohio would

be faced over time with cutting benefits to current active members and retirees.

Boards could be faced with harmful choices to reduce or eliminate health care. The

fiscal impact of this proposal on state and local retirement plans would be significant; costs would be shifted from the federal government to state and local governments. Reduction of our contributions would severely restrict investment income

sources. Remember, over 80% of our benefit disbursements are paid by investment

income. The loss of contributions results in fewer funds to invest. This means less

investment earnings, longer funding periods, and higher contribution rates.

Another tragic consequence is the unfunded mandate that would be imposed on

state and local governments. The important legislation on unfunded mandates that

came from the House Ways & Means Committee in 1995 is extremely relevant today

on the issue of mandatory coverage. State and local government officials appreciated

your actions then and urge that the same commitment continue today.

If our contribution rate was decreased by the 12.4% to fund Social Security, we

would need an additional 6–7% increase of covered payroll to provide comparable

benefits. A survey indicates a higher average total cost for Social Security integrated

plans at 26% versus non Social Security covered plans of 22%. Who is going to pay

for the increased cost? It will be shared by workers and their employers. Workers

will get less take home pay and employers’ costs will increase—taxpayers will pay

more.

Since 1935, various changes have been enacted to mandate large sectors of employees into Social Security, generally driven by the need for additional cash flow

to pay benefits. Each time the basis for change was to supposedly strengthen the

program. Each time it has failed. Merely including more participants does not improve the program’s long term stability. It may for a couple of years, but as retirements increase, greater and greater resources are needed.

It is reported that the unfunded liability for Social Security is in excess of $9 trillion. Each revision of Social Security has focused on raising additional revenue and/

or raising the retirement age. Perhaps this time it is prudent to focus on the liabilities. The 638,000 members and beneficiaries of our system do not cause liabilities

for Social Security. But the legislative fix—looking to increase the short term cash

flow—requiring newly hired public employees to be in the Social Security program—

would cause a substantial increase in long term Social Security liabilities and in
56

taxpayer liabilities in the state of Ohio as well as many other states and their subdivisions.

It seems unwise to financially and administratively disrupt these plans for the

purpose under consideration by the Subcommittee. Indeed, requiring newly hired

public workers and their employers to participate in Social Security would constitute a tax increase on millions of Americans. Many public plans financed by taxpayers and public workers are operating in a sound and prudent fiscal manner.

Rather than imposing mandatory Social Security—a new tax on America—our successes should be studied for ideas to use in restructuring Social Security.

Chairman BUNNING. Sergeant Pfeifer.

f

STATEMENT OF MARTY PFEIFER, SERGEANT, WASHINGTON

METROPOLITAN POLICE DEPARTMENT; AND DISTRICT OF

COLUMBIA TRUSTEE, NATIONAL FRATERNAL ORDER OF

POLICE

Mr. PFEIFER. Good morning, Mr. Chairman, distinguished Members of the House Subcommittee on Social Security. My name is

Sergeant Marty Pfeifer, and I’m a 26-year veteran with the Metropolitan Police Department in Washington, DC and currently serve

as the elected Trustee from the District of Columbia on the National Board of the Fraternal Order of Police which is the largest

organization of law enforcement professionals in the Nation representing over 272,000 members.

In addition, in 1995, I served as chairman of the District of Columbia Retirement Board which provides retirement benefits for

police officers, fire fighters, teachers, and judges in the District of

Columbia, none of whom participate in Social Security. Since 1996,

I have chaired the Investment Committee of the board which now

manages approximately $5 billion in assets.

I am here this morning to discuss fairness; fairness to those officers, public safety officials, and other public employees who have

chosen not to contribute to Social Security. We understand there

are proposals being considered that would require the inclusion of

all public sector employees in the Social Security system.

The Fraternal Order of Police vehemently opposes any Social Security reform measures that include mandatory Social Security

participation. Employees in nine Social Security covered jurisdictions represent a sizeable portion of State and local government

work forces. According to OPPOSE, over 3.9 million full-time employees are affected. Social Security coverage varies considerably,

of course, by employee group, but it should be noted that according

to the Public Pension Coordinating Council, 76 percent of public

safety personnel do not participate in Social Security.

If the Federal Government imposes mandatory Social Security

participation, even if only restricted to new hires, it not only comprises severely the financial solvency of existing pension and retirement plans, the cost to State, localities, and the individual employees would be immense. Both the employee and his or her employer

would each be required to pay an additional 6.2 percent of payroll

into Social Security. This amount would be in addition to the contribution already paid by the employer and the employee into the

State or local retirement system.
57

I cannot overestimate the damage that would be done to State

and local governments and families of the employees if the Federal

Government forces them to pay a new tax of 12.4 percent. Collected

data shows that the first year cost to employers, local and State

governments, of covering newly hired employees would be over

$771 million. The newly hired employees would be responsible for

an equal amount making the cost in the first year of over $1.5 billion. The total annual cost to employers for covering employees not

currently covered under Social Security would be about $8.5 billion.

When the employee share is counted, that amount rises to over $17

billion per year.

For example, Mr. Chairman, of the over 240,000 State and local

employees in the State of Kentucky, more than 61,000, many of

whom are law enforcement officers do not currently participate in

Social Security. The annual cost of mandating participation is approximately $80.9 million a year.

Federally mandated participation in Social Security is not a

minor issue. Such a mandate would adversely affect millions of employees and impose billions of dollars in additional cost to State

and local governments who are trying to stretch every dollar. Many

retirement and pension plans for public sector employees have been

specifically designed and refined on the assumption that local governments would not be required to participate in Social Security.

This was a reasonable assumption since local governments have

never been required to pay into the system adopted in 1935 for

those who chose to participate.

An important consideration for law enforcement and other public

safety officers is a much earlier retirement age than other more

typical government employees. Local and State retirement plans

take this early retirement into consideration; Social Security does

not. As this Subcommittee is aware, the Advisory Council on Social

Security recommended that extended to all newly hired State and

local government employees as a way to raise 10 percent of the

money needed to rebalance the program. The Council’s report failed

to address the impact that mandatory participation would have on

the employers and the employees at the State and local levels of

government.

The Fraternal Order of Police understands that reforming Social

Security is necessary and certain steps need to be taken if we are

to avoid the expected shortfall in 2030. Sometimes these proposals

sound good on the surface but after careful consideration are revealed to be unsound policies with damaging consequences. We believe that mandating the inclusion of all public sector employees

into the Social Security system falls into this category.

This is about fairness, Mr. Chairman. It is unfair to change the

rules 63 years later because the Federal Government is looking for

an easy way to fund Social Security without making hard choices.

The State and local governments who chose not to participate in

Social Security did not create this problem nor did the nearly 4

million employees who do not pay into the system, but all of them

would be paying a hefty price for their previous decision to create

their own retirement plans. Destroying the retirement programs of

these hard working Americans and raiding the budgets of State
58

and local governments should not be a part of the Federal Governments solution.

Mr. Chairman, I want to thank you and the Members of the Sub- committee for the opportunity to appear here today. I’d be pleased

to answer any questions. [The prepared statement follows:]

Statement of Marty Pfeifer, Sergeant, Washington Metropolitan Police De- partment; and District of Columbia Trustee, National Fraternal Order of

Police

Good morning, Mr. Chairman and distinguished Members of the House Sub- committee on Social Security. My name is Sergeant Marty Pfeifer and I am a 26

year veteran with the Washington Metropolitan Police Department and currently

serve as the elected Trustee from the District of Columbia on the National Board

of the Fraternal Order of Police, which is the largest organization of law enforcement professionals in the nation, representing over 272,000 officers.

In addition, in 1995 I served as Chairman of the District of Columbia Retirement

Board, which provides retirement benefits for law enforcement officers, teachers, fire

fighters and judges in the District of Columbia—none of whom participate in the

Social Security system. Since 1996, I have chaired the Investment Committee of

that Board, managing approximately $5 billion in assets.

I am here this morning to discuss fairness. Fairness to those officers, public safety

officials and other public employees who have chosen not to contribute into the Social Security system. We understand that there are proposals being considered

which would require the inclusion of all public sector employees in the Social Security system.

The Fraternal Order of Police vehemently opposes any Social Security reform

measures that include mandatory Social Security participation.

Employees in non-Social Security-covered jurisdictions represent a sizable portion

of the State and local government workforce. According to OPPOSE, an organization

opposed to mandatory Social Security coverage with which the F.O.P. works on this

issue, over 3.9 million full-time employees are affected.

Social Security coverage varies considerably, of course, by employee group, but it

should be noted that, according to the Public Pension Coordinating Council (PPCC),

seventy-six percent (76%) of public safety personnel do not participate in Social Security.

If the Federal government imposes mandatory Social Security participation, even

if only restricted to new hires, it not only compromises severely the financial solvency of extent pension and retirement plans, the cost to States, localities, and the

individual employees would be immense. Both the employer and his or her employer

would each be required to pay 6.2% of payroll into the Social Security trust fund.

This amount would be in addition to the contribution already paid by the employer

and the employee into the State or local retirement system.

I cannot overestimate the damage that would be done to State and local governments and the families of the employees if the Federal government forces them to

pay a new tax of 12.4%.

Collected data shows that the first year cost to employers—local and State governments—of covering newly hired employees would be over $771 million. The newly

hired employees would be responsible for an equal amount, making the cost of the

first year coverage over $1.5 billion. The total annual cost to employers for covering

employees not currently covered would is $8.5 billion. When the employees’ share

is counted, that amount rises to over $17 billion per year.

For example, Mr. Chairman, of the over 240,000 State and local employees in the

State of Kentucky, more than 61,000—many of whom are law enforcement officers—

do not currently participate in Social Security. The annual cost of mandating participation is approximately $80.9 million a year.

Federally mandated participation in Social Security is not a minor issue. Such a

mandate would adversely affect millions of employees and impose billions of dollars

in additional costs to the State and local governments who are trying to stretch

every needed dollar at the local level.

Many retirement and pension plans for the public sector employee have been specifically designed and refined on the assumption that local governments would not

be required to participate in the Social Security system. This was a reasonable assumption since local governments have never been required to pay into the system—adopted in 1935 for those who chose to participate. An important consideration for law enforcement and other public safety officers is an much earlier retire59

ment age than other, more typical, government employees. Local and State retirement plans take this early retirement into consideration. Social Security does not.

In the event mandatory participation is imposed, how are public safety officers supposed to live between the time that they retire and the age at which they qualify

to collect Social Security?

As this Subcommittee is doubtlessly aware, the Advisory Council on Social Security recommended that Social Security be extended to all newly hired State and

local government employees as a way to raise ten percent (10%) of the money needed to rebalance the program. The Council’s report failed to address the impact that

mandatory participation would have on employers and employees at the State an

local level of government.

The Fraternal Order of Police understands that reforms in the Social Security system are necessary and that certain steps need to be taken if we are to avoid the

expected budget shortfall in 2030. Sometimes, proposals sound good on the surface,

but after examiniation are revealed to be unsound policy with damaging consequences. We believe that mandating the inclusion of all public sector employees

falls into this category.

This is about fairness, Mr. Chairman. It is unfair to change the rules sixty-three

years later because the Federal government is looking for an easy ways to earn revenue and ‘‘save’’ Social Security without making hard choices. The State and local

governments who chose not to participate in Social Security did not create this problem, nor did the nearly four million employees who do not pay into the system. But

all of them would be paying a hefty price for their previous decision to create their

own retirement plans. Destroying the retirement programs of these hard-working

Americans and looting the budgets of State and local governments should not be

part of the Federal government’s solution.

Mr. Chairman, I want to thank you and the members of this distinguished Subcommittee for the opportunity to appear before you today. I would be pleased to answer any questions.

Chairman B

Mr. Lussier.

UNNING. Thank you.

f

STATEMENT OF THOMAS R. LUSSIER, EXECUTIVE DIRECTOR,

MASSACHUSETTS TEACHERS’ RETIREMENT BOARD

Mr. LUSSIER. Mr. Chairman, Members of the Subcommittee, my

name is Tom Lussier. I’m the executive director of the Massachusetts Teachers’ Retirement System. We administer retirement, survivor, and disability benefits for nearly 110,000 active, inactive,

and retired public school teachers and administrators. We enrolled

our first member on July 1, 1914.

It is our opinion that expanding Social Security taxes will result

in higher costs to all Massachusetts taxpayers; reduced benefits for

all future Massachusetts teachers; unintended reductions in critical

public services, and the destruction of our current retirement systems. Worse, it is our belief that this enormous price, paid by our

taxpayers and public servants, will produce no appreciable, positive

result on behalf of the Social Security Program.

The problems that bring us together for this hearing are not dissimilar from those that have been successfully confronted by public

plans throughout the country. In 1987, Massachusetts ultimately

faced the reality that a pay-as-you-go financing program was irresponsible and threatened the stability of our State budget and the

retirement security of our dedicated public employees. Over a period of time, we have adopted and funded actuarially sound funding schedules, and we’ve repealed regressive legalist restrictions on

the investment of system assets. As a result, the MTRS has seen

its original 40-year funding schedule reduced by 10 years. Our sys60

tem which in 1987 was less than 40 percent funded, by some estimates, is currently more than 85-percent funded.

In our view, it is totally unreasonable to assume that Massachusetts or any other State which finds itself in a similar situation will

be able to maintain a comprehensive benefit program and absorb

the additional employer costs resulting from forced Social Security

coverage. The actuary for the Massachusetts Public Employer Retirement Administration Commission has reported that the Social

Security benefit is 43 to 75 percent below the Massachusetts superannuation retirement benefit depending on salary. Normal cost

payments by employers in Massachusetts are currently trending

downward. In fact, for employees hired after July 1, 1996, these

costs range between 2 and 4 percent of salary. The present Social

Security employer rate is 6.2 percent. Thus, for new employees

only, Massachusetts government employers would be required to

make an additional payment under Social Security of between 2.2

and 4.2 percent of payroll just to pay their Social Security tax.

Inevitably, the passage of mandatory Social Security coverage

will result in the repeal of current retirement benefits. Although

there is a temptation to assume that a supplemental retirement

program would be developed to bridge the gap between the level of

Social Security benefits and those currently provided by our system, it is pure speculation as to what form such a program might

take.

Some have suggested that imposing mandatory Social Security

coverage on all State and local government employees is a simple

matter of fairness. Since fairness is a difficult quality to evaluate,

consider these questions: Massachusetts has provided retirement

benefits for its public school teachers since 1914. Is it fair to undermine that commitment in order to ever so slightly improve the

short-term cash flow of a pay-as-you-go Social Security system that

will provide our public employees reduced benefits at higher costs?

The Massachusetts legislature has crafted a public retirement program that responds to the unique characteristics of vastly different

jobs, risks, and responsibilities. Is it fair to force the abandonment

of such a program in order to fund a less secure one-size-fits-all

program? The implementation of mandatory Social Security will increase the cost of providing retirement benefits for the Commonwealth and most of its cities and towns. Is it fair for the Congress

to impose such a tax on our State and municipalities? The Unfunded Mandate Reform Act of 1995 received overwhelming support throughout the Congress. Is it fair to be against unfunded

Federal mandates except for this one?

In closing, please accept my most sincere best wishes in your endeavor to strengthen and prudently fund the Social Security Program. Over the years, many of us who have opposed mandatory Social Security have been incorrectly seen as anti-Social Security. The

Social Security Program is an American treasure, and it must be

preserved and strengthened. For nearly 20 years, my mother’s

monthly Social Security check was her most significant means of

support. Her Social Security benefit allowed her as it does millions

of other Americans the opportunity to live independently and with

dignity. We owe it to her and to countless people like her to preserve and to protect the Social Security system. However, I would
61

respectfully suggest to you that it would be wrong to honor that

commitment by causing Massachusetts and other States to break

their commitments made to their members and to their public retirement systems. Thank you, Mr. Chairman. [The prepared statement follows:]

Statement of Thomas R. Lussier, Executive Director, Massachusetts

Teachers’ Retirement Board

My name is Thomas R. Lussier. I am the Executive Director of the Massachusetts Teachers’ Retirement Board (MTRB), a position that I have held since November of

1984. I served as the First Deputy Commissioner of the Massachusetts Division of

Public Employee Retirement Administration during 1983 and 1984 after having

been elected to four terms in the Massachusetts House of Representatives. I served

as a member of the Massachusetts Retirement Law Commission from 1984 through

1987 and am currently an elected member of the Executive Committee of the National Council on Teacher Retirement.

The MTRB administers retirement, survivor and disability benefits for nearly 110,000 active, inactive and retired public school teachers and administrators who

comprise the membership of the Massachusetts Teachers’ Retirement System

(MTRS). The MTRS, originally known as the Massachusetts Teachers’ Retirement

Association, was established by the Massachusetts General Court in 1914. Our first

member was enrolled on July 1, 1914. The MTRS is one of the 106 contributory retirement systems that serve the public employees of the Commonwealth of Massachusetts. Collectively, the Massachusetts public retirement community represents

nearly half a million employees, retirees and beneficiaries who remain outside of the

Social Security System. The assets of these systems exceed $30 billion. On behalf of the members of the MTRB and our membership, let me first fully endorse the very comprehensive testimony that has been submitted by Robert J.

Scott on behalf of The Coalition to Preserve Retirement Security (CPRS). We are

active members of the CPRS and are proud to be part of such a positive effort on

behalf of millions of public employees and their beneficiaries. To supplement the

message of the CPRS, I want to specifically express our very serious concerns with

regard to the negative impact that will most certainly result should Congress opt

to mandate Social Security coverage on Massachusetts public school teachers and

administrators. In general, our concerns could easily be echoed by the administrators and trustees of each of the Commonwealth’s other 105 retirement systems on

behalf of their active and retired members.

It is our opinion, that expanding Social Security taxes and coverage to Massachu- setts teachers and to all other public employees will result in higher costs to all

Massachusetts taxpayers, reduced benefits for all future Massachusetts teachers

and other public employees, unintended reductions in critical public services such

as education and public safety, and the destruction of our retirement systems as we

currently know them. Worse, it is our belief that this enormous price, paid by our

taxpayers and public servants, will produce no appreciable positive result on behalf

of the Social Security program. In fact, the long-term liabilities associated with expanding Social Security coverage to all State and local government employees will

inevitably far exceed the short-term gains that can appear to make this alternative

attractive.

BRIEF BACKGROUND

The Social Security program was established in 1935, 21 years after the first

teacher was enrolled in the MTRS. The program covered all private sector employees and specifically excluded state and local government employees. Public employees not covered by a public retirement system were allowed voluntary participation

in the Social Security program in 1950; those covered by a public retirement system

were allowed voluntary participation in the program in 1954. Participating state

and local governmental units could also withdraw from the program.

Since 1983, the Social Security Act has been amended to preclude the withdrawal

of state and local governmental units; to require that all public employees hired

after March 31, 1986 be covered by Medicare health insurance, with matching employer and employee contributions; to require as of 1991 that all public employees

not covered by a state or local retirement plan be covered by Social Security or another plan which provides comparable retirement benefits; and to implement antiwindfall provisions to ensure that public employees who also had employment that

was covered by Social Security did not receive excess credit for Social Security purposes.
62

1 Report of the Funding Advisory Committee and the Retirement Law Commission to the Governor and General Court of Massachusetts, October 1976. 2Massachusetts Legislative News, NRTA/AARP Newsletter, January 6, 1977.

3Massachusetts Senate Committee on Ways and Means, Fiscal Year 1986 Budget Recommendations, June, 1985.

Today, approximately five million Americans are outside of the Social Security system because they are covered by a public retirement plan. Additionally, there are

millions of public retirees who rely on the financial strength and continuity of public

plans for their retirement income and security.

THE SUCCESS OF PUBLIC RETIREMENT SYSTEMS SHOULD SERVE AS A MODEL FOR

SOCIAL SECURITY REFORMS.

The problems which bring us together for this hearing are not dissimilar from those that have been successfully confronted by public plans throughout the country.

In 1976, a special Massachusetts study found: ‘‘Under the present pay-as-you-go arrangement, the future costs of Massachusetts pension benefits are scheduled to increase dramatically from 12.1 percent of statelocal employee payrolls in fiscal year 1978 to 31.9 percent in fiscal 1993.1

In 1977, one of the first public hearings that I participated in as a young state legislator concerned the relative merits of abandoning a ‘‘Pay-As-You-Go’’ financing

program for an actuarially sound funding program. At the time, numerous groups

argued that future funding was unnecessary and that valuable state and local tax

dollars could be better spent on far more immediate needs. In fact, the National Retired Teachers Association published a legislative alert which reported that ‘‘it

would seriously damage the economy of the Commonwealth to drain off hundreds

of millions of dollars for funding. We believe that the interests of present public retirees, with an average pension of $4,500 being eroded by inflation, take precedence

over some hypothetical retiree of the 21st century.’’ 2

As late as June of 1985, the Massachusetts Senate Committee on Ways and Means reported:

‘‘It is irresponsible for a state or individual to ignore the fiscal implications of bal- looning payments that must be made... Since FY1975, the state’s appropriation for

pension costs (including both state and teachers’ pensions) have increased by 163.2

percent, which is an average increase of about 10.4 percent per year, compounded...

pensions have been growing about 10 percent faster than the entire state budget.’’ 3

In 1987, Massachusetts ultimately faced the reality that a ‘‘Pay-As-You-Go’’ fi- nancing program was fiscally irresponsible and threatened the retirement security

of all of the Commonwealth’s dedicated public employees. Over a period of time we

have adopted and funded actuarially sound funding schedules; we have repealed regressive ‘‘Legal List’’ restrictions on the investment of system assets; we have repealed an arbitrary cap on system benefits; and we have diligently monitored the

potential for abuse, especially in the area of disability retirement benefits. As a result, the MTRS has seen its original 40 year funding schedule reduced by 10 years; our system, which in 1987 was less than 40% funded, by some estimates

is currently more than 85% funded. Other Massachusetts systems have totally

erased their unfunded actuarial liability. We have seen modest improvements in

benefits; greater opportunities for portability; and, as we speak, our Legislature is

considering legislation to provide teachers with an enhanced benefit based on a formula that more properly accounts for years of dedicated service. In a recent report prepared for the U. S. General Accounting Office, the Massa- chusetts Public Employee Retirement Administration Commission wrote: ‘‘The Massachusetts experience represents a transition from ‘pay as you go’ fund- ing to actuarially sound financing over a relatively short period. Present retirees

and employees, as well as future employees, can be confident that a sound pension

system will exist guaranteeing their hard-earned benefits. Rather than jeopardizing

those benefits through forced Social Security, the federal government should look to

the Commonwealth as an example...’’

MASSACHUSETTS OFFERS ITS TEACHERS AND OTHER PUBLIC EMPLOYEES A SOUND RE- TIREMENT SYSTEM; MANDATORY SOCIAL SECURITY COVERAGE WILL RESULT IN HIGH- ER COSTS TO MASSACHUSETTS TAXPAYERS, WILL REDUCE BENEFITS FOR ALL FUTURE

TEACHERS AND OTHER PUBLIC EMPLOYEES AND WILL RESULT IN UNINTENDED RE- DUCTIONS IN CRITICAL PUBLIC SERVICES.

The Massachusetts contributory retirement law (Mass. Gen. Laws, Chap. 32),

which sets forth the benefits provided by each of the Commonwealth’s 106 retirement systems, guarantees a sound retirement program for all Massachusetts public
63

4Opinion of the Justices, 364 Mass. 847 (1974–74) Opinion of the Justices to the House of

Representatives.

employees. The Social Security Advisory Council implies that public employees need

Social Security benefits in order to offset deficiencies in public retirement plans. The

facts don’t support such a view.

According to a recent analysis completed by the actuary for the Massachusetts

Public Employee Retirement Administration Commission, the Social Security benefit

is 43–75% below the Massachusetts superannuation retirement benefit depending

on salary. The Commission has concluded that ‘‘...replacing the Massachusetts benefit structure with the Social Security benefit structure substantially diminishes the

purchasing power of our retirees.’’ A closer look at the full program clearly supports

such a proposition:

• Massachusetts pension benefits are guaranteed. The Massachusetts retirement

law establishes a contract with each member that prevents the reduction of retirement benefits. In a 1974 advisory opinion, the Massachusetts Supreme Judicial

Court stated: ‘‘...the ‘contract’ is formed when a person becomes a member by entering the employment, and he is entitled to have the level of rights and benefits then

in force preserved in substance in his favor without modification downwards.

...When we speak of the level of rights and benefits protected by 25(5) we mean the

practical effect of the whole complex of provisions...’’ 4

• A Massachusetts retirement allowance is not reduced for post-retirement income from any source other than a Massachusetts governmental unit.

• Massachusetts provides both job related and non-job related disability benefits

for members. A Massachusetts public employee receives 72% of current salary plus

an annuity in the case of a job related illness or injury. For 1997, the average MTRS

job related disability benefit was $32,000; the average non-job related disability benefit was $14,000 annually.

• The Massachusetts retirement law provides pre-retirement survivor benefits,

pre-and post-retirement accidental death benefits, and each retiree has the option

of providing a survivor benefit at the time of retirement. In certain instances, additional survivor benefits are available to minor children until age 22 if the child is

a full-time student.

• Although they could be better, Massachusetts generally provides cost-of-living

adjustments for its retirees and survivors. A recently enacted amendment provides

for an annual cost-of-living adjustment equal to the CPI or 3% whichever is lower,

payable on the first $12,000 of a member’s benefit. For teachers, the Massachusetts

Legislature is currently considering establishing a minimum pension benefit for all

teachers who retired with a minimum of 25 years of service. In a 1997 report entitled, ‘‘Retirement Benefits for the 21st Century: An Actuarial Appraisal of Retirement Alternatives’’ the MTRB called upon the Legislature to enact a purchasing

power protection plan in order to guarantee the long-term financial security of every

Massachusetts retired teacher. As we get closer to attaining our goal of full funding,

post-retirement benefit protection will only get better.

• Since all Massachusetts public retirement systems are governed by a common

law, retirement benefits are totally portable within the Commonwealth. In addition,

since the MTRS allows relatively inexpensive purchases of service credit for of outof-state teaching, for certain non-public school teaching service, and for military

service, our members enjoy the benefits of a highly portable system. Should the Congress pass the recently introduced Retirement Account Portability Act of 1998, important barriers to portablitiy between private and public plans will be removed.

• Massachusetts retirement benefits, as is the case in virtually all public retirement plans, have been designed to meet the unique needs of our membership. Although this is particularly true for public safety employees, Massachusetts has also

provided better benefits at lower retirement ages for individuals who are engaged

in certain hazardous or high risk non-public safety careers. The Massachusetts Legislature is currently considering providing enhanced benefits to teachers who have

served 25 years or more. In the context of education reform, many have suggested

that it is in the best interest of our children to allow teachers to retire before they

suffer the burnout that frequently comes at the end of a 35 or 40 year career.

In our view, it is totally unreasonable to assume that Massachusetts, or any other

State which finds itself in a similar situation, will be able to maintain such a comprehensive benefit program and absorb the additional employer cost resulting from

forced Social Security coverage. Additionally, Massachusetts employees, who currently make contributions ranging from 5 to 12% depending on their membership

date and group classification, can ill afford to pay an additional 6.2% for Social Security coverage.
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In the report prepared for the U. S. General Accounting Office, the Massachusetts Public Employee Retirement Administration Commission wrote: ‘‘Normal cost payments by employers in Massachusetts are trending downward... Ultimately, for employees hired after 7/1/96, these costs would range between 2%

and 4% of salary. The present Social Security employer rate is 6.2%. Thus, for new

employees only, Massachusetts’ governmental employers would be required to make

an additional payment under Social Security of between 2.2% and 4.2% of payroll.

Consequently, between $210 and $410 million would be required to meet these additional costs.’’

Inevitably, the passage of mandatory Social Security coverage will result in the repeal of our current retirement benefits for all future Massachusetts teachers and

other public employees. Although there is a temptation to assume that a supplemental retirement program would be developed to bridge the gap between the level

of Social Security benefits and those currently provided by our system, it is pure

speculation as to what form such a program might take.

To illustrate the severity of our concerns, please consider the following summaries

of three possible outcomes:

Option 1. Since our anticipated employer normal cost contribution for new members is currently less than the Social Security tax, it is fair to assume that any supplemental program will be designed as a defined contribution plan with no employer

contribution. Such a program would leave future Massachusetts teachers and public

employees with no disability protection, a significantly higher retirement age, and

the potential for dramatically lower retirement income.

Option 2. Since the 106 Massachusetts public retirement systems are governed by

one law, there is a tremendous amount of equality across the broad spectrum of

Massachusetts governmental units with regard to retirement benefits. All employees

currently enjoy the total portability of benefits amongst our numerous systems. Let

us assume that the Legislature will opt to allow each governmental unit to respond

to mandatory Social Security coverage in its own way. Portability, one of the goals

of the proponents of mandatory coverage, will be destroyed and we will have a disjointed system of the ‘‘haves’’ and the ‘‘have-nots.’’ Who will have more success recruiting the best public servants—the affluent community that offers a rich supplemental retirement program or the older urban community that is forced to choose

between police salaries and police retirement benefits?

Option 3. Teacher retirement costs are currently the responsibility of state government. Let’s assume that the Commonwealth, faced with the obligation to continue to fund the normal cost for current members of the MTRS as well as the system’s actuarial unfunded liability, establishes a supplemental program for all Massachusetts teachers. Is it possible that the Legislature would fund any employer

contribution to the supplemental program and absorb the 6.2% Social Security tax?

It is our belief that the Legislature would opt to do neither. Future teachers would

be left with a defined contribution plan with no employer contribution from the

state and every local government would be faced with a totally new obligation equal

to 6.2% of their teacher payroll. Mandatory Social Security coverage will then have

resulted in the unintentional reduction of critical local services and/or will result in

a greater tax burden at the local level.

APPLYING MANDATORY SOCIAL SECURITY COVERAGE TO NEWLY HIRED TEACHERS AND

OTHER PUBLIC EMPLOYEES DOES NOT ADVANCE THE CAUSE OF FAIRNESS;

MANDATORY COVERAGE IMPOSES A SIGNIFICANT UNFUNDED MANDATE.

Some have suggested that imposing mandatory Social Security coverage on all

State and local government employees is a simple matter of fairness. Arguing that

all Americans have an obligation to financially support the Social Security system,

proponents of mandatory Social Security believe that everyone should pay his or her

fair share.

First, let me suggest that all Americans, including those who are currently exempt from mandatory participation, contribute to the Social Security system. As

American consumers we all participate in the economic activity that allows private

employers to pay Social Security taxes on behalf of their employees. In addition,

countless public employees, including myself, have contributed to the Social Security

system. Notwithstanding those contributions, many of us who choose public service

as our primary career, may never qualify for one dollar of Social Security benefits.

Secondly, fairness is a difficult quality to evaluate. Consider these questions:

Massachusetts has provided retirement benefits for its public school teachers

since 1914. For 21 years before the Social Security system even existed, Massachusetts was responsibly fulfilling its obligation to public school teachers. For nearly

four generations, Massachusetts taxpayers and our members have invested in the
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future of our retirement program. Is it fair to undermine that commitment in order

to ever so slightly improve the short-term cash flow of a pay-as-you-go Social Security system that will provide our public employees reduced benefits at higher costs?

The Massachusetts Legislature has crafted, and continues to enhance, a public retirement program for Massachusetts public employees that responds to the unique

characteristics of vastly different job risks and responsibilities. Is it fair to force the

abandonment of such a program in order to fund a less secure, ‘‘one size fits all’’

program?

The implementation of mandatory Social Security will increase the cost of providing retirement benefits for the Commonwealth and most of our cities and town. The

increased cost will result in higher state and local tax burdens, significantly reduced

retirement protection, critical reductions in essential public services or some combination of all of the above. Is it fair for the Congress to impose such a tax on our

State, our cities and our towns? To force lesser benefits on dedicated public employees? To unintentionally reduce essential local services?

The Unfunded Mandate Reform Act of 1995 received over-whelming support

throughout the Congress. Congress was properly concerned about passing the cost

of expensive federal mandates onto State and local governments. Is it fair to be

against unfunded federal mandates... except for this one?

It has also been suggested that current members of our public retirement systems

will not be effected by imposing mandatory Social Security coverage on new employees. Our experience causes us to be concerned about this suggestion as well.

For example: A 43 year old teacher in Springfield, Massachusetts, with 18 years

of service in the MTRS, seeks and receives a promotional opportunity as a vice principal in the Hartford, Connecticut school system. Since she’s a vested member of the

MTRS, she leaves her funds on deposit and begins her commute to Hartford. After

five years of experience in Connecticut, she applies for and receives a principalship

back in Massachusetts. She returns home and works until her ultimate retirement.

Today, this teacher would take a refund of her contributions from the Connecticut

Teachers’ Retirement System, purchase her five years of out-of-state service in the

MTRS and ultimately retire with essentially a career of uninterrupted creditable

service. Were mandatory Social Security coverage to be applied in this instance, how

would she be effected? As a new employee in Connecticut, she would have contributed to Social Security. When she subsequently returns to Massachusetts, what is

she? If she’s deemed to be exempt from Social Security because she’s a vested member of the MTRS, will her five years of Social Security contributions in Connecticut

ever benefit her? If she’s deemed to be a new Massachusetts employee and therefore

mandated into Social Security, will she be able to once again become active in the

MTRS? Is it possible that she and her employer could be forced to fund current

MTRS and Social Security contributions? Most importantly, when she ultimately retires what level of benefits will she actually be entitled to? Will the offset and antiwindfall provisions of Social Security negatively impact her ability to combine her

public pension with Social Security?

This is one current member who will undoubtedly be effected by the adoption of

mandatory Social Security. Let us not forget that there could be millions like her

throughout America.

CONCLUSION

In closing, please accept my most sincere best wishes in your endeavor to

strengthen and prudently fund the Social Security program. Over the years, many

of us who have opposed mandatory universal Social Security coverage have been

seen as anti-Social Security. At times, some have opted to tear down the system as

a justification for continuing to exclude public employees. In my view, such a course

is wrong. The Social Security program is an American treasure and it must be preserved and strengthened.

My Mother died last August at the age of 83. For nearly 20 years, her monthly

Social Security check was her most significant means of support. A Social Security

benefit allowed her, as it does millions of other Americans, the opportunity to live

independently and with dignity. We all owe it to countless people just like her to

preserve and protect the Social Security system. However, I would respectfully suggest to you that we would be wrong to honor that commitment by causing Massachusetts and other States to break the commitments made to the members of their

public retirement systems.

Thank you for the opportunity to participate in today’s hearing.
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Chairman BUNNING. Mr. Pyne.

STATEMENT OF GEORGE PYNE, EXECUTIVE OFFICER, PUBLIC

EMPLOYEES’ RETIREMENT SYSTEM OF NEVADA

Mr. PYNE. Thank you, Mr. Chairman. Mr. Chairman, Members

of the Subcommittee, my name is George Pyne. I am the executive

officer of the Public Employees’ Retirement System of Nevada. By

way of background, nearly 100,000 people within the State of Nevada are members or recipients of benefits from the Public Employees’ Retirement System. In a State with under 2 million residents,

we estimate our retirement system has some financial impact on

1 out of every 5 Nevadans.

