Testimony 

Before the Subcommittee on Social 

Security, Committee on Ways and Means, 

House of Representatives 

United States General Accounting Office 

GAO

For Release on Delivery 

Expected at 10:00 a.m. EDT 

Thursday, May 1, 2003 SOCIAL SECURITY 

Issues Relating to 

Noncoverage of Public 

Employees 

Statement of Barbara D. Bovbjerg, Director 

Education, Workforce, and Income Security Issues 

GAO-03-710T 
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Social Security’s provisions regarding public employees are rooted in the 

fact that about one-fourth of them do not pay Social Security taxes on the 

earnings from their government jobs, for various historical reasons. Even 

though noncovered employees may have many years of earnings on which 

they do not pay Social Security taxes, they can still be eligible for Social 

Security benefits based on their spouses’ or their own earnings in covered 

employment. 

To address the issues that arise with noncovered public employees, Social 

Security has two provisions—the Government Pension Offset (GPO), which 

affects spouse and survivor benefits, and the Windfall Elimination Provision 

(WEP), which affects retired worker benefits. Both provisions reduce Social 

Security benefits for those who receive noncovered pension benefits. Both 

provisions also depend on having complete and accurate information on 

receipt of such noncovered pension benefits. However, such information is 

not available for many state and local pension plans, even though it is for 

federal pension benefits. As a result, GPO and WEP are not applied 

consistently for all noncovered pension recipients. In addition to the 

administrative challenges, these provisions are viewed by some as confusing 

and unfair, and a number of proposals have been offered to either revise or 

eliminate GPO and WEP. Such actions, while they may reduce confusion 

among affected workers, would increase the long-range Social Security trust 

fund deficit and could create fairness issues for workers who have 

contributed to Social Security throughout their working lifetimes. 

Making coverage mandatory has been proposed to help address the 

program’s financing problems, and doing so could ultimately eliminate the 

need for the GPO and the WEP. According to Social Security actuaries, 

mandatory coverage would reduce the 75-year actuarial deficit by 10 

percent. However, to provide for the same level of retirement income, 

mandating coverage would increase costs for the state and local 

governments that would sponsor the plans. Moreover, GPO and WEP would 

still be needed for many years to come even though they would become 

obsolete in the long run. 

SOCIAL SECURITY 

Issues Relating to Noncoverage of Public 

Employees 

www.gao.gov/cgi-bin/getrpt?GAO-03-710T.

To view the full report, including the scope 

and methodology, click on the link above. 

For more information, contact Barbara D. 

Bovbjerg at (202) 512-7215 or 

bovbjergbj@gao.gov. 

Highlights of GAO-03-710T, a testimony 

before the Subcommittee on Social 

Security, Committee on Ways and Means, 

House of Representatives 

May 1, 2003

Social Security covers about 96 

percent of all US workers; the vast 

majority of the rest are state, local, 

and federal government employees. 

While these noncovered workers 

do not pay Social Security taxes on 

their government earnings, they 

may still be eligible for Social 

Security benefits. This poses 

difficult issues of fairness, and 

Social Security has provisions that 

attempt to address those issues, 

but critics contend these provisions 

are themselves often unfair. The 

Subcommittee asked GAO to 

discuss these provisions as well as 

the implications of mandatory 

coverage for public employees. 

GAO has previously recommended 

that the Internal Revenue Service 

(IRS) provide for complete and 

accurate reporting of noncovered 

pensions, but IRS has responded 

that it lacks the necessary authority 

from the Congress. GAO therefore 

takes this opportunity to bring the 

matter to the attention of the 

Congress for its consideration. To 

facilitate complete and accurate 

reporting of government pension 

income, the Congress should 

consider giving IRS the authority to 

collect this information, which 

could perhaps be accomplished 

through a simple modification to a 

single form. 
Page 1 GAO-03-710T 

Mr. Chairman and Members of the Subcommittee: 

I am pleased to be here today to discuss Social Security provisions 

affecting public employees. Social Security covers about 96 percent of all 

U.S. workers; the vast majority of the rest are state, local, and federal 

government employees. While these noncovered workers do not pay 

Social Security taxes on their government earnings, they may still be 

eligible for Social Security benefits. This poses difficult issues of fairness, 

and Social Security has provisions that attempt to address those issues. 

