Social Security: Issues Relating to Noncoverage of Public Employees
Published: 2003-05-01T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: 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. Congress asked GAO to discuss these provisions as well as the implications of mandatory coverage for public employees.
section_title: What GAO Found
paragraphs: 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.

section_title: Letter
paragraphs: 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.
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.
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.
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. www.gao.gov/cgi-bin/getrpt?GAO-03-710T.
To view the full report, including the scope  and methodology, click on the link above.  For more information, contact Barbara D.  Bovbjerg at (202) 512-7215 or  bovbjergbj@gao.gov.
Mr. Chairman and Members of the Subcommittee:  I am pleased to be here today to discuss Social Security provisions  affecting public employees. Social Security covers about 96 percent of all  U.S. workers; the vast majority of the rest are state, local, and federal  government employees. While these noncovered workers do not pay  Social Security taxes on their government earnings, they may still be  eligible for Social Security benefits.  This poses difficult issues of fairness,  and Social Security has provisions that attempt to address those issues.  However, these provisions have been difficult to administer. They have  also been a source of confusion and frustration for the workers they  affect.
I hope I can help clarify and provide some perspective on the complex  relationship between Social Security and public employees. Today, I will  discuss Social Security’s coverage of public employees, Social Security’s  provisions affecting noncovered public employees, and the potential  implications of mandatory coverage of public employees. My testimony is  based on a body of work we have published over the past several years.
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  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.
subsections: section_title: Background
paragraphs: 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. 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  not have to depend on welfare. Toward this end, Social Security’s benefit  provisions redistribute income in a variety of ways—from those with  higher lifetime earnings to those with lower ones, from those without  dependents to those with dependents, from single earners and two-earner  couples to one-earner couples, and from those who do not live very long to  those who do. These effects result from the program’s focus on helping  ensure adequate incomes. Such effects depend to a great degree on the  universal and compulsory nature of the program.
According to the Social Security trustees’ 2003 intermediate, or best- estimate, assumptions, Social Security’s cash flow is expected to turn  negative in 2018. In addition, all of the accumulated Treasury obligations  held by the trust funds are expected to be exhausted by 2042. Social  Security’s long-term financing shortfall stems primarily from the fact that  people are living longer. As a result, the number of workers paying into the  system for each beneficiary has been falling and is projected to decline  from 3.3 today to about 2 by 2030. Reductions in promised benefits and/or  increases in program revenues will be needed to restore the long-term  solvency and sustainability of the program.
section_title: About One-Fourth of Public Employees Are Not Covered by Social Security
paragraphs: 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  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.
section_title: Provisions Seek Fairness but Pose Administrative Challenges
paragraphs: 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  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. 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  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.
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. This GPO “loophole” raises  fairness and equity concerns. 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  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.
section_title: Mandatory Coverage Has Been Proposed
paragraphs: 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. Mandatory coverage could also enhance inflation- protection for the affected beneficiaries, improve portability, and add  dependent benefits in many cases. However, to provide for the same level  of retirement income, mandatory coverage could increase costs for the  state and local governments that would sponsor the plans. Moreover, if  coverage were extended primarily to new state and local employees, GPO  and WEP would continue to apply for many years to come for existing  employees and beneficiaries even though they would become obsolete in  the long run.
While Social Security’s solvency problems have triggered an analysis of  the impact of mandatory coverage on program revenues and expenditures,  the inclusion of such coverage in a comprehensive reform package would  need to be grounded in other considerations. In recommending that  mandatory coverage be included in the reform proposals, the 1994-1996  Social Security Advisory Council stated that mandatory coverage is  basically “an issue of fairness.” The Advisory Council’s report noted that  “an effective Social Security program helps to reduce public costs for  relief and assistance, which, in turn, means lower general taxes. There is  an element of unfairness in a situation where practically all contribute to  Social Security, while a few benefit both directly and indirectly but are  excused from contributing to the program.”
The impact on public employers, employees, and pension plans would  depend on how states and localities with noncovered employees would  react to mandatory coverage. Many public pension plans currently offer a  lower retirement age and higher retirement income benefit than Social  Security. For example, many public employees, especially police and  firefighters, retire before they are eligible for full Social Security benefits;  new plans that include Social Security coverage might provide special  supplemental benefits for those who retire before they could receive  Social Security benefits. Social Security, on the other hand, offers  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.
section_title: Conclusions
paragraphs: 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.
section_title: Matter for Congressional Consideration
paragraphs: 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.
section_title: GAO Contributions and Acknowledgments
paragraphs: 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.