Mr. Chairman, I have yet to talk to a member of our system who

does not have serious reservations about the cost impact and threat

to retirement security this proposal brings to thousands of current

and future members of our PERS, Public Employees’ Retirement

System. The numbers speak for themselves.

Consider that Nevada PERS already provides adequate replacement income for career employees at a cost of only 18.45 percent

of payroll. Should we be forced to overlay the cost of Social Security

on our current plan structure, it is estimated Nevada employers

and new hires share in the first-year cost of $27 million for mandatory coverage. This increases to $157 million in the 5th year. Given

that our present member payroll is $2.3 billion this represents a

significant increase in the amount targeted for payment of retirement benefits. Even if Social Security were not a direct overlay on

our current benefit structure but rather combined with reduced

PERS benefits, the costs are prohibitive. For regular members of

our plan the contribution rate needed to maintain current benefit

levels when combined with Social Security is estimated to go from

18.45 percent of payroll to 27.1 percent. In our opinion, this shows

the relative inefficiency of the pay-as-you-go funding structure of

Social Security.

Continuing the scenario of maintaining level benefits at an increased cost, let’s further explore what this means to the average

Nevada PERS member: The teacher who teaches our children; the

police officer that protects our neighborhoods. New hires would be

burdened with a higher cost for the same benefits as their fellow

employees. They must also suffer the potential consequences of the

additional cost to their employer who will face difficult decisions

about revenues to fund the added tax. Does the employer raise

taxes to cover the cost or, perhaps, cut the very public services the

employer is in the business of providing or fail to give cost-of-living

adjustments to employees? We respectfully believe that in Nevada,

employers would not seek to widen their revenue base by raising

taxes, so the alternatives would be service reductions or no cost-ofliving adjustments.

Mr. Chairman, the impact of a pay reduction is significant but

also must be viewed as merely the first hit on our members’ income. As employers seek to fund their half of the added cost, other

benefits that aren’t guaranteed such as health care may need to be

reduced. This would impose a serious strain on the economic stabil67

ity of the member and upon his standard of living, and I must emphasize, for no additional benefits.

The alternative of cutting services to fund benefits is also not

likely as Nevada is one of the fastest growing States in the nation

and as more people come into our State, more public services are

required, not less. From a timing perspective, this unfunded mandate could not come at a worse time. As government grows, so too

grows the cost of government, and it is clear that in Nevada workers will bear the brunt of the weight of funding to bring some form

of Social Security to our retirement system.

We also must be mindful that significant differences exist in the

dates of retirement eligibility and other plan features for PERS and

Social Security and because changes in Social Security are beyond

the control of the State of Nevada, how often would we need to redesign our benefit program and at what cost to our employees, employers, and taxpayers if our goal is to maintain benefits similar

to our current structure.

Current plan members are rightfully concerned that because

most benefits come from earnings on investments, reduction of contribution income into our present plan will threaten their own retirement security as well. New revenue sources would need to be

found and most likely in the form of higher contribution rates.

Finally, the Nevada legislature may decide on reduced PERS

benefits and contribution levels for new hires to fund the additional

Federal tax, but now the bottom line poses a threat to their retirement security.

Mr. Chairman, we recognize the important role Social Security

plays in the financial security of millions of Americans, however,

we respectfully suggest that mandatory Social Security for State

and local government employees will not accomplish any of the

long-term funding goals of Social Security and will create tremendous economic burdens for public workers they can ill afford.

Thank you, Mr. Chairman.

[The prepared statement follows:]

Statement of George Pyne, Executive Officer, Public Employees’

Retirement System of Nevada

As the Executive Officer of the Public Employees’ Retirement System of Nevada

(PERS), my statement provides the Nevada perspective on mandatory Social Security coverage and its effect on our members, benefit recipients, employers and taxpayers in Nevada. A summary of our plan provisions and funding structure will

serve as a backdrop to discussions of the cost impact and benefit structure differences between PERS and Social Security as it exists today.

The Nevada Legislature established PERS in 1947. At the time of PERS’ creation,

state and local government employees were prohibited from participating in Social

Security. The mission of the system was at that time, and is today, to provide a

retirement program that meets the income replacement needs of Nevada’s public

employees at retirement. The Nevada State Legislature recognized that a pension

plan meeting this objective also serves to attract and retain qualified employees

whose training and experience benefit all Nevadans.

In contrast, Social Security is a program designed as a ‘‘safety net’’ to guarantee

a level of income above the poverty level. The difference in the objectives of these

two programs is most noticeable when one considers the higher percentage of preretirement income that non-FICA pension plans such as Nevada replace at retirement.
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NEVADA PERS’ BENEFITS STRUCTURE

Presently, more than 70,000 state and local government employees are members

of PERS. We have over 19,000 benefit recipients receiving various types of allowances from PERS. Nevada provides a comprehensive benefit program to its members

and beneficiaries which includes service retirement, disability, and pre-retirement

survivor benefits. In a state whose population is approximately 1.8 million, we estimate the System has some financial impact on 1 out of every 5 Nevadans, and infuses over $300 million annually into the Nevada economy.

Service Benefit:

Prominent features of our plan include 5 year vesting (as opposed to 40 quarters

under Social Security) and a 2.5% multiplier for each year of service up to 30 years.

This translates into replacement of pre-retirement income of up to 75 percent. Benefits are calculated using the average of a retirees’ highest 3 years of earnings, insuring the initial benefit amount accounts for recent cost of living increases. After retirement, cost of living adjustments from 2%–5% are paid annually based upon the

number of years a person is retired. Therefore, like others in our industry, we take

exception to the Social Security Advisory Council’s suggestion that Social Security

is superior to state and local pension plans.

Regarding portability, Nevada provides 100% intrastate portability amongst Nevada employers, and further allows members to purchase up to 5 years service credit without regard to previous public service, thereby enhancing their retirement benefit.

Public Safety Benefit:

Our pension plan also recognizes the need for earlier retirement eligibility for its

police and fire members. A 1987 study recognized that physical ability declines with

age and a youthful more vigorous front-line public safety work force is needed to

protect the public. Social Security provides no flexibility to offer early retirement to

address this important public safety issue.

Disability and Survivor Benefits:

In addition to service retirement eligibility beginning at age 65 with 5 years of

service, disability benefits are payable to members with 5 or more years of service

who become disabled from the performance of their job or a comparable job. Survivor benefits may be payable for the lifetime of the surviving spouse, and until age

23 for dependent children if they remain in school.

FINANCING NEVADA PERS BENEFITS

Our investment program plays an integral role in funding the benefits of the System. Unlike Social Security, PERS is funded on an actuarial reserve basis. This

means contributions paid to the System today are set aside and invested to fund

future benefits. In fact, the great majority of benefits paid by PERS come from return on investment. This focus on investment performance is amplified by the reduction in the ratio of active members to benefit recipients as America ages. Without this funding mechanism in place, delivery of benefits with certainty into the future is threatened.

Nevadans can ill afford the financial burden associated with mandatory coverage.

Nevada is among the fastest growing states in the nation with an annual population

growth rate of over 5%. As population grows, so to grows the need for additional

public services. Our public employee population is increasing at a rate of 4% annually to address this growing need for public service. Recent estimates by the System’s actuary project the first year cost of covering new hires of the System under

Social Security to be approximately $27 million. After 5 years, the cumulative cost

will increase to $157 million and to $384 million after 10 years.

Considering these costs, overlaying Social Security on our current benefit structure results in significantly higher actuarially determined contribution rates. Expressed as a percentage of payroll, contribution rates for new hires would increase

from 18.45% and 27.95% to 30.85% and 40.35% for regular members and public

safety members respectively. Obviously this is cost prohibitive.

By replacing our current benefit structure with one which attempts to mirror current PERS benefits but with payments from two sources, PERS and Social Security,

overall cost is reduced but not back to our current contribution rates. Under the scenario where benefits remain the same, contribution rates still increase to 27.1% for

regular members and 40.2% for our police/fire members. This shows that Social Security does not buy as much replacement income at retirement as does PERS. More69

over, employees in this scenario would be taking a 6.2% pay cut in the form of a

FICA tax contribution just to maintain their current benefit levels.

If our objective is to keep overall plan costs identical to current rates and be cost

neutral to both the employee and employer, as both share in the costs, benefit levels

would be reduced significantly. It is estimated the service time multiplier for new

hires would be 1%. For a career employee of 30 years the resulting benefit would

not serve as adequate replacement income when combined with Social Security.

IMPACT OF MANDATORY COVERAGE

Mandatory coverage of new hires is likely to have an adverse impact on current

members of the System as well. Our actuarial analysis is not complete. However,

it appears the lack of new entrants will increase the unfunded liabilities and extend

the time period in which to fully fund promised benefits. Because our System prefunds benefits, the influx of new member contributions is important to maintain a

flow of funds to be invested that will support future benefits. Our actuarial method

depends on these contributions to avoid underfunding. If the amount of funds are

inadequate to support the benefit structure, contribution rates for current plan

members will have to be increased. Benefits for current plan members cannot be reduced because Nevada courts have ruled PERS benefits to be a property right. The

state’s contractual obligation requires benefits to be maintained or replaced with

equal or greater benefits.

An unfunded mandate like Social Security will require a drastic redesign of a pension plan that does exactly what it is intended to do, provide Nevada’s public employees a reasonable base income at retirement. PERS Board and the Nevada Legislature will face tough choices regarding contribution rates, benefit levels, and amortization periods. Additionally, the Nevada Legislature must look at services provided

to our taxpaying public, and perhaps make reductions in those services to free up

the funds to pay for this costly benefit change. All this happens at a time in Nevada

where we must increase services due to our greatly expanding population base. The

general funds of every public employer in the state will be affected by any increase

in the contribution rates.

No matter how we look at it, individual plan members are likely to suffer the

most from mandatory coverage. Contribution rates will either increase with no real

increase in benefits, or benefits will diminish for the same overall cost that existed

prior to mandatory coverage. Other considerations involve the additional costs in administration of a second tier of benefits for new hires to include pre-retirement

counseling, record keeping, and benefit determination.

In summary, we are opposed to mandatory Social Security of state and local government employees. It would cause serious disruption to our well-founded, wellfunded and well-designed public employees’ retirement system.

the questioning with Sergeant Pfeifer, because some of the things

Chairman BUNNING. Thank you, Mr. Pyne. I’m going to start off

f

that he said are really critical. You said that 76 percent of public

personnel do not participate in Social Security. Now, you also

raised an excellent point which is that law enforcement and other

public safety officers retire at a much earlier age than more typical

government employees. I’m wondering what happens to those safety officers that are covered under Social Security. Do their plans

which may be a combination of Social Security and an employer

pension, pay some type of transition benefits until Social Security

kicks in?

Mr. PFEIFER. Typically, what happens is the benefits are coordinated with Social Security so that the plan will carry you a certain

number of years. Let’s say you retire at age 55, they carry you the

additional 10 years with your current retirement plan at a level—

in the good plans which are funded—at a higher level. Then, once

you get to the age where you hit Social Security there will be an

offset and Social Security will pick up a piece of that, so that the
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expense to the local or the State government will decrease once you

hit 65 and you integrate with Social Security.

Chairman BUNNING. But they will maintain the same level of

benefits. In others words, say they’re getting $1,000, and they hit

65, what benefit would they then receive? Would they receive more

than $1,000 or would they receive the same benefit when Social Security is included?

Mr. PFEIFER. When Social Security kicks in, in some plans, and

it varies—because all these plans vary according to how they’re

structured—in some plans, the $1,000 would be reduced to reflect

the contribution provided by Social Security, and because you’ve

touched on that, what we’re really talking about here are replacement rates and how much of your income you’re going to replace

at the time you retire.

Chairman BUNNING. That’s right. That’s what I’m trying to find

out.

Mr. PFEIFER. Individual plans do not always keep pace with inflation. They do not have escalators built in like Social Security

does with the CPI, Consumer Price Indexes. So, some of these

plans—let’s say if you retire at a relatively generous benefit at 60

percent of your salary the day you retire. If you have no CPI provision in there that continues to keep you up with the cost of living

and you live 20 years more, and the inflation rate is only the current 2.5 or 3 percent today, you’ve lost about 60 percent of your

earning capacity if you have absolutely no CPI in there. So, what

happens is you have to go out and get another job to augment that

if that’s the case. If you’re fortunate enough to have an escalator

in there which will keep you up with inflation like Social Security

does, then you’re much better off, and that’s one of the positive features of Social Security, the fact that you do have CPI built into

it, so that you’re always staying relatively current with the cost of

living.

Chairman BUNNING. Do you know what the average age of the

police officers and the safety officers retirement is?

Mr. PFEIFER. It would vary from State from State. Generally

speaking, now, it would be somewhere between 50 and 55 years.

Chairman BUNNING. The reason I ask that is I have a police officer who happens to be my field representative, and he retired very

early and became a member of my staff, and now he’s paying Social

Security and will not only get his retirement from the police but

he will get Social Security added on top of that when he becomes

old enough to retire from public service in the congressional office.

How does a disability plan—and I’m staying with this before I let

others inquire—how do the disability plans offered police and fire

fighters by their State and local retirement plans differ from the

Social Security Disability Program?

Mr. PFEIFER. Generally speaking, of course, varying from locality

to locality, State to State, the disability provisions vary widely. The

disability provision for Social Security itself is a very high bar to

get over, because you have to be almost totally and permanently

disabled, and you cannot really be employable per se.

Chairman BUNNING. You do have to be permanently disabled.

Mr. PFEIFER. That’s Social Security. Now, in public safety, the

bar is lowered, because consideration is given to the fact that if a
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officer is injured in the line of duty and is no longer fit to perform

public safety jobs such as riding a scout car on the street, riding

the back step of a firetruck, then we need to make a provision to

compensate the member as much as possible and make them

whole.

Chairman BUNNING. Do they have percentages of disability and

things like that?

Mr. PFEIFER. Percentages of disability vary widely. Again, it

could vary—some plans—from 20 percent depending on the extent

of the disability up to about two-thirds disability.

Chairman BUNNING. And that would include of the salary that

you were making at the time that you were partially or permanently disabled?

Mr. PFEIFER. Of the base salary. Now, the key thing to consider

when you look at disability is because it is disability income, that

is not taxable. So, that is tax free, so whatever percentage you get,

unless you change it today or sometime soon, is going to be tax

free. If you retire on an optional retirement or a standard retirement then you pay taxes on that money. So, someone who retires,

let’s say, on a——

Chairman BUNNING. Except if you live in Kentucky, you don’t.

Mr. PFEIFER. I might have to move there. [Laughter.]

So, if you retire on disability, you pay no Federal tax. In most

cases, you pay no State tax. If I retired on the same amount on a

optional retirement, as we call it, I would pay Federal tax, and I

would be in the 28-percent tax bracket, probably, so I’d be paying

a significant amount.

Chairman BUNNING. I’m going to submit some questions to others that are at the table in writing, and I would appreciate your

participation.

[The questions and answers follow:]

Responses of Sgt. Marty Pfeifer to Mr. Bunning’s Questions

1) Should mandatory coverage of newly hired employees be enacted, potentially resulting in a lowering of retirement benefits and/or salaries? What would be the impact on the ability for safety officers to recruit new hires?

No, the National Fraternal Order of Police vehemently opposes any Social Security reform measures that include mandatory participation of public employees,

newly hired or otherwise.

The answer for this is simple; it is a question of fairness to those law enforcement

officers, public safety officials and other public employees who have chosen not to

participate in the Social Security system. All are much better served, in terms of

benefits and retirement income, than they would have been or would be, if the Federal government mandated Social Security participation. To do so endangers the

plans and the retirements of employees currently in other public pension systems

and may jeopardize the ability of local law enforcement to fulfill their public safety

mission.

Social Security coverage varies considerably by employee group, but according to

the Public Pension Coordinating Council (PPCC), seventy six percent (76%) of public

safety personnel do not participate in the Social Security program. These employees

represent a sizable portion of the State and local government workforce, approximately 3.9 million full-time employees.

If the Federal government imposes mandatory Social Security participation, even

if restricted to new hires (a term which does not have a clear definition), it not only

compromises severely the financial solvency of existing pension and retirement

plans, but does not consider the immense cost to States, localities, and the individual employees. Both the employee and his or her employer would each be required

to pay 6.2% of payroll into the Social Security trust fund. This amount would be
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in addition to the contribution already paid by the employer and the employee into

the State or local retirement system. I cannot overstate the damage that would be done to State and local governments and the families of the employees if the Federal government forces them to pay a

new tax of 12.4%.

Collected data shows that the first year cost to employers—local and State govern- ments—of covering newly hired employees would be over $771 million. The newly

hired employees would be responsible for an equal amount, making the cost of the

first year of coverage over $1.5 billion. The total annual cost to employers for covering employees not currently covered under Social Security would be $8.5 billion.

When the employees’ share is counted, that amount rises to over $17 billion per

year. For example, of the over 240,000 State and local employees in the State of Ken- tucky, more than 61,000—many of whom are law enforcement officers—do not currently participate in Social Security. The annual cost of mandating participation

would be approximately $80.9 million a year. Federally mandated participation in Social Security is not a minor issue. Such a mandate would adversely affect millions of employees and impose billions of dollars

in additional costs to State and local governments who are trying to stretch every

dollar at the local level.

In real terms, this means that local and State government officials would be under tremendous pressure to change these pension systems, pitting the public safety officers against elected officials—something that no one wants. Even if the current pension systems, which would be extremely difficult to change, were maintained a Social Security tax on employees and their government employers would

negatively impact public safety operations. The added financial burden at the local

and State level could result in layoffs, reduced pay or other benefits, no cost-of-living

increases and could reduce purchases of necessary equipment and technology, or

even a combination of these consequences. Too many law enforcement agencies in

our nation are forced to ‘‘make do’’ as it is, and adding this new unfunded Federal

mandate would inflict greater hardship on the State and local governments budgetary concerns. Also of great concern to our membership is States who can change their pension systems without going through the collective bargaining process. Facing public pressure against tax increases, the legislatures in these States would likely change

them, making them much less beneficial to public safety employees. State and local

government pension contributions to these systems are likely to be reduced, probably dollar for dollar for allocation to Social Security taxes. Congress and the Administration should carefully weigh any proposal that would cut the take-home pay of public safety officers—even if just the new hires—by 6.2%,

the additional amount they would have to pay out under the mandatory participation plan. Would we retain or recruit the best officers if current pension systems

are severely curtailed—reducing substantially or eliminating the much-needed provisions relating to early retirement, line-of-duty disability and early death benefits—

so that the total percentage of both the employing agency and employee contributions remain about the same, once Social Security taxes are factored in? Would we

get the very best officers if the employing agency also reduces the future pay raises

or freezes cost-of-living or other increases, in order to pay its portion of the new Social Security tax? The answer is obviously not.

Imposition of this tax would negatively affect government expenditures on policing

innovations, technology and crime-fighting equipment. It could severely curtail current public safety pension systems, giving employees in these plans, police and firefighters, much less protection than they have now. A new, mandatory tax for Social

Security will hurt efforts to recruit and retain the best of public safety officers possible.

The Advisory Council on Social Security recommended that Social Security be extended to all newly hired State and local government employees as a way to raise

ten percent (10%) of the money needed to rebalance the program, without defining

the term ‘‘new hire.’’ The Council’s report also failed to address the impact that

mandatory participation would have on employers and employees at the State and

local level of government.

Many retirement and pension plans for public sector employees have been specifically designed and refined on the assumption that local governments would not be

required to participate in the Social Security system. This was a reasonable assumption since local governments have never been required to pay into the system, which

was adopted in 1935 for those who chose to participate.

Also of great concern to law enforcement officers are the very limited disability,

death and early retirement benefits of Social Security as compared to current pen73

sion systems for public safety officers. Simply put, the Social Security system is not

designed to meet the needs of law enforcement officers and other public safety employees. Active law enforcement officers are typically younger people. The physical and psychological stress of the job and inherent danger of police work often result in

early retirement, and, on no few occasions a job-related disability is part of the reason. In the past fifty years, State and local governments have developed pension

systems which acknowledge and incorporate the very different needs of police, fire

and other public safety professionals. These systems take into account that law enforcement officers often undergo a career change in middle age, usually in their late

forties to early fifties. In many police departments, a large percentage of law enforcement officers will be sufficiently disabled at all ages for varying lengths of time

and thus be unable to perform their official duties. Therefore, the governments

which employ these officers have recognized that public safety officers need certain

protections and benefits which reflect the unique nature of their jobs. Social Security, on the other hand, provides no comparable disability retirement benefits for public safety professionals. Social Security requires that an employee be

completely unable to perform any substantial and gainful employment. This means

that a person unable to perform regular and continuous duties as a law enforcement

officer, who would, under current local and State plans, receive some disability benefit to supplement a subsequent career at a lower salary, would receive nothing

under Social Security. Additionally, there are others who will not be able to continue performing the du- ties of a law enforcement officer after reaching middle age (some departments even

institute mandatory retirement ages), because of the physical rigors and psychological demands of police work. Such retirements are ‘‘early’’ for other careers, but

nor for the public safety professional. They would receive NO Social Security benefits.

Also of particular concern to public safety professionals is the much lower death benefits provided by Social Security. Most current retirement death benefits pay between fifty and seventy-five percent (50–75%) of an officer’s salary.

2) Comments on the GAO Testimony

We found the arguments advanced by GAO to be unpersuasive in making the case for mandatory coverage. They acknowledge the existence of a ‘‘cross over point,’’

about 2050, after which the cost of benefits paid to the public employees will exceed

the amount received in taxes.

They contend that mandatory participation is a matter of ‘‘fairness.’’ We would strongly disagree, especially on the following points made by GAO in their testimony: Many public employees in non-covered systems receive Social Security benefits as a result of other covered service.

• This is false. In 1983, Congress adopted the so-called ‘‘windfall elimination provision’’ and ‘‘government pension offset’’ (for spousal benefits), which were expressly

designed to prevent public employees from receiving benefits that are out of proportion to their contributions. In fact, both adopted provisions unfairly overpenalize employees who participate in government pension plans in lieu of Social Security. GAO

argues—in the very same testimony—that it is difficult to administer the ‘‘windfall

elimination provision’’ and ‘‘government pension offset.’’ It estimated that total overpayments ranged from $160 to $355 million.

Mandatory participation would be fair because Social Security reduces the need

for public assistance to the elderly.

• Public plans also relieve society from the need to provide assistance to the elderly, and do so more effectively than Social Security, whose beneficiaries do need

SSI (funded out of general revenues) because Social Security benefits are not great

enough to support them.

The GAO report also fails to address the special needs of law enforcement and

other public safety officers addressed above.

3) Just as each of you want to protect your citizens’ retirement income security, we

too have a responsibility for all Americans. Finding a solution that works and is fair

isn’t going to be easy.

The Fraternal Order of Police appreciates the complexity of this issue and shares

the Subcommittee’s commitment to fairness.

We strongly believe that requiring public pensions be scrapped in favor of Social

Security coverage, which is less suited to the needs of many public employees, especially public safety officers, is unfair. Unfair and, in the long run, will have negligible impact on the Social Security system.
74

In short, we do not see any compelling reason why a Federally mandated program which has managed itself into periodic solvency crises is superior to local and State

plans designed to meet the special needs of the public employee. Every indication

is that these employees are better served by their own plans and would lose a great

deal of benefits if forced into Social Security. If fairness is really an issue, then why

penalize individuals by forcing them to lose their greater benefits in order to pay

for the Social Security behemoth? The Social Security program is an important source of future retirement protec- tion for millions of Americans, and it requires a long-term solution, not the shortterm politically palatable fixes that have been tried in the past. Public pension

plans like those in California, Colorado, Massachusetts, Nevada, Louisiana, Ohio,

Texas and other States can provide models for reform.

Mandating participation in Social Security is not the right solution, nor does it represent meaningful reform. The GAO testimony and their final report reflects that

bringing in new hires would extend solvency for only two years—a minimal impact

at best.

In addition, State and local plans which are not covered by Social Security would sustain severe financial damage if they are now required to participate. This would

result in less benefits for not only the ‘‘new hires’’ whose participation would be

mandatory, but for current members and retirees in a number of the States. Existing systems would be required to alter their asset allocation models, resulting in

lower yields therefore accelerating financial impact. If this is about fairness, Mr. Chairman, we believe it is unfair to change the rules sixty-three years later because the Federal government is looking for an easy way

to fund Social Security without making hard choices. The State and local governments who chose not to participate in Social Security did not create this problem,

nor did the nearly four million employees who do not pay into the system. But all

of them would be paying a hefty price for their previous decision to create their own

retirement plans. Destroying the retirement programs of these hard-working Americans and raiding the budgets of State and local governments should not be part of

the Federal government’s solution.

4) Your plans are also going to be impacted by demographics. How are your State

Legislators or Retirement Boards focusing on this issue and what actions are they

considering? Do you expect you will see benefit cuts in the future, even without mandatory coverage?

Demographics are only one factor in considering the financial health of a plan. Many other factors such as investment guidelines, which are often determined by

statute, asset allocation, and benefits structure all have a direct impact on a plans’

ability to deliver on benefits promised. The vast majority of plans that cover public safety employees are ‘‘defined benefit’’ plans. These ‘‘DB’’ plans that are fully funded and have well constructed investment

programs allow for changing demographics within the plan structure. Asset liability

and strategic asset studies performed every three to five years ensure that appropriate changes are made in a timely fashion.

Plans that are underfunded such as Social Security face serious problems in delivering the benefits promised to the participants and beneficiaries of their respective

plans. These structural problems that have gone unaddressed for decades require

immediate attention.

Often, the ways chosen to address these structural problems are to reduce benefits, increase funding or terminate the plan. In the case of Social Security, a combination of increased funding and some modification of benefits would be the most

appropriate remedy.

Given that the life expectancy of both men and women has increased significantly

since Social Security was created over sixty years ago, it would seem appropriate

to increase the normal retirement age (NRA) before qualifying to receive certain

benefits. Although this is technically a reduction in benefits, if Americans are given

sufficient time to plan and invest, I believe this is a reasonable option.

A more aggressive investment approach would also be a way to improve the financial stability of Social Security. This means allowing the investment of Social Security assets in capital markets that until now has not been permitted. Increased investment returns over an extended period of time dramatically improves the financial health of any plan.

The Federal Government as the Plan Sponsor also has a duty to educate the public about the benefits that Social Security can provide and the risk associated with

more aggressive investment vehicles such as stocks and corporate bonds. Americans

should know that they must plan and carefully invest to accomplish their individual

retirement goals.
75

Unfortunately, for many Americans, Social Security is their only retirement plan.

Some form of ‘‘forced savings’’ must be made mandatory for every worker so they

have a variety of ways to fund their retirement years. Social Security was never intended to be the only source retirement benefits for Americans. Personal Savings

Accounts, 401 Ks and IRAs are all appropriate vehicles to accomplish this goal.

In conclusion, if reasonable modifications are made to Social Security such as increasing the Normal Retirement Age, improved investment performance, and a requirement for all Americans to participate in some form of ‘‘Forced Savings’’ program in addition to Social Security, I believe it that Social Security can be made

solvent without a significant reduction in benefits.

Every American must be aware that they are responsible for retirement planning

and that early planning combined with an effective investment program will provide

sufficient income during their golden years.

1. You mention that the majority of your benefits paid by your system come from reResponses of George Pyne to Mr. Bunning’s Questions

f

turn on investment of your retirement fund. Who manages that fund and how is the

fund invested currently?

The PERS investment program is designed to generate earnings to fund the System’s benefits while minimizing investment risk. By establishing a well-diversified

portfolio, PERS has strengthened control over the achievement of those objectives.

Through the prudent person standard, the Retirement Board has established investment objectives and policies which recognize future funding requirements based on

current membership demographics.

The investment objective of PERS is to:

• produce a total return from investments which, over the long term, exceeds the

rate of inflation (CPI) by 3% by capturing market returns within each asset class;

• invest so the short-term volatility of the returns will not cause PERS to alter

its long-term investment program;

• structure an investment program which is sufficiently uncomplicated to control

PERS’ ability to consistently meet return and risk objectives, and

• maintain an investment program which operates in compliance with the Public

Pension Principles

PERS’ investment portfolio is managed by external investment firms in compliance with the above objectives. PERS employs a number of institutional investment

firms to manage its assets. Each of these firms is charged with a specific style mandate and market benchmark. Currently 19 firms manage 23 portfolios for the System. A list of assets managed by each firm follows the response to this question.

One of the key determinants of risk and return is asset allocation. PERS employs

a ‘‘conservative’’ asset mix which is designed to provide stable returns through a variety of market environments. Our target asset allocation is:
76

Nevada PERS Investment Managers

Hired Mandate

Asset Size in

Millions of

Dollars (8/98)

Alliance Capital .............................. 1986 S&P 500 Index ............................... $ 815

...................................................... 1996 Value Index ..................................... $ 337

...................................................... 1998 Growth Equity ................................ $ 388

Atlanta Capital ............................... 1998 Growth Equity ................................ $ 277

Axe-Houghton ................................. 1987 Intl. Equity Index ........................... $ 792

Bank of New York .......................... 1997 Securities Lending ......................... ......................

...................................................... 1997 STIF Fund ...................................... $ 9

Barclays Global Inv. ....................... 1986 S&P 500 Index ............................... $ 817

Baring Asset Management ............ 1997 Intl. Bonds ...................................... $ 456

Bradford & Marzec ......................... 1997 Active Bonds ................................... $ 513

Brinson Partners ............................ 1990 Intl. Bonds ...................................... $ 661

Dresdner RCM ................................ 1997 Active Bonds ................................... $ 631

Invesco Realty Advisors ................. 1992 Real Estate ..................................... $ 390

J&W Seligman ................................ 1998 Value Equity Funded 9/98 ............. ......................

L&B Real Estate ............................ 1989 Real Estate ..................................... $ 255

Loomis, Sayles—Detroit ................. 1994 Value Equity ................................... $ 328

Nicholas Applegate ......................... 1976 Active Bonds ................................... $1,059

Pathway Capital ............................. 1986 Alternative Investments ................ $ 106

Patterson Capital ........................... 1987 Active Bonds ................................... $ 540

Payden & Rygel .............................. 1997 Active Bonds ................................... $ 555

PM Realty Advisors ........................ 1986 Real Estate ..................................... $ 296

...................................................... 1991 Mortgages ....................................... $ 4

State Street Research .................... 1987 Active Bonds ................................... $1,067

Callan Associates ............................ 1983 Investment Consultant .................. ......................

TOTAL PERS FUND ..................... ............ .......................................................... $10,296

2. Nevada, like a number of other States, cannot reduce benefits for current plan

members because Nevada courts have ruled retirement benefits to be a property right.

In addition, your State’s population base is expanding. How would these factors influence decisions of your State Legislators, should mandatory coverage be enacted for

newly hired employees?

Public pension benefits as property rights and Nevada’s expanding population are

two of several factors that would influence decisions of Nevada lawmakers if mandatory coverage of newly hired state and local government employees is enacted.
77

1 A significant cost to a state whose payroll is approximately $2.3 billion.

Nevada courts adopted the legal theory that its public employees have a contractual (or vested) right to retirement benefits which can not be diminished unless replaced by benefits of equal or greater value. The courts have further ruled that

members of our system vest in the benefit structure in place at their time of hire.

Given the above legal framework, the benefits of members hired prior to the effective date of mandatory coverage cannot be diminished or impaired. Unfortunately,

the cost to maintain their present benefit package is likely to increase if mandatory

coverage of new hires is enacted. This effect is based on our financing structure,

which anticipates future members of the system will share with current members

in the payment of the System’s accumulated liabilities. Currently, that payment is

approximately 3.6% of payroll for regular members and 6.02% for police and fire

members. Future members will not contribute towards the current System’s unfunded liability if they are mandated under Social Security because they would participate in a new plan that is coordinated with Social Security. The lack of new hires

coming into the plan will result in higher contribution rates, both for the employees

and public employers, because an ever-diminishing group will be contributing to the

system.

Additionally, due to the funding inefficiency of Social Security ($1 invested in

PERS provides a much greater return than $1 invested in Social Security) benefit

equality cannot be sustained without significant additional cost to the people of the

State. To serve as an illustration of this point, consider the following ramifications

for newly hired employees if they are mandated under Social Security:

• Maintain Current Benefit Levels:

If the goal of the Nevada Legislature is to maintain current benefit levels when

PERS benefits are combined with Social Security contribution rates would increase

from 18.75% to 27.1% of payroll for regular members.1

• Maintain Current Cost Levels:

If the Legislature wanted to retain current budgetary pension costs only 6.05%

would be available for PERS funding. This results in a service multiplier of between

.7% to .9% (our current multiplier is 2.5%) and a drastic reduction in income replacement levels when PERS is combined with Social Security.

New hires will be faced with substantially higher costs for benefits similar to current employees, or lower benefits for the same cost. In either instance there is little

or no room for them to participate in payment of the System’s liabilities.

The problem is further exacerbated by Nevada’s expanding population base. Our

actuarial projections anticipate an accelerated growth rate for our system which

translates into lower contribution rates. The positive result of this growth is negated

if new hires are mandated under Social Security.

3. GAO did a great deal of work, as you heard in Ms. Fagnoni’s testimony, analyzing

State and local retirement systems. Her staff met with many of your representatives.

I want to give you the opportunity to comment on her testimony or GAO’s responses

to the questions that were asked of them. Do any of you have any comment you would

like to make in response to the GAO testimony?

It is clear from the GAO report that the principal motivation behind Social Security reform is to address Social Security’s financial shortfall. The GAO estimates

that mandatory coverage would extend the trust fund’s solvency by 2 years. This

‘‘so-called benefit,’’ however, would come at a tremendous cost to taxpayers, employers, and employees in their respective states and local jurisdictions—and eventually

to Social Security when benefits come due.

To say as the GAO report does on page 21 under Conclusions that ‘‘the implications for mandatory coverage are mixed’’ downplays the serious disruption mandatory coverage will bring to the taxpayers, public employees and public employers of

Nevada. First, consider the impact on contribution rates. In order to provide the

same retirement package for new employees as current employees, retirement costs

would not just ‘‘increase’’ they would rise to a cost prohibitive level. In our plan that

cost is approximately 9% of payroll! There is also no mention in the GAO report

of the psychological and emotional impact on thousands of public employees who

will be forced away from the financial security of our present plan to the financial

insecurity of Social Security and its extremely inefficient means of funding benefits.

Neither does it consider one fundamental principle behind the establishment of our

pension plan, to attract and retain qualified public servants. How does a Social Security benefit incent an individual to choose public sector employment? The answer

is: it does not.
78

The GAO report seems to dismiss all of this by further concluding that ‘‘Social

Security would provide future employees with benefits that are not available, or are

available to a lesser extent, under current state and local pension plans.’’ This implies that Social Security provides better benefits than public pension plans, which

is clearly not the case.

Nevada PERS provides a comprehensive program of service, disability, and survivor benefits to its members and beneficiaries. Our examination shows that overall

we provide a superior benefit package which includes five year vesting, intrastate

portability, high income replacement ratios, and funded cost-of-living increases to all

benefit recipients ranging from 2%–5% compounded annually. Nevada’s program

provides more comprehensive benefits and provides more retirement income at a

lower cost than does Social Security. Nevada’s pension system also addresses the

unique needs of the public safety sector such as earlier retirement, an element of

coverage sorely lacking in the Social Security system. This will be discussed in great

detail below.