However, these provisions have been difficult to administer. They have 

also been a source of confusion and frustration for the workers they 

affect. 

I hope I can help clarify and provide some perspective on the complex 

relationship between Social Security and public employees. Today, I will 

discuss Social Security’s coverage of public employees, Social Security’s 

provisions affecting noncovered public employees, and the potential 

implications of mandatory coverage of public employees. My testimony is 

based on a body of work we have published over the past several years.1

In summary, Social Security’s provisions regarding public employees are 

rooted in the fact that about one-fourth of them do not pay Social Security 

taxes on the earnings from their government jobs, for various historical 

reasons. Even though noncovered employees may have many years of 

earnings on which they do not pay Social Security taxes, they can still be 

eligible for Social Security benefits based on their spouses’ or their own 

earnings in covered employment. To address the fairness issues that arise 

with noncovered public employees, Social Security has two provisions—

the Government Pension Offset (GPO), which affects spouse and survivor 

benefits, and the Windfall Elimination Provision (WEP), which affects 

retired worker benefits. Both provisions reduce Social Security benefits 

for those who receive noncovered pension benefits, and both provisions 

also depend on having complete and accurate information on receipt of 

such noncovered pension benefits. However, such information is not 

available for many state and local pension plans, even though it is for 

federal pension benefits. As a result, GPO and WEP are not applied 

consistently for all noncovered pension recipients. We have made 

recommendations to improve the availability and tracking of key 

information, and in the federal case, the implementation of our 

 1

See the list of related GAO products at the end of this statement. 
Page 2 GAO-03-710T 

recommendations has saved hundreds of millions of dollars. However, 

congressional action appears to be needed in this area with respect to 

state and local government pensions. At the same time, a number of 

proposals have been offered to either revise or eliminate GPO and WEP. 

While we have not analyzed such proposals, we believe it is important to 

consider both the costs and fairness issues they raise. 

Aside from the issues surrounding GPO and WEP, another aspect of the 

relationship between Social Security and public employees is the question 

of mandatory coverage. Making coverage mandatory has been proposed to 

help address the program’s financing problems. According to Social 

Security actuaries, doing so would reduce the 75-year actuarial deficit by 

10 percent. Mandatory coverage could also enhance inflation-protection, 

pension portability, and dependent benefits for the affected beneficiaries, 

in many cases. However, to provide for the same level of retirement 

income, mandatory coverage could increase costs for the state and local 

governments that would sponsor the plans. Moreover, the GPO and WEP 

would continue to apply for many years to come even though they would 

become obsolete in the long run. 

Social Security provides retirement, disability, and survivor benefits to 

insured workers and their dependents. Insured workers are eligible for 

reduced benefits at age 62 and full retirement benefits between age 65 and 

67, depending on their year of birth.2

 Social Security retirement benefits 

are based on the worker’s age and career earnings, are fully indexed for 

inflation after retirement, and replace a relatively higher proportion of 

wages for career low-wage earners. Social Security’s primary source of 

revenue is the Old Age, Survivors, and Disability Insurance (OASDI) 

portion of the payroll tax paid by employers and employees. The OASDI 

payroll tax is 6.2 percent of earnings each for employers and employees, 

up to an established maximum. 

One of Social Security’s most fundamental principles is that benefits 

reflect the earnings on which workers have paid taxes. Social Security 

provides benefits that workers have earned to some degree because of 

their contributions and those of their employers. At the same time, Social 

Security helps ensure that its beneficiaries have adequate incomes and do 

 2

Beginning with those born in 1938, the age at which full benefits are payable will increase 

in gradual steps from age 65 to age 67. 

