Social Security: Coverage of Public Employees and Implications for Reform
Published: 2005-06-09T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: 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, but critics contend these provisions are themselves often unfair. The Subcommittee asked GAO to discuss Social Security's effects on public employees as well as the implications of reform proposals.
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, the GPO and the 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. In recent years, various Social Security reform proposals that would affect public employees have been offered. Some proposals specifically address the GPO and the WEP and would either revise or eliminate them. 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. Other proposals would make coverage mandatory for all state and local government employees. According to Social Security actuaries, mandatory coverage would reduce the 75-year actuarial deficit by 11 percent. It could also enhance inflation protection, pension portability, and dependent benefits for the affected beneficiaries, in many cases. However, to maintain the same level of spending for retirement, mandating coverage would increase costs for the state and local governments that sponsor the plans, and would likely reduce some pension benefits. Moreover, the GPO and the WEP would still be needed for many years to come even though they would become obsolete in the long run.

section_title: Letter
paragraphs: I am pleased to be here today to discuss how Social Security affects public  employees and how reforms may change those effects. Social Security  covers about 96 percent of all U.S. workers; the vast majority of the rest  are state, local, and federal government employees. One option for Social  Security reform is extending coverage to all state and local government  employees who are not currently covered. 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. Still, 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  current provisions affecting noncovered public employees, and proposals  to modify those provisions or make coverage mandatory for all public  employees. My testimony is based on a body of work we have published  over the past several years.
In summary, Social Security does not cover about one-fourth of public  employees, for various historical reasons. As a result, these employees do  not pay Social Security taxes on earnings from their noncovered jobs.  Nevertheless, they can still be eligible for Social Security benefits based on  their spouses’ or their own earnings in covered employment. Currently,  Social Security has two provisions to address the resulting fairness issues.  The Government Pension Offset (GPO) affects spouse and survivor  benefits, and the Windfall Elimination Provision (WEP) affects retired  worker benefits. Both provisions reduce Social Security benefits for those  who receive noncovered pension benefits. However, the Social Security  Administration (SSA) cannot effectively and fairly apply these provisions  because it does not have access to complete and accurate information on  receipt of such noncovered pension benefits. Implementation of some of  our recommendations has improved the availability and tracking of key  information for federal retirees, which we estimate will save hundreds of  millions of dollars. However, Congressional action is still needed to  improve access to information on state and local government pensions.
In recent years, various Social Security reform proposals that would affect  public employees have been offered. Some proposals specifically address  the GPO and the WEP and would either revise or eliminate them. While we  have not analyzed these proposals, we believe it is important to consider  both the costs and the fairness issues they raise. Still other proposals  would make coverage mandatory for all state and local government  employees. According to Social Security actuaries, doing so for all newly  hired state and local government employees would reduce the 75-year  actuarial deficit by about 11 percent. It 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, it could increase costs for the state and local  governments that would sponsor the plans. Moreover, the GPO and the  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 don’t 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’ 2005 intermediate, or best- estimate, assumptions, Social Security’s cash flow is expected to turn  negative in 2017. In addition, all of the accumulated Treasury obligations  held by the trust funds are expected to be exhausted by 2041. Social  Security’s long-term financing shortfall stems primarily from the fact that  people are living longer and having fewer children. 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 employment because there was  concern over the question of the federal government’s right to impose a  tax on state governments, and some had their own retirement systems.  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, amendments to the Social Security Act extended mandatory  coverage to newly hired federal workers and to all members of the  Congress.
SSA estimates that in 2004 nearly 5 million state and local government  employees, excluding students and election workers, are not covered by  Social Security. In addition, about three-quarters of a million federal  employees hired before 1984 are also not covered. Seven   states—California, Colorado, Illinois, Louisiana, Massachusetts, Ohio,   and Texas—account for 71 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,  members generally have a survivor annuity option and disability benefits,  and many 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 such plans are 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 nearly all noncovered state and  local employees become entitled to Social Security as workers, spouses,  or dependents. However, their noncovered status complicates the  program’s ability to target benefits in the ways it is intended to do.
section_title: Current Provisions Seek Fairness but Pose Administrative Challenges
paragraphs: To address the fairness issues that arise with noncovered public  employees, Social Security has two provisions—the Government Pension  Offset, to address spouse and survivor benefits, and the Windfall  Elimination Provision, to address 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.