The GAO reported cited the 1994–1996 Social Security Advisory Council’s conclusion that mandating new hires under Social Security is ‘‘an issue of fairness.’’ It is

their contention that those of us who do not contribute to Social Security often receive benefits from periods of covered employment or as a dependent of a covered

worker and that somehow this isn’t ‘‘fair.’’ This position ignores that, as covered

workers, these individuals did participate in Social Security and are subject to the

Windfall Elimination Provision (WEP), just as beneficiaries are subject to the Government Pension Offset (GPO). These programs address the issue of ‘‘fairness’’ as

addressed by the Social Security Advisory Council.

If the Social Security Administration finds it difficult to determine whether someone is subject to the WEP or GPO, less drastic measures (than mandating Social

Security coverage) could be taken to address this problem. One suggestion is to revise Form 1099R to include a code which indicates a retiree’s income is from a governmental pension plan. This would help identify those individuals subject to offset.

There are other issues of ‘‘fairness’’ that weren’t addressed in the GAO report. At

the time of Nevada PERS creation in 1947, public employees were prohibited from

participation in Social Security. Today, Nevada enjoys a financially sound retirement program that guarantees an adequate pension at retirement for its public employees. It is fundamentally unfair for the federal government to force upon our

state an unfunded mandate resulting in either the same benefits at greater cost, or

reduced benefits for Nevada’s public employees. I question the fairness of Congress

imposing such taxes on states, cities, and towns, whose local services would be reduced and whose public employees would likely incur benefit cuts.

Regarding issues concerning the public safety sector, the Nevada Legislature determined it is the public policy of the State of Nevada to allow early retirement for

police officers and firemen as compared to miscellaneous government employees.

This policy is founded on the need to have a younger more physically agile workforce to meet the demands placed on our public safety occupations. Social Security

contains no such program. Is it fair to take this benefit away from our public safety

employees when early retirement is the legislated policy of the State of Nevada?

Moreover, many Social Security reform proposals would extend the normal retirement age past the age 67 threshold.

Policy decisions related to survivor benefits and disability retirement for all of Nevada’s public employees have also been addressed by the Nevada Legislature. It is

simply a matter of ‘‘fairness’’ that the rules are not now changed in the middle of

the game to the detriment of all Nevadans.

4. Just as each of you want to protect your citizens’ retirement income security, we

too have that responsibility for all Americans. Finding a solution that works and is

fair to each generation of Americans isn’t going to be easy.

As you have well pointed out, many of your plans replace a higher percentage of

pay than does Social Security. GAO, at my request, is taking a look at certain local

plans in more detail to assess what Congress might learn from these plans as we

consider Social Security reform. Based on the success of so many of your State and

local retirement plans, what lessons can we learn from your plans that might work

in a solution for Social Security?

The most important lesson that can be learned from public pension plans is that

investments should play a key role in funding the benefits for Social Security. Unlike Social Security, public pension plans are funded on an actuarial reserve basis.

This means the investment return on contributions paid to the system is used to

fund future benefits. In fact, the great majority of benefits paid by public plans

comes from return on investments.
79

I would suggest that a new Social Security System could look much like today’s

public pension fund with a well-diversified portfolio designed to generate earnings

needed to fund future benefits while minimizing risk. An independent board (or

boards—to diversify control of the asset base) could be established to manage the

assets of the fund which would include a mix of equity and fixed income securities.

The boards would establish investment objectives and policies with an eye on future

plan liabilities. They would act as fiduciaries for the benefit of Social Security participants.

Public pension plan boards have other functions as well. In addition to investment

policy they also formulate administrative policy and recommend plan design

changes to their respective state legislators. By keeping abreast of both economic

and demographic changes over time, public plan boards are responsive to the needs

of their members and beneficiaries. I believe it beneficial if an independent board(s)

for Social Security had similar authority.

5. Your plans are also going to be impacted by demographics. How are your State

Legislators or Retirement Boards focusing on this issue and what actions are they

considering? Do you expect you will see benefit cuts in the future, even without mandatory coverage?

Our State Legislature and Retirement Board are very mindful of changes in plan

demographics. From our perspective, demographics are those elements intrinsic to

our plan population; including the ratio of active members to retirees, mortality experience, average entry age, average retirement age, etc. The System performs an

actuarial valuation each year and a comprehensive experience study every three to

five years, to keep abreast of changes in plan demographics. Based on these reviews,

assumptions for future plan experience are modified and contribution rates adjusted

to maintain the fiscal integrity of our plan.

This process, coupled with benefits that are funded on an actuarial reserve basis

works well over time. Demographic changes are evaluated frequently and considered

in funding the system on the actuarial reserve basis. As I indicated earlier however,

mandatory coverage would change all this and cause a significant disruption to the

well-founded structure of our pension plan.

Again, thank you for the opportunity to respond to your questions regarding mandatory Social Security coverage.

Sincerely,

GEORGE PYNE

f

Executive Officer

Chairman BUNNING. Mr. Portman—excuse me, Mr. Neal, first.

Mr. NEAL. Thank you, Mr. Chairman. I have a question for Mr.

Lussier. First, I want to thank Mr. Lussier for that wisdom he imparted as a son of Massachusetts to the Subcommittee; a former

member of the legislature and you’ve guys have done a terrific job.

Mr. LUSSIER. Thank you.

Mr. NEAL. In your testimony, Tom, you spoke of what would happen in terms of higher State and local costs if this alteration was

made in the Social Security initiative. Would you elaborate on

that?

Mr. LUSSIER. Sure. In order, simply, to provide Social Security—

based on the employer costs for a new member of our system being

on average somewhere between 2 and 4 percent, we could see right

on the surface that to go from that number, 2 or 4 to 6, is an increase before we even talk about building any kind of a supplemental as been suggested as a possibility. As a result, we would

suggest that what would most likely happen is that we would end

up with some form of a defined contribution plan that would be totally funded by employees and would ultimately provide lower benefits to the employees. We also suggest that because of the unique

responsibility that the State has assumed for our system for teach80

ers, that there is a huge possibility that the State, obviously, maintaining its commitment to the existing teacher population might

opt to provide some sort of a supplemental program, but we think

it’s more than likely that the Social Security tax component of that

would be shifted back to the local cities and towns which would be

a total increase of 6.2 percent on cities and towns for teacher costs

which they have never borne since the teacher system was established and since it has always been an obligation of the Commonwealth. So, that we think that the effect at the local level could be

two pronged. It could be higher costs to provide the benefits that

are provided through our many local systems in Massachusetts for

their own employees plus the addition of the cost for teachers being

shifted from the State to the locals as the State views this as an

opportunity to get out from under that new obligation.

Mr. NEAL. Given Proposition 2.5 back in Massachusetts.

Mr. LUSSIER. That’s right. Given the local——

Mr. NEAL. You didn’t vote for that legislature, did you?

Mr. LUSSIER. No, not at all. [Laughter.]

In fact I had a rather contentious election over that one.

Given the limitations on local tax levies and the improbability of

voters voting to raise those levy limits to fund this kind of a benefit, I think you would see that that extra cost would come out of

essential services. It would come out of public safety; it would come

out of education, and the other services that are provided based on

our local property tax base.

Mr. NEAL. Thanks, Tom.

Thanks, Mr. Chairman.

Chairman BUNNING. Mr. Portman.

Mr. PORTMAN. Thank you, Mr. Chairman, and thanks for the testimony from around the country and from our safety officers. Mr.

Schumacher, good to see you again from my State of Ohio. I have

a lot of questions, and I also would ask the Chairman if I could

submit some for the record.

Chairman BUNNING. Without objection.

[The questions and answers follow:]

Responses of Richard E. Shumacher to Mr. Portman’s Questions

1. You mention that over 80% of the benefits paid by your plan come from investment

earnings and that your system collects about 22% of covered payroll in employee and

employer contributions. Who oversees the investments of the fund and how is the

fund invested?

Answer: The Ohio legislature created the Public Employees Retirement System

(PERS) in 1933. The legislation provides that the funds of the system are invested

by the system for the exclusive benefit of its members and beneficiaries.

The investment duties of the board are set by statute. Until 1997 the system operated under a legal list of investments. Since 1997 investments are made subject to

the prudent person standard. The System’s internal professional investment staff

manages the investment activities. About 8% of the assets in international investments are managed through external managers. The funds are invested in U.S. equities, U.S. fixed income, real estate, and international equities. The board’s investment policy provides for an allocation of the various asset classes. The asset allocation is calculated to determine the optimal mix of asset classes to provide the necessary long-term returns needed to fund the accruing long-term projected liabilities.

Portfolio risk is a part of this consideration. The current asset allocation target is

U.S. equity, 35%; international equity, 18%; U.S. fixed income, 35%; real estate,

11%; and cash, 1%.
81

Follow-up question. Mandatory coverage of newly hired State and local employees

would likely result in a lowering of receipts to that fund. What impacts do you see

that having in the State of Ohio?

Follow-up answer: As previously pointed out, over 80% of the benefit payments

for PERS are financed by investment earnings. Mandatory coverage of newly hired

state and local employees would divert the cash flow from the retirement system

to Social Security. If we reduce the flow of funds available for investment, we will

reduce investment earnings. For our pension plan to continue the same benefit payouts with such reduction, employee and/or employer rates would have to be increased by 6–7% of covered payroll. The rate increases are an unfunded mandate

on state and local governments to maintain the status quo of the benefit payment.

The increased rates would not produce any additional retirement or ancillary benefits. The reduction in investment income requires higher contribution rates to provide the same benefit.

2. GAO did a great deal of work, as you heard in Ms. Fagnoni’s testimony, analyzing

State and local retirement systems. Her staff met with many of your representatives.

I want to give you the opportunity to comment on her testimony or GAO’s responses

to the questions that were asked of them. Do any of you have any comment you would

like to make in response to the GAO testimony?

Answer: I commend the Government Accounting Office (GAO) for doing a thorough job in researching and writing the Implications of Extending Mandatory Coverage to State and Local Employees.

Perhaps the most striking information is the similarity between their cost analysis and that of the individual state and local government pension plans of the increased cost for moving Social Security uncovered employees into the mandatory

coverage. Our actuary has indicated that there would be a five to seven percent cost

increase to cover the individuals in Social Security and to maintain our current level

of benefits. The GAO publication indicates that it would be a seven percent increase

in cost. In most cases, this increased cost would be spent with the individuals receiving the same total benefits as they are currently receiving under the individual

state and local government plans. It is noted in the report that the inclusion of state

and local government pension plans is estimated to extend the Social Security Administration solvency by only two years.

It appears that the major emphasis in the move to mandatory Social Security coverage is on the short-term cash flow increases. We are unable to discern from the

report what increased long-term liabilities for those employees being mandated in

would add to future payouts. In her comments, Ms. Fagnoni stated ‘‘As with most

other elements of the reform proposals put forward by the 1994–1996 Social Security Advisory Council, such as raising the retirement age, extending mandatory coverage to newly hired state and local employees would resolve only a part of the trust

funds’ solvency problem.’’ This is an indication that mandatory coverage of new

hires may not be a wise solution for the funding problem. It could be that the future

short-term cash inflow is increased, but that future liabilities are increased by a

greater degree. A review of promised benefits versus the sources of income (contribution rates and other income) shall be made to determine that assets are adequate to provide for the benefit payout stream. If assets are inadequate to meet the

stream of payments, a fundamental flaw exists and adding more people will not provide long-term stability or solvency.

3. Just as each of you want to protect your citizens’ retirement income security, we

too have that responsibility for all Americans. Finding a solution that works and is

fair to each generation of Americans isn’t going to be easy.

As you have well pointed out, many of your plans replace a higher percentage of

pay than does Social Security. GAO, at my request, is taking a look at certain local

plans in more detail to assess what Congress might learn from these plans as we

consider Social Security reform. Based on the success of so many of your State and

local retirement plans, what lessons can we learn from your plans that might work

in a solution for Social Security?

Answer: Social Security is a major factor in the lives of many older citizens of our

country. It needs to be viable and financially sound. There are two distinctively different philosophies for funding pension benefits, pay-as-you-go and pre-funding.

Under the pay-as-you-go scenario, current contributions collected are used to meet

current benefit payments. The long-term effect is the need for greater and greater

current contributions to meet rising expenditures. To cover benefit payments for an

aging population, extreme pressure is put on increasing inflows.
82

Using a pre-funding philosophy, contributions are collected and invested. This technique adds a second source of funding. Therefore, the contributions are not the

only source of funds to meet payouts. Accumulating assets over a person’s working

career to provide old age benefits is a good example of maintaining generational equity. When the Ohio legislature created PERS, it delegated the funding of benefits

and investment of assets to the retirement system. The state of Ohio, itself, is not

involved in the investment of retirement system assets. The basic position is that

rates charged to provide benefits must generate sufficient assets to cover the liabilities as they come due. It is imperative that today’s collections grown through investment earnings, meet tomorrow’s liabilities.

4. Your plans are also going to be impacted by demographics. How are your State

Legislators or Retirement Boards focusing on this issue and what actions are they

considering? Do you expect you will see benefit cuts in the future, even without mandatory coverage?

Answer: The retirement board focuses on demographics during each annual actu- arial review. Once every five years a review is done which is the basis for changing

assumptions to reflect demographic trends. Liabilities are due over the long-term,

therefore, the funding criteria mirrors this long-term period. By beginning with a

sound funding policy, year-to-year changes are minimal. For example, the pending

retirements of the baby boomer generation are not cause for alarm in our system.

The impact will be an increase in cash outflows which will come from the assets

accumulated for this purpose.

Absent mandatory Social Security, we do not expect any benefit cuts. However, if there is mandatory coverage, our system will be unable to continue its current

ancillary benefit structure.

5. How are your contribution rates for employees determined so that funds are available to pay promised benefits?

Answer: The retirement board establishes contribution rates on the basis of actuarial studies. The actuarial studies are performed to determine the future liabilities

for benefits established by state statutes. The studies, among other factors, take into

consideration the demographics of plan members. Also developed are economic assumptions, i.e., market returns, wage inflation, etc. The result of this effort is a rate

structure that will fund retirement benefits over working careers. It should be noted that the employee and employer contribution rates for PERS have been stable over the last 25 years. While the rates have not increased, there

have been benefit enhancements added.

6. What benefit programs do the contributions support?

Answer: Besides the vested retirement benefits (age and service retirement, dis- ability, survivor benefits), PERS provides non-vested health care coverage to its

retirants and beneficiaries. Through varying techniques, we can provide a health

care coverage program funded by employer contributions which are included in the

current rate structure. If mandatory Social Security coverage were forced upon this

system, because of the reduction in our funding base, this ancillary program would

need to be severely curtailed or abandoned.

Cost of living increases (equal to the CPI change but not to exceed three percent)

of pension payments are funded under the current rate structure. Again, reductions

in our coverage base could require a reduction in the cost of living allowance payments. The overriding discipline for PERS is that adequate funds must be generated

ask a couple of questions of the Ohio system and feel free to chime

to meet the promised liabilities.

Mr. PORTMAN. Let me, just begin by making a comment and then

f

in from other States or from the other safety officer plans. My general comment is that we’ve got a Social Security system that needs

reform, and I’m for reform as is the Chairman, that’s why we’re

having these hearings, and, yet, I think it would be an irresponsible thing to simply get an infusion of funds, immediate funds, by

taking employees who are currently in systems that work—that are

prefunded; that invest in the market; that do all of the things that

many of us think we ought to be doing in Social Security—and
83

throwing them into Social Security without any promise, frankly,

that Social Security’s going to do those things.

So, I have real concerns about the proposals that we’ve seen both

from the Advisory Committee, Senator Moynihan’s proposal, and so

on, because I think that they are probably going in the wrong direction. In fact, we need more flexibility in our plans. I’m a big proponent of more flexibility in our pension plans as well through the

private sector. In any case, that’s kind of the perspective I bring

to this which probably doesn’t surprise anyone on the panel.

I also happen to be from Ohio where we have a system that

works, and that’s where I want Mr. Schumacher, to spell it out a

little more, because in your testimony you didn’t have time to get

into some of Ohio’s plan. I think it’s important for people to understand that the contribution rate is about 23.3 percent of payroll

now. Is that correct, when you include the employer contribution

and the employee contribution?

Mr. SCHUMACHER. Mr. Chairman, Mr. Portman, it’s 21.8 percent.

Mr. PORTMAN. So, it’s a relatively high percentage. We’re not saying the reason our State employees and teachers and so on don’t

want to get into the Federal plan is because they are concerned

about paying more payroll taxes. It’s more in terms of how the plan

works, the benefits, and the soundness of it fiscally. The funds are

invested. Can you tell us a little more about how those funds are

invested?

Mr. SCHUMACHER. Yes, the State legislature has given the retirement systems in Ohio a prudent person rule and the individual

boards set up an asset allocation program with a very keen sense

of the risk of the portfolio and the maximization of return. The return on investments is a major income stream for the——

Chairman BUNNING. Could you pull the mike to you so that the

recorder can hear you better. Thank you.

Mr. SCHUMACHER. The income stream is a major source of earnings for the State of Ohio and that funds a great deal of our benefits. Yesterday, I did review with our board terminations in the

State of Ohio in our pension plan for the month of April. The individuals who were terminated over various working careers and retirement careers had paid in, including interest furnished by earnings, of about $4 million. The payout by the system for those individuals over their retirement years was $28 million.

Mr. PORTMAN. That’s a successful plan. Again, I think when you

look at the short-term benefit of including mandatory coverage, it’s

obvious, but in the longer term, you will not see benefits to Social

Security and it’s because these folks are going to retire also, and

they’re going to be a strain on the system eventually. So I think

it’s a short-term fix that isn’t a responsible, structural change in

Social Security that we would really need.

Let me just ask you quickly on the taxation. How are those benefits taxed?

Mr. SCHUMACHER. The benefits are taxed under the Internal

Revenue Code 100 percent.

Mr. PORTMAN. Fully taxed for Social Security.

Mr. SCHUMACHER. Fully taxed.

Mr. PORTMAN. And how about at the State level.
84

Mr. SCHUMACHER. The same taxation applies at the local level

with the exception that survivor benefits are not taxed in the State

of Ohio.

Mr. PORTMAN. One other question I have on the plan. You mentioned briefly that it covers more than just retirement income, and

if you could talk a little, particularly, on the health care side, what

it provides and what the impact on the health care benefits were

there to be mandatory coverage?

Mr. SCHUMACHER. Yes, health care in Ohio is not a mandated

benefit. It is a benefit that is provided to be given at the option of

the retirement board. Currently, we provide for two PPOs and various health care—Medicare, HMOs—and this is done at zero cost

to the original retirement and at a contributing cost for the spouse

under the age of 65 of $60 a month; over age 65, of $20 a month.

Mr. PORTMAN. Again, an attractive plan and it’s working. I would

just make a general comment that probably we could learn something at the national level from some of these State plans as we

asked GAO earlier.

I would make one other comment which is that the Unfunded

Mandate Relief Act did not go through this Subcommittee. I wish

it had, but this Subcommittee is very interested in that issue and

has used that discipline that we got 3 years ago through that act.

It actually came through the government—then called the Government Operations Committee, now, Government Reform and Oversight Committee, but it is certainly the intent of this Congress, this

majority in Congress, not to impose unfunded mandates. That’s another good point that I, frankly, hadn’t thought through until I

heard your testimonies this morning. Thank you all for your testimony. Thank you, Mr. Chairman.

Chairman BUNNING. Mr. Collins.

Mr. COLLINS. Thank you, Mr. Chairman. As a followup to Mr.

Portman, Mr. Schumacher, noticing that the contributions are

equivalent to 23 percent—at least 14 and then matching from the

employer—how does the actual retirement check from your plan

compare to an equal worker of same time, same salary range under

Social Security?

Mr. SCHUMACHER. The basic annuity formula is 2.1 percent per

year of employment. A person with 30 years of employment can retire at any age on a straight life benefit of 63 percent of their final

average salary; that’s the average of the highest 3 years of income.

If they wish, they can take a joint survivor benefit or they can take

a benefit over other lives and as much of 100 percent of what they

receive to their spouse or to the beneficiary.

Mr. COLLINS. How would that compare to a worker earning equal

pay on their Social Security check that you would know?

Mr. SCHUMACHER. I do not know the answer to that question.

Mr. COLLINS. Yes, sir.

Mr. SCOTT. I think if you take an average worker who earns

$35,000 a year, under our system that worker would get 75 percent

of pay after 30 years of service. So, that’s somewhere in the neighborhood of $25,000, $26,000, $27,000, $28,000. Social Security ceiling is in the neighborhood of $12,000, I believe, now.

Mr. COLLINS. Quite a bit of difference. Mr. Scott, you mentioned

that most State and local plans offer considerable portability.
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Mr. SCOTT. That’s correct.

Mr. COLLINS. How does this work and what is your outlook for

increased portability?

Mr. SCOTT. Well, I think portability is probably one of the big

issues that our industry—whether it’s private sector retirement or

public—has to deal with. I mean, it’s weak across the whole environment, and, of course, Social Security provides complete portability. We’ve been working on that, and we’ve put in place, for example, interest on refunds several years ago; we allow people to

buy into the system. If they come in and they’ve got some money,

they buy into the system for public or private sector service. We

also have what we call a hybrid; that is if you come to PERA, Public Employees Retirement Association, and you work for, say, 5 or

10 years and you walk out of the system, we will give you your

money back, which is at 8 percent, plus we’ll match that; give you

2 percent of the employer contribution and then interest at 80 percent of our assumed rate which gives you 8 percent interest. So, on

your money you would be taking 32 percent return on that money

as you walk out the door. The unfortunate part of that is that most

younger people take it and it’s gone. As people have more years of

service, they generally will take it and roll it over which you’ve allowed them to do through the Tax Codes.

Now, if you leave the money with PERA—and this is an encouragement to do so—we will, when you retire, give you your 8 percent plus 50 percent match of 4 percent, and then we’ll annuitize

that because you don’t have the full defined benefit. And, so that

calculation actually gives you a better benefit than the defined benefit does until you reach 20 years of service, and that annuitized

amount is protected completely for cost of living; it gives you access

to our retirement health care. So, we think we’re making some

strides there, and, of course, the big argument is defined benefit

versus defined contribution, but that’s the way we deal with it.

Mr. COLLINS. OK, very good. Thank you, Mr. Chairman.

Chairman BUNNING. Thank you. I have just one more question

I’d like to ask all the panel. Mr. Pyne, I’d like for you to start us

off. As you know there are many options being considered for the

Social Security reform. One option being put forth by both Democrats and Republicans alike is to create personal retirement savings accounts. If Social Security were to be reconfigured to include

such accounts, would State and local employees want to participate?

Mr. PYNE. First of all, I think what’s admirable about that is at

least the dialog has to do with advanced funding and recognizing

the fact that you need to build wealth and the way to do it, not

unlike our plans, is to use the power of compounding and the investment markets and advance fund benefits. What you’re really

doing there, then, is you’re becoming more like us in the public sector because that’s exactly what we do is advance fund benefits.

Now, we do it on a defined benefits basis not so much on a personal

retirement account type of a basis, but, at the same time, we’re already there, so it would just seem, from my perspective, that we’re

sort of where I think Social Security needs to go. So, it’s not advantageous for us to be moved into that type of an environment. So,

I think we’re just fine right where we are. Our public employees
86

can participate in 457 plans and plans of that sort which essentially have the same features, I think, of these personal retirement

accounts.

Chairman BUNNING. Would anyone else in the panel like to com- ment about it?

Mr. PFEIFER. Mr. Chairman, I think, from my personal perspec- tive, that would be a very positive innovation, and the reason I say

that is because, as I understand it, the way Social Security is invested, you’re invested, basically, in long-term fixed income instruments of the U.S. Government. Now, in a diversified retirement

plan such as mine and such as the others sitting around this table,

we not only buy fixed income from the United States, we buy U.S.

equities, international equities, and a variety of other investment

instruments that improve the performance of those funds and improve the investment returns so that you’re able to grow the money

over time and payout a very generous benefit, hopefully, at the end

of the time, because you have so much time to deal with. The only downside I would see with that is the personal retire- ment savings accounts, just as with the defined contribution plans,

there’s a certain responsibility that the employer—in this case, I

assume it would be the Federal Government would have—to educate the individuals who participate in that particular option to

make sure they know some of the basics of investing so they invest

the money prudently and get what they expect. Obviously, certain

individuals would be adverse to risk; certain individuals would be

willing to take more risk, so I think that’s something that would

have to be very carefully looked at, but I think that would be a

very positive innovation.

Chairman BUNNING. Anyone else? I thank the panel for their

participation, and we look forward to dealing with you again. We

may submit questions in writing for you to answer for the record.

Thank you.

[The questions and answers follow:]

Responses of Robert J. Scott to Mr. Bunning’s Questions

You make the point that public plans do a good job providing for retirement security

for their members. For example, in Colorado, a 15-year employee earning a high of

$15,000 would receive 28.6% of pay under Social Security when he retired, as opposed to 33% under the Colorado plan. You also challenge the Social Security Advisory Council’s assertion that Social Security’s protection is superior to State and local

plans over the course of a lifetime. Would you provide more detail as to how you

reach this conclusion?

It is well established that most public plans provide a strong retirement benefit

for their employees at virtually all levels of compensation and all periods of covered

service. (We have enclosed copies of a study done by Third Millennium on this subject, but there is a great deal of other evidence that supports this point as well.)

These better benefits are possible because of the greater investment return on public pension plan contributions compared to Social Security.

Those who try to argue that Social Security provides better protection over the

course of a lifetime generally argue that Social Security provides better ancillary

benefits, such as survivor benefits and disability benefits, and Social Security also

provides better portability. Also, Social Security benefits are adjusted for the costof-living.

In our written testimony to the Social Security Subcommittee (pages 3–4) we covered this topic at length. Ancillary benefits of public plans are generally better than

those provided by Social Security. Not only are dollar benefits generally higher, but

public plan disability benefits may be easier to qualify for. Disability benefits for

public safety workers, such as fire and police officers, are superior in public plans

to benefits provided by Social Security. Social Security survivor benefits for children
87

cut off at age 18. Public plan benefits often extend through college, if the surviving

child is a full-time student.

Public plans also provide cost-of-living adjustments for retired workers. In gen- eral, the post retirement cost-of-living adjustment is comparable to the Social Security adjustment, except for periods of unusually high inflation. (See, for example, the

Third Millennium study, page 16) Public plans account for inflation that occurs during a career by basing benefits on an employee’s high three or five year compensation, or on his final three or five years of compensation. The portability issue is discussed in response to question two.

You mention that most State and local plans offer considerable portability. How does

this work and what is your outlook for increased portability in the future?

Some people argue that Social Security’s greatest advantage is that it is com- pletely portable. It is true that all workers who accumulate the required 40 quarters

are entitled to some benefit under current law, although many workers who are in

and out of the work force during their careers may receive only a very low benefit

measured in dollars. (Those workers having fewer than 40 quarters receive no

monthly retirement benefit and no refund of contributions paid.) It is not true, however, that workers are guaranteed a specific benefit through Social Security. Unlike

public and private plans, where an employee is vested in a specific ‘‘accrued benefit,’’

Social Security benefits may be modified by Congress in ways that are either beneficial or adverse to workers, and those workers have no contractual protection. Benefits in the Social Security program, and other entitlement programs, such as Medicare, have been modified in the past to reduce benefits for current and future participants

Public plan participants are always 100 percent vested in their own contributions, and interest at a reasonable rate is added. Most public plans use rapid vesting

schedules for qualifying for a monthly retirement benefit. Generally the vesting requirement is five years; see Third Millennium study, page 14. Employees are always

free to roll over their vested account balance into an IRA, in lieu of any monthly

benefit from the public retirement system. Colorado PERA is a defined benefit plan that really is a hybrid because it includes some of the attractive portability features of a defined contribution plan. Employees

who terminate PERA-covered employment before retirement age may elect a refund

that includes their own contributions (8 percent of salary) plus interest, and a 25

percent match on that amount. The employee may elect instead to leave the account

in PERA and receive at retirement a refund that includes additional accumulated

interest plus a 50 percent match, or a lifetime monthly benefit. The lifetime monthly

benefit, if elected, is the greater of the benefit based on the defined benefit formula

(2.5 percent of high-three-year salary per year of service) or a money purchase benefit calculated by annuitizing the employee contributions plus interest and a 50 percent match. PERA will propose state legislation in 1999 that would increase the

matching levels from 25%/50% to 50%/100%.

Colorado’s hybrid features recognize that many employees covered by PERA will

not retire in a job covered by PERA. These employees have good choices that they

can make at termination that will enable them to build up a sufficient retirement

income, in or out of PERA. The State Teachers’ Retirement System of Ohio has a

similar hybrid feature in its defined benefit plan.

PERA’s Board of Trustees would also like to propose to the Colorado Legislature

that a small portion of future employer contributions be allocated as a partial match

to voluntary contributions that employees make to their own 401(k), 457 plan, or

403(b) plan accounts. This may start in 2001, unless Social Security for new hires

is mandated, in which case it may not be possible at all.

Public employees in any state can continue earning service credit if they transfer

from one job to another within the same system. Some retirement systems within

the same state allow service years to be carried into the new system under reciprocity agreements. In addition, most states permit employees to ‘‘buy in’’ past service

credits into their retirement plan, often by using money accumulated in a previous

employer’s plan. According to a survey of 105 plans conducted by the Public Retirement Institute, about 92 percent of statewide public pension plans allow the purchase of service credits.

Colorado PERA for example allows any employee with at least one year of earned

PERA service to buy other years earned through prior public or private sector service, provided they are not currently vested for benefits in the previous employer’s

plan. For employees hired in 1999 or later, federal law limits the number of private

sector years that can be purchased to five years. The five year cap is not expected

to be a problem for most employees, but Colorado would support an increase or

elimination of the cap, if proposed in Congress.
88

H.R. 3788, the ‘‘Retirement Security for the 21st Century Act,’’ by Reps. Portman and Cardin, would enhance the ability of all public employees to purchase service.

The bill would allow rollovers from IRC section 457 and 403(b) plans into public defined benefit plans to purchase service. Currently, rollovers to purchase service are

only allowed from 401(a) or 401(k) plans, pursuant to federal law. As a result, employees usually purchase service credits in their public plan with after-tax moneys.

3. In your testimony, you discuss the importance of how ‘‘new hire’’ would be defined,

if mandatory coverage for new hires were to be enacted. Would you provide more detail as to why this definition is important and what the impacts are?

The definition of the term ‘‘new hire’’ will have a substantial effect on the turnover rate. The most important issue is whether or not the term ‘‘new hire’ will refer

only to employees who are not employed by the state or local government in any

capacity on the date when Social Security coverage for new hires becomes effective,

or whether it will also apply to employees who change jobs within a system, in other

words, lateral transfers.

The resolution of this question will affect the short-term cost of mandatory Social Security coverage to government employers. It will also have effects on pension plan

assets; the greater the number of new hires, the lower the amount of new money

which is contributed to the pension plan. In addition, there may be a ‘‘lock in’’ effect

for some employees who may be reluctant to change jobs if such a change would

result in having to pay the Social Security tax.

4. GAO did a great deal of work, as you heard in Ms. Fagnoni’s testimony, analyzing

State and local retirement systems. Her staff met with many of your representatives.

I want to give you the opportunity to comment on her testimony or GAO’s responses

to the questions that were asked of them. Do any of you have any comment you would

like to make in response to the GAO testimony?

We were pleased to see that the GAO report acknowledges the existence of a cross over point, after which the cost of benefits paid to public employees will exceed the

amount received in taxes. GAO estimated the cross over point to be 2050. (Page 9

of the report) We were also pleased to see GAO acknowledge (page 20) that administrative prob- lems would require at least a four year lead time for public employers to adjust to

a system of mandatory coverage for new hires. We found the arguments which GAO discussed in favor of mandatory coverage to be unpersuasive. GAO discussed the so-called ‘‘fairness’’ issue, for the most quoting

or referring to arguments made by others. This issue of fairness is discussed at

great length in my written testimony, pages 7–10. It is hard to believe, at this point in time, that anyone knowledgeable can argue that mandatory coverage is fair simply because many public employees in noncovered systems receive Social Security benefits as a result of other covered service.

The windfall elimination provision adopted in 1983 and the government pension offset (for spousal benefits), which were expressly designed to prevent public employees from receiving benefits that are out of proportion to their contributions, should

dispose of this point once and for all. But the argument appears at page 10 of the

GAO report.

GAO also quotes others as arguing that mandatory coverage would be fair because

Social Security reduces the need for public assistance to the elderly, or because the

parents of public employees may receive Social Security benefits. But public plans

also relieve society from the need to provide assistance to the elderly, and may do

this more effectively than Social Security, some of whose beneficiaries do need SSI

(funded out of general revenues) because Social Security benefits are not great

enough to support them. If the parents of public employees receive Social Security,

it is presumably because those parents made Social Security contributions. Moreover, the children of public employees will generally make Social Security contributions, even through their parents receive no benefits or reduced benefits.

The GAO also argued that it is difficult to administer the Windfall Elimination

Provision and the Government Pension Offset, and ‘‘estimated ... total overpayments

to be between $160 million and $355 million over the period 1978 to 1995.’’ In the

context of the Social Security funding deficit, as well as the harm that would be

done to public plans by mandatory coverage, the amounts cited are trivial. The report noted that additional data matches by SSA, with cooperation from non-covered

retirement systems, will be implemented to improve administration of the WEP and

GPO reductions. The GAO also believes that there is a significant risk that some

state and local employees will not be covered under either a public plan or by Social

Security, as required by OBRA 1990. From our experience, there is no significant

risk of noncoverage. SSA, the IRS, and state and local officials have developed
89

manuals and other programs to help make sure every employee is covered under

an approved plan. This is no reason to mandate Social Security coverage for state

and local workers.

As for the financial benefits of mandatory coverage, GAO largely relies on the es- timates of others that mandatory coverage would solve about 10 percent of Social

Security’s actuarial problem. If true, this is because contributions will be received

throughout the 75-year period, while many of the liabilities accruing because of

those contributions will not have been paid. In any event, if contributions are not

saved, rather than used to fund operating costs of the government, mandatory coverage will not help Social Security at all, except perhaps during a relatively brief

period when no benefits are being paid.

5. Just as each of you want to protect your citizens’ retirement income security, we

too have that responsibility for all Americans. Finding a solution that works and is

fair to each generation of Americans isn’t going to be easy. As you have well pointed out, many of your plans replace a higher percentage of pay than does Social Security. GAO, at my request, is taking a look at certain local

plans in more detail to assess what Congress might learn from these plans as we

consider Social Security reform. Based on the success of so many of your State and

local retirement plans, what lessons can we learn from your plans that might work

in a solution for Social Security?