Background 
Page 3 GAO-03-710T 

not have to depend on welfare. Toward this end, Social Security’s benefit 

provisions redistribute income in a variety of ways—from those with 

higher lifetime earnings to those with lower ones, from those without 

dependents to those with dependents, from single earners and two-earner 

couples to one-earner couples, and from those who do not live very long to 

those who do. These effects result from the program’s focus on helping 

ensure adequate incomes. Such effects depend to a great degree on the 

universal and compulsory nature of the program. 

According to the Social Security trustees’ 2003 intermediate, or bestestimate, assumptions, Social Security’s cash flow is expected to turn 

negative in 2018. In addition, all of the accumulated Treasury obligations 

held by the trust funds are expected to be exhausted by 2042. Social 

Security’s long-term financing shortfall stems primarily from the fact that 

people are living longer. As a result, the number of workers paying into the 

system for each beneficiary has been falling and is projected to decline 

from 3.3 today to about 2 by 2030. Reductions in promised benefits and/or 

increases in program revenues will be needed to restore the long-term 

solvency and sustainability of the program. 

About one-fourth of public employees do not pay Social Security taxes on 

the earnings from their government jobs. Historically, Social Security did 

not require coverage of government employees 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. 

However, virtually all other workers are now covered, including the 

remaining three-fourths of public employees. 

The 1935 Social Security Act mandated coverage for most workers in 

commerce and industry, which at that time comprised about 60 percent of 

the workforce. Subsequently, the Congress extended mandatory Social 

Security coverage to most of the excluded groups, including state and 

local employees not covered by a public pension plan. The Congress also 

extended voluntary coverage to state and local employees covered by 

public pension plans. Since 1983, however, public employers have not 

been permitted to withdraw from the program once they are covered. 

Also, in 1983, the Congress extended mandatory coverage to newly hired 

federal workers. 

The Social Security Administration (SSA) estimates that 5.25 million state 

and local government employees, excluding students and election 

workers, are not covered by Social Security. SSA also estimates that 

About One-Fourth of 

Public Employees Are 

Not Covered by Social 

Security 
Page 4 GAO-03-710T 

annual wages for these noncovered employees totaled about $171 billion 

in 2002. In addition, 1 million federal employees hired before 1984 are also 

not covered. Seven states—California, Colorado, Illinois, Louisiana, 

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

noncovered payroll. 

Most full-time public employees participate in defined benefit pension 

plans. Minimum retirement ages for full benefits vary; however, many state 

and local employees can retire with full benefits at age 55 with 30 years of 

service. Retirement benefits also vary, but they are usually based on a 

specified benefit rate for each year of service and the member’s final 

average salary over a specified time period, usually 3 years. For example, 

plans with a 2-percent rate replace 60 percent of a member’s final average 

salary after 30 years of service. In addition to retirement benefits, a 1994 

U.S. Department of Labor survey found that all members have a survivor 

annuity option, 91 percent have disability benefits, and 62 percent receive 

some cost-of-living increases after retirement. In addition, in recent years, 

the number of defined-contribution plans, such as 401(k) plans and the 

Thrift Savings Plan for federal employees, has been growing and becoming 

a relatively more common way for employers to offer pension plans; 

public employers are no exception to this trend. 

Even though noncovered employees may have many years of earnings on 

which they do not pay Social Security taxes, they can still be eligible for 

Social Security benefits based on their spouses’ or their own earnings in 

covered employment. SSA estimates that 95 percent of noncovered state 

and local employees become entitled to Social Security as workers, 

spouses, or dependents. Their noncovered status complicates the 

program’s ability to target benefits in the ways it is intended to do. 

To address the fairness issues that arise with noncovered public 

employees, Social Security has two provisions—GPO, which addresses 

spouse and survivor benefits and WEP, which addresses retired worker 

benefits. Both provisions depend on having complete and accurate 

information that has proven difficult to get. Also, both provisions are a 

source of confusion and frustration for public employees and retirees. As a 

result, proposals have been offered to revise or eliminate both provisions. 