CPRS takes no position on whether on not Social Security should be subject to structural reform, or what the nature of that reform should be if it occur. Of course

we are willing to share our experience in devising and funding our retirement plans,

for whatever relevance that experience may have. Colorado PERA, like most public plans, is a defined benefit plan. Plan contributions are pooled for investment purposes, allowing for great diversity of investment

and eliminating the possibility that a particular employee could be adversely effected by poor investment choices. Also, while public plans generally provide rapid

vesting, there are some plan forfeitures of employer contributions by short term employees, and these forfeitures help meet the funding requirements of the plan. Unlike Social Security, however, state and local retirement plans are funded. Most benefits, and many plan improvements, are paid for out of investment earnings on contributions. In my written testimony, I pointed out that STRS of Ohio estimated that the average retired employee lived for 26 years after retirement. Three

years of benefits are paid for out of employee contributions, six years are paid for

out of employee contributions, seventeen years of retirement benefits are paid for

out of investment earnings on contributions. Earlier I pointed out that Colorado PERA and most other public plans do an excellent job of providing ancillary benefits and cost-of-living adjustments for retired

workers. Many of these benefits are paid for out of earnings on investments. It is important to be aware that ancillary benefits and cost-of-living adjustments

are easier to provide because of the defined benefit structure of most public plans.

Most proposals for restructuring Social Security envision private individual accounts, in which retirement benefits are based on the amount in the account at retirement. It would certainly be possible to provide ancillary benefits and cost-ofliving adjustments under such a structure, but it would be difficult if most of the

funds are contained in individual accounts.

If there were no pooling of investment and risk, ancillary benefits would have to

be provided out of the employee’s individual account, probably by some form of insurance. This would reduce the value of the employee’s retirement account and

would require regulation of the insurance providers to deal with such issues as adverse selection.

Cost-of-living adjustments could be purchased as part of an annuity, but there

would be no way for the retiree to achieve cost-of-living adjustments, or other plan

improvements, from favorable post-retirement investment experience. Public plans,

with their large pool of assets and defined benefit structure, are able periodically

to provide plan improvements for retirees and current plan participants out of favorable investment experience. At the same time, contribution rates for many public

plans have been reduced slightly over the last decade.

It is well worth noting that women face special problems under an individual account system. Many women go in and out of the work force, reducing lifetime contributions to a retirement plan. Also women generally live longer than men, meaning the proceeds of a defined contribution account would have to last them longer.

People who go in and out of the work force also see their benefits reduced under

Social Security and defined benefit public plans, but probably not to the same extent

as would be the case in a defined contribution plan. Moreover, Social Security and

most public plan benefits are provided in the form of a lifetime annuity, and are
90

adjusted for inflation pre-and post-retirement. These factors tend to mitigate the effects of having a shorter career. Colorado PERA encourages its members to contribute on a voluntary basis to defined contribution plans, to foster increased portability

and to help supplement their basic income during retirement.

6. Your plans are also going to be impacted by demographics. How are your State

Legislators or Retirement Boards focusing on this issue and what actions are they

considering? Do you expect you will see benefit cuts in the future, even without mandatory coverage?

Colorado PERA and other public plans are funded on an actuarially sound basis.

Contributions are fairly level as a percentage of payroll. This level-cost funding

helps assure over the long term that benefits promised will be paid when they become due. PERA’s trustees and independent consulting actuary compare actuarial

experience against assumptions every year, and actuarial assumptions about mortality, salary increases, turnover, etc., are usually adjusted every five years based

on significant changes in trends. Public plans use reasonable assumptions about the

rate of investment return in funding plan liabilities; the average assumption is

about 8 percent per year.

Public plans and private plans have recognized for years that the ratio of active

employees to benefit recipients has decreased, and will continue to do so. In contrast

to Social Security, no benefit reductions or contribution rate increases are expected

to be necessary to pay benefits. In the absence of mandatory Social Security, Colorado PERA will be able to pay plan benefits that are provided by Colorado statute

without contribution rate increases. Over the years, as progress has been made in

amortizing unfunded actuarial accrued liabilities, plan benefit provisions have been

improved at times.

On behalf of all the members of the Coalition to Preserve Retirement Security,

thanks again for the opportunity to provide information to the Subcommittee on this

important issue.

Normandie—oh, I can see it better out there, OK. Ms. Jergen, is

The final panel we’ll hear from testimony: Robert Normandie?

f

that fair?

Ms. JERNIGAN. Jernigan.

Chairman BUNNING. Jernigan. And Joseph Rugola.

Mr. RUGOLA. Very good, Mr. Chairman. Thank you.

Chairman BUNNING. OK. Robert is chairman of the Coalition to

Assure Retirement Equity. Ms. Jernigan is a chapter member of

the National Association of Retired Federal Employees, and Joseph

is the international vice president of the American Federation of

State, County, and Municipal Employees and is the executive director of the Ohio—what is this, Rob?

Mr. PORTMAN. You represent greater Ohio, so I thought it was

appropriate. [Laughter.]

Chairman BUNNING. OK—and is the executive director of the

Ohio Association of Public School Employees.

Mr. Normandie, go ahead.

STATEMENT OF ROBERT E. NORMANDIE, CHAIR, COALITION

TO ASSURE RETIREMENT EQUITY

Mr. NORMANDIE. Mr. Chairman and Members of the Subcommittee, I’m Robert Normandie, legislative researcher for the National

Association of Retired Federal Employees. However, I’m here today

testifying as chair of the Coalition to Assure Retirement Equity,

CARE; a coalition of 41 organizations representing millions of Federal, State, and local government retirees and employees.

CARE was formed in 1991 to specifically address the Social Security government pension offset, GPO, which had been enacted as
91

part of the Social Security amendments in 1977. Since December

1982 when the law went into effect, some 271,000 Federal, State,

and local retirees have been affected by the GPO.

The GPO has particularly affected the economic well-being of

thousands of women by severely reducing or eliminating their Social Security widow’s benefits. I personally have heard from hundreds over the past several years, and their stories have a lot of

similarities. Many worked in lower-level jobs and receive moderate

pensions and may have worked part time or full time after raising

their children. When they go to the Social Security office to apply

for benefits, usually as widows, they are shocked and dismayed to

find out about the GPO. The widows’ benefit they expected to receive is drastically reduced or eliminated, and they really do not

know how they are going to survive on a pension that barely pays

the rent. The reaction of everyone is the same: They all feel they

have been penalized because they worked for the government. If

they had worked in the private sector, say for IBM, they could receive a company pension and still get their husbands’ Social Security. In addition, if they had also worked in the private sector and

earned enough Social Security credits, they find that their own Social Security benefit is reduced by 50 percent or more by the windfall elimination provision.

The WEP, enacted as part of the 1983 Social Security amendments, has affected some 356,000 government retirees since 1986.

The GPO and WEP were a part of the 1977 and 1983 congressional

efforts to curtail the costs of the Social Security Program in the

context of long-term solvency. The GPO applied Social Security’s

dual entitlement provision to all government pension programs

that covered workers not covered by Social Security. Initially, this

meant Social Security spouse benefits would be offset by 100 percent of the non-Social Security covered government pension. This

was changed to two-thirds in 1983 on the basis that one-third of

the pension was equivalent to a private sector pension.

The Social Security Subcommittee in a 1996 information paper

on GPO and the WEP said, ‘‘There is nothing magical about the

two-thirds figure, and it is the source of much controversy. In fact,

there is tremendous variance in the actual individual equivalent

depending on length of government career and average salary.’’ The

paper also quoted a 1990 Congressional Research Service analysis

that stated Social Security was the equivalent of 51 percent of the

civil service benefit of an average retiree in 1990 which would support at least a one-half offset rather than two-thirds. The House,

in fact, had passed a provision that would have reduced the offset

to one-third. This occurred just prior to Congress’ reduction of the

offset from 100 percent to two-thirds.

This same Congressional Research Service analysis concluded by

stating, ‘‘The part of the CSRS, Civil Service Retirement System,

benefit, that can be considered to be the equivalent of Social Security covers a very wide range depending on the circumstances of

each individual. Because of this variability, all inclusive conclusions about the generosity and fairness of CSRS benefits and the

general equity of the two Social Security antiwindfall measures,

GPO and WEP, are probably inappropriate. The various illustrations indicate, however, that the antiwindfall measures miss the
92

mark considerably for many civil service retirement system annuitants.

In summary, the GPO and WEP have had a devastating effect

on the retirement incomes of many Federal, State, and local government retirees. It is hoped, Mr. Chairman, that your Subcommittee will seriously consider changes to the GPO and WEP provisions

of the Social Security Act to provide a more equitable solution.

Thank you.

[The prepared statement follows:]

Statement of Robert E. Normandie, Chair, Coalition to Assure Retirement

Equity

Mr. Chairman and members of the Subcommittee, I am Robert E. Normandie, legislative researcher for the National Association of Retired Federal Employees. I am

here today testifying as Chair of the Coalition to Assure Retirement Equity (CARE),

a coalition of 41 organizations representing millions of federal, state and local government retirees and employees.

CARE was formed in 1991 to specifically address the Social Security Government

Pension Offset (GPO) which had been enacted as part of the Social Security Amendments of 1977. Since December of 1982, when the law went into effect, some 271,000

federal, state and local retirees have been affected by the GPO.

At the time of formation of the coalition a House bill to repeal the GPO had been

introduced and bills to either repeal or amend the GPO have continued to be introduced in each subsequent Congress. The Windfall Elimination Provision (WEP) bill

introduced by Rep. Barney Frank last year is the first such bill, to my knowledge,

that has addressed the WEP.

The GPO has particularly affected the economic well being of thousands of women

by severely reducing or eliminating their Social Security widow’s benefits. I personally have heard from hundreds of women over the past several years and their stories have a lot of similarities. Many worked in lower level jobs and receive moderate

pensions and may have worked part time, or full time, after raising their children.

When they go to the Social Security office to apply for benefits, usually as widows,

they are shocked and dismayed to find out about the GPO. The widow’s benefit they

expected to receive is drastically reduced or eliminated, and they really do not know

how they are going to survive on a pension that barely pays the rent.

The reaction of every one is the same. They all feel they have been penalized because they worked for the government. If they had worked in the private sector, say

for IBM, they could receive a company pension and still get their husband’s Social

Security.

In addition, if they had also worked in the private sector and earned enough Social Security credits they find that their own Social Security benefit is reduced by

50% or more by the WEP. The WEP, enacted as part of the 1983 Social Security

Amendments, has affected some 356,000 government retirees since 1986.

The GPO and WEP were part of the 1977 and 1983 Congressional efforts to curtail the costs of the Social Security program in the context of long term solvency.

The GPO applied Social Security’s dual entitlement provision to all government pension programs that covered workers not covered by Social Security. Initially this

meant Social Security spouse benefits would be offset by 100% of the non-Social Security covered government pension. This was changed to two-thirds in 1983 on the

basis that one-third of the pension is equivalent to a private sector pension.

The Social Security Subcommittee in a 1996 information paper on GPO and WEP

said ‘‘there is nothing magical about the two-thirds figure, and it is the source of

much controversy. In fact, there is tremendous variance in the actual individual

equivalent depending on length of government career and average salary.’’ The

paper quoted a 1990 Congressional Research Service (CRS) analysis that stated Social Security was the equivalent of 51% of the civil service benefit of an average retiree in 1990 which would support at least a one-half offset rather than two-thirds.

The House, in fact, had passed a provision that would have reduced the offset to

one-third. This occurred just prior to Congress’ reduction of the offset from 100%

to two-thirds.

This same CRS analysis concluded by stating, ‘‘the part of the CSRS [Civil Service

Retirement System] benefit that can be considered to be the equivalent of Social Security covers a very wide range, depending on the circumstances of each individual.

Because of this variability, all-inclusive conclusions about the generosity and fairness of CSRS benefits, and the general equity of the two Social Security anti93

windfall measures [GPO and WEP], are probably inappropriate. The various illustrations indicate, however, that the anti-windfall measures miss the mark considerably for many CSRS annuitants.’’

In addition to proposals to reduce the GPO to one-third or one-half, one House

bill in a prior Congress would have eliminated the offset for retirees whose combined monthly government pension and spousal Social Security benefits were below

$300. For those with combined pensions and Social Security between $300 and $900

the bill would have increased the offset rate gradually to the full two-thirds.

CARE has supported Rep. William Jefferson’s GPO bills that would eliminate the

offset for any government retiree whose combined monthly pension and spousal Social Security benefits are $1,200 or less. If the combined amount is over $1,200 then

only that amount over the $1,200 would be subject to the two-thirds offset. Rep. Jefferson’s bill has 161 cosponsors which indicates a fair amount of support.

Rep. Frank’s bill would eliminate the WEP for any government retiree who has

combined monthly pension and Social Security spousal benefits of $2,000 or less. For

those with combined amounts between $2,000 and $3,000 the WEP is phased in.

This bill would increase the Social Security benefits of about 93% of those who are

currently affected by the WEP.

Realizing the inequity of the WEP, Dr. Robert J. Meyers, former Chief Actuary

of the Social Security Administration, has proposed that the percentage in the

‘‘guarantee’’ be reduced from 50% to 20%. The ‘‘guarantee’’ is that the reduction in

benefits resulting from applying the WEP formula can be no more than 50% of the

government annuity. This only helps people with extremely small government pensions. Social Security estimates that 90,000 government retirees would see an increase in their benefits under Dr. Meyers’ proposal.

In summary, the GPO and WEP has had a devastating effect on the retirement

incomes of many federal, state and local government retirees. It is hoped, Mr. Chairman, that your Subcommittee will seriously consider changes to the GPO and WEP

provisions of the Social Security Act to provide a more equitable solution.

American Federation of Government

Coalition to Assure Retirement Equity Members

f

Employees

American Federation of State, County,

and Municipal Employees

American Federation of Teachers

American Foreign Service Association

American Postal Workers Union

Employees For Full Offset Repeal Today

(Denver, Co.)

Federally Employed Women

Federal Managers Association

Gray Panthers

Illinois Retired Teachers Association

International Association of Fire

Fighters

International Federation of Professional

and Technical Engineers

International Union of Electronic,

Electrical, Salaried, Machine &

Furniture Workers

Louisiana Retired State Employee’s

Association

Mailhandlers Div. of Laborers’

International Union of North America

Massachusetts Pension Not Posies

Coalition

National Air Traffic Controllers

Association

National Association of Air Traffic

Specialists

National Association of Governmental

Employees

National Association of Letter Carriers

National Association of Police

Organizations

National Association of Postal

Supervisors

National Association of Postmasters of

the U.S.

National Association of Retired Federal

Employees

National Committee to Preserve Social

Security and Medicare

National Council of Senior Citizens

National Council on Teacher Retirement

National Education Association

National Federation of Federal

Employees

National League of Postmasters

National Rural Letter Carriers

Association

National Treasury Employees Union

Older Women’s League

Patent Office Professional Association

Professional Managers Association

Public Employee Department—AFL–CIO

Retired State, County and Municipal

Employees Association of

Massachusetts

School Employee Retirees of Ohio, Inc.

Senior Executives Association

Social Security Managers Association

Women’s Institute For A Secure Retirement
f

94

Chairman BUNNING. Thank you very much.

Ms. Jernigan.

STATEMENT OF BERNADINE A. JERNIGAN, CHAPTER MEMBER,

NATIONAL ASSOCIATION OF RETIRED FEDERAL EMPLOYEES

Ms. JERNIGAN. Mr. Chairman, Members of the Subcommittee, my

name is Bernadine Jernigan. I’m a member of the Vienna, Virginia,

Chapter of the National Association of Retired Federal Employees.

I’m 73 years old and have worked both for the Federal Government

and in the private sector. I am currently——

Chairman BUNNING. Pardon me, Ms. Jernigan, would you please

pull that right up to you, so we can all hear a little better? Thank

you.

Ms. JERNIGAN. I am currently employed 2 days a week as a

secretary/receptionist in a small business firm. I first started working in the private sector in 1943. In 1946, at the end of World War

II, I married a marine. Military families transfer every few years

making it difficult for wives to develop a long-term career. Also, my

generation of women were professional homemakers, not usually a

high salaried position.

Despite these complications, while raising my family, I earned

the quarters needed to become eligible for Social Security benefits

at age 62. My husband served in Korea and when that conflict

ended he returned home and was hired by the Central Intelligence

Agency. We were stationed overseas several times during the next

15 years, and when 3 of our 5 children were in college at the same

time I went to work to help pay the college expenses. At that time,

I was 49 years old and found it difficult to find a good paying position in my previous profession. I was hired by the CIA, but it was

at a lower paid GS position.

After working 13 years, I retired under the Civil Service Retirement System. My husband had also retired, and he went to work

in the private sector. At age 65, he began receiving his full Social

Security benefits. At age 62, I filed for my own Social Security benefits, but continued to work in my 2 day a week job continuing to

pay into the Social Security system. The Social Security office told

me that I would receive a check for $152 a month, but my first

check was for $32. I had been hit by the windfall elimination provision and took an initial deduction because of being age 62. All together, I lost almost 75 percent of my benefits.

My husband died in 1993, and the government pension offset

stepped in and reduced my already reduced benefits—I’m sorry. Instead of receiving full widows benefits, I receive about one-third of

that amount because of my years as a government employee. No

one in the private sector has two-thirds of his pension taken away.

Current government employees who retire under the new Federal Employees Retirement System, FERS, are not affected by the

GPO. I could have also been exempt, but I was never informed that

if I had worked three more weeks I could have transferred to FERS

and been exempt from the GPO. I continue to work at age 73 and

have approximately $50 in Social Security taxes withheld from my
95

pay each and every month. I have been told I will never see this

money, but I must continue to pay it. GPO and government pension offset and windfall elimination are laws that discriminate against some government employees. Those

of us affected by these unjust laws are not asking for benefits we

have not paid for or earned. We ask that the system be made fair.

Why are some, especially widows, less entitled than others. We

simply ask that these two laws be repealed. Each time I receive a

cost-of-living adjustment in my small annuity, my Social Security

benefits are reduced. It’s not easy to live on income below the national poverty level. In 1997, I received a letter from the Social Security Administra- tion claiming that they had overpaid me $600. My requests for

clarification were ignored, and they just refused to answer my

questions. A visit to the local Social Security office ended in a confrontation when the clerk accused me of being responsible for the

overpayment, and it was all my fault, and she ushered me out the

back door.

After nearly 30 years of working and paying into Social Security,

I receive $156. This is after the deductions of $43.80 for Medicare,

$16 for the overpayment, and a $280 offset. Without windfall and

government pension offset, I should be receiving close to $500 in

widows benefits. It’s excruciatingly painful to suffer the loss of

$280 of my promised benefits each and every month of my life.

Why are government employees being punished? Where is the

fairness in these two pieces of legislation? Why must we continue

to fight for the benefits we were promised and have already paid

for? Are we going to our graves fighting these discriminations?

Thank you.

[The prepared statement follows:]

Statement of Bernadine A. Jernigan, Chapter Member, National

Association of Retired Federal Employees

My name is Bernadine A. Jernigan and I am a member of the Vienna, Virginia

chapter of the National Association of Retired Federal Employees. I am 73 years old

and have worked both for the federal government and in the private sector. I am

currently employed two days a week as a secretary/receptionist in a small business

firm.

I first started working for the federal government in 1943. In 1946, at the end

of World War II, I married a marine. Military families transfer every few years

making it difficult for wives to develop a long-term career. Also, my generation of

women were professional homemakers, not usually a high-salaried position. Despite

these complications, while raising my family, I earned the quarters needed to become eligible for Social Security benefits at age 62.

My husband served in Korea and when that conflict ended he returned home and

was hired by the Central Intelligence Agency (CIA). We were stationed overseas several times during the next fifteen years. When three of our five children were in

college at the same time I went to work to help pay the college expenses. At that

time I was 49 years old and found it difficult to find a good paying job in my previous profession.

I was hired by the CIA but it was in a lower paid GS position. After working thirteen years I retired under the Civil Service Retirement System. My husband had

also retired and he went to work in the private sector. At age 65 he began receiving

his full Social Security benefits.

At age 62 I filed for my own Social Security benefits but continued to work in

my two day a week job, continuing to pay into the Social Security system. The Social Security office told me that I would receive $152 a month but my first check

was for only $39. I had been hit by the Windfall Elimination Provision (WEP), and

took an additional reduction because of being age 62. Altogether I lost almost 75%

of my benefits.
96

My husband died in 1993 and the Government Pension Offset (GPO) stepped in

and reduced my already reduced benefits. Instead of receiving a full widow’s benefit,

I receive about one-third of that amount because of my years as a government employee. No one in the private sector has two-thirds of his pension taken away. Current government employees who retire under the new Federal Employees Retirement System (FERS) are not affected by GPO. I could have been exempt also but

I was never informed that if I had worked three more weeks I could have transferred to FERS and been exempt from the GPO.

I am continuing to work at age 73 and have approximately $50 in Social Security

taxes withheld from my pay each and every month. I have been told I will never

see this money again but I must continue to pay it.

GPO and WEP are laws that discriminate against some government employees.

Those of us affected by these unjust laws are not asking for benefits we have not

paid for or earned. We ask that the system be made fair. Why are some (especially

widows) less entitled than others? We simply ask that these two laws be repealed.

Each time I receive a cost-of-living adjustment in my small annuity my Social Security benefits are reduced. It is not easy to live on an income below the national poverty level.

In 1997 I received a letter from the Social Security Administration claiming that

they had overpaid me $600. My requests for clarification were ignored and they just

refused to answer my questions. A visit to the local Social Security office ended in

a confrontation when the clerk accused me of being responsible for the overpayment,

that it was all my fault.

After nearly 30 years of working and paying into Social Security I receive only

$156. Without WEP and GPO I should be receiving about $500 in widow’s benefits.

It is excrutiatingly painful to suffer the loss of $350 of my promised benefits each

and every month of my life.

Why are government employees being punished? Where is the fairness in this

WEP and GPO legislation? Why must we continue to fight for the benefits we were

promised and have already paid for? Are we going to our graves fighting this discrimination?

Chairman B

Mr. Rugola.

UNNING. Thank you for your testimony.

f

STATEMENT OF JOSEPH RUGOLA, INTERNATIONAL VICE

PRESIDENT, AMERICAN FEDERATION OF STATE, COUNTY,

AND MUNICIPAL EMPLOYEES (AFSCME); AND EXECUTIVE

DIRECTOR, LOCAL 4, OHIO ASSOCIATION OF PUBLIC

SCHOOL EMPLOYEES (OAPSE)

Mr. RUGOLA. Mr. Chairman and Members of the Subcommittee,

I’m Joseph Rugola, international vice president of the American

Federation of State, County, and Municipal Employees and Executive Director of the Ohio Association of Public School Employees,

OAPSE, Local 4 of AFSCME.

I appreciate the opportunity to be here today to share our experiences with the government pension offset, a Federal law that’s had

a devastating affect on thousands of our members. I would also like

to express AFSCME’s opposition to mandatory Social Security coverage for public employees who do not currently participate in the

system. In the interest of time, I will submit my written testimony

which includes further information in opposition to mandatory Social Security coverage.

My local union known as OAPSE represents nearly 40,000 workers in school districts throughout Ohio. Ohio is a State that does

not participate in Social Security for its public employees. Our

OAPSE members are covered instead under SERS, the Ohio School

Employees Retirement System, which is a defined benefit pension
97

plan. While our members can’t receive Social Security benefits

based on their earnings in public service, they can receive benefits

as the spouse or widow of a Social Security covered worker. Unfortunately, the government pension offset demands that they reduce

these Social Security benefits by two-thirds of the amount of the

public pension.

Currently, the average SERS pension is less than $500 a month.

These relatively low pensions reflect the lower paying job categories and work patterns of school district employees who are predominantly women. Our members are school cafeteria workers,

crossing guards, bus drivers, custodians, classroom aids, and secretaries. Many retire after a full-length career as school district

employees, but they may have worked only a 30-hour week, a pattern we call ‘‘short hours.’’ Others may have had less than a full

career, say 15 or 20 years in their school district following divorce

or child rearing. Most of these women began their careers expecting to retire with both a pubic pension and a Social Security spouse

benefit. It’s a shock when they realize that they will not receive a

much needed portion of their expected retirement income.

We recognize that private sector workers cannot receive full Social Security benefits from their own work plus full benefits from

a spouse. This rule for dually eligible Social Security beneficiaries

is supposed to be the basis for the GPO, but the situations really

are not comparable. To start with, school district employers in Ohio

contribute 13.5 percent of payroll to SERS. The worker share is

more than 8 percent. The total of these contributions, 21.5 percent,

is nearly double the combined employer-employee contribution

under Social Security. These rates are typical for public pensions

in non-Social Security jurisdictions.

The GPO law assumes that the public plan contributions that exceed Social Security rates are the equivalent of contributions to a

private pension plan. This reasoning precipitated the 1983 offset

revision which reduced the original 100-percent offset to the current two-thirds, but even the two-thirds calculation is very imprecise and not very fair.

Consider the fact that most private pension plans do not require

any contributions from any workers. They’re financed completely

by the employer. Nevertheless, when the workers retire, they get

their full pension benefit plus their full Social Security benefit with

no offset of any kind. Meanwhile, our members pay on both the

front and the back end. To make matters worse, their entire pension benefit is subject to Federal income taxes while Social Security

benefits are tax free for most retirees.

To see how much the GPO can hurt, take a look at two of the

members of our retiree organization. Due to time limitations they

will have to represent the many, many calls and letters that

OAPSE regularly receives from GPO victims. Take Shirley Milburn

of Windsor, Ohio, for example. Her SERS pension check is $405 a

month. Her husband’s monthly Social Security benefit is $786 a

month. Normally, she could expect to receive a spousal benefit

equal to half his benefit or $393 a month. Instead, the GPO reduces it to only $121 a month giving her a total retirement benefit,

pension plus Social Security, of only $526 a month, and from that

amount she must still deduct her Medicare part B premium of $43.
98

Another example is Donna Stevenson, an OAPSE member who

retired to Lake Park, Georgia. Her SERS pension is $534 a month,

and her husband receives $827 a month from Social Security. Instead of getting a spousal benefit of $413, Donna’s benefit from Social Security is only $55 a month. When she deducts her Medicare

premium, she’s left with a monthly check of $12.

When the GPO was first enacted, it was meant to target people

receiving multiple government pensions, some of whom had higher

incomes in retirement than they had while working. Our members

just don’t fit the image of these so-called double and triple dippers.

Congress could not have had them in mind when the GPO was

passed. That’s why AFSCME strongly supports H.R. 2273, the GPO

reform bill, sponsored by Congressman Jefferson.

The Jefferson bill would permit the public pensioners who were

not covered by Social Security to keep as much as $1,200 a month

in combined pensions and Social Security spousal widow’s benefits

before the two-thirds offset is imposed. We believe this will protect

thousands of low-pension women who badly need their Social Security benefits to keep them out of poverty. It’s a targeted approach

to GPO reform, and it makes good sense.

If H.R. 2273 were in effect today, Shirley Milburn would be a lot

better off. She could keep her SERS pension check of $405 a month

plus her entire Social Security spouse benefit. This would give her

a combined monthly benefit of $798. Donna Stevenson would be in

much better shape too.

We urge the Members of the Subcommittee to give careful consideration to H.R. 2273. Shirley and Donna and thousands more

like them are counting on your support. Thank you, Mr. Chairman.

[The prepared statement follows:]

Statement of Joseph Rugola, International Vice President, American

Federation of State, County, and Municipal Employees (AFSCME); and

Executive Director, Local 4, Ohio Association of Public School Employees

(OAPSE)

Good morning, Mr. Chairman and Members of the Subcommittee. I am Joseph

Rugola, International Vice President of the American Federation of State, County

and Municipal Employees (AFSCME) and Executive Director of AFSCME Local 4—

the Ohio Association of Public School Employees (OAPSE). I appreciate the opportunity to be here today in order to express AFSCMEs opposition to mandatory Social Security coverage for public employees who do not currently participate in the

system. We would also like to share our experiences with the Government Pension

Offset (GPO), a federal law thats had a devastating effect on so many of our members.

My local union, known as ‘‘OAPSE,’’ represents nearly 40,000 workers in school

districts throughout Ohio. Ohio is a state that does not participate in Social Security

for its public employees. Our OAPSE members are covered, instead, under SERS—

Ohios School Employees Retirement System—which is a defined benefit pension

plan.

While our members cant receive Social Security benefits based on their earnings

in public service, they can receive benefits as the spouse or widow of a Social

Security-covered worker. Unfortunately, the Government Pension Offset demands

that they reduce these Social Security benefits by two-thirds of the amount of their

public pension.

Currently, the average SERS pension is less than $500 a month. These relatively

low pensions reflect the lower-paying job categories and work patterns of school district employees, who are predominantly women. Our members are school cafeteria

workers, crossing guards, bus drivers and custodians. Many retire after a full-length

career as school district employees, but they may have worked only a 30-hour

week—a pattern we call ‘‘short-hours.’’ Others may have had less than a full career—say 15 or 20 years in their school district following divorce or child rearing.
99

Most of these women began their careers expecting to retire with both a public

pension and a Social Security spouse benefit. Its a shock when they realize that

they will not receive a much-needed portion of their expected retirement income.

We recognize that private-sector workers cannot receive full Social Security benefits from their own work plus full benefits from a spouse. This rule for duallyeligible Social Security beneficiaries is supposed to be the basis for the GPO. But

the situations really are not comparable. To start, school district employers in Ohio

contribute 13.5 percent of payroll to SERS. The workers share is more than 8 percent. The total of these contributions—21.5 percent—is nearly double the combined

employer-employee contribution under Social Security. These rates are typical for

public pensions in non-Social Security jurisdictions.

The GPO law assumes that the public-plan contributions that exceed Social Security rates are the equivalent of contributions to a private pension plan. This reasoning precipitated the 1983 offset revision, which reduced the original 100 percent offset to the current two-thirds. But even the two-thirds calculation is very imprecise

and not very fair.

Consider the fact that most private pension plans do not require any contributions

from workers. Theyre financed completely by the employer. Nevertheless, when the

workers retire they get their full pension benefit plus their full Social Security benefit, with no offset of any kind. Meanwhile, our members pay on both the front and

back ends. To make matters worse, their entire pension benefit is subject to federal

income taxes, while Social Security benefits are tax-free for most retirees.

To see how much the GPO can hurt, take a look at two of the members of our

retiree organization. Due to time limitations, they will have to represent the many,

many calls and letters that OAPSE regularly receives from GPO victims.

Take Shirley Milburn of Windsor, Ohio, for example. Her SERS pension check is

$405 a month. Her husbands monthly Social Security benefit is $786.30. Normally,

she could expect to receive a spousal benefit equal to half his benefit, or $393.15.

Instead, the GPO reduces it to only $121.80, giving her a total retirement benefit—

pension plus Social Security—of only $526.80 a month. And from that amount, she

must still deduct her Medicare Part B premium of $43.80.

Another example is Donna Stevenson, an OAPSE member who retired to Lake

Park, Georgia. Her SERS pension is $534.39 a month and her husband receives

$827.60 a month from Social Security. Instead of getting a spousal benefit of

$413.80, Donnas benefit from Social Security is only $55.80. When she deducts her

Medicare premium, shes left with a monthly check of only $12.

Its my understanding that when the GPO was first enacted, it was meant to target people receiving multiple government pensions, some of whom had higher incomes in retirement than they had while working. Our members just dont fit the

image of these so-called ‘‘double and triple dippers.’’ Clearly, Congress did not have

them in mind when the GPO was passed.

Thats why AFSCME strongly supports H.R. 2273, the GPO reform bill sponsored

by Louisiana Congressman William Jefferson. The Jefferson bill would permit public

pensioners who were not covered by Social Security to keep as much as $1,200 a

month in combined pension and Social Security spouse or widows benefits before the

two-thirds offset is imposed. We believe this will protect thousands of low-pension

women who badly need their Social Security benefits to keep them out of poverty.

Its a targeted approach to GPO reform and it makes good sense.

If H.R. 2273 were in effect today, Shirley Milburn would be a lot better off. She

could keep her SERS pension check of $405.00 a month, plus her entire Social Security spouse benefit of $393.15. This would give her a combined monthly benefit of

$798.15—well within the bills $1,200 limit.

Donna Stevenson would also be in much better shape. Shed receive a total monthly benefit of $948.19 and could put a few of her financial worries to rest.

We urge the Members of the Social Security Subcommittee to give careful consideration to H.R. 2273. Shirley and Donna—and thousands more like them—desperately need your support.

Just as we oppose the punishing effects of the Government Pension Offset,

AFSCME opposes any action to mandate Social Security participation for state or

local governments that do not currently provide Social Security coverage to their

public employees. Nearly 25 percent of public employees are not covered by Social

Security. About the same percentage of AFSCME members are in this category. But

these individuals do not lack pension protection. Nearly all are covered by state or

local defined benefit pension plans.

Furthermore, the Omnibus Budget Reconciliation Act (OBRA) of 1990 has already

ensured that any temporary, part-time or seasonal employee not covered by one of

these public plans be covered under Social Security. So, already there is basic pen100

sion protection for all American workers—private and public-sector. There is no

need to mandate Social Security coverage in an effort to protect workers interests. Public employees and their employers have been given ample opportunity to come under Social Security. Most have voluntarily done so. Those still outside the system

clearly prefer their own state or local pension plans. The vast majority of these

plans are healthy and actuarially sound. Most of them have been in existence longer

than Social Security and were designed to function without it. They have excellent

records for providing disability protection and retirement security to their participants.

Mandated Social Security coverage could have serious implications for public em- ployees, their employers, and their pension plans, even if the coverage applies only

to future hires.

Employees (i.e., future hires) would be required to pay 6.2 percent of their pay- checks in FICA tax, even though most are already making substantial contributions

to their public employee pension plans. Unlike the private sector—where plans are

usually financed entirely by employers—contributions by public workers in nonSocial Security jurisdictions typically range from 8 to 10 percent of pay. Adding the

Social Security payroll tax would create an unaffordable burden for millions of these

workers, most of whom have lower-to middle-incomes.

Employers would also be required to contribute 6.2 percent of payroll to Social Se- curity, on top of the contributions they now make to fund their own pension plans

(typically 13 to 15 percent of payroll). Many of the states most affected, such as

California and Massachusetts, have only recently pulled themselves out of deep fiscal crises and simply cannot afford to meet this new expenditure. If forced to do so,

the result could be a loss of jobs and public services. Faced with a requirement to pay the Social Security payroll tax on behalf of em- ployees, governments would most likely try to create new pension plan tiers for new

hires that would integrate Social Security with supplemental public pensions. This

could result in reduced benefits, increased employee contributions and changes in

retirement ages. Benefit structures for future retirees could be drastically altered. It could also destabilize public pension funds for todays workers and retirees. Ben- efits in existing public pension plans rely heavily on a funds investment earnings.

If some of these investments are cut off and the proceeds diverted to new plans, it

could spell serious trouble for AFSCME members and other public employees. The result could be the inability of pension plans to pay promised benefits to cur- rent participants, unless taxes are raised to fund much higher employer contributions. In addition to reductions in basic benefits, plans would be forced to look seriously at other types of cuts—in already small cost-of-living adjustments or retiree

health care coverage, for example. AFSCME believes that mandatory coverage would create havoc for public retirees, while providing only limited relief for Social Security. After all, an influx of new

funds might help with a quick fix, but eventually the new participants will be eligible to collect benefits. At that point, they might create new problems for Social Security. In closing, we would like to emphasize AFSCMEs strong support for strengthen- ing Social Security—our nations great system of income protection that touches the

lives of most American workers, including 75 percent of AFSCME members. AFSCME opposition to mandatory coverage is not based on a belief that Social Security doesnt work. We think it does a remarkable job of providing basic security

and shielding participants from potential poverty. Rather, we oppose mandatory coverage because it will cause serious problems for a group of workers and retirees who

have never been part of that system. For the majority who do participate in Social Security, we advocate maintaining the systems current social insurance structure, while making the moderate changes

necessary to ensure the systems long-term solvency.