Under the GPO provision, enacted in 1977, SSA must reduce Social 

Security benefits for those receiving noncovered government pensions 

when their entitlement to Social Security is based on another person’s 

(usually their spouse’s) Social Security coverage. Their Social Security 

Provisions Seek 

Fairness but Pose 

Administrative 

Challenges 
Page 5 GAO-03-710T 

benefits are to be reduced by two-thirds of the amount of their 

government pension. Under the WEP, enacted in 1983, SSA must use a 

modified formula to calculate the Social Security benefits people earn 

when they have had a limited career in covered employment. This formula 

reduces the amount of payable benefits. 

Regarding GPO, spouse and survivor benefits were intended to provide 

some Social Security protection to spouses with limited working careers. 

The GPO provision reduces spouse and survivor benefits to persons who 

do not meet this limited working career criterion because they worked 

long enough in noncovered employment to earn their own pension. 

Regarding WEP, the Congress was concerned that the design of the Social 

Security benefit formula provided unintended windfall benefits to workers 

who spent most of their careers in noncovered employment. The formula 

replaces a higher portion of preretirement Social Security-covered 

earnings when people have low average lifetime earnings than it does 

when people have higher average lifetime earnings. People who work 

exclusively, or have lengthy careers, in noncovered employment appear on 

SSA’s earnings records as having no covered earnings or a low average of 

covered lifetime earnings. As a result, people with this type of earnings 

history benefit from the advantage given to people with low average 

lifetime earnings when in fact their total (covered plus noncovered) 

lifetime earnings were higher than they appear to be for purposes of 

calculating Social Security benefits. 

Both GPO and WEP apply only to those beneficiaries who receive 

pensions from noncovered employment. To administer these provisions, 

SSA needs to know whether beneficiaries receive such noncovered 

pensions. However, our prior work found that SSA lacks payment controls 

and is often unable to determine whether applicants should be subject to 

GPO or WEP because it has not developed any independent source of 

noncovered pension information.3

 In that report, we estimated that failure 

to reduce benefits for federal, state, and local employees caused $160 

million to $355 million in overpayments between 1978 and 1995. In 

response to our recommendation, SSA performed additional computer 

matches with the Office of Personnel Management to get noncovered 

 3

See U.S. General Accounting Office, Social Security: Better Payment Controls for Benefit 

Reduction Provisions Could Save Millions, GAO/HEHS-98-76 (Washington, D.C.: Apr. 30, 

1998). 
Page 6 GAO-03-710T 

pension data for federal retirees in order to ensure that these provisions 

are applied. These computer matches detected payment errors; correcting 

these errors will generate hundreds of millions of dollars in savings, 

according to our estimates.4

Also, in that report, we recommended that SSA work with the Internal 

Revenue Service (IRS) to revise the reporting of pension information on 

IRS Form 1099R, so that SSA would be able to identify people receiving a 

pension from noncovered employment, especially in state and local 

governments. However, IRS does not believe it can make the 

recommended change without new legislative authority. Given that one of 

our recommendations was implemented but not the other, SSA now has 

better access to information for federal employees but not for state and 

local employees. As a result, SSA cannot apply GPO and WEP for state and 

local government employees to the same degree that it does for federal 

employees. To address issues such as these, the President’s budget 

proposes “to increase Social Security payment accuracy by giving SSA the 

ability to independently verify whether beneficiaries have pension income 

from employment not covered by Social Security.” 

In addition to facing administrative challenges, GPO and WEP have also 

faced criticism regarding their design in the law. For example, GPO does 

not apply if an individual’s last day of state/local employment is in a 

position that is covered by Social Security.5

 This GPO “loophole” raises 

fairness and equity concerns.6

 In the states we visited for a previous 

report, individuals with a relatively minimal investment of work time and 

Social Security contributions gained access to potentially many years of 

full Social Security spousal benefits. To address this issue, the House 

 4

SSA performed the first such match in 1999 and advised that it willl be done on a recurring 

basis in the future. SSA identified about 14,600 people whose benefits should have been 

calculated using WEP’s modified formula. We estimate that detecting these payment errors 

will generate $207.9 million in lifetime benefit reduction for this cohort. We further 

estimate each year’s match will generate about $57 million in lifetime benefit reductions for 

each new cohort. 