Ms. Jernigan, thank you for being here and sharing your story with

Thank you.

Chairman BUNNING. Thank you very much for your testimony.

f

us. I am very sorry to hear of your experience at the Social Security office. I wish some representatives of Social Security were

here—I don’t think they are—so they could—we hear those stories

quite frequently. In fact, I would say 75 percent of all calls to my

office in my district are on Social Security problems, and so it is
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not an unusual occurrence. To be ushered out the back door might

be an unusual occurrence. We understand your frustration, and we

want to do something about it. I don’t know if Mr. Jefferson’s bill

is the exact way to do it, but it would be a start in the right direction.

Let me ask Mr. Normandie, you indicated that CARE has supported Congressman Jefferson’s proposal that would eliminate the

government pension offset and the $1,200 threshold would be—

anything less that, they could get to the $1,200 threshold. You also

mentioned Congressman Frank’s bill on the windfall elimination

provision and a separate proposal by Dr. Robert Myer. Does CARE

support either the Frank bill or the Myer proposal?

Mr. NORMANDIE. CARE doesn’t really have a position on the

Frank bill, because we were formed as a coalition for the government pension offset, and we really haven’t developed a policy yet

on that or on Dr. Myers’ proposal.

Chairman BUNNING. Joseph, you mentioned that you also support 2273, because it would protect thousands of low-pension

women who need their benefits to keep them out of poverty. Are

you saying that the overall policy, it makes better sense to target

the government pension offset as opposed to rebuilding it all together?

Mr. RUGOLA. Our goal, when we began the debate years ago, Mr.

Chairman, was to have the GPO reversed. It’s our opinion——

Chairman BUNNING. Completely eliminated.

Mr. RUGOLA. Completely eliminated. But the fact of the matter

is that in the 20 years I’ve been with OAPSE, for me, this issue’s

become as much of a women’s poverty question as it is a retirement

or pension question. We just have thousands of people who are at

or near the poverty line, and our objective ought to be, we think,

to take care of that problem first. I think the GPO is unfair. I pay

into Social Security. I’m looking forward to drawing my benefit. I’m

also going to be the recipient of a private pension plan. I don’t have

an offset.

I think the GPO is unfair, and it ought to be repealed, but the

fact of the matter is that the real tragedy is for the overwhelming

number of women. Of our members, we calculate about 70 percent

of them at some point will be affected by the GPO, and since our

membership is almost 70 percent women, we’re talking about tens

of thousands of women who really will be at the edge of poverty

or in poverty during retirement. The cap in Congressman Jefferson’s bill, we think, is a reasonable place to begin work on this: It

at least alleviates the poverty aspect of the GPO.

Chairman BUNNING. Mr. Portman.

Mr. PORTMAN. Thank you, Mr. Chairman, and I appreciate the

testimony on both the issues. I have one general question that I

just thought of as you were responding to Mr. Bunning. One of the

unfairness aspects of this is the fact that with private pension savings there’s no offset. I don’t know what you’re private pension is—

are you in a 457 plan or 403 plan?

Mr. RUGOLA. We’re in a defined benefit pension plan which falls

under neither one of those categories, actually, but our——

Mr. PORTMAN. It’s a public sector——
102

Mr. RUGOLA. No, the plan under which I will draw a benefit is

a private pension plan.

Mr. PORTMAN. OK.

Mr. RUGOLA. Our members are covered, of course, under the

School Employee Retirement System which is a defined benefit

public plan.

Mr. PORTMAN. OK. I guess my question is you’ve made the analogy, really, between the two and drawn the unfairness argument

out of that saying that if you are in a private plan you don’t have

an offset. If you’re in a government plan you do have an offset.

There also are, of course, options for government employees to get

into private plans like the 457 plan; not a private plan but a defined contribution plan or a 403(b) plan, and, as you know, I’ve got

legislation to greatly expand that and to be able to permit rollovers—and I’ll make a pitch for my legislation here. Actually, it

will help this situation.

Chairman BUNNING. Rob, there’s nobody here listening to——

Mr. PORTMAN. OK, nobody’s listening?

Chairman BUNNING. You have to sell it to the rest of the Subcommittee.

Mr. PORTMAN. I got to get you and Mac on it, but it’s actually

helps in this situation because it will give government employees

a lot more options in terms of providing for their retirement savings without having to worry about all this. Is that correct? In

other words, the 457 plans, 403(b) plans would not result in any

kind of offset.

Mr. RUGOLA. Right, that portion of it. That’s my understanding

of how it would work, but, you know, the point you’re making, Congressman, is an excellent one in terms of how the income aspect

of this, the poverty aspect of this plays out. Our average salary in

our union for active workers is just over $15,000 a year. Even for

our full-time workers who are mostly women—secretaries and

classroom aids in the schools—the average salary is barely over

$20,000 a year.

The question will be how much of their—particularly, those who

are trying to raise a family on their own—how much of their income will be able to be devoted to a private pension plan? They

really suffer on both ends. They wouldn’t be able to take advantage

of the kind of options that you’re talking about, because the disposable income question comes into play, and then when they do retire, if they’re affected by the offset, they’re penalized at that point

during retirement.

Mr. PORTMAN. I understand that it would be difficult for some

people, particularly young families, to put that money aside. I also

think it’s in their interest, particularly if we can get this legislation

passed, because you have more options in terms of rollover; more

options in terms of buying service credits with those assets out of

those plans that you want to, and, of course, we raise the contributions and allow the plans just to be more of a backstop to the Social

Security and the State retirement plans. So, I understand what

you’re saying, though, there still will be a group of people who are

unlikely to take advantage of that. I think more education is necessary on both fronts.
103

Let me ask you another question with regard to the fairness

issue, and, again, understanding this is a $5 billion question, I

think, with regard to the repeal; $5.5 billion, I guess, with regard

to the windfall elimination. Is there more education that could take

place? You’ve all essentially said people are shocked when they find

out this is true. Are we doing a good enough job, and are the State

plans doing a good enough job to explain to people the situations

so that there is at least more planning and less of that shock?

Mr. RUGOLA. The answer to that question, I think, is that the

State plans are doing everything that they can. I think there’s a

limit to how much people can do to prepare themselves for the effect of the GPO when they’re already low-income workers. The fact

of the matter is as we’ve heard earlier today from a couple of other

witnesses, what our folks are asking for here is not a benefit that

hasn’t been earned. Most of the widows, most of the women affected by the GPO are the spouses of men who worked, and under

any circumstances would be entitled to half of that Social Security

benefit. So, I think it’s problematic in that regard. Our people

know, believe me. I’m not a pension expert, but I’m more of an expert than I want to be on the misery that’s been caused by the

GPO, because I have to face too many people everyday and explain

to them what the effect of this is going to be on their retirement

security.

Mr. PORTMAN. Has your group, the international group, spent

some time looking at how we could target something like H.R. 2273

to the situation that you talk about; not just to women although

you mentioned low-income, fixed-income widows is where you see

most of that misery you talk about, but is there a way to come up

with some income targets in a context like this more general legislation, H.R. 2273, that you all have looked at?

Mr. RUGOLA. To my knowledge, the cap itself is really the only

rational and effective way to deal with it. It’s a $1,200 limit which,

I might add since you asked Congressman, it’s kind of interesting

because I was here testifying a few years ago on the offset. I had

a side conversation with Congressman Kasich and he suggested

that there might be a lot more understanding if there were a cap

involved because Congress when it passed the GPO, in the first

place, it was aimed at these huge pensioners who were double and

triple dippers. His point to me was folks would understand a lot

more readily what you’re trying to get at which is the poverty question.

Mr. PORTMAN. If we could target them more.

Mr. RUGOLA. If it was targeted at lower income.

Mr. PORTMAN. And getting it done in the context of Social Security reform.

Mr. RUGOLA. Yes. We don’t know of any better way to do it than

the income cap that’s in Congressman Jefferson’s bill.

Mr. PORTMAN. Thank you, Mr. Chairman.

Chairman BUNNING. Thank you.

Mr. Collins.

Mr. COLLINS. Just one brief question, Mr. Chairman. Going back

to the question we asked Mr. Scott about portability. If a person

retires from a government job under the government retirement

program and is not entered into the Social Security system, and
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then they go to work in the private sector and come under the Social Security guidelines, would it be feasible for the government retirement program to be portable whereby any deduction that would

be the same or equal to Social Security, instead of being deposited

to the Social Security account for that individual, is then deposited

directly to the same retirement account but the worker would not

be eligible until he or she retired from the second job.

Mr. RUGOLA. Congressman Collins, now you’re getting into some

technical areas of retirement that I’m just not well-versed enough

on to answer, and I’m reluctant to get into those kind of discussions, because it takes a retirement system person to answer that

question, and I’m a union person, not a retirement system person.

Mr. COLLINS. Well, the money follows the person, and it goes into

the same retirement account only they would not be eligible for the

increased benefit until such time as eligible for retirement again.

Mr. RUGOLA. I understand the concept you’re describing. In your

question, you use the word ‘‘feasibility,’’ and that part of it is—the

feasibility aspect is something that——

Mr. COLLINS. How would that affect the offset and such?

Mr. RUGOLA. I think the offset——

Mr. COLLINS. Do you think we’d have just one retirement system? One retirement plan for that individual, no matter if it was

public or private, one retirement plan for all of us.

Mr. RUGOLA. Well, on the question of whether public employees

ought to be mandated into the system, we’re opposed to that for a

number of reasons.

Mr. COLLINS. Yes, but once they retire from the public and go

into the private sector for employment, then they have to come

under the Social Security.

Mr. RUGOLA. They do if they qualify.

Mr. COLLINS. So, if Social Security deductions and matching by

the employer normally being directed to the Social Security Trust

Fund were directed instead to that same retirement program they

are already participating in and drawing benefits from, and as long

as the benefits wouldn’t change until the time they became eligible

for retirement again they wouldn’t be double dipping or wouldn’t

have two retirement systems; they’d still have just one.

Mr. RUGOLA. If I understand your question correctly, what’s

problematic is the objective. First of all, many of our people who

are covered by SERS, by our public plan, have either come late in

their career to the public schools or they were employed previously

in the private sector and then have come to public sector work. I’m

not sure about the feasibility of post-public sector careers in

that——

Mr. COLLINS. You would be in a prospective basis. It would not

be retroactive to anyone; it would be prospective.

Mr. RUGOLA. Right, I understand that piece of it, as I said. I’m

just not——

Mr. COLLINS. I just thought I throw it out for discussion. Thank

you, Mr. Chairman.

Chairman BUNNING. I want to thank the panel. Often, it’s impossible for us, on the Subcommittee, to cover every issue that we are

interested in during the hearing. Therefore, we may submit additional questions in writing for you to answer for the record. I would
105

like to thank all of our witnesses for your extensive and thoughtful

testimony. I have learned and I think the panel has learned a great

deal today on things that we have dealt with.

Chairman BUNNING. The Subcommittee stands adjourned.

[Whereupon, at 12:35 p.m., the hearing was adjourned subject to

the call of the Chair.]

[Submissions for the record follow:]

Statement of Donald L. Novey, President, California Correctional Peace

Officers Association

Should Social Security be expanded to cover all newly hired state and local

employees?

My name is Don Novey. I am the president of the California Correctional Peace

Officers Association which represents 27,000 state employees who work the toughest

beat in California. I suppose you could characterize these dedicated men and women

as working class, but their work is in a class of its own.

Their noble function in our society is extraordinary; the sacrifices they routinely

make carrying out their duties—sacrifices that are sometimes taken for granted—

are a portrait of their courage, commitment to service, and professionalism. I am

proud to be associated with these special Americans who put their lives on the line

every day they go to work.

Let me briefly describe the conditions correctional officers commonly face at work.

They are routinely ‘‘gassed’’ by inmates throwing urine and feces. They are exposed

to life-threatening diseases like tuberculosis, hepatitis, and AIDS. They are often assaulted with deadly handmade weapons. In fact, in California alone, correctional officers endure about 1,500 assaults each year. Sometimes these attacks are fatal. Everyday—24 hours a day—they ‘‘walk the line,’’ armed only with a side-handle baton,

among some of the toughest, most violent inmates in the world.

The stress behind prison walls is suffocating and unrelenting. Only about one in

five felony convictions in California actually results in prison time which means that

only the worst of the worst are sent to state prison. Thus unlike other law enforcement professionals, correctional peace officers face the state’s most violent criminals

all day every working day. A reporter who toured Folsom Prison wrote: ‘‘There is

no denying a palpable tension suffuses the atmosphere. The idea of spending a halfhour here seems unpleasant; the specter of years seems unbearable.’’

To magnify the ‘‘palpable tension,’’ prisons in California are operating at an

alarming 201% capacity, holding over twice the number of inmates for which they

were designed. At the same time that our prison population is exploding, budget

cuts and staff shortages are reducing the ratio of officers to inmates to dangerously

low levels.

With this background, I would now like to turn to the issue at hand. I am perplexed and disappointed by the proposal to include all currently uncovered newly

hired state and local employees in Social Security. I also must question the findings

of the Report of the Advisory Council on Social Security, which report has been

given significant consideration by this subcommittee.

The council’s report, which is two volumes and 750 pages, devotes roughly onehalf page to this issue. Given my perspective of the issue and the many questions

that were apparently not discussed, I can come to only one conclusion: that the Advisory Council’s recommendation to expand Social Security to include newly hired

state and local employees has not been given sufficient thought.

Consequently, I want to commend and to thank Chairman Bunning for devoting

an entire hearing to focus on this troubling proposal. I believe that after careful consideration, level heads will prevail and most of us will agree that burdening correctional officers, police, and other hard-working, essential public servants would be

enormously unfair.

In the report’s brief half-page coverage of this issue, three potential flaws are suggested. First, bringing state and local employees into Social Security may raise Constitutional issues. Secondly, while there may be a short-term influx of revenue, it

is questionable whether or not it would sustain sufficient benefits to be paid out in

the future. Finally, the added financial burden on workers and taxpayer-funded,

public employers already contributing to public pension systems would be unjust.

We strongly concur with these concerns and I will expound on them throughout the

course of my remarks.
106

At this point, we would like to respond to what appears to be the only argument offered in the council’s report in favor of expanding Social Security to state and local

employees. The report states that it is a question of fairness. We completely agree

that it is a question of fairness, but we emphatically disagree with the report’s apparent conclusion that the current system is unfair to other working Americans who

contribute to Social Security. Let’s examine the question of fairness. Is it fair to raid the paychecks of devoted public servants who already make tre- mendous personal sacrifices, whose stressful occupations place extreme demands

upon them while they are notoriously underpaid? Is it fair to impose a double tax

on the families of public safety officers and other state employees? Because states

have limited and defined budgets, the ‘‘employers’’ portion of the Social Security tax

would be paid by the state from its payroll funding which means the employees’ tax

as well as the matching employers’ contribution would be paid from a single source. Is it fair to destroy well-established, highly effective retirement systems that are designed, under an existing set of rules, to accommodate the specific needs of state

and local employees? On the basis of this issue alone, three members of the Advisory Council opposed the ‘‘inclusion of currently uncovered state and local employees

because of the financial burden that would be placed on workers and employers who

are already contributing to other public pension systems.’’ The fact is, the new tax

would be more than a ‘‘financial burden.’’ It would result in an immediate deterioration of state employees’ existing retirement systems. Additionally, it would remove

an enormous infusion of contributions into private investments which would be

damaging to the economy in general. Is it fair to punish the working class, many of whom can least afford it, to pay for over forty-years of irresponsible fiscal policies of the federal government? The

state and local governments and especially their dedicated employees did not create

the financial mess Social Security is now facing. We should not have to pay for it. Is it fair to impose a new payroll tax on states and counties which would inevi- tably result in cuts to or the elimination of important programs as well as a reduction in already dangerously thin staffing levels for correctional facilities? Is it fair

or wise to add to the extreme danger levels and unrelenting job-related stress of correctional officers and our police by taking urgently needed funds for training, safety

equipment, technological advancements and sending the money to Washington? Is it fair or wise to place side by side two young correctional officers, one a ‘‘newly hired,’’ who are required to perform the same duties, face equal risks, make comparable sacrifices, but who receive different benefits. It may not have an impact at

first, but as the years pass and resentment builds, compounded by the daily tension

and stress that comes with the job, loyalty may weaken or professionalism may be

compromised. Worst case, in an instant these two officers could be faced with a life

and death decision. At best, this situation would damage morale in an environment

that can ill afford such an atmosphere.

Can any of us honestly and sincerely answer any of these questions ‘‘yes?’’ I seriously doubt it. So if, as the council’s report suggests, the proposal is simply a question of fairness, let us answer it now. Clearly it is not fair to mandatorily cover all

newly hired state and local employees. Still, we can take the question of fairness

a step further. Let us review it from the perspective of all other workers who are

paying into Social Security.

Who in our society have chosen to be correctional or police officers? These are

high-stress, dangerous, underpaid jobs that most citizens will not do. Yet they want

it done; they expect it to be done; and they expect it to be done professionally by

qualified, well-trained, highly-skilled individuals. They want emergency services

readily available. They want their police to be well equipped. At a time of need, they

want their fire-fighters at their door in an instant. They also want computers in

their children’s classrooms, the best teachers, and a wide range of educational and

extracurricular activities and programs.

Is it reasonable to believe that private sector employees would begrudge a small

percentage of underpaid, overworked public servants having their own retirement

system? Would these same citizens answer ‘‘yes’’ to the fairness issue questions cited

above? I strongly believe that they would NOT on both counts. Furthermore, I firmly suggest that Americans paying into Social Security who are given the perspective

of all sides of the issue would gratefully acknowledge the sacrifices of the devoted,

conscientious, hard-working public servants who are now being targeted for this onerous tax.

Perhaps, instead of an issue of ‘‘fairness,’’ the true reason for proposing an expansion of Social Security to newly hired state and local employees is because it seems

an easy fix to bolster the long-term projections for Social Security. The intensity and

political nature of the larger debate over Social Security should not tempt us to

make this particular change without reviewing it on its own merits.
107

Ironically, this quick fix may backfire. It is quite possible that Social Security will lose money by forcing public safety officers into the system. First of all, public safety officers retire at a younger age—and for good reason. In consequence of the intense

nature of their employment as well as the obvious occupational hazards, public safety officers commonly retire between the ages of fifty and fifty-five. In addition, public safety officers are not protected by age discrimination. They can be forced into

retirement at age fifty-five. The state benefits operationally by having a younger,

healthier work force. Consequently, many public safety officers would require 12–

14 years of benefits beyond that of their private sector counterparts. Public safety

officers are also more likely to end careers or retire prematurely as a result of disabilities. They are more likely to suffer from a wide range of physical and/or psychological problems. This means they would be paying into Social Security for a shorter

period and receiving benefits for a much longer period. In addition to the fairness question and the economics of the issue, a legal ques- tion looms. The legislative history of the Social Security Act indicates that public

employees were excluded because Congress was concerned about the Constitutionality of imposing a federal tax on or to dictate the affairs of state governments. This

could seemingly present numerous hurdles, and if the inevitable Constitutional challenge determines that states would not be required to match the Social Security tax

as does private sector employers, the economic feasibility argument eluded to above

would render itself a foregone conclusion. The council’s report states that: ‘‘In light of several Supreme Court decisions deal- ing with Federal/State relationships in the area of labor law, it is now generally

thought that there is no Constitutional barrier to compulsory coverage.’’ However,

it is not ‘‘generally thought’’ that the Constitutional issue in this matter has been

decided. It is ambiguous and open for debate. We urge you to carefully contemplate the full ramifications of forcing state- employed public safety officers into Social Security. Raiding the paychecks of devoted public servants is morally wrong. Looting the budgets of already strapped

states and counties to bail out an inefficient, wasteful federal government would be

reprehensible. Destroying a retirement system that should be emulated and replicated would be indefensible. The Constitutional argument remains unanswered.

Inequitable benefits’ packages would destroy morale. Perhaps most disturbing, after

creating undue hardships for thousands of families for many years, Social Security

could find its coffers just as empty several generations into the future. Thank you for this opportunity to express our opinion. We hope you will seriously consider our concerns.

Statement of Jennifer DuCray-Morrill, Deputy Chief Executive Officer— Government Affairs & Program Development, State Teachers’ Retirement

System, State of California

f

My name is Jennifer DuCray-Morrill. I am Deputy Chief Executive Officer—Gov- ernment Affairs & Program Development of the California State Teachers’ Retirement System (CalSTRS). CalSTRS has 518,000 active and retired teacher members

and currently pays retirement, disability, and survivors’ benefits to some 154,000

recipients. CalSTRS pays out $238 million each month in retirement, disability, and

survivors’ benefits, totaling $2.9 billion annually. We very much appreciate the opportunity to present our views to the Subcommit- tee on the issue of imposing mandatory Social Security coverage on newly-hired

State and local government workers. Before describing the specific impact that mandatory coverage would have on CalSTRS, its active members, and its retirees, I would like to respond to a number

of points raised at the hearing, particularly by the General Accounting Office (GAO)

in its testimony.

There can be no serious question that the true driving force behind proposals to

impose mandatory coverage of new State and local government workers is a new

source of revenue for the Federal government. The Federal government would be requiring State and local governments to bear a significant additional cost burden in

order to help bolster the solvency of the Social Security trust fund.

However, as the GAO recognizes in its testimony, while new Federal revenue may

be the driving force behind mandatory State and local coverage proposals, revenue

is not itself an appropriate justification for imposing mandatory coverage. As the

GAO notes: ‘‘While Social Security’s solvency problems have triggered an analysis

of the impact of mandatory coverage on [Social Security] program revenues and expenditures, the inclusion of such coverage in a comprehensive reform package would
108

need to be grounded in other considerations.’’ (U.S. General Accounting Office,

‘‘Mandating Coverage for State and Local Employees,’’ Testimony before the Subcommittee on Social Security, House Committee on Ways and Means (GAO/T–

HEHS–98–127) (May 21, 1998), at p. 4). In searching for an appropriate policy justification, GAO points to the 1994–96 So- cial Security Advisory Council statement that mandatory coverage is ‘‘basically ‘an

issue of fairness.’ ’’ (Id., at pp. 4–5). GAO then quotes the Advisory Council report to the effect 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.’’ (Id., at p. 5). It is important to examine in detail just how this ‘‘fairness’’ consideration balances

out.

As a threshold matter, the Advisory Council’s asserted rationale of equitably shar- ing the burden of Social Security as a social welfare program does not ring true as

applied to State and local governments already struggling with the cost burdens of

Medicaid, welfare, and other social safety net responsibilities which the Federal government has passed down to the States. Mandatory coverage threatens a significant

payroll cost increase for State and local governments. It seems quite difficult to justify this additional cost burden on the ground that State and local governments—

and State and local taxpayers—are not now bearing their fair share of social safety

net responsibilities. Moreover, State and local governments have only two responses

available to such an additional cost burden coming from the Federal government—

raising taxes or cutting spending on other essential government services. More fundamentally, by imposing mandatory coverage the Federal government would be seeking to carry out its commitment to the participants in the Social Security system by forcing State and local governments to cast aside the commitment

they have made to their workforce and the participants in their retirement systems.

State and local governments would be asked to largely dismantle for the future their

successful retirement systems that have served millions of participants for decades,

in order to solve a Federal problem that these State and local governments had no

hand in creating. States like California—which has pre-funded the CalSTRS teacher retirement program to pay out almost $3 billion in benefits each year—would be asked to cast

aside these decades of successfully providing retirement benefits to generations of

workers, in order to force the future membership into a pay-as-you-go Social Security system that will provide these State and local government employees with reduced benefits at higher cost to State and local governments. It is not without clear

irony that, at the same time mandatory coverage proposals are being discussed that

would force States to largely dismantle successful pre-funded retirement systems in

order to help pay for the inadequacies of the pay-as-you-go Social Security system,

State and local government retirement systems are being examined by GAO and

others as a model for how a pre-funded retirement plan can be achieved and managed in the government context.

If mandatory coverage is imposed, State and local governments would lose flexibility to tailor retirement benefits to the unique work histories of the broad range of

occupations necessary for the diverse State and local services, giving way to the

‘‘one-size-fits-all’’ approach of Social Security. State and local governments would

lose the flexibility to manage retirement costs directly, with such costs now largely

being thrust upon them from the Federal government.

On the employee side, while the GAO testimony notes that mandatory coverage

will ‘‘increase participation in an important national program,’’ the testimony produces no conclusive evidence that overall retirement benefits of new State and local

government workers will be sustained, let alone improved, under any reasonable

cost scenario for State and local governments. Indeed, as described below, actuarial

studies undertaken for our system show that the current CalSTRS plan produces

a much greater benefit than a plan coordinated with Social Security for the same

level of contribution. Certainly the 364,000 active members of CalSTRS have not

been clamoring to shift into Social Security.

This should not be surprising since the new State and local government workers

mandated into Social Security would be expected to receive less in Social Security

benefits than they contribute. The solvency problem facing the Social Security trust

fund is a later-term problem when the Baby Boomers begin to retire en masse. The

retirements shortly afterward by the new State and local workers mandated into Social Security will only exacerbate the problem unless these State and local workers

forced into Social Security in fact will receive less in benefits than they contributed.

Somehow, the ‘‘fairness’’ rationale failed to surface vis-a`-vis State and local govern109

ment workers in the past when the situation was reversed and participants drew

out more in benefits than they had contributed. Social Security has been in place for some 63 years as a ‘‘pay-as-you-go’’ system. Employers and employees in one generation have paid employment taxes which are

used to pay current benefits and, in turn, a later generation of employers and employees have paid employment taxes which are used to pay that preceding generation’s employees’ benefits. Consequently, there is a certain rough justice as to current employers and employees participating in the Social Security system. It is inequitable to mandate nonparticipating State and local governments into So- cial Security at this late point. This legislation is asking the entering generation of

State and local employees, and the State and local governments which employ them,

to contribute at a high rate of tax to pay benefits for a prior generation of workers,

none of whom worked for the State and local governments which are being mandated into Social Security. Compared to all of the current employers in the Social

Security system, the upshot of mandating the non-participating State and local governments into Social Security is to provide all current benefits to someone else while

imposing the current burdens on the mandated State and local governments and

their employees.

It might have been ‘‘fair’’ to mandate State and local governments at the start—

everyone would be treated equally, but it is unfair to wait until late in the game

and then mandate coverage.

State and local governments have designed their retirement plans in reliance

upon their exclusion from mandatory Social Security coverage. Benefits have been

structured and trusts funded on this basis. State and local tax rates have been established which provide adequate sums to fund these retirement benefits along with

the other expenses of State and local governments.

There is, understandably, a great deal of reluctance on the part of voters to increase State and local taxes. All parties, including those favoring mandating Social

Security coverage for State and local government employees, concede that if coverage is mandated, benefit costs will increase substantially if State and local governments maintain the current level of benefits, even taking Social Security benefits

into account. The alternative, and more likely scenario, is that benefits will be cut

in order to maintain the current levels of taxation. That is unfair to State and local

government employees.

This burden will be particularly hard on teachers who are disproportionately the

group affected by mandatory Social Security coverage. At a time when schools, particularly schools in California, are straining to improve educational performance in

the face of stringent budgetary restrictions, to add the cost of mandatory Social Security coverage would be a devastating blow.

In summary, Mr. Chairman, once ‘‘fairness’’ is considered in all of its aspects—

and not just those that favor the Federal side—it becomes quite clear that ‘‘fairness’’

provides no true rationale for mandating new State and local government workers

into Social Security.

Let me briefly outline the specific impacts that mandatory coverage would have

on CalSTRS and its 518,000 active and retired participants.

CALSTRS AND OTHER EXISTING STATE AND LOCAL RETIREMENT SYSTEMS IN STATES

THAT DO NOT PARTICIPATE IN SOCIAL SECURITY ARE SUCCESSFUL AND SHOULD

NOT BE DISRUPTED

• State and local governments do an excellent job managing retirement plans and

providing good benefits for their employees.

—The California State Teachers’ Retirement System (CalSTRS) pays out $238

million each month in retirement, disability, and survivors’ benefits, for total benefits of $2.9 billion annually. An average CalSTRS retiree’s annual benefit at retirement is approximately $18,000.

• State and local government plans are more soundly funded than Social Security.

State and local plans are sound because the necessary employer and employee contributions have been actuarially determined and put into trust funds and invested

in accordance with sound portfolio management principles. State and local plans invest in a range of securities providing a greater return than the government bonds

held by the Social Security ‘‘trust fund.’’

—CalSTRS has a strong funding level, with assets representing 97% of accrued

liabilities.

—CalSTRS retirees on average receive retirement benefits for 26 years. Two years

of that payout represent the employee contributions, two years represent the employer contributions, and 22 years of that payout are funded by investment earnings.
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—CalSTRS’s assets totaled more than 22 times benefits paid in 1995–96. By contrast, Social Security’s assets were less than 2 times annual benefits paid, providing

much less opportunity for investment growth.

• By operating their own retirement systems, State and local governments are

able to tailor benefits to the work histories of the uniquely broad range of occupations of State and local workers.

—Police and fire personnel retire earlier because of the physical demands of the

job. Judges enter late in their careers and serve for a limited period. Teachers often

have long, steady careers. The ‘‘one-size-fits-all’’ approach of Social Security determined in Washington provides no such flexibility.

—State and local government employers are able to manage retirement benefits

and costs directly—rather than having costs thrust upon them by the Federal government—and employee groups have input on benefits through the bargaining and

State legislative processes.

• CalSTRS strongly believes that all of its teacher participants should receive

comparable benefits for the same service and pay. Mandatory Social Security coverage would disrupt that equity because new hires likely would receive less in benefits under a plan coordinated with Social Security than current CalSTRS members

receive under the existing plan.

MANDATORY SOCIAL SECURITY COVERAGE FOR ALL STATE AND LOCAL NEW HIRES

WILL HAVE A HARSH IMPACT ON NEW EMPLOYEES, CURRENT PARTICIPANTS, STATE

AND LOCAL EMPLOYERS, AND THE STATES AND LOCAL RETIREMENT PLANS THEMSELVES

• Harsh cost impact or benefit cuts in the case of new hires

—If added to current pension costs, the 12.4% Social Security payroll tax cost for

new teachers would create a major financial burden for California public schools.

The average additional annual cost for a new hire would be at least $1,600 each

for the employer and the employee.

—The additional Social Security payroll tax burden approaches the normal cost

of the current CalSTRS retirement plan (15.79%), leaving little room for the design

of a retirement benefit to supplement Social Security for the new hires except in

the unlikely event that new State and local funding can be found.

—State and local retirement plans produce substantially higher investment returns than Social Security. If Social Security is substituted for a large portion of

the State and local retirement plan benefit, contributions to the State and local plan

will have to increase to fund the same level of benefits. In California actuarial studies indicate that it would cost an additional 3% to 6% of payroll to fund a supplemental retirement tier that when combined with Social Security equates to the retirement benefits currently provided by CalSTRS.

—Actuarial studies show that the current CalSTRS plan produces a much greater

benefit than a plan coordinated with Social Security for the same level of contribution, for essentially all combinations of age and service.

—Mandatory Social Security coverage would substitute an unfunded benefit under

the pay-as-you-go Social Security system for the funded retirement benefit that the

new State or local worker would have received under the State or local government

retirement system.

—Given the fiscal and political difficulties of increasing State and local government retirement costs, it seems likely that State and local employers would respond

to mandatory coverage for new hires by cutting benefits under the State and local

retirement plan rather than increasing contribution costs.

• Adverse impact on current participants and existing State and local government

plans

—As the GAO testimony notes, ‘‘Mandatory coverage and the resulting changes

to benefit levels for newly hired employees are likely to result in reduced contributions to the current pension plan. The impact of reduced contributions on plan finances would depend on the actuarial method and assumptions used by each plan,

the adequacy of current plan funding, and other factors.’’ (p. 10). Even though

CalSTRS is currently well-funded, in the future the liabilities for the closed group

of current participants could exceed assets, creating an unfunded liability. A substantial reduction in the contributions from new hires would have an adverse impact on the pay-down of any unfunded liability of the plan.
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DUBIOUS BENEFIT FOR THE SOCIAL SECURITY TRUST FUND UNLESS STATE AND LOCAL

WORKERS WILL RECEIVE LESS IN SOCIAL SECURITY BENEFITS THAN THEY CONTRIBUTE

• Mandating Social Security coverage for State and local new hires would provide

a short-term cash flow into the Social Security trust fund. But the Social Security

trust fund has no short-term funding or liquidity problem.

• The solvency problem facing the Social Security fund is a later-term problem

when the Baby Boomers begin to retire en masse. The retirements shortly afterward

by the new State and local workers mandated into Social Security will only exacerbate the problem unless these State and local workers forced into Social Security

in fact will receive less in benefits than they contributed.

• The payroll tax contributions of the State and local workers mandated into Social Security will merely be invested in Federal debt, not growing investments, and

hence there will be even greater dependence on the future taxing resolve of the Federal government when that debt must be cashed in to pay benefits.

CONCLUSION

Mr. Chairman, we would strongly urge you and the other Members of the Committee, in examining proposals for mandatory coverage of State and local government workers, to look beyond the siren call of short-term revenue and to consider

the severe cost and dislocation that would be imposed on State and local governments and their retirement systems that have successfully funded retirement benefits for generations of workers in public service.

Statement of Charles G. Hardin, President, Council for Government Reform

Thank you for the opportunity to present our views.

Mr. Chairman, thank you for allowing me to testify for the record regarding the

f

addition of state and local government workers to the Social Security system. I

greatly appreciate this opportunity to share the views of our 350,000 members with

the Subcommittee.

As we are all aware, Social Security is facing its greatest crisis. Soon, demographic trends will push our nation’s retirement income security system into virtual

bankruptcy.

One of the proposed solutions to this problem is to corral all newly hired state

and local government workers into the current Social Security structure.

I firmly believe that this is the wrong approach. We should be looking to build

a structure that can withstand the demographic storm brewing on the horizon, not

adding more ballast to a sinking ship.

In the short run, adding newly hired state and local government workers will

make Social Security’s balance sheet look better. But this is only a short-term fix.

Soon-to-be-hired state and local employees have no one to speak for them and Congress must take care not to use them for its own purposes.

What will happen when we add these workers to our already overburdened retirement income structure? With Social Security’s current rate of return, our problems

will only get that much bigger in the long run.

Right now, state and local government workers who are excluded from Social Security are enjoying high returns on their retirement investment. The mammoth

California Public Employees Retirement System (CALPERS) reported a 20.1% rate

of return during the 12 months ending on June 30, 1997. And the Virginia Retirement System returned 20.6% for their pensioners during the calendar year of 1997.

While CGR would much prefer to see individually directed retirement investments, these rates of return are very solid compared with Social Security’s nearnegative return rate. Privately-run mutual funds hold the same advantages of state

or local run funds, but they could not be held hostage to political considerations as

has happened in the past.

State and local government workers are not workers who are in need of rescue

by Social Security. In fact, the millions of workers in Social Security can only wish

they received such good return on their investments.

We should be moving in the opposite direction. We should be looking at how these

state pension systems protect the retirement income security of their members and

we should be designing a plan to apply these principals to the millions of workers

who face Social Security shortfalls in their future.
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In addition, by carving out new hires in state and local governments, we will essentially be creating a new ‘‘notch.’’ Newly-hired state and local government employees will look with anger and envy at their predecessors’ fat retirement savings and

wonder why Congress consigned them to the miniscule Social Security benefit.

And the simple answer will be: Congress wanted to spend their money.

Fixing Social Security should start with a fundamental rethinking of how the program is structured. The old nostrums of tax hikes, benefit cuts, and corralling more

workers into the system have been played out. They don’t work and only make

things worse for future generations.

I urge the subcommittee to reject any proposal to include newly hired state and

local government workers in the current Social Security plan and to push instead

for wider reform that will secure the retirement income of current retirees, current

workers and future workers.

f

ELEANOR DEUTSCH

BROOKLYN, N.Y. 11218–1442

May 28, 1998

A.L. Singleton

Chief of Staff

Committee on Ways and Means

U.S. House of Representatives

1102 Longworth House Office Building

Washington, D.C. 20515

Dear Chairperson:

I would like to take this opportunity to thank the Subcommittee on Social Security for giving consideration to individuals like myself to take part in these legislative proceedings.

Those immediately affected by the Government Pension Offset fully understand

the impact of these proceedings and are very grateful that they have finally come

to fruition.

I have suffered for several years financially and because of this offset I am being

forced to exhaust my lifetime savings. My husband and I worked all of our lives and

contributed to Social Security and my government pension fund for which may I add

is a very small amount. Anything you can do to change or revise the law will be

a personal gratification not only to me but to thousands of government workers.

The Government Pension Offset is a very unfair law and I am sure after great

deliberation it can be revised to make it right to all concern.

I have two main points to make:

1) The 1977 Amendments to the Social Security Act was written to bring equity

to the program and yet the legislation was amended in January 1983 by Public Law

97–455 and again in April, 1983 by Public Law 98–617, again in November, 1984

by Public Law 98–21 and finally in December, 1987 by Public Law 100–203.

I count four amendments to the original law in 1977 which indicates to me that

these changes were necessary to correct legislation that was either poorly written

or unpopular with those individuals later exempted and

2) As an applicant in 1995, I feel that there was no choice given to me where I

could meet one of the exemptions. My years of dedicated service were behind me,

I did not belong to an exempted group, there was no offer for me to change my pension plan for FERS and my single voice could not be heard in Congress.

For the past several years I could not understand why my benefits were decreased

by a twothirds formula. As my resources are steadily being exhausted I become

more and more dependant on my benefits which places me in a unfair position of

being more reliant on the government instead of being self-reliant for myself.

Can you imagine the thousands and maybe millions of constituents depending

more on government benefit programs?

The time is now appropriate for Congress to right a wrong for those beneficiaries

who have struggled to meet their every day living expenses.

In closing, it is my only wish that we are given and are compensated in the future

so that life will be much easier in our golden years.

I thank you and your staff for finally giving this the proper attention it deserves.

Sincerely yours,

ELEANOR DEUTSCH
f

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Statement of Patrick L. Doyle, Director, Division of Social Security, Commonwealth of Kentucky

These are the comments of the Kentucky Division of Social Security on the Sub- committee Social Security’s hearing on mandatory social security coverage for newly

hired employees of state and local governments. Brief comments concerning GPO

and WEP are also included.

The exception from social security coverage for state and local government em- ployees was included in the original version of the Social Security Act passed in

1935. This exception is the federal government’s recognition of its constitutional limitation to mandate a social security employer tax on the states and their political

subdivisions.

The 1950 amendments to the act, effective January 1, 1951, allow a state to enter into a voluntary agreement with the federal government permitting the state and

its political subdivisions to provide social security coverage for their employees. This

voluntary coverage concept was included in Section 218 of the Social Security Act.

The Omnibus Budget Reconciliation Act of 1990—which requires social security coverage for all state and local employees not covered under a Section 218 agreement,

or state and local employees not belonging to a qualified, public retirement system—

avoided the constitutionality question by retaining the states’ and their political

subdivisions’ right to determine if employees will be covered under social security

or a qualified, public retirement system. The new-hire proposal for universal social

security does not provide for any options to state and local governments. The Tenth Amendment to the Constitution expressly provides that ‘‘the powers not delegated to the United States by the Constitution, nor prohibited by it to the

States, are reserved to the States respectively, or the people.’’ After decades of erosion, the Tenth Amendment’s revival was initiated by the United States Supreme

Court in 1991 in Gregory v. Ashcroft and further strengthened in the landmark New

York v. United States decision in 1992. The High Court’s 1992 ruling included the

following statement: ‘‘Congress may not simply ‘commandeer’ the legislative processes of the States by directly compelling them to enact and enforce a federal regulatory program.’’ Aside from the obvious question of constitutionality, the imposition of universal social security coverage would cause havoc on the organization of many state retirement systems. Some Kentucky retirement systems were created prior to 1951 specifically for certain career employees, such as teachers, police and firefighters, when

social security coverage was not available to public employees. These non-social security retirement systems were designed to provide these employees with a complete

benefit structure of retirement, disability and health insurance coverage that was

based on the unavailability of social security coverage. The imposition of the ‘‘new hire’’ rule places Kentucky’s retirement systems in the position of having to review all the pension plans for the affected employees. Sound

pension policy dictates that Kentucky must consider the issue of equity to its employees, as well as the reasonableness of the income replacement at retirement. If

new-hires retain the benefits of current pension plans, then they would be entitled

to a significantly higher level of income replacement at the time of retirement (current pension benefits plus social security), at a significantly higher cost to the taxpayers. Kentucky cannot justify paying higher benefits simply because of the hire

date of an employee. Kentucky would be forced to either increase the benefits of current ‘‘old hires’’ in the interest of equity or to establish new retirement systems or

new tiers for the new hires with equivalent total income replacement values. This

process of creating an entirely new retirement system for a new class of employees

requires legislative and policy considerations that cannot be accomplished with a

stroke of a pen.

The economics of establishing a separate system for the new hires could undermine the actuarial soundness of the old system due to the loss of new members contributing to the system. A two-tiered system, while actuarially more sound, would

likely lead to further legislative pressures to increase benefits or to expensive lawsuits brought by either of the employee groups.

If, and when, the above problems are legally overcome, the implementation of the

new-hire concept of social security must be implemented at significant cost and effort to state and local employers. Kentucky’s state government and its 216 city governments, county governments, boards of education and smaller political subdivisions effected by the change would incur first year employer contribution costs of

an estimated $5 million. This, of course, must be matched equally by employee con114

tributions. (The cost to retirement systems in Kentucky to implement the ‘‘new hire’’

proposal could possibly exceed the amount of ‘‘new-hire’’ social security contributions

collected from Kentucky in the first year.) Over and above the financial drain of the social security contributions on already very limited resources, all government employers would be required to modify their

payroll systems to accommodate another class of employee. This would be very expensive for those governmental employers who have computerized payrolls system.

One must also factor in the cost of training payroll personnel about the modified

payroll system, maintaining the records of a new employee group and the additional

withholding and reporting requirements the ‘‘new-hire’’ proposal would mandate. It has been said that the ‘‘new-hire’’ proposal would ease the administrative burden of the social security program for the Internal Revenue Service and the Social

Security Administration. One only has to examine current medicare coverage with

its new-hire provisions to realize that it is very complicated and requires additional

and constant administration by both the state and local employers and the federal

agencies. In the event this proposal becomes law, Section 218 must remain in place to ensure the details of social security coverage for the employees continue under all existing Section 218 Agreements. Each of Kentucky’s 1,500 agreements is unique to

the applicable governmental employer. State and local governmental employers also

need the avenues Section 218 provides to allow for social security coverage of veteran (‘‘old-hire’’) employees, if they so desire, as in current medicare-only coverage. Congress recognized a basic inequity in the application of social security benefits to certain groups of public employees without social security coverage when the Government Pension Offset and the Windfall Elimination Provision were enacted. The

GPO and WEP benefit reductions addressed these inequalities. Congress may wish

to consider simply fine tuning the GPO and WEP provisions as this would be far

more appropriate and efficient than enacting mandatory social security legislation

that would create a new class of public employees.

Statement of Edith U. Fierst, Member, 1994–96 Advisory Council on Social

f

Security

INTRODUCTION

I very much appreciate this opportunity to present my views in writing since unhappily I was not able to accept the invitation of your Staff Director, Kim Hildred,

to testify in person. The views expressed are mine alone; I do not appear on behalf

of any clients, persons or organizations.

REASONS FOR BRINGING NEW HIRES UNDER SOCIAL SECURITY

The members of the 1994–96 Social Security Advisory Council, whatever their

views on the contentious issue of privatization, were unanimous in recommending

that all new hires by State and local governments be brought under mandatory coverage of Social Security. Doing so would cut the long-run estimated deficit in the

trust fund by 0.25 percent of payroll because contributions would start to flow into

the trust fund promptly after mandatory coverage were enacted, but the benefits

payable to State and local employees would not become due for some years. The

trust fund would profit from the time lapse between collecting the tax and paying

benefits.

In making this recommendation the members of the Advisory Council were mindful of several major advantages that would flow to covered employees from being

brought under coverage of the national retirement system. These include:

1. Portability. Bringing newly hired State and local employees under coverage of

Social Security would enable them to move from one job to another without sacrificing retirement benefits. This missing portability is often very important to employees, although little publicized. Traditionally employers have thought of the lack of

portability of pension plans as a way of locking in their labor force, and the attention of employee leaders has been focused primarily on those who stay, not on those

who leave.

I experienced the pressures created by lack of portability when I worked for the

Federal Government under the Civil Service Retirement System (CSRS). The time

came when I wanted to leave for other employment, but realized doing so would

cause me to incur a major financial loss. CSRS offers retirement without reduction

for early retirement at a younger age than does Social Security—at age 55 after 30
115

years of service, at age 62 after 5 years of service—and CSRS indexes benefits to

the cost of living only for those who have retired under the system. Those who leave

before retiring must wait to age 62 before starting to receive the benefits they have

earned; they also sacrifice the COLAs that would be payable to retirees in the years

between leaving government service and reaching age 62 Moreover, they lack the

protection of survivor annuities for their widow(er)s if they die in those interim

years.

As a consequence of these and perhaps other disincentives, many workers covered

by CSRS feel locked in. They become time-servers, watching the calendar until their

earliest possible date for retirement. This is not good for either the workers or their

employers. Many press for abolition of their jobs so they can retire at age 50 after

20 years of service, and for a number of reasons, their supervisors are often glad

to help them out. This has entailed considerable cost to the taxpayers.

Fortunately this problem was solved for future Federal employees in 1984 when

a new retirement law became effective, bringing new Federal hires under Social Security, but analogous problems continue to plague employees of the State and local

governments and the governmental units that employ them. All would be happier

if retirement benefits were made portable by bringing new hires under Social Security.

2. Cost of living increases. Not only does Social Security compute initial benefits

under a formula that takes into consideration average wage increases before the employee reaches retirement age or qualifies for disability or dependent benefits, it also

guarantees that the purchasing power of benefits will be retained through annual

cost of living increases indexed to price increases. The plans of state and local government for public employees rarely, if ever, provide full COLAs. Today, we are in

a period of relative price stability, when cost of living increases may seem to matter

little, but this stable economy may not last. Without it, the security of retirees is

at risk, as we have seen so often in parts of the world with runway inflation.

3. Security for dependents. Social Security provides monthly benefits for spouses,

surviving widows and widowers and children at no additional cost to those whose

dependents are covered. Individual employees do not need to make an election to

be covered, nor do they pay extra for it. Rather, these benefits are the insurance

part of Social Security. They have substantial value.

By contrast, under many State and local government plans, coverage is optional

with the employee, and those who elect coverage pay for it through reductions in

their own retirement benefits.

I saw how this works when a client came to me while I was in the private practice

of law. The client was highly educated and intelligent, a star at a local think tank.

His father, who had been a well-respected state government worker, was recently

deceased. Much to the family’s surprise and consternation, the father had opted

against a survivor annuity for his wife because paying for it would have reduced

his retirement benefits. Suddenly my client’s mother was left without income after

a marriage of 50 years; fortunately in her case the children were able and willing

to take on the burden of supporting their mother. But we all know that is not true

for everyone.

Social Security has made lack of protection for surviving spouses a non-problem

for covered families. For them, the desperation that used to beset elderly widows

and their families is a thing of the past. While many have reason to worry because

the benefit is too low (something we can and should remedy by increasing benefits

for survivors of two-earner couples), no one, not even a divorced spouse after a marriage that lasted at least ten years, is excluded.

Some of those who favor privatization have been spreading a myth that while

some public plans based on individual accounts make these accounts available to

young widows, the only benefit available to those covered by Social Security is $255

in funeral expenses. The truth is that Social Security provides a monthly benefit for

eligible mothers until the youngest child reaches age 16 and an additional benefit

for surviving children until they reach age 18, or if later, finish high school or reach

age 19. If the child is disabled before age 22, the child’s benefits last as long as the

child is disabled and the eligible caretaker’s lasts as long as the child needs care.

The value of this insurance for the family of an average wage worker with two children and a mother of 27 is estimated at $307,000.

Public employees and their families, like everyone else, need this coverage. They

can get it only if they are covered by Social Security.

4. The Public Pension and Windfall Offsets. Both the public pension

and windfall offsets were designed to protect the Federal Government from the

obligation to make excessive payments to retirees covered under both Social Security and pensions not covered by Social Security. They work as follows:
116

A. The Public Pension Offset (PPO) reduces benefits payable to spouses or survivors by Social Security by two-thirds of the benefits earned by that spouse or survivor in a public job not covered by Social Security. Thus a Social Security spouse

or survivor benefit of $300 is reduced to zero if the spouse has earned a pension

of $450 a month or more in non-covered public employment.

Many retirees do not learn of the public pension offset until they are about to retire. Then they are shocked and believe they have been cheated by an unfair policy.

I’m sure you and other Members of Congress hear from them. However, the protesters do not understand that the PPO is analogous to the dual entitlement rule under

which Social Security benefits payable to spouses and survivors are reduced by the

benefits they themselves earned as workers. Indeed, the dual entitlement rule demands a total offset, not one that reduces overlapping benefits by only two-thirds.

The PPO is a smaller offset presumably because public pensions substitute for both

Social Security and private pensions payable to those in private employment.

While the public pension offset might be improved at the margins, in view of the

dual entitlement rule which reduces benefits for those covered under Social Security

both as workers and spouses (or survivors), it is hard to make the case for eliminating it altogether except by bringing public employees under coverage of Social Security.

B. The Windfall Offset reduces the replacement rate of Social Security payable to

retirees with only short-term coverage under Social Security if they also had noncovered employment. Its purpose is to restrict the number of employees entitled to

payment of the highest replacement rate under Social Security’s progressive formula. Under that formula, a 90 percent replacement rate is paid for the initial

roughly $5500 a year in earnings (indexed); this high return is designed to assure

minimum adequacy for persons who worked many years at low wages. The high replacement rate was never intended to give a windfall to short-term employees with

high pay whose lifetime covered earnings are low because most of their work was

done under non-covered plans.

Before the windfall offset was enacted, persons who had worked for many years

in exempt public employment sometimes received benefits from Social Security as

high as those whose low-paid lifetime careers were under Social Security. This was

unfair and unintended. Its cost to Social Security was substantial.

Nevertheless those who are adversely affected by the windfall offset are often surprised at retirement age to learn about it; they, like those covered by the PPO, may

feel cheated and outraged.

Perhaps the windfall offset could be moderated at the margins, but I have heard

no good arguments for eliminating it for employees whose major career was in noncovered public employment. The best solution is to bring these employees under coverage of Social Security during their years of public employment.

ATTITUDE OF PUBLIC EMPLOYEES

Many public employees say they prefer plans offered by their State or local government employers to Social Security. Frequently they lack understanding of the

very real advantages of coverage under Social Security outlined above.

In addition, typically these employees do not understand that their large benefit

amounts derive from generous contributions by their employers rather than from

their exempt status. They may not realize that private pensions provide similar benefits to those also covered by Social Security or that they could have the equivalent.

Public employers could fund separate plans with the amount they now contribute

in excess of the 6.2 percent of earned income employers are required to contribute

to Social Security or the 12.4 percent employees and employees are required to contribute. If they did so, many public employers would provide excellent pension plans,

making their employees much better off than they are now because they would have

both Social Security and pensions.

The recent extraordinary performance of the stock market has given ammunition

to those who prefer separate coverage dependent upon private investment. Investment advisers and managers who earn their living by working for the funds of these

plans are particularly articulate in their defense. Their self-interest in these plans

should be taken as a caution against too much reliance on their views.

I understand that it is difficult for Members of Congress who represent large

numbers of uncovered public employees to vote to include them when their leaders

oppose bringing them under Social Security. Nevertheless I believe public employees

can be persuaded to accept Social Security coverage by a combination of the advantages to public employees of Social Security coverage listed above and the realization that Social Security is not an either/or to special plans for public employees.
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INTEREST OF PUBLIC EMPLOYERS

Many state and local governments have been overpromising future retirement

benefits to placate employees who demanded pay increases that could not be afforded immediately. These governmental units could seize the opportunity of to restructure their retirement packages at the time of changeover to Social Security,

thus solving a big financial crisis which awaits them in the future. And they could

do this while at the same time providing their employees supplemental plans, possibly of an individual accounts type that would make everyone happy. Inasmuch as

the coverage of State and local government employees would apply to new hires

only, there would be time for the governmental units to phase in such coverage and

absorb any transitional expenses while at the same time, initiating supplemental

plans for covered public employees.

CONCLUSION:

I regret I could not be here to answer your questions, but I would be pleased to

do so if anyone wishes to contact me.

Statement of Alfred K. Whitehead, General President, International

Association of Fire Fighters

f

Mr. Chairman. My name is Alfred K. Whitehead, and I am the General President

of the International Association of Fire Fighters. I greatly appreciate this opportunity to express the views of the nation’s more than 225,000 professional fire fighters and emergency medical personnel on the vitally important issue of mandatory

Social Security coverage of public sector employees.

The IAFF strongly supports efforts to ensure the future solvency of the Social Security system. Thousands of our members are counting on Social Security as an important part of their retirement security, and we are committed to preserving the

system for them and their families. We are also committed to protecting the retirement security of those fire fighters who are currently outside the Social Security

system.

On behalf of both of these groups, the IAFF is adamantly opposed to the mandatory coverage of those public employees who are not currently part of the Social Security system. Mandatory coverage would wreak havoc with the economic security

of fire fighters who are currently not covered by Social Security, and would only

produce a short term cosmetic benefit to the Social Security system. In the long run,

both groups of fire fighters would be harmed by mandatory coverage.

BACKGROUND

When the Social Security system was created in 1935, government employees

were expressly excluded. It wasn’t until the 1950s that state and local government

agencies were given the option to join the system. Even then, fire departments in

24 states were prohibited from voluntarily joining the Social Security. It wasn’t until

1994 that all fire fighters had the right to vote on whether or not to enroll in Social

Security.

In response to this long-standing arrangement, state and local governments that

were outside the scope of Social Security developed their own retirement systems

that took into account the unique needs of their employees. These plans have been

extremely successful in meeting the retirement security needs of their members. On

the whole, these plans offer higher benefits at lower cost than Social Security.

The ability to tailor retirement plans has been especially important to the nation’s

fire fighters and emergency medical personnel. Fire fighters retire at much earlier

ages than the general population—well before eligibility for Social Security benefits.

In many cases, fire fighters are legally required to retire at a given age, and therefore do not even have the option of working until age 62. In addition, fire fighters

are far more likely than the general population to leave work due to a disability.

This ability to tailor the retirement benefits is the primary reason that so many

public safety agencies have opted to remain outside the Social Security system.

While only 30% of all public employees are not covered by Social Security, fully 76%

of fire fighters and police officers are not covered. It is important to note that the

creation of specially tailored retirement plans did not come cheaply. In many cases

fire fighters gave up increased wages and other benefits in exchange for better pensions, including disability benefits and survivor benefits.
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PROBLEMS WITH MANDATORY COVERAGE

There are four distinct problems that the members of my organization have with

proposals to extend Social Security coverage to all public sector employees. First and

foremost, it would wreak havoc with the specially tailored fire fighter pension plans.

Even if mandatory coverage is required only for new hires, the pension systems that

fire fighters helped design, and in many cases gave up wage increases to get, could

not be sustained. The system would collapse, leaving the retirement security for

thousands of fire fighters in shambles.

Second, mandatory Social Security coverage would amount to a 6.2% income tax

on public sector employees. The vast majority of these workers are middle-income

Americans who are struggling to make ends meet. This is precisely the wrong group

that our nation should be looking to to shoulder more of the current tax burden.

Consider a fire fighter who is supporting a family of four on $32,500 a year. Mandatory Social Security coverage would cost that family over $2,000 in increased taxes.

Imposing a significant new tax on middle-income wage earners is counterintuitive

and would be counterproductive.

Third, mandatory Social Security coverage would impose an enormous financial

burden on the public safety agencies that employ our members. This increased cost

will necessarily result in either reduced services or increased local taxes, or both.

Many fire department budgets are already stretched to their maximum, and it simply will not be possible to sustain further budget cuts without jeopardizing public

safety.

Finally, mandatory coverage of public employees will harm the Social Security

system. While mandatory coverage will bring a short term infusion of cash into the

system, Congress needs to show the courage to resist the quick fix and look at the

protecting the system in the long run. The millions of workers who are brought into

the system under mandatory coverage will one day begin receiving benefits. Since

the amount of contributions made by an individual does not equal the benefits paid

by the system, bringing a sizable new group of employees into Social Security is a

guaranteed money loser and a significant threat to the long-range solvency of the

system.

ARGUMENTS MADE IN FAVOR OF MANDATORY COVERAGE

Although the true reason for extending Social Security coverage to all public employees is undoubtedly the short term cash infusion into the system, advocates of

the proposal argue that the change is justified for two reasons—both of which are

highly suspect.

First, they argue that employees need Social Security. Because not all employers

can be counted on to provide a pension, it is the responsibility of the federal government to ensure that all workers have some minimal level of retirement income.

While valid on its face, this argument ignores a significant change in the law made

in 1990. In that year, Congress voted to extend Social Security coverage to any public employee who is not covered by a pension plan that is at least comparable to

Social Security.

Second, they argue that many public employees who are not covered by Social Security nevertheless qualify for benefits either because their spouse is covered or because they contribute to Social Security in a second job. To the extent that either

of these situations is inequitable, Congress has already addressed the problem with

the Spousal Offset and the Windfall Offset which reduce Social Security benefits

paid to any individual who is receiving a pension from employment that is not covered by Social Security.

CONCLUSION

Mr. Chairman, just last week a member of our organization testified before another subcommittee of this distinguished body. That hearing was called to explore

ways that the United States government can adequately honor the nation’s public

safety officers for their extraordinary valor. Members of the Subcommittee appeared

deeply moved as they listened to the tales of heroism displayed by fire fighters and

law enforcement officers who selflessly risked their lives to save the lives of others.

A mere seven days later my organization is appearing before you to ask—to

plead—that you not recklessly jeopardize the retirement income of these same heroes. If Congress truly wants to honor its nation’s domestic defenders, let it begin

by preserving their economic security.

Thank you.
f

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Hon. Barbara A. Mikulski, a U.S. Senator from the State of Maryland

Mr. Chairman, I want to thank you for having this hearing and for permitting

me to provide testimony on a very important issue, the Government Pension Offset.

The Pension Offset is an issue that is very important to me, very important to

my constituents in Maryland and very important to government workers and retirees across the nation.

First, I want to thank Representative Jefferson for his leadership in the House

of Representatives on Government Pension Offset reform. He has introduced important legislation which I hope this committee and the House will soon approve.

I have introduced a similar bill in the Senate, S. 1365 The Government Pension

Offset Reform Act, to modify this heartless rule of government that prevents current

workers from enjoying the benefits of their hard work in their retirement. I want

the middle class of this Nation to know that if you worked hard to become middle

class you should stay middle class when you retire.

As many in this room know, under current law, there is something called the Government Pension Offset law. This is a harsh and unfair policy. Let me tell you why.

If you are a retired government worker, and you qualify for a spousal Social Security benefit based on your spouse’s employment record, you may not receive the full

amount for which you qualify because the Pension Offset law reduces or entirely

eliminates a Social Security spousal benefit when the surviving spouse is eligible

for a pension from a local, state or federal government job that was not covered by

Social Security. This policy only applies to government workers not private sector

workers.

Let me give you a hypothetical example of two women I call Helen and her sister

Phyllis. Helen is a retired Social Security benefits counselor who lives in Woodlawn,

Maryland. Helen currently earns $600 a month from her federal government pension. She’s also entitled to a $645 a month spousal benefit from Social Security

based on her deceased husband’s hard work as an auto mechanic. That’s a combined

monthly benefit of $1,245.

Phyllis is a retired bank employee also in Woodlawn, Maryland. She currently

earns a pension of $600 a month from the bank. Like Helen, Phyllis is also entitled

to a $645 a month spousal benefit from Social Security based on her husband’s employment. He was an auto-mechanic too. In fact, he worked at the same shop as

Helen’s husband.

So, Phyllis is entitled to a total of $1,245 a month, the same as Helen. But, because of the Pension Offset law, Helen’s spousal benefit is reduced by 2⁄3 of her government pension, or $400. So instead of $1,245 per month, she will only receive

$845 per month. This reduction in benefits only happens to Helen because she

worked for the government. Phyllis will receive her full benefits because her pension

is a private sector pension. I don’t think that’s right and that’s why I have introduced my legislation.

The crucial thing about Government Pension Offset Reform Act that I have proposed is that it guarantees a minimum benefit of $1,200. So, with this reform to

the Pension Offset, Helen is guaranteed at least $1,200 per month. Let me tell you

how it would work.

Helen’s spousal benefit will be reduced only by 2⁄3 of the amount her combined

monthly benefit exceeds $1,200. In her case, the amount of the offset would be 2⁄3

of $45, or $30. That’s a big difference from $400 and I think people like our federal

workers, teachers and our firefighters deserve that big difference.

Why should earning a government pension penalize the surviving spouse? If a deceased spouse had a job covered by Social Security and paid into the Social Security

system, that spouse expected his earned Social Security benefits would be there for

the surviving spouse. Most working men believe this and many working women are

counting on their spousal benefits. But because of this harsh and heartless policy,

the spousal benefits will not be there, your spouse will not benefit from your hard

work, and chances are, you won’t find out about it until your loved one is gone and

you really need the money.

The Government Pension Reform Act guarantees that the spouse will at least receive $1,200 in combined benefits. It guarantees that Helen will receive the same

amount as Phyllis. I have introduced this legislation, because these survivors deserve better than the reduced monthly benefits that the Pension Offset currently allows.

They deserve to be rewarded for their hard work, not penalized for it. Many workers affected by this Offset policy are women or clerical workers and bus drivers who
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1Many of our statewide ‘umbrella’ groups are composed of hundreds of State and local member organizations, whose members are also NAPO members. 2For purposes of this statement, I am using the definition ‘‘law enforcement officer’’ contained

in 42 U.S.C. § 3796b(5). That provision states: ‘‘ ‘Law enforcement officer’ means an individual

involved in crime and juvenile delinquency control or reduction, or enforcement of the laws, including, but not limited to, police, corrections, probation, parole, and judicial officers.’’

are currently working and looking forward to a deserved retirement. These are people who worked hard as federal employees, school teachers, or firefighters.

Frankly, I would repeal this policy all together. But, I realize that budget considerations make that unlikely. As a compromise, I hope we can agree that retirees

who work hard should not have this offset applied until their combined monthly

benefit exceeds $1,200.

In the few cases where retirees might have their benefits reduced by this policy

change, my legislation contains a ‘‘hold harmless’’ provision that will calculate their

pension offset by the current method. My legislation would also index the minimum

amount of $1,200 to inflation so retirees will see their minimum benefits increase

as the cost of living increases.

Mr. Chairman, I believe that people who work hard and play by the rules should

not be penalized by arcane, legislative technicalities. If the federal government is

going to force government workers and retirees in Maryland and across the country

to give up a portion of their spousal benefits, the retirees should at least be allowed

a livable level of benefits.

Thank you again, Mr. Chairman, for having this hearing on this important issue.

I hope that as the debate on the future of Social Security continues, this issue, and

other issues that penalize people for hard work will be addressed and will be remedied.

Statement of Robert T. Scully, Executive Director, National Association of

Police Organizations, Inc.

f

I. INTRODUCTION: BACKGROUND AND OVERVIEW

I am Robert Scully, the Executive Director of the National Association of Police

Organizations, otherwise known as NAPO. I am a retired police officer who served

for 25 years with the Detroit Police Department. I also served as a full-time elected

officer of the Detroit Police Officers Association and was a collective bargaining

team member from 1973–92. In addition, I was NAPO’s elected president from 1983

to 1993.

NAPO is a national non-profit organization representing State and local law enforcement officers. NAPO is a coalition of police associations and unions serving to

advance the interests of law enforcement officers through legislative and legal advocacy and educational programs. NAPO represents more than 4,000 law enforcement

unions and organizations, with over 220,000 sworn law enforcement officers, 3,000

retired officers, and more than 100,000 citizens dedicated to crime control and law

enforcement.1

Mandating Social Security taxes on the vast majority of public safety officers, primarily law enforcement officers, firefighters, and rescue squad workers,2 would have

serious implications and unintended consequences. It would have a dramatic and

negative impact on the recruitment and retention of well-qualified public safety officers and their current pension funds. Even mandating that only new hires be included in the system would still have serious unintended and possibly devastating

consequences. Such a Federal mandate would strain State and local government

budgets and would probably reduce current salaries, freeze future pay raises, and

curtail or eliminate other benefits, such as retiree health insurance, retirement pensions, death benefits, and line-of-duty disability pay for public safety officers.

II. BRIEF HISTORY OF THE APPLICABILITY OF SOCIAL SECURITY TO STATE AND LOCAL

PUBLIC EMPLOYEES

When established in 1935, the Social Security program covered all private sector

workers in commerce and industry and excluded State and local government employees from Social Security coverage. The legislative history of the Social Security

Act indicates that these employees were excluded because most had their own retirement systems and because Congress was concerned about the constitutionality
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3 Joint Committee Print, Committee on Ways and Means and Committee on Post Office and

Civil Service, U.S. House of Representatives, 9th Cong. 2d Session, March 27, 1980, WMCP: 96–

54, reprinting ‘‘Report of the Universal Social Security Coverage Study Group,’’ transmitted by

the U.S. Secretary of Health, Education, and Welfare on March 24, 1980, pp. xiii–xiv. 4This data is from the 1997 Survey of State and Local Government Employee Retirement Systems, Government Finance Officers Association, Chicago, Illinois. This survey is done for members of the Council, which is composed of the National Association of State Retirement Administrators, National Conference on Public Employee Retirement Systems, National Council on

Teacher Retirement, as well as the Government Finance Officers Association.

of imposing a Federal tax on State governments, an issue which has never been litigated. In 1950, Congress added Section 218 of the Act which allowed for voluntary par- ticipation in the system by State and local employees not covered by public retirement systems. Then, in 1954 this provision was amended to permit voluntary participation by those State and local employees who were covered in a public retirement system, if a State or local government agency entered into an agreement with

the Federal government. In 1983, Congress once again amended the 1935 Act, making several relevant changes. First, State and local government agencies participating in the Social Security system (whose employees were voluntarily covered) could no longer exit from

the system; for these employees, it was no longer voluntary. Second, all private sector and government employees hired after March 31, 1986, were covered by Medicare health insurance, with matching contributions from employer and employees.

Third, by 1991, all State and local government employees not covered by a public

retirement system were required to be in the Social Security system, which is in

effect today. The Social Security Administration estimates that 4.9 million State and local gov- ernment employees are not covered by the system (although there may be more

than that). Seven states, California, Ohio, Texas, Massachusetts, Illinois, Colorado,

and Louisiana account for a large percentage of the non-covered public employee

payroll. The 1980 ‘‘Report of the Universal Social Security Coverage Study Group,’’ which lead to the 1983 amendments, stated:

Unfortunately, in contrast to the case with the Federal workforce, the likely costs of requiring Social Security coverage for all State and local government workers are

considerable. Because most existing State and local pension plans lack many of the

features of Social Security, the new coordinated systems would cost many State and

local governments more than they are paying to operate their noncoordinated plans.

We should not forget that these increased costs usually translate into superior retirement, disability, and survivors protection for State and local government employees. Nonetheless, in these times of fiscal constraint at all levels of government, the

Federal legislature should move cautiously in imposing new costs on State and local

governments. In addition, many current State and local government plans are payas-you-go; hence, imposing the Social Security payroll tax . . ‘‘crowds out’’ revenue

that governments were anticipating for paying future benefits based on their existing pension plans.3 [Emphasis added.]

III. SPECIAL PENSION NEEDS OF STATE AND LOCAL PUBLIC SAFETY EMPLOYEES AND

THE UNINTENDED CONSEQUENCES OF IMPOSING SOCIAL SECURITY TAXES ON THEM

Best estimates by the Public Pension Coordinating Council for 1996 (the most re- cently available data) indicate that 76 percent of State and local public safety personnel do not pay Social Security taxes and are not covered by the system.4

A. Special needs of public safety officers and inadequacy of Social Security:

Let me describe the dilemma faced by public safety officers when Social Security’s very limited disability, death, and early retirement benefits are factored in, compared with current pension systems. Simply stated, the Social Security system was

not designed for police officers and firefighters.

First, being an active police officer is a younger person’s job. This is due to the

special dangers and physical stresses of police work, often resulting in a disability

or forcing police officers into an earlier retirement, as these stresses mount. During

the last century and especially the last 50 years, State and local governments have

developed pension systems which acknowledge that police and firefighter jobs are

very different than normal careers, with a set of dangers and stresses not faced by

most other professionals. These systems take into account that law enforcement officers and firefighters usually must undergo a career change in middle age, usually

in their late 40s to mid 50s. In many police departments, a large percentage of po122

5 A survey of the 50 States, conducted by the National Council on Teacher Retirement, disclosed that 6 States have explicit constitutional provisions guaranteeing pension rights, 15

States have express guarantees in their statutes, 18 States have common law contractual rights,

and 11 States approach the issue in other ways (often through a combination of contractual

rights and statutory or constitutional provisions). Moore, Cynthia L., Public Pension Plans: The

State Regulatory Framework, 3rd ed., National Council on Teacher Retirement (to be published

in 1998).

lice officers will be sufficiently disabled at all ages for varying lengths of time and

thus be unable to perform their duties as officers. Therefore, most governments have

recognized that public safety officers need certain protections and benefits in recognition of the nature of their jobs. I will describe a typical system, the City of Detroit Policemen and Firemen Retirement System, shortly. Social Security provides no comparable disability benefits for police officers and firefighters. Social Security requires that an employee be unable to perform any substantial and gainful employment. This means that an individual unable to perform

regular and continuous duties as a public safety officer, who would now receive

some disability benefit to supplement a subsequent career at usually a lower salary,

would receive nothing under Social Security. In addition, there are other officers who will not be able to continue to keep performing the duties after reaching middle age, because of the physical and psychological stresses and demands of police work. And therefore they must retire from

police work and begin another career. Unfortunately, for these public safety employees, no Social Security benefits will be available, as they start a new career at much

less pay.