5

Exemption due to “The Last Day of Employment” Covered Under Social Security–

State/Local or Military Service Pensions (SSA’s Program Operations Manual System, GN 

02608.102). 

6

See U.S. General Accounting Office, Social Security Administration: Revision to the 

Government Pension Offset Exemption Should Be Considered, GAO-02-950 (Washington, 

D.C.: Aug. 15, 2002). 
Page 7 GAO-03-710T 

recently passed legislation that provides for a longer minimum time period 

in covered employment. 

At the same time, GPO and WEP have been a source of confusion and 

frustration for the roughly 6 million workers and nearly 1 million 

beneficiaries they affect. Critics of the measures contend that they are 

basically inaccurate and often unfair. For example, some opponents of 

WEP argue that the formula adjustment is an arbitrary and inaccurate way 

to estimate the value of the windfall and causes a relatively larger benefit 

reduction for lower-paid workers. A variety of proposals have been offered 

to either revise or eliminate them. While we have not studied these 

proposals in detail, I would like to offer a few observations to keep in 

mind as you consider them. 

First, repealing these provisions would be costly in an environment where 

the Social Security trust funds already face long-term solvency issues. 

According to SSA and the Congressional Budget Office (CBO), proposals 

to reduce the number of beneficiaries subject to GPO would cost $5 billion 

or more over the next 10 years and increase Social Security’s long-range 

deficit by up to 1 percent. Eliminating GPO entirely would cost $21 billion 

over 10 years and increase the long-range deficit by about 3 percent. 

Similarly, a proposal that would reduce the number of beneficiaries 

subject to WEP would cost $19 billion over 10 years, and eliminating WEP 

would increase Social Security’s long-range deficit by 3 percent. 

Second, in thinking about the fairness of the provisions and whether or not 

to repeal them, it is important to consider both the affected public 

employees and all other workers and beneficiaries who pay Social 

Security taxes. For example, SSA has described GPO as a way to treat 

spouses with noncovered pensions in a fashion similar to how it treats 

dually entitled spouses, who qualify for Social Security benefits both on 

their own work records and their spouses’. In such cases, each spouse may 

not receive both the benefits earned as a worker and the full spousal 

benefit; rather the worker receives the higher amount of the two. If GPO 

were eliminated or reduced for spouses who had paid little or no Social 

Security taxes on their lifetime earnings, it might be reasonable to ask 

whether the same should be done for dually entitled spouses who have 

paid Social Security on all their earnings. Far more spouses are subject to 

the dual-entitlement offset than to GPO; as a result, the costs of 

eliminating the dual-entitlement offset would be commensurately greater. 
Page 8 GAO-03-710T 

Aside from the issues surrounding GPO and WEP, another aspect of the 

relationship between Social Security and public employees is the question 

of mandatory coverage. Making coverage mandatory has been proposed in 

the past to help address the program’s financing problems. According to 

Social Security actuaries, doing so would reduce the 75-year actuarial 

deficit by 10 percent.7

 Mandatory coverage could also enhance inflationprotection for the affected beneficiaries, improve portability, and add 

dependent benefits in many cases. However, to provide for the same level 

of retirement income, mandatory coverage could increase costs for the 

state and local governments that would sponsor the plans. Moreover, if 

coverage were extended primarily to new state and local employees, GPO 

and WEP would continue to apply for many years to come for existing 

employees and beneficiaries even though they would become obsolete in 

the long run. 

While Social Security’s solvency problems have triggered an analysis of 

the impact of mandatory coverage on program revenues and expenditures, 

the inclusion of such coverage in a comprehensive reform package would 

need to be grounded in other considerations. In recommending that 

mandatory coverage be included in the reform proposals, the 1994-1996 

Social Security Advisory Council stated that mandatory coverage is 

basically “an issue of fairness.” The Advisory Council’s report noted that 

“an effective Social Security program helps to reduce public costs for 

relief and assistance, which, in turn, means lower general taxes. There is 

an element of unfairness in a situation where practically all contribute to 

Social Security, while a few benefit both directly and indirectly but are 

excused from contributing to the program.” 