Social Security death benefits are much lower than current retirement death benefits which often pay anywhere from 50 percent to 75 percent of an officer’s salary.

B. Unintended likely consequences of mandatory Social Security taxes and coverage:

I would like to discuss the impact of imposing Social Security taxes on these essential workers. Mandating that government agencies and public safety officers each

pay 6.2 percent of pay would have a negative repercussion on the retention and recruitment of the highly trained and competent law enforcement officers and firefighters—the most qualified job candidates possible.

Let me explain what is likely to happen to the majority of police and pension systems and to government expenditures if Social Security taxes and coverage are universally mandated.

There seems to be a presumption that governmental bodies can reduce benefits

received from current pension plans by the same amount that would be received as

benefits by public safety officers under Social Security. First, let us put aside the

great disparity between what one receives from a pension plan as compared with

Social Security.

As a general proposition, participants in State and local government pension systems have a right to receive retirement benefits at a defined point in the future.

These rights are vested by explicit constitutional provisions, statutory provisions,

common law contractual rights, or a combination of the above, in all 50 states.5 In

many States, public safety officer retirement benefit levels cannot be reduced without the agreement of both the employer and the employee through collective bargaining or a vote of the citizenry. Therefore, a vested public pension in the majority

of states is a contractual or statutory right that can be modified only with some difficulty.

There would be tremendous pressure by government agencies to change these

pension systems, pitting public safety officers against elected officials—something

none of us wants. But let us assume that most of these current pension systems,

which cannot be easily changed, are maintained. A Social Security tax on employees

and their government employers would negatively impact public safety operations

and could result in layoffs, reduced pay or other benefits, or no cost-of living increases, and could reduce purchases of necessary equipment and technology, or a

combination of these consequences. At the outset, this new unfunded Federal mandate would probably inflict on State and local governments reduced staffing or,

worse yet, layoffs, or would cause a several percentage point reduction in pay for

public safety employees, all based on a 6.2 percent increase in employee personnel

costs for local governments.

Let us focus on a somewhat different scenario. There are states, fewer in number,

where State governments can change their public pension systems without collective

bargaining or votes of the citizens. Facing public pressure against tax increases, the

legislatures in these states would likely change the current systems to make them

much less beneficial to public safety workers. State and local government pension
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6 In many States, any government effort to modify current pension systems, either to reduce

the contributions or benefits, cannot be unilaterally undertaken without input from workers, but

must be the subject of collective bargaining.

contributions to these systems are likely to be reduced, probably dollar-for-dollar for

allocation to Social Security taxes. Those current police and fire pension systems so affected would be severely cur- tailed. Public safety officers in these plans would therefore have much less protection than they do now, causing police and firefighting work to become much less desirable.

For all of these scenarios, both Congress and the Administration need to ask the following questions: Would we retain the best public safety officers we now have if

their take-home pay is automatically cut by 6.2 percent, which is the additional

amount that they would have to pay out? Or if Social Security taxes are applied

only to new hires, would we recruit the best public safety officers if their take-home

pay is automatically reduced by 6.2 percent in taxes? Would we retain or recruit

the best officers if current pension systems are severely curtailed—reducing substantially or eliminating excellent early retirement, line-of duty-disability, and early

death benefits—so that the total percentage of both employing agency and employee

contributions remain about the same, once Social Security taxes are factored in?

Would we get the best officers if the employing agency also reduces future pay

raises or freezes cost-of-living or other increases, in order to pay its portion of Social

Security? I am afraid that the answer to all of these questions would be ‘No!,’ given

the tight labor markets and a variety of career choices. In addition, imposing this tax would negatively affect government expenditures on the best technology and equipment available for law enforcement to fight crime. In short, mandatory Social Security taxes on law enforcement would hurt efforts to recruit the best qualified and competent law enforcement personnel. It would result in a pool of less qualified candidates for law enforcement positions, with negative implications for public safety.

C. Additional implications if Social Security taxes and coverage are imposed on only

new hires:

Even expanding the Social Security system to just new hires would cause serious morale problems. It would create a different class of public safety officers and could

very well endanger the trust essential among police officers and firefighters depending upon each other in life-threatening situations. If Social Security taxes are imposed on just new hires, it is likely that State and local governments would respond

to this added tax burden over time in the same ways and with the same negative

consequences for public safety officers and the public safety. Over time, mandatory coverage on new hires would destroy the early retirement and disability benefits for public safety officers. One might as well abandon many

of these individuals and their families if Congress mandates Social Security coverage and thereby causes the States to replace the current pension systems. On the

other hand, trying to blend the special needs of actuarially funded pension systems

with the structure of Social Security will create substantial complications and costs

for benefit design and administration, as well as collective bargaining.6

There are other financial implications, as well, if Social Security is applied to new hires. If State and local governments reduce their contributions dollar-for-dollar in

new Social Security taxes, current pension systems for grandfathered employees will

eventually be severely impacted, as current employees retire with no contributions

coming in from government agencies and new workers enter the police and firefighting forces of this country. In effect, Social Security would eventually and inevitably

destroy these fire and police pension fund systems. I will describe these potential

consequences shortly while discussing the impact on the Detroit police and firefighter pension system.

D. State tax implications of mandatory coverage:

For these public safety officer pension systems, there are tax implications which have not been considered. Current retirees receive a benefit which is fully taxed,

bringing in revenue to governments at all levels, unlike Social Security payments

which are untaxed below a certain income level. Also, closely related, the after-tax

income of current public safety officers will be reduced by any shift from pre-tax

pension contributions to after-tax Social Security contributions.

E. Examples of several systems’ benefits and probable impact of mandatory coverage:

To illustrate all of these concerns, I have set forth several examples of the retirement benefits and line-of-duty death and disability benefits available to police offi124

cers or their families which Social Security cannot even come close to matching. (My

staff surveyed several police and firefighter pension funds in Michigan, Ohio, Florida, and California, and the comments by their officials have been integrated into

this statement.)

Example One: City of Detroit Policemen and Firemen Retirement System.—This

Detroit retirement system has approximately 5,400 active employee members and

7,800 retirees and beneficiaries and over $3 billion in investments from which to

pay benefits. Line-of-duty disability benefits can amount to 66.6 percent of final salary for full disabilities. And employees can retire after 25 years of service, with a

retirement set at 62.5 percent of salary, increasing by 2.1 percent for each year after

25 years until 35 years is reached. A line-of-duty death before retirement results

in 45.5 percent of the average patrolmen’s salary.

Public safety employees are required to contribute 5 percent of salary until eligible for retirement, and in the 1995–96 fiscal year, the City of Detroit had a computed employer contribution of 25.9 percent.

In addition, with an annual average salary of $40,000 for police officers and firefighters and a total annual payroll (before overtime) of approximately $220 million,

the City of Detroit and public safety officers would have to pay a combined total

of at least $27.2 million in Social Security taxes, if it were made mandatory.

Even if Social Security applies only to new hires, it would be very difficult for the

City of Detroit to maintain this system of benefits and salaries for its current public

safety employees, as it is required to do under Michigan’s constitution (one of 6

state constitutions guaranteeing pension rights). One of two events would likely

occur:

First, as other cities have done, Detroit might be tempted to create a second tier

system for the new hires, to reduce its contribution by at least the same amount

that it would pay into Social Security, 6.2 percent, (if not more). (Presumably this

would be done through collective bargaining.) As the number of new hires increases

and there are fewer pre-Social Security coverage employees to fund the current system, the system could very well develop unfunded liabilities for those employees already vested in the current system, eventually reducing the amount of funds which

can be paid out. There is no way that reducing the City’s and employees’ contributions to the current system—dollar-for-dollar of Social Security taxes paid—would

come close to matching these benefits. Nationally, covering only new hires will eventually hurt hundreds of thousands of current public safety employees, reducing their

death, disability, and early retirement benefits, making public safety careers much

riskier and less desirable financially.

Or, alternatively, the City may retain the current system for new hires. In that

case, as in most large American cities, Detroit will likely pay the 6.2 percent increase for new hires (with the numbers of covered employees increasing every year)

by taking it from somewhere else, whether from beginning salaries, new equipment,

salary increases for all employees, or retirement health benefits—a particularly vulnerable target, or a combination of these. The most immediate consequences of a

6.2 percent tax would likely be a significant decrease in a new-hire’s salary and reductions in health insurance for retirees or other benefits. Do not have any doubts;

this is what would happen!

An official for the Detroit fire and police pension system told us during an informal NAPO survey, ‘‘We have 50 years or more of success and a history of serving

our police officers and firemen. Why would the Federal government want to disrupt

this healthy and fine-tuned system?’’ That sentiment was mirrored by others.

Example Two: Ohio Police and Fire Disability and Pension Fund.—The Ohio Police and Fire Disability and Pension Fund serves 25,000 members and 15,000 retirees or surviving beneficiaries.

Approximately 25 percent of all police and fire retirements are due to full or partial disability occurring in the line-of-duty, which is not an unusual number. Full

disability results in payments to the officer at 75 percent of active duty salary in

this statewide system, and partial disabilities (79 percent of police and fire disability

retirements overall) results in disability awards ranging from 5 percent to 60 percent of salary. As compared with this system, Social Security would provide no benefits to these individuals, unless they were totally unemployable in any line of work.

And, even if they were so unemployable, the benefit would be a fraction of what

these officers currently receive in disability pay. In addition, line-of-duty death benefits replace all of an officer’s income and are available for the public safety officer’s

survivors; the Social Security benefit is significantly lower.

Employees contribute 10 percent of their pay, and State agencies pay 19.5 percent

of pay for police officers and 24 percent of pay for firemen. To retain the same benefits and to impose Social Security would result in employees paying 16.2 percent of
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7Section 535 of the City’s Charter provides that, should Social Security be mandatory, the

City will integrate the Social Security benefits with the Safety Members Pension Plan, so that

benefits are ‘‘at least equal to the benefit offered by the Safety Members Pension Plan prior to

such integration.’’ (p.678, Charter of the City of Los Angeles, Rev. 12–13–90)

pay and municipalities paying 25.7 percent for police and 30.2 percent for firefighters, a heavy burden.

Also, if Social Security taxes were imposed on all active police and fire personnel,

then Ohio municipalities would have to pay an additional $68.2 million (based on

a payroll in FY 1996 of $1.1 billion) for public safety officers alone.

As the head of this Ohio pension fund has said, ‘‘Our workers will be giving up

the certainty of an actuarially funded pension for the uncertainty of a pay-as-you

go plan with an unreachable age for retirement and a very-hard-to-reach requirement for eligibility for disability benefits.’’

Example Three: City of Tampa Pension Fund for Firefighters and Police Officers.—

The Tampa City Pension Fund for Firefighters and Police Officers has 1,411 active

contributing public safety officers and 1,205 retired members and beneficiaries, as

of October 1997. Officers can receive up to 65 percent of salary for line-of-duty disabilities, regardless of age. They can retire after 20 years at age 46 with a pension

at 50 percent of salary (increasing for later retirement). For a death benefit, a surviving spouse receives 65 percent of the member’s earned benefit, plus cost-of-living

increases.

The City contributes 7.7 percent of salary, and employees contribute 5.75 percent

of salary into this retirement system. The system is very healthy financially, and

its investments, mostly in equities, have returned an average annualized return to

15 percent, making these benefits possible.

A pension fund official told us that if Social Security taxes were imposed on new

police officers and firefighters in this system, it would be necessary to continue the

current system to maintain the same level of benefits, to fill in the gaps prior to

age 62 or 65. If coverage were made mandatory for all public safety officers, based

on 1996 payroll figures of $66.5 million, the city would pay $4.1 million, and employees would pay the same amount, resulting in a significant reduction in pay. Yet,

even if coverage applied to just new hires, the likely consequence of superimposing

a 6.2 percent tax on employee and employer would be to reduce the number of firefighters and police officers serving Tampa’s citizens or significantly reduced benefits

for these employees, or a combination of both.

By contrast, there is the statewide Florida Retirement Systems, which includes

a system for ‘special risk’ members, including all Florida county firefighters and

deputy sheriffs. Members of this system are also covered by Social Security. Employing agency contributions equal a whopping 32.6 percent—26.4 percent for the pension system and 6.2 percent for Social Security. Interestingly, the benefits are not

nearly as beneficial as Tampa’s system. To recover disability, public safety officers

must be unable to hold any substantial gainful employment and officers cannot retire under age 55. Therefore, even with a greater outlay of funds, the Florida State

system cannot provide nearly the same security and benefits essential to attract and

keep police officers, as does the Tampa system.

Example Four: City of Los Angeles, The Safety Members’ Pension Plan.—In the

City of Los Angeles, there are over 12,000 active public safety officers contributing

to the Safety Member’s Pension Plan or an earlier pension plan for those hired prior

to 1980 (the vast majority of firefighters and police officers are in the Safety Members Pension Plan). In addition, there are 11,049 individuals receiving a service, disability, or survivor pension.

Public safety officers hired between 1980 and June 30, 1997, belong to Plan I.

Those hired since June 30th are members of Plan II. Plan I members can retire at

age 50, with a minimum of 10 years of service. Plan II members can retire at any

age with at least 20 years of service. In all other aspects, the plans are the same.

The amount of the pension will vary from 20 percent of final average salary after

10 years, to 55 percent of salary after 25 years, to 70 percent of salary after 30

years. Service-connected disabled members receive 30 to 90 percent of average salary, depending on the degree of disability. A service-connected death qualifies a survivor for a benefit at 75% of the member’s final average salary.

The active members contribute 8 percent of their salary, and the City contributes

approximately 15 percent of salary (which varies from year to year), for an approximate total of 23 percent. At the end of FY 1996, the Pension Plan’s investments

were valued at $6 billion, and the rate of return for that year was 14.6% percent.7
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IV. CONCLUSION: IMPACT OF MANDATORY SOCIAL SECURITY ON PUBLIC SAFETY

OFFICERS

In conclusion, keep in mind these essential points: Social Security does not address the special needs of police officers and firefighters. First, they and their families need the security of service-connected disability and death benefits. Social Security benefits do not provide anywhere near the same level of benefits, and, in fact,

provide no disability benefits unless one is totally unable to perform any work, not

just public safety work.

Second, Social Security is not appropriate for public safety officers who normally

retire prior to or around 55 years of age, as usually they must, due to the stresses

and dangers faced every day. Social Security will pay these individuals nothing,

until they reach 65 (unless they take a reduced benefit at age 62).

Even mandating Social Security taxes on just new police officers and firefighters

will seriously disrupt compensation and benefits for all of them. From our perspective, it makes no sense whatsoever to harm a system of pension funds that is working well and paying needed benefits to those who protect the public safety through

public service. Forcing State and local governments and employees to pay a combined 12.4 percent tax will have major consequences.

Scaling back and reducing the benefits in the current plans, even if done only for

new hires, would reduce and could potentially eliminate these crucial benefits paid

to these officers in recognition that they repeatedly put their lives on the line and

are often disabled at some point in their careers. This would be the consequence of

reducing employer and employee contributions to current pension plans in order to

pay Social Security taxes.

For those remaining State and local governments which will both pay the 6.2 percent tax and retain their current pension systems for everyone, there will still be

serious consequences to both pay and working conditions. This is because the money

to pay the tax has to come from somewhere, and raising taxes or pay to make up

the difference is not politically feasible. As a result, first, officers will automatically

suffer a minimum de facto pay decrease through the newly imposed 6.2 percent tax,

in order for them to keep their current pension benefits. Second, either local governments will reduce the number of public safety officers to retain current pay levels

and benefits, or they will reduce the pay of law enforcement officers or freeze future

cost-of-living increases. Also, to minimize the impact on pay, it is probable that government bodies will not provide public safety officers with the essential equipment

(such as bulletproof vests) and technology needed to effectively perform their work.

Under a mandatory Social Security system, police officers and firefighters will pay

more taxes for inadequate benefits. Their ability, through collective bargaining and

the political process, to obtain what they need to compensate them for their service

to us, the public, will be severely weakened. Even if limited to new hires, the consequences of mandatory Social Security taxes—lowering benefits or salaries and

freezing cost-of-living increases—will make police and fire safety work less financially desirable. If we tamper with the current system, we will most assuredly lose

some of our better candidates and current officers to other professions, in view of

the fierce competition among police departments and the private sector.

Mandatory Social Security taxes and coverage will hurt, not help, 75 percent of

the public safety officers not included, in addition to millions of other public employees. It will hurt us all.

V. NEED FOR PROPOSED LEGISLATION TO WEP AND GPO

I would also like to briefly touch on two Social Security provisions that the Subcommittee on Social Security will be addressing in this hearing. These two provisions, the Government Pension Offset (GPO) and Windfall Elimination Provision

(WEP), affect the way benefits are calculated for retirees of Federal, State and local

governments, who do not pay into Social Security. The GPO was instituted in 1977

and later amended in 1983, to set a two-thirds offset for Social Security benefits of

spouses or surviving spouses earning government pensions. The WEP was adopted

as part of the Social Security Amendments of 1983, which affect an individual’s Social Security if that person becomes eligible for a Federal, State or local government

pension after 1985, based on work not covered by Social Security.

In present form, the GPO and WEP unfairly over-penalize employees who participate in government pension plans in lieu of Social Security. NAPO believes that

there must be some equity when lawmakers distinguish between pensions earned

in the private sector and those in the public sector. Currently, there is legislation

pending in the 105th Congress correcting these inequities, which we strongly support.
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As part of the CARE coalition (Coalition to Assure Retirement Equity), NAPO has

been actively lobbying to ensure that the concerns of public employees are met. This

legislation would not repeal the GPO or WEP but would appropriately amend the

provisions. I recognize the fiscal and budget considerations which would arise from

such a repeal. However, I also recognize that law enforcement and other government employees who do not pay into Social Security should not be used as tools to

facilitate the solvency of the Social Security program. The modified legislative proposals addressing these issues are, as follows.

On July 25, 1997, Congressman William Jefferson (D–LA) introduced H.R. 2273

to amend the Government Pension Offset. Congressman Jefferson’s bill would remove the offset for anyone whose combined monthly benefit from a government pension and a spouse’s Social Security benefit is $1,200 or less. On November 4, 1997,

Senator Barbara Mikulski introduced S.1365, a companion bill, with some modifications. Her bill would provide for an index adjustment for the $1,200 threshold, due

to the cost of living. Also, Senator Mikulski’s bill would initiate the two-thirds offset

for anything over $1,200, compared to a dollar-for-dollar offset in Congressman Jefferson’s bill.

On September 25, 1997, Congressman Barney Frank (D–MA) introduced H.R.

2549 to amend the Windfall Elimination Provision. This bill would amend Title II

of the Social Security Act. Under this bill, individuals whose combined monthly government pension and Social Security benefits are $2,000 or less would be exempt

from the WEP. The WEP would then be phased in for amounts between $2,000 and

$3,000, and, if over $3,000, the full WEP would apply.

It is estimated that 500,000 government retirees have already been affected by

the GPO (210,000) and WEP (290,000). These provisions will financially impact

many more low- to middle-income government employees in the future. As stated

before, many law enforcement employees retire early due to the nature of their jobs.

Subsequently, many will enter the private sector and earn enough credits to qualify

for Social Security. These individuals will become greatly impacted by the WEP formula because of their short, or fairly evenly split careers, compared to workers with

long-covered Social Security jobs.

The GPO has a profound effect on the economic security of a widow (or widower),

who receives a government pension and relies on the full payment of their widow’s

benefit of Social Security. The law unfairly offsets a recipient whose pension was

not covered by Social Security and exempts individuals who earned their pension

in the private sector. Furthermore, public pensions are taxed, while Social Security

is not if income falls below a certain amount, which adds to the host of inequities

facing many public sector workers. It should be noted again that an estimated 75

percent of law enforcement employees do not pay into Social Security.

Statement of National Committee to Preserve Social Security and Medicare

Thank you for the opportunity to submit a statement for the record.

Chairman Bunning, Members of the Subcommittee on Social Security, we appref

ciate your holding this hearing to review anti-windfall provisions of Social Security

law. We welcome this opportunity to submit testimony regarding proposed reforms

to Social Security to lessen any inappropriate adverse impact on Government employees who are covered under retirement systems which are outside of the Social

Security system. On behalf of the 5.5 million Members and supporters of the National Committee to Preserve Social Security and Medicare we appreciate the importance of this series of hearings, and its contribution to the unfolding national dialogue.

We especially appreciate your willingness to include testimony in this particular

hearing about how the Government Pension Offset (GPO) and Windfall Elimination

Provisions (WEP) of Social Security can unfairly impact low earners. Our testimony

will focus on these issues, as well as issues related to disability coverage of Government annuitants. We will also comment on proposals to bring currently non-covered

government employees into the Social Security System.

Mr. Chairman, as you know, federal, state, and local workers receiving retirement

or disability benefits for government employment which was not covered by Social

Security, also may be eligible for Social Security based on their own or a spouse’s

employment. In recent years, Congress has reduced Social Security benefits to such

individuals, arguing that government annuitants frequently received higher Social

Security benefits in relation to contributions than individuals who worked solely

under Social Security. Some of these reductions are excessive and inequitable.
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For example, 64 year old Mrs. Ruth Shoup of Florida, is a victim of a double off- set. She is affected by both the GPO and WEP. Her late husband, a retired policeman, paid into Social Security all of his life. Mrs. Shoup also worked all of her life,

for about 20 years in the private sector and about 21 years with the Postal Service.

After her husband’s death, Mrs. Shoup was forced into early retirement due to rheumatoid arthritis. When she applied for Social Security widow benefits she was told

that the offset essentially eliminated any benefits to which she might be otherwise

entitled. Despite her husband’s life-long contributions to Social Security and her

own for about 20 years, she has been told that when she turns 65 she’ll probably

only see an extra $50 per month from Social Security. She lives on $950 per month

after taxes and her health insurance premium. When Mrs. Shoup becomes eligible

for Medicare her $50 per month health coverage, including her coverage for prescription drugs, will terminate. After two operations on her hands, Mrs. Shoup’s

medical bills are mounting. Ironically, because of the offset and windfall elimination, Mrs. Shoup may be eligible for Medicare premium assistance when she

turns 65.

Mr. Cornelius Faass, also of Florida, is 67 years old. He worked until almost 3 years ago, mostly part time since he started his Social Security at age 62. In December of 1995, Mr. Faass began receiving a pension from Holland where he worked

as a Merchant Marine before acquiring U.S. citizenship in 1962. The Dutch pension

is about $175 to $200 per month depending upon the current exchange rate. Since

January, because of the GPO, SSA has been taking $123 per month from his Social

Security due to the pension. Mr. Faass was receiving Medicaid food stamp assistance of $90 per month until the pension came. Then his food stamps were dropped

to $77 per month and eventually revoked entirely last July. In November, his food

stamp assistance was reinstated to $32 per month.

GOVERNMENT PENSION OFFSET

Under the Government Pension Offset, a government annuitant may receive only that portion of a Social Security spouse or widow benefit which exceeds two-thirds

of the government pension. No one but a government annuitant suffers a loss of Social Security due to receipt of a pension. Spouse and survivor benefits are not denied

to persons receiving other, comparable non-Social Security annuities. Frequently, the offset totally eliminates a Social Security benefit a spouse or widow relied upon receiving. The National Committee, a long standing member of

the Coalition to Assure Retirement Equity (CARE), supports modification of the offset to lessen its severity. We commend your colleagues Congressman William Jefferson and Senator Barbara Mikulski for introducing legislation, H.R. 2273 and

S.1365, to alleviate the problem. This legislation would protect many low-income

women, in particular from excessive reductions. We urge you to enact such legislation this year and to include the Mikulski language which ensures that the proposed

$1,200 threshold for the offset will be regularly adjusted for inflation, and that also

ensure no one receives an inadvertent reduction in benefits as a result of any

change enacted.

WINDFALL ELIMINATION

Under Windfall Elimination, Social Security Benefits are reduced for a worker who personally earns both a government pension and a Social Security benefit from

separate employment unless the worker has 30 or more years of Social Security employment. The maximum reduction applies to a worker with 20 or fewer years of

Social Security employment and can be as much as half the government pension.

Hardest hit by this provision are workers with careers roughly evenly divided between covered and non-covered employment. Phasing the reduction over more years,

for example by using a 2.5 percent reduction in the first bend point for each year

less than 30, would provide a more equitable benefit to workers with significant

years of Social Security employment. Because government pension plans provide proportionately smaller pensions to short service workers, a worker with a divided career has the worst of both worlds.

The government pension is proportionately less than it would be for a full government career and Social Security can be reduced by as much as 55.5 percent. The 90 percent replacement rate in the first bend point of the Social Security ben- efit determination method was deliberately designed to weigh benefits so as to give

added protection to low and average earners. The Windfall Elimination Provision,

by its across-the-board reduction to 40 percent of the first bend point, regardless of

the wage earner’s level of earnings, frustrates that purpose. The low earner is deprived of the protection intended by the law in order to make certain no high earner

is overcompensated. This unintended penalty on low earners and those with lifetime
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modest wages could be minimized by limiting the Social Security windfall reduction

to a smaller proportion of the pension received from non-Social Security covered employment as has been suggested by former Social Security Actuary Robert J. Myers.

DISABILITY BENEFIT GAP

A requirement for Social Security Disability insurance benefits is earnings in at least five of the ten years before becoming disabled. The purpose of this ‘‘recency

of work’’ test is to limit benefits to persons who are out of the work force because

of disability. However, only Social Security earnings count. Government employment

is treated as if the individual was unemployed. Workers who move between Social

Security covered employment and non-Social Security covered employment thus can

be deprived of disability benefit protection without ever having missed a day of

work. The recency of work test should recognize all employment. Windfall elimination and the Social Security disability benefit formula are adequate safeguards

against excessive benefits.

DISABILITY BENEFIT CAP

A separate provision of law effectively denies Social Security disability benefits to

anyone working two jobs, one in Social Security covered employment and the second

in non-Social Security employment. Combined disability benefits are capped at 80

percent of pre-disability Social Security earnings alone. Government earnings are ignored in setting the 80 percent cap, but government benefits count against the cap.

Total earnings should be the basis for the 80 percent cap.

There is historic precedent for recognizing and protecting the worker’s total earnings from loss of earnings due to disability. When an 80 percent disability benefit

cap was initially placed on Social Security earnings in the early 1970s, only earnings on which Social Security FICA taxes had been paid were considered. Workers

with earnings over the taxable wage base had no protection for their higher income

above the wage base. Within four years, Congress recognized this inequity and revised the law. The disability benefit cap was re-established as 80 percent of earnings in covered employment, thereby protecting the worker’s entire income. Individuals working two jobs deserve this same recognition of total earnings in capping

combined disability benefits.

MOVING NON-COVERED WORKERS INTO SOCIAL SECURITY

All of the problems and inequities discussed in this testimony would become a

thing of the past if Social Security were universal as has been consistently advocated by the National Committee. Until that goal is achieved, we are appreciative

of the efforts of this Committee to ensure that Social Security reductions imposed

on persons with non-covered pensions do not go beyond Congress’ intent to eliminate

only inappropriate excess benefits.

f

NATIONAL CONFERENCE ON PUBLIC

EMPLOYEE RETIREMENT SYSTEMS (NCPERS)

May 26, 1998

The Honorable Jim Bunning, Chairman

Subcommittee on Social Security

Committee on Ways and Means

U.S. House of Representatives

Dear Chairman Bunning:

I am writing to you on behalf of The National Conference on Public Employee Retirement Systems (NCPERS) to urge you not to support legislation that would reform Social Security by mandating coverage for public employees. Currently there

are several bills that have been introduced in the House that are designed to keep

Social Security solvent. All of these bills have one thing in common, mandatory coverage of public employees by the Social Security System. We strongly oppose such

a provision because it would have a profoundly negative affect on our members and

their beneficiaries.

NCPERS is a powerful pension advocacy partnership with 450 fund members

from all 50 states, representing more than $750 billion in assets and more than 5

million public employees and retirees.
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While 80 percent of our members are already covered by the Social Security pro- gram, we are still opposed to mandatory coverage because we believe that it is unfair to those funds who are not currently in the system. Many of our members were

not allowed to participate in the program when Social Security was first introduced.

They were then forced to start their own retirement plans. Additionally, many of

our members have retirement funds that pre-date the creation of Social Security.

Forcing them to join the Social Security program at this point would be very costly

both for public employees and state and local governments for the following reasons: • It would be costly to retirement programs. Making Social Security mandatory would have little impact on the projected funding shortfalls of Social Security, however, such a move would greatly affect public employees. Public employees currently

not covered would be required to pay an additional 6.2% in payroll taxes. • It would be costly to states and localities. As employers, states and localities would also be required to pay an additional 6.2% in payroll taxes. This would cost

California over $2.3 billion annually, Ohio $1 billion annually, and hundreds of millions to Texas, Illinois, Colorado, Massachusetts and Louisiana. • It would be disruptive to existing retirement programs. Many public employers would be unable to absorb the higher costs. They would be required, in addition to

the Social Security payroll tax, to continue the funding of their respective retirement plans. Many of these plans are established constitutionally and to make such

a change would require legislative action and/or a constitutional amendment.

• It would require the creation of a second tier. A second tier of retirement benefits would have to be created for prospective employees required to be covered by

Social Security.

NCPERS acknowledges the arguments of proponents of mandatory Social Security

coverage, that everyone should be covered by Social Security to reduce public assistance costs. However, these proponents fail to note the existence of properly funded

state and local government retirement plans also reduce the cost of public relief.

They also argue that public employees who are not covered by Social Security often

get benefits from a spouse or through other employment covered by Social Security.

This issue was already addressed by Congress in the 1983 ‘‘anti-windfall’’ legislation

that was passed to reduce the Social Security benefit of such employees.

Although we are aware that specific action on this issue will not take place for

the remainder of this session, a number of hearings are already scheduled, as well

as the SAVER Summit and other forums for you and Congress to begin the process

of debate. We feel it is important for us to communicate with you our position for

what is anticipated to be a legislatively charged issue in the next Congress.

I urge you to oppose any provision to extend mandatory Social Security coverage

of public employees. Such a law would be detrimental to the millions of uncovered

public employees and their employers.

Sincerely,

JAY W. BIXBY

f

President

NATIONAL CONFERENCE OF STATE LEGISLATURES

WASHINGTON, DC 20001

May 20, 1998

The Honorable Jim Bunning, Chairman

Subcommittee on Social Security

Committee on Ways and Means

U.S. House of Representatives

Dear Chairman Bunning:

On behalf of the National Conference of State Legislatures I urge you to oppose

efforts to extend Mandatory Social Security Coverage to all newly hired State and

local employees.

The subcommittee’s hearing on May 21, 1998, ‘‘The Future of Social Security for

this Generation and the Next,’’ is expected to highlight the devastating effects such

a change would have on state finances. While the number of covered State and local

workers has remained consistent at 70%, future efforts by the federal government

to expand mandatory coverage would have severe consequences for states with large

numbers of uncovered employees and would constitute a tremendous cost shift to

states. NCSL firmly opposes all efforts by the federal government to extend mandatory coverage to additional categories of state and local employees.
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In 1991, NCSL opposed final OBRA 1990 regulations and revenue procedures mandating full Social Security coverage, including Medicare, for public sector employees who are not members of a retirement system. The final rule required public

employee retirement systems to meet minimum contribution and benefit level standards, and also required that part-time, seasonal and temporary (PST) employees be

immediately and fully vested (100 percent) in any employer-sponsored retirement

arrangement in order to satisfy the rules. The mandate disproportionately affected

approximately 3.8 million State and local employees who were part-time, seasonal

and temporary employees—the very employees least able to pay the tax increase on

their income resulting from mandatory coverage. NCSL maintains that the U.S. Department of Treasury and the IRS went well beyond the intent of OBRA 1990 in their interpretation of the law. At the time of

the final rule, NCSL feared that the action would make it easier for the federal government to become further involved in the administration of state and local public

plans and to expand mandatory Social Security coverage to all state and local public

employees. Presently, it appears that the Congress intends to consider these proposals as possible revenue generators. State and local retirement plans do an excellent job of providing for the retire- ment of public employees. Rather than extending the unfunded mandate, NCSL

urges the Congress and the administration to grandfather preexisting state and

local retirement plans. In other words, public plans in existence prior to the adoption of OBRA 1990 (November 5, 1990) would be deemed in compliance with the law

and benefits received from a state or local retirement system would qualify as being

equivalent to a benefit received under Social Security. NCSL opposes any additional involvement of the federal government in public pension plans and the expansion of mandatory Social Security coverage for public

employees of state and local governments who are not already covered. NCSL believes that state and local governments should be allowed to affiliate their plans

with Social Security on a voluntary basis. We look forward to working with you further on this issue. If our staff can be of any assistance to you, please do not hesitate to contact Chris Zimmerman, our Federal Budget and Tax Committee Director at (202) 624–8668 or Gerri Madrid, our

Fiscal Policy Associate at (202) 624–8670.

Sincerely,

TOM JOHNSON, CHAIR

Federal Budget and Taxation Committee

f

Ohio House of Representatives

Statement of Russell Graves, President 1997–98, National Conference of

State Social Security Administrators

The National Conference of State Social Security Administrators (NCSSSA) represents more than 70,000 state and local government employers nationwide. These

comments concern a major issue that has arisen in recent proposals regarding mandated social security coverage for all newly-hired state and local government employees.

It may seem somewhat ironic that the NCSSSA, which has been given the statutory authority in all 50 states, including several U. S. territories, to serve as the

liaison between the federal Social Security Administration and the state and local

units of government, would come out and oppose a proposal for universal Social Security coverage. An in depth explanation of the respective roles of the State Social

Security Administrator, the NCSSSA as an organization, and the Social Security

Administration would be in order, and, as such, follows:

The exception from social security coverage for state and local government employees was included in the original version of the Social Security Act (HR 7260),

approved in 1935. The committee reports on the act contain no discussion of the exception provision. In the January 22, 1935, hearings of the Committee of Ways and

Means, however, Dr. E. E. Witte, Executive Director of the Committee on Economic

Security, was quoted as saying:

‘‘Government employees are excluded from the tax for obvious reasons. The federal government cannot impose a tax on the states or the political subdivisions of

the states. This is a tax measure...’’

The 1950 amendments to the act, effective January 1, 1951, allow a state to enter

into a voluntary agreement with the Social Security Administration and permit the

state and its political subdivisions to provide social security coverage for their em132

ployees. Section 218 of the Social Security Act includes this voluntary coverage concept. The Omnibus Budget Reconciliation Act of 1990 (OBRA 90) requires social secu- rity coverage for every state and local government employee who does not belong

to a qualified, public retirement plan or not covered by social security under a Section 218 agreement. OBRA 90 retains the states’ and their political subdivisions’

right to determine whether employees are covered by social security or a public retirement plan that provides comparable, but in most cases greater, benefits. Although public employers have managed to comply with the coverage requirements

of OBRA 90, it has only been with significant expense and great administrative effort. And though the cost is great, every state and local governmental employee has

some form of retirement protection.

Aside from the obvious question of constitutionality, the imposition of universal social security coverage would cause havoc on the organization of many state retirement systems. The cost of universal social security to state and local government

employers would be devastating. States in which there is limited Social Security,

such as California, Colorado, Illinois, Louisiana, Massachusetts, Ohio and Texas,

would face overwhelming burdens on already strained budgets. Even states that already have general social security coverage for their public employees (Connecticut,

Florida, Kentucky and Michigan to name a few) would have thousands of employees

impacted and millions of tax dollars in costs as universal coverage is phased in.

Some public retirement systems were created prior to 1951 specifically for certain

career employees, such as teachers, police and firefighters, when social security coverage was not available to public employees. These non-social security retirement

systems were designed to provide their members with a complete benefit structure

of retirement, disability and survivors coverage that was based on the unavailability

of social security coverage. The imposition of the ‘‘new hire’’ rule places public retirement systems in the posi- tion of having to review all the pension plans for their affected employees. Sound

pension policy dictates that states must consider the issue of equity to its employees, as well as the reasonableness of the income replacement at retirement. If newhires retain the benefits of current pension plans, then they would be entitled to

a significantly higher level of income replacement at the time of retirement (current

pension benefits plus social security), at a significantly higher cost to the taxpayers.

States cannot justify paying higher benefits simply because of the hire date of an

employee. These states would be forced to either increase the benefits of current ‘‘old

hires’’ in the interest of equity or to establish new retirement systems or new tiers

for the new hires with equivalent total income replacement values. This process of

creating an entirely new retirement system for a new class of employees requires

legislative and policy considerations that cannot simply be accomplished with a

stroke of a pen.

The economics of establishing a separate system for the new hires could undermine the actuarial soundness of the old system due to the loss of new members contributions to the system. A two-tier system would likely lead to further legislative

pressures to increase benefits or to expensive lawsuits brought by either of the employee groups.

It has been said that the ‘‘new-hire’’ proposal would ease the administrative burden of the social security program for the Internal Revenue Service and the Social

Security Administration. One only has to examine current medicare coverage with

its new-hire provisions to realize that it is very complicated and requires additional

and constant administration by both the state and local employers and the federal

agencies.

It is somewhat surprising and, perhaps even more alarming, that Chairman

Bunning was quoted as saying ‘‘...To many, covering those State and local government workers not covered under Social Security is an issue of simple fairness...’’.

‘‘Simple fairness’’ seems like a very frivolous reason to change a well established

public pension policy for nearly 5.0 million government workers. In fact, based upon

the original language in the Social Security Act, which excluded state and local government employees from participating in the program, quite the opposite would

seem to fit under the general category of ‘‘simple fairness.’’

Requiring all newly hired state and local government employees to participate in

the federal program will cause financial hardships to the various affected employers.

Actuarial costs such as the employer’s share of retirement contributions to the existing plans will be significantly increased. This will occur because newly hired employees will, in all likelihood, be contributing at an employee contribution typically

one-half of the non-covered employees. For the next fifteen to twenty years, at a

minimum, the public plans will continue to have to pay retirement benefits to ‘‘old

hires’’ at the rates in effect when they established service credit, however, the
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amount of revenues available to the pension fund has now been reduced because of

lower ‘‘new-hire’’ employee contributions. This income gap between benefit payout and employee contributions paid in could have potentially three disastrous effects. First, it may force the pension fund to seek

higher rates of returns by investing in more volatile and highly speculative types

of investments. One needs only to recall the financial horror stories such as those

in one county in a western state and others like it to see the results of an overly

aggressive investment policy. Second, the required employer contribution could become so high that, when faced with tax caps in some localities and states, the employing entity will be forced to choose which types of service will be reduced or simply deleted altogether in order to pay the higher employer contribution rate, as well

as the required matching share of the Social Security contributions. Third, situations will arise when a ‘‘newly-hired’’ employee working side-by-side with an ‘‘oldhire,’’ faces the unfortunate truth of having to work perhaps as many as five or

seven more years to enjoy the full complement of retirement benefits from both the

federal and state (or local) governments to which they are entitled. This is based

upon many non-covered public retirement plans which have a ‘‘normal’’ retirement

age of 60, as compared to an ever-escalating age for unreduced Social Security benefits (presently up to nearly age 70). In the event this proposal becomes law, Section 218 must remain in place to ensure that details of social security for the employees continue under the existing

Section 218 Agreements. State and local governmental employers also need the avenues Section 218 provides to allow for social security coverage of veteran (‘‘old-hire’’)

employees, if they so desire, as in current medicare-only coverage.

Imposition of universal coverage would impair, and in some cases severely lessen,

retirement security for millions of state and local government employees. Government pension plans work well for employees because returns on investments allow

the employees to receive substantially greater benefits than would be possible under

an incremental approach. Public pension funds are invested directly in the economy,

thereby creating jobs and earning dividends that help fund future retirement benefits.

The NCSSSA requests that serious consideration be given to all of the ramifications of universal social security coverage. We propose that perhaps an alternative

be given to expanding certain existing voluntary coverage provisions, such as extending the option to divide retirement systems on the basis of desire for coverage,

to all states (Social Security Act Section 218 (d)).

We believe the human and monetary costs to state and local governments of universal social security, at this time, far outweigh the benefit of any revenue to be

gained by the federal government.

The NCSSSA appreciates the opportunity to express our position on this matter

of national interest. If you have any questions or would require additional information from the NCSSSA, please contact me (405) 521–3555.

Mr. Chairman and Members of the Subcommittee:

On behalf of the 2.3 million teachers and other education employees who are

Statement of the National Education Association

f

members of the National Education Association (NEA), we would like to thank you

for the opportunity to address the subcommittee about Social Security reform.

We would like to address two issues: the government pension offset provision and

mandatory Social Security coverage. NEA strongly supports scaling back the pension offset provision, which requires the reduction of Social Security benefits to

thousands of retirees whose public employer does not participate in Social Security,

but who are otherwise entitled to Social Security benefits based on their spouses’

private sector employment. The provision’s current two-thirds reduction in spousal

benefits severely limits the retirement benefits of retired public employees.

On the issue of mandatory participation in the Social Security program, NEA opposes such a requirement because it would weaken current pension plan benefits

for public sector retirees. It would also impose unfunded mandates on fiscally overburdened state and local governments.

GOVERNMENT PENSION OFFSET

When the Social Security system was established in 1935, state and local government employees were excluded from coverage. In the 1960s, these employees were

given the opportunity to elect to participate in the Social Security system. As a re134

sult, public sector employees in 36 states opted to enroll in Social Security in the

1960s and 1970s. The remaining 13 states and a number of local governments in

two others chose instead to maintain and enhance their existing retirement systems. The government pension offset affects government employees and retirees in vir- tually every state, but its impact is most acute in 15 states. They are Alaska, California, Colorado, Connecticut, Georgia (certain local governments), Illinois, Louisiana, Kentucky (certain local governments), Maine, Massachusetts, Missouri, Nevada, Ohio, Rhode Island, and Texas. Nationwide, more than one-third of teachers

and education employees and more than one-fifth of other public employees are not

covered by Social Security. In 1977, federal legislation was enacted that required a dollar-for-dollar reduction

of Social Security spousal benefits to public employees and retired public employees

who received earned benefits from a federal, state, or local retirement system. Following a major campaign to repeal the provisions, Congress and the President

agreed in 1983 to limit the spousal benefits reduction to two-thirds of a public employee’s retirement system benefits. But this remedial step falls well short of addressing the inequity of Social Security benefits between public and private employees.

The harshest affects of the offset provision are borne by lower-income women. It

is estimated that the spousal benefit is eliminated entirely in 9 of 10 cases, even

though the covered spouse paid Social Security taxes for many years, thereby earning the right to these benefits. Moreover, these estimates do not capture those public employees or retirees who never applied for spousal benefits because they were

informed they were ineligible.

According to the Congressional Budget Office, the government pension offset reduces benefits for some 200,000 individuals by more than $3,600 a year. Ironically,

the loss of these benefits may cause these women and men to become eligible for

more costly assistance, such as food stamps.

The present system creates a tremendous inequity in the distribution of Social Security benefits. The standard for this narrow class of individuals—retired public employees who are surviving spouses of retirees covered by Social Security—is inconsistent with the overall provisions of the Social Security Act and does not apply to

persons receiving private pension benefits. This imbalance exists even though Congress, through ERISA standards and tax code provisions, has more direct influence

over private employers than public employers.

Three Personal Illustrations of How the Offset Provision Harms People

• A retired widow who worked as a custodian in the Parma, Ohio, public schools

receives just $215 a month from the Ohio School Employees Retirement System.

Her Social Security spousal benefit is reduced to $215 a month after applying the

government pension offset provision.

• A disabled former school employee and widow who retired in 1986 receives $403

a month from her school pension. That income totally offsets a $216 per month Social Security survivor’s benefit. Her total income is about 70 percent of the federal

poverty level.

• A retired widow who worked as a school cook receives $233 a month from her

school pension. Her Social Security widow’s benefit is reduced by $155 because of

the automatic offset. Her combined total income is about 76 percent of the federal

poverty level.

NEA supports H.R. 2273, legislation sponsored by Representatives William Jefferson (D–LA) and J.D. Hayworth (R–AZ), that would amend Title II of the Social Security Act to protect low-and middle-income public retirees by limiting the government pension offset. H.R. 2273 and companion bill S. 1365, sponsored by Senator

Barbara Mikulski (D–MD), would also move to restore equity between public and

private employees in the distribution of Social Security benefits.

MANDATORY SOCIAL SECURITY PARTICIPATION

NEA believes that requiring state and local employees to participate in the Social

Security system is unnecessary and financially burdensome. A federal mandate for

participation will not solve the systems’ financial difficulties and would weaken

state and local plans whose benefits are superior to those provided by Social Security.

The 15 states that have opted not to participate in the Social Security system

have strong plans that provide ancillary benefits such as health care, disability and

survivor coverage and secure portability. These ancillary benefits would have to be

lowered or eliminated if non-participating pension systems are required to pay Social Security.
135

Mandatory participation would also create unnecessary and burdensome financial burdens for the state and city governments involved, as well as hurt active and retired employees. If these governments are required to pay the full cost of the FICA

tax, this could result in diluted benefits to retirees and fewer funds available for

investment, a large source of income for the affected pension plans. We urge you to support H.R. 2273, which moves to restore eligibility for mostly lower-income survivors of spouses who paid into the Social Security system, and to

reject mandatory Social Security participation. Teachers and other public employees

who have devoted their working lives to children and public service should not have

to worry about the security of their retirement plans.

Statement of Robert M. Tobias, National President, National Treasury

f

Employees Union

Chairman Bunning, Members of the Subcommittee:

I am Robert M. Tobias, National President of the National Treasury Employees Union (NTEU). Thank you very much for holding this timely hearing today and for

giving us an opportunity to present our members’ views on the effects of the Government Pension Offset (GPO).

NTEU represents over l60,000 federal employees and retirees. Many of our mem- bers have already felt the effects of the Government Pension Offset. Others are not

yet aware of the impact this offset could have on their retirement income. Federal

retirees often first become aware of the existence of this offset at the time they first

apply for Social Security benefits. As you know, the Government Pension Offset reduces or eliminates the Social Se- curity benefit many federal retirees are otherwise eligible for on their spouse’s earnings record. Under current law, Social Security benefits normally due an individual

as a spouse or widow of a Social Security recipient, are reduced by two-thirds of

the amount of the government pension. For example, if an elderly widow is eligible for a monthly pension of $600 as a result of her federal government service, two-thirds of that amount, or $400, must

be used to offset the Social Security spouse’s or widow’s benefit for which she might

also be eligible. If she is eligible for a monthly spousal Social Security benefit of

$500 based on her husband’s earnings record, the GPO results in her receiving only

$l00 per month. This is not an isolated example.

More often than not, this offset disproportionately affects those who can least af- ford to forego this retirement income. The effects are particularly devastating to female federal employees who are often eligible for only meager federal pensions resulting from either interruptions in their careers while raising their families or

working in lower graded positions for most of their careers. Had these individuals

toiled in the private sector earning private pension benefits instead of dedicating

their careers to public service, they would remain fully eligible to collect their spousal Social Security benefits. NTEU strongly supports legislation introduced by Congressman William Jefferson (D–LA), H.R. 2273. While this legislation would not entirely eliminate the GPO, it

represents a humane step in the right direction by applying the GPO only to combined annuity and Social Security spousal benefits that exceed $l200 per month.

One hundred and sixty two of Congressman Jefferson’s colleagues apparently agree

with him and have added their names as cosponsors of his legislation. While we

urge this Congress to address this important issue and pass H.R. 2273, we continue

to believe that the GPO unfairly penalizes individuals who spend their careers in

public service and should be repealed.

I want to share with this Committee the circumstances of two particular long- term federal employees who are negatively impacted by the Government Pension

Offset.

Mrs. Joan Lonnemann has been a seasonal Internal Revenue Service employee at

the Cincinnati, Ohio Service Center for 33 years. Although Mrs. Lonnemann is fully

eligible to retire, she simply cannot afford to take that chance right now. Her husband, who is six years her senior, has already retired and currently receives Social

Security. She currently receives her spousal Social Security benefit, based on her

husband’s earnings record, of $5l2 per month. And, she is entitled to continue to

receive her spousal Social Security benefit just as long as she continues working!

If and when Mrs. Lonnemann is forced to retire, all but $26 of that benefit will end.

As absurd as this sounds, these are the facts. If, as expected, she receives a

monthly annuity for her 33 years of public service of approximately $730 per month,

her Social Security spousal benefit will be reduced by 2⁄3 of that amount, or $486,
136

leaving her a Social Security spousal benefit of $26. She is not entitled to Social

Security benefits in her own right.

Surely, the Government Pension Offset was never intended to wreak this kind of

havoc. Should Mrs. Lonnemann retire and her husband predecease her, she would

be left to live on $756 per month ($730 plus $26 in Social Security spousal benefits).

Blindly applying a law such as the Government Pension Offset without regard to

the economic hardship it causes is difficult to justify. This is precisely the situation

Congressman Jefferson looks to rectify by passage of his legislation, H.R. 2273.

Another case that has been brought to my attention is that of Mr. Oliver Hall

of Havertown, Pennsylvania. Mr. Hall worked for the federal government as a customs inspector for 35 years and was forced to retire after a severe stroke. His retirement annuity, based on his long career in public service, is a little over $l400 per

month. When Mr. Hall’s wife retired in late l997, he was told he would be eligible

for spousal Social Security benefits based on her earnings record of $452 per month.

Of course, Mr. Hall is not eligible for this spousal Social Security benefit because

of the Government Pension Offset. The first he learned of this offset, however, was

in a letter dated December 28, l997 from the Social Security Administration. With

very little in the way of explanation, Social Security states, ‘‘We are writing to let

you know that you are entitled to monthly husband’s benefits on claim number....we

reduce Social Security benefits paid to husbands or wives if they also receive a government pension based on their own work...for this reason, we cannot pay you.

As you can imagine, this came as quite a surprise to Mr. Hall who has appealed

this ruling to the Social Security Administration. Mr. Hall is hardly alone in being

caught unaware of this offset. Many more federal employees will be caught similarly

unaware and many more—especially women—will be forced into poverty as a result

of the Government Pension Offset.

Again, thank you for holding this important hearing today and for shining some

light on an issue that often catches federal retirees completely by surprise. We look

forward to working with you to correct this inequity. Let’s begin by passing H.R.

2273. Thank you very much.

Statement of Sally D. O’Hare, Retired Illinois High School Teacher, Palos

f

Heights, Illinois

Prior to my retirement in June, 1994, at age 64, I had been a high school mathematics teacher for 32 years. I taught in the private schools for eight years and then

taught in the public schools for twenty-four years. I paid social security as a private

school teacher. I also paid social security for 24 years as a public school teacher on

income earned outside of the school year, and as a part-time counselor, and other

part-time curriculum assignments.

I receive a pension from my 24 years as a public school teacher. My social security

monthly check is reduced dramatically by the off-set regulation. If my husband precedes me in death, which actuarially is quite likely, I would receive none of his social Security benefit as his widow. This is identified as a widow’s penalty.

I am currently an independent contractor and have a part-time marketing job, in

education. I must pay federal taxes, State taxes, and Social Security taxes on this

income. I must pay the social security tax as an employer and as an independent

contractor employee. I pay all of my taxes and no income is off the books, nor part

of the underground economy. I will receive not one dime of the additional Social Security taxes I must pay from my current employment. This inequity needs to be corrected for those persons, such as my self who have fallen through the cracks. You

are in a position to rectified this injustice for senior citizens, who are retired teachers and who elect to stay in the work force. I would welcome an opportunity to testify before your committee. Thank you for your spirited representation of this matter

in our behalf.
f

137

Statement of Hon. George V. Voinovich, Governor, State of Ohio

Thank you for the opportunity to provide written testimony for members of the

House Ways and Means Subcommittee on Social Security.

As Governor of the State of Ohio, I strongly oppose the imposition by the federal

government of mandatory Social Security coverage on state and local government

employees.

Mandatory Social Security would be another example of the federal government

imposing an unfunded mandate on state and local governments. If state and local

governments raise tax revenues to maintain the current benefit structure of existing

state retirement systems, the funding liability for Social Security would shift from

the federal government to state and local governments.

OHIO PUBLIC PENSION SYSTEMS

State and local government employees originally were excluded from the Social

Security system and were not permitted to join the program voluntarily until 1954.

The State of Ohio took efforts to ensure that state and local public employees also

were protected. In fact, the State created the State Teachers Retirement System in

1921 to provide financial security in retirement for the teachers of Ohio. The Public

Employees Retirement System (PERS), Ohio’s largest retirement system, also was

formed before the creation of the Social Security system. PERS was established by

Ohio’s legislature in 1933 to provide needed benefits to qualified members and their

beneficiaries. These benefits include: survivor, disability, lump sum death benefits,

and supplemental health care coverage for a retiree who is 65 and is eligible for

Medicare, in addition to retirement income.

There are now five public employee retirement systems in the state of Ohio:

• Public Employees Retirement System of Ohio (PERS)

• State Teachers Retirement System of Ohio (STRS)

• Police and Fireman’s Disability and Pension Fund

• School Employees Retirement System (SERS)

• Ohio State Highway Patrol Retirement System

All of the State’s systems were designed to meet the direct needs of the occupations served.

There are over 1.1 million active and retired members in Ohio’s five retirement

systems. Ninety-two percent of the State’s public employees are not covered by Social Security. As the largest retirement systems, PERS is a multiple employer plan

covering 3,700 state and local government units. PERS currently has 637,500 active

and inactive members and benefit recipients.

All Ohio retirement systems included a defined benefit plan and are pre-funded

through employee and employer contributions and investments income. The largest

source of income of the systems is investment return. For example, Ohio law requires pension benefits under Ohio’s systems to be financed over a 30 year working

career. Benefits under STRS are funded over 27 years. In PERS, over 70 percent

of disbursements come from investments. Earnings pay for 17 years of 26 years of

expected payments under STRS. The concept of financing an employee’s benefits

over a working career provides intergenerational equity. It avoids the problem of

current pensions being paid for by future generations. The systems have funded liabilities so that as the ratio of active members to benefit recipients decreases, contribution rates will not have to be increased to fund the same level of benefits.

The investment of the state retirements funds provides a tremendous amount of

capital in the economy of Ohio and the nation, unlike Social Security funds which

simply support other government programs.

The state and local pension plans were actuarially sound at their conception and

remain so today. These systems are accepted, trusted, fiscally sound and provide excellent benefits for their members. There is no need to restructure the state and

local retirement systems.

IMPACT OF MANDATORY SOCIAL SECURITY

Mandatory Social Security would result in a drastic restructuring or abandonment

of many excellent state and local retirement programs.

Financially strong, well-funded state and local retirement systems will be reduced

to unstable pension systems. Current active members and retirees will suffer benefit
138

reductions and loss of help with health care costs causing the systems to break the

social contract we have with our members.

In Ohio, a response to mandated Social Security for State of Ohio employees

would rest with the General Assembly to enact legislation to change public employee

benefits. If the General Assembly would choose to take no action to change Ohio

statute, the added burden of the cost of FICA contributions would rest on public employees and employers at a rate of 6.2% for each group. Adding the full cost of the

FICA tax to the state retirements system taxes would create an enormous unfunded

mandate for the state and localities.

If the General Assembly would choose to add no new costs to employers and employees, future investment fund flows would be reduced to make FICA payments.

The remaining contributions would be used to provide a level of benefits within

those contribution levels. This approach would necessitate a reduction of benefits to

public employees. Changes to the program could include the elimination of health

care for participants, including retirees; elimination of death, disability or survivor

benefits; or reducing cost of living adjustments.

The General Assembly also could take the position that the current levels of benefits would be maintained by integrating state retirement plan and Social Security

benefits. If this scenario were adopted, additional costs for the PERS, for example,

likely would be in the range of six percent to seven percent of covered payroll, especially if there were a continuation of some meaningful retiree health benefits. Without post-retirement health care programs, an enormous burden will be shifted to the

Medicare and potentially the Medicaid programs.

Under the second and third scenarios, reduced cash flow into the systems will result in a lower amount of funds to invest. Since investment earning are a vital part

of pension financing, the reduction will cause a longer funding period (up to 40

years in the estimate of STRS).

In addition, public plan benefits are tailored to specific subsets of all workers. Social Security does not address the special needs of our uniformed employees. Disability, which accounts for 25 percent of Police and Fire retirements, is not provided

by Social Security unless one is totally unemployable for any job. Partial disabilities,

which encompass 79 percent of Police and Fire disability retirements with awards

ranging from five percent to 60 percent of salary, are not covered by Social Security.

Also, the nature of Police and Fire work requires early retirement, when Social Security is not yet available.

Increased contribution rates or reduced benefits also could hurt the recruiting and

retention of public employees. Many public employees receive lower pay but better

benefits than their private sector counterparts. Removing the benefit incentive will

entice many employees to seek employment in the private sector.

Practically speaking, mandatory Social Security would cause employee rates to increase or employee benefits to decrease. Public employees are fully and immediately

vested in their own contributions. This is not the case with Social Security. Ohio

public employees would be forced to participate in a poorly funded system with future benefits at risk. Mandatory Social Security taxes likely will cause states, especially Ohio, to reduce or eliminate the funding of post retirement health care programs—shifting an enormous burden to Medicare programs.

Any change to state programs would result in significant administrative cost increases, as well. The state would need to change publications, computer systems,

benefit processing, and member education efforts, just to name a few.

History has shown that Social Security calculation of benefits and corresponding

revenues is faulty. The small transition funds received from mandating coverage

will not fix the basic problems with Social Security, and in the long-run the new

obligation may offset the added revenue. If the benefits for current beneficiaries and

current participants cannot be fiscally met, then the infusion of more participants

simply exacerbates the problem. The result will be the destruction of secure longstanding state pension funds for very little gain and lesser benefits for public employees.

CONCLUSION

I believe that it would not be prudent to alter the funding of Ohio’s public employee retirement systems that are solvent, stable systems. Mandating that public

employees covered by the public pension systems in Ohio and other states participate in Social Security is flawed public policy. It would cause great harm to systems

which pre-date social security and cause the systems to break promises made to

their members for little or no material help to Social Security.
139

I respectfully urge your opposition to any attempt to require state and local em- ployees to participate in Social Security. Thank you for your consideration of my

concerns.

Statement of Hon. Max Sandlin, a Representative in Congress from the

f

State of Texas

Thank you Mr. Chairman and Ranking Member Rangel, for the opportunity to testify today on the impact of the Windfall Elimination Provision on the Social Security benefits of retired government employees. I appreciate the committee including

both the Government Pension Offset and the Windfall Elimination Provision in the

debate on the future of Social Security. I would like to echo the testimony given by my colleagues, Mr. Frank and Mr. Jefferson, regarding their respective bills. Both bills are worthy of consideration by

this committee. I have cosponsored the bill by Mr. Jefferson and support full Social

Security widow’s benefits for former government employees. I also support the legislation introduced by Mr. Frank, which addresses the Windfall Elimination Provision, on which I am about to testify. Mr. Chairman, just like many of my colleagues on this committee, I spend time virtually every weekend traveling through my district visiting with my constituents.

From every corner of the 19 counties in the First Congressional District of Texas,

I have heard from former local, state and federal government employees who have

been surprised by the paucity of their Social Security benefits due to the Windfall

Elimination Provision, enacted in 1983.

One of these constituents happens to be my mother, whose suggestions and advice I have learned over many years not to ignore. My mother was happy to spend nearly

30 years serving society as a public school teacher, a job which simultaneously challenged and fulfilled her. However, she never expected that her reward for these

years of service would be a significant reduction in her Social Security benefits. She,

like many of the 290,000 government retirees affected by this provision, feels like

the federal government has turned its back on her when she needs its help the

most—during her retirement years. The Windfall Elimination Provision was enacted in 1983 to help restore solvency to the program and correct a perceived inequity in the treatment of people who had

worked both in jobs covered by Social Security and jobs exempted from Social Security. Mr. Chairman, I understand the history of and the rationale for the Windfall

Elimination Provision. It may be true that due to a flaw in the Social Security formula, prior to 1983 some retirees eligible for both Social Security benefits and a

local, state, or federal government pension received a larger-than-justified benefit.

I don’t think anyone in this hearing room wants to be giving undeserved benefits

to retired government employees who also spent time in the private sector. However, I also don’t think anyone in this room believes we should now punish these

teachers, firemen, and policemen with Social Security benefits that fail to meet their

expectations, fail to provide them with a basic standard of living, and fail to fulfill

the agreement they have made with the federal government. Some claim that this provision is not particularly onerous to many of the affected retirees because the provision generally affects only those who are well off and have

a generous government pension. I assure the members of this committee that my

mother, for one, is not one of the retirees who feel this provision is not particularly

onerous. She spent much of her life in public service and planned her retirement

carefully. To have had her Social Security benefits arbitrarily and unexpectedly reduced was more than just an insult—it was also a lowering of her standard of living

in her retirement years. According to a 1990 CRS report, the Windfall Elimination Provision ‘‘is appropriate for typical CSRS annuitants, but over-penalizes lower-paid workers with

short or fairly evenly split careers, and under penalizes workers with long Social

Security-covered careers.’’ I appreciate the work Mr. Frank has done on addressing

the impact of the Windfall Elimination Provision on low income retirees. His bill

partially repeals the Windfall Elimination Provision for government employees with

small pensions. I think this may be one very effective way of restoring benefits to

those who most need them and who may be disproportionately affected by this provision.

However, I have introduced a bill, H.R. 3077, the Social Security Benefit Restoration Act, to repeal the Windfall Elimination Provision and restore equity and fairness to the Social Security benefits of our retired government employees. I introduced this bill calling for the complete repeal of the Windfall Elimination Provision
140

because I believe the provision is unfair to any retired government employee, regardless of his or her financial status. This bill would put our federal government back in the business of providing our retired government employees with the retirement security they deserve. I recognize

that full repeal of the Windfall Elimination Provision would be expensive, and we

need to debate a reasonable way to pay for this legislation. However, this bill would

not be creating a new benefit, only restoring a benefit that retirees once had. I don’t

think this means the bill should be exempt from pay-go rules, but it does mean that

it should be part of any debate on Social Security reform. As Congress moves forward with reform of the Social Security system, Mr. Chairman, I urge you and the

members of this committee to remember our retired federal, state, and local government employees and seriously consider repeal of the Windfall Elimination Provision. I would like to close, Mr. Chairman, by reading you a portion of a letter from a constituent. This constituent writes:

‘‘From day one of my employment, I was always told that someday I would be glad the withholding from my check for Social Security would be there for me at retirement. That was always in my plan for retirement. Now a significant amount of what

I was promised is being withheld from my check. Just at a time in my life when

I am very likely to need extra funds for health care and to maintain a fair standard

of living it is being taken away. This is unfair to us seniors.’’ Thank you Mr. Chairman, Ranking Member Rangel, and members of this committee.

S

fTATE TEACHERS RETIREMENT SYSTEM OF OHIO

May 13, 1998

Mr. A. L. Singleton, Chief of Staff

U. S. House of Representatives

Committee on Ways and Means

1102 Longworth House Office Bldg.

Washington, D. C. 20515

Dear Mr. Singleton:

These comments are being submitted on behalf of the State Teachers Retirement

System of Ohio Board of Trustees and the more than 300,000 active and retired

members of our system for the printed record of the Subcommittee on Social Security of the Committee on Ways and Means hearing on ‘‘The Future of Social Security

for this Generation and the Next.’’

Ohio has a long history, predating Social Security, of providing retirement and

disability security and family income to state and local public employees. When Social Security was initiated in the mid-1930s by Congressional action, Ohio public

employees were not permitted to participate. Later, when states were given the option of joining Social Security, Ohio voted to remain independent. Ohio public servants were already well served. The Ohio public retirement systems were and are

stable and working well.

After carefully studying the January 6, 1997 Advisory Council on Social Security

report and analyzing the actuarial impact both in terms of increasing costs and reducing benefits to the members of our system, we stand strongly opposed to any proposal that would require mandatory participation in Social Security. We respectfully

urge your determined opposition to any proposal that would mandate coverage for

any non-covered system.

The soundness of Social Security for the future is a very important issue for the

nation. However, mandating participation is not the solution; it provides no longterm fiscal benefits to Social Security, but causes permanent and serious damage

to plans like STRS and those like us throughout the nation.

Unlike Social Security which is a pay-as you-go system, STRS is 83% reserve

funded. Member and employer contributions, along with income from investments,

provide the reserves needed to finance retirement benefits. Investment income provides 65% of the funds for benefit payments.

It would be a serious mistake to believe that those public employees who remained in public pension funds would not be adversely affected by mandatory coverage for new hires. Faced with the added cost of Social Security, it is certain that

over time Ohio would be forced to change existing public pension plans by adjusting

benefits downward as well as dropping retiree health care. The impact of reducing

contributions to public plans by more than half in most systems would reduce the
141

capital stream necessary for investment and could force such plans to cut back on

benefits for all members. There is no way that states can deal with an unfunded

mandate of such immense proportions.

In restructuring the Social Security system, we believe that consideration should

be given to what non-covered systems have done well in providing for our members.

The area of investments alone provides great potential for restructuring Social Security. Simply adding more members which has never worked in the past, and which

will not work now, is not the answer.

We appreciate the opportunity to comment on this important issue and would be

pleased to provide further information if that would be helpful to you. Thank you

for your consideration.

Respectfully,

HERBERT L. DYER

f

Executive Director

TEACHERS’ RETIREMENT SYSTEM OF KENTUCKY

June 3, 1998

Representative Jim Bunning

Chair, House Social Security Subcommittee

2437 Rayburn Building

Washington, D.C. 20515

Dear Congressman Bunning:

I wish to comment on the proposal to mandate Social Security participation for

all new public employees that is under consideration in the House Social Security

Subcommittee. As you know, the retirement benefits of public school teachers and

administrators in Kentucky are provided exclusively by the Kentucky Teachers’ Retirement System which has more than 75,000 members.

The Kentucky General Assembly has acted over a period of years to establish an

excellent level of benefits for public school teachers. While enhancing the recruitment and retention of qualified teachers, the benefit program also recognizes that

the current demands placed on teachers make it beneficial to the State and the

teachers to provide meaningful benefits at ages several years prior to age 65 or the

extended ages planned by Social Security.

Unlike the Social Security program which operates on a pay-as-you-go basis, the

Commonwealth has acted responsibly by funding the cost of the program on an actuarial reserve basis from contributions made by active members and the State. The

June 30, 1997 actuarial valuation by an independent actuary reflects that the current total contribution rate of 19.81 percent of active member payroll plus reserve

funds and investment income will be sufficient to pay all benefits earned by retired

and currently active members. Members contribute 9.855 percent, and the State

matches the member contribution plus an additional 3.25 percent to retire the System’s unfunded obligations with the contributions totaling 22.96 percent, 3.15 percent of which is allocated for a comprehensive health insurance plan for retirees.

The current levels of funding allow the System to maintain reserve trust funds that

assure the actuarial and financial soundness of KTRS.

Buck Consultants, the System’s Actuary, has stated that if the current 22.96 percent contribution rate to KTRS is reduced by 12.4 percent due to mandated Social

Security, the KTRS benefit accrual formula per year of service by public school

teachers would have to be reduced from 2.5 percent to

less than 1.0 percent. The reallocation of 12.4 percent from the KTRS is a distinct

possibility since it would be improbable that members or the State could contribute

an additional 12.4 percent of payroll, and the choice would be either large increases

in contributions or significant reductions in KTRS benefits now available to all

KTRS members. An illustration identifies the negative impact on an average teacher. Under current KTRS laws, a new teacher would receive 83 percent of their average salary at age 55 after teaching 33 years. If the KTRS funding is reduced by 12.4

percent to accommodate Social Security coverage, the KTRS benefit for the same

new teacher would be less than 33 percent at age 55, and they would have to wait

at least ten years to be eligible to receive Social Security.

Most would agree with the GAO finding that mandatory coverage would benefit

the financially troubled Social Security program. The program would receive an additional 12.4 percent of salaries of newly hired public school teachers and other pub142

lic employees for a period of 40 plus years before having to make any payments to

most of the teachers and other government employees. I understand that the Social

Security actuaries estimate that the savings resulting from mandatory coverage

would be hundreds of billions of dollars over the next 75 years, but the saving for

Social Security would represent funds lost by the newly covered employees and their

employers, such as the state of Kentucky.

It appears that the reason such a blatant and unwarranted transfer of wealth

could even be considered results from too much attention to actuarial funding and

not enough recognition of the fact that Social Security is almost a pure pay-as-yougo system where today’s active workers support today’s retirees. It also appears the

reason for this proposal is not to protect the retirement benefits of future state and

local employees, but to use their current contributions to help solve the Social Security deficit problem.

I have read the statements made at the May 21, 1998 meeting of the House Social

Security Subcommittee by the Executive Directors of three state pension plans, Colorado, Ohio and Nevada. The makeup of those public pension plans is very similar

to that of the Kentucky Teachers’ Retirement System, and rather than repeat their

positions, I submit that their findings and recommendations are typical of the public

plans that would be affected by mandatory Social Security coverage.

In conclusion, it is the position of the Kentucky Teachers’ Retirement System that

mandatory Social Security coverage would impose significant negative impact on

Kentucky’s teachers who would either contribute an additional 6.2 percent for Social

Security or have their KTRS benefits reduced more than half of the current level.

The choice of the state of Kentucky would be increase taxes to pay the additional

6.2 percent employer payment required for Social Security or reduce the KTRS benefits. With 12.4 percent of contributions allocated to Social Security, the KTRS

would lose multimillion of dollars each year due to a loss of income from investments, a source of income that funds over 60 percent of the annuities paid to retirees.

Congressman Bunning, we ask that you consider the serious consequences that

mandatory coverage would place on Kentucky’s future teachers and the necessity of

the State having to increase taxes or dismantling of a retirement system that has

provided meaningful benefits to Kentucky’s teachers since 1940. We need your help

on this very important issue.

Please advise if you would like additional information pertaining to the Kentucky

Teachers’ Retirement System and its members.

Sincerely,

PAT N. MILLER

Executive Secretary

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