The impact on public employers, employees, and pension plans would 

depend on how states and localities with noncovered employees would 

react to mandatory coverage. Many public pension plans currently offer a 

lower retirement age and higher retirement income benefit than Social 

Security. For example, many public employees, especially police and 

firefighters, retire before they are eligible for full Social Security benefits; 

new plans that include Social Security coverage might provide special 

supplemental benefits for those who retire before they could receive 

Social Security benefits. Social Security, on the other hand, offers 

 7

SSA uses a period of 75 years for evaluating the program’s long-term actuarial status to 

obtain the full range of financial commitments that will be incurred on behalf of current 

program participants. 

Mandatory Coverage 

Has Been Proposed 
Page 9 GAO-03-710T 

automatic inflation protection, full benefit portability, and dependent 

benefits, which are not available in many public pension plans. Costs 

could increase by as much as 11 percent of payroll for those states and 

localities, depending on the benefit package of the new plans that would 

include Social Security coverage. Alternatively, states and localities that 

wanted to maintain level spending for retirement would likely need to 

reduce some pension benefits. Additionally, states and localities could 

require several years to design, legislate, and implement changes to 

current pension plans. Finally, mandating Social Security coverage for 

state and local employees could elicit a constitutional challenge. 

There are no easy answers to the difficulties of equalizing Social Security’s 

treatment of covered and noncovered workers. Any reductions in GPO or 

WEP would ultimately come at the expense of other Social Security 

beneficiaries and taxpayers. Mandating universal coverage would promise 

the eventual elimination of GPO and WEP but at potentially significant 

cost to affected state and local governments, and even so GPO and WEP 

would continue to apply for some years to come, unless they were 

repealed. Whatever the decision, it will be important to administer all 

elements of the Social Security program effectively and equitably. 

GPO and WEP have proven difficult to administer because they depend on 

complete and accurate reporting of government pension income, which is 

not currently achieved. The resulting disparities in the application of these 

two provisions is yet another source of unfairness in the final outcome. We 

have made recommendations to the Internal Revenue Service to provide 

for complete and accurate reporting, but it has responded that it lacks the 

necessary authority from the Congress. We therefore take this opportunity 

to bring the matter to the Subcommittee’s attention for consideration. 

To facilitate complete and accurate reporting of government pension 

income, the Congress should consider giving IRS the authority to collect 

this information, which could perhaps be accomplished through a simple 

modification to a single form. 

Mr. Chairman, this concludes my statement, I would be happy to respond 

to any questions you or other members of the Subcommittee may have. 

Conclusions 

Matter for 

Congressional 

Consideration 
Page 10 GAO-03-710T 

For information regarding this testimony, please contact Barbara D. 

Bovbjerg, Director, Education, Workforce, and Income Security Issues, on 

(202) 512-7215. Individuals who made key contributions to this testimony 

include Daniel Bertoni and Ken Stockbridge. 

GAO Contributions 

and 

Acknowledgments 
Page 11 GAO-03-710T 

Social Security: Congress Should Consider Revising the Government 

Pension Offset “Loophole.” GAO-03-498T. Washington, D.C.: February 27, 

2003. 

Social Security Administration: Revision to the Government Pension 

Offset Exemption Should Be Considered. GAO-02-950. Washington, D.C.: 

August 15, 2002. 

Social Security Reform: Experience of the Alternate Plans in Texas.

GAO/HEHS-99-31, Washington, D.C.: February 26, 1999. 

Social Security: Implications of Extending Mandatory Coverage to State 

and Local Employees. GAO/HEHS-98-196. Washington, D.C.: August 18, 

1998. 

Social Security: Better Payment Controls for Benefit Reduction 

Provisions Could Save Millions. GAO/HEHS-98-76. Washington, D.C.: 

April 30, 1998. 

Federal Workforce: Effects of Public Pension Offset on Social Security 

Benefits of Federal Retirees. GAO/GGD-88-73. Washington, D.C.: April 27, 

1988. 

Related GAO Products 

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