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 a 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 the 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 the WEP, the Congress was concerned that the design of the  Social Security benefit formula provided unintended windfall benefits to  workers who had 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 the GPO and the 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, SSA cannot apply these provisions effectively and  fairly because it lacks this information, according to our past work. In  response to our recommendation, SSA performed additional computer  matches with the Office of Personnel Management to get noncovered  pension data for federal retirees. These computer matches detected  payment errors; we estimate that correcting these errors will generate  hundreds of millions of dollars in savings. However, SSA still lacks the  information it needs for state and local governments and therefore it  cannot apply the GPO and the WEP for state and local government  employees to the same degree that it does for federal employees. The  resulting disparity in the application of these two provisions is yet another  source of unfairness in the final outcome.
In our testimony before this committee in May 2003, we recommended  that the Congress consider giving the Internal Revenue Service (IRS) the  authority to collect the information that SSA needs on government  pension income, which could perhaps be accomplished through a simple  modification to a single form. Earlier versions of the Social Security  Protection Act of 2004 contained such a provision, but this provision was  not included when the final version of the bill, was approved and signed  into law.
section_title: Some Reform Proposals Would Affect Public Employees
paragraphs: In recent years, various Social Security reform proposals that would affect  public employees have been offered. Some proposals specifically address  the GPO and the WEP and would either revise or eliminate them. Still  other proposals would make coverage mandatory for all state and local  government employees.
subsections: section_title: Some Proposals Focus on the GPO or the WEP
paragraphs: The GPO and the WEP have been a source of confusion and frustration for  the more than 6 million workers and 1.1 million beneficiaries they affect.  Critics of the measures contend that they are basically inaccurate and  often unfair. For example, some opponents of the 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. In the case of the GPO, critics contend that the two- thirds reduction is imprecise and could be based on a more rigorous  formula. A variety of proposals have been offered to either revise or  eliminate the GPO or the WEP. 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 the most recent estimates from SSA eliminating the GPO  entirely would cost $32 billion over 10 years and cost 0.06 percent of  taxable payroll, which would increase the long-range deficit by about  3 percent. Similarly, eliminating the WEP would cost nearly $30 billion and  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 the 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 on both  their own work records and their spouses’. In such cases, spouses may not  receive both the benefits earned as a worker and the full spousal benefit;  rather they receive the higher amount of the two. If the 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. Otherwise, such couples would be worse off  than couples that were no longer subject to the GPO. And far more  spouses are subject to the dual entitlement offset than to the GPO; as a  result, the costs of eliminating the dual entitlement offset would be  commensurately greater.
section_title: Mandatory Coverage Has Been Proposed
paragraphs: Making coverage mandatory for all state and local government employees  has been proposed to help address the program’s financing problems.  According to Social Security actuaries, doing so for all newly hired state  and local government employees would reduce the 75-year actuarial  deficit by about 11 percent. Covering all the remaining workers increases  revenues relatively quickly and improves solvency for some time, since  most of the newly covered workers would not receive benefits for many  years. In the long run, however, benefit payments would increase as the  newly covered workers started to collect benefits. Overall, this change  would still represent a net gain for solvency, although it would be small.
In addition to considering solvency effects, the inclusion of mandatory  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.”  Its 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.”
Moreover, mandatory coverage could improve benefits for the affected  beneficiaries, but it could also increase pension costs for the state and  local governments that would sponsor the plans. The effects on public  employees and employers would depend on how states and localities  changed their noncovered pension plans to conform with mandatory  coverage. For example, Social Security offers automatic inflation  protection, full benefit portability, and dependent benefits, which are not  available in many public pension plans. Creating new pension plans that  kept all the existing benefit provisions but added these new ones would  increase the cost of the total package. Under this scenario, costs could  increase by as much as 11 percent of payroll, depending on the benefit  packages of the new plans. 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. Mandating Social Security coverage for state and local  employees could also elicit a constitutional challenge. Finally, mandatory  coverage would not immediately address the issues and concerns  regarding the GPO and the WEP. If left unchanged, these provisions would  continue to apply for many years to come for existing employees and  beneficiaries. Still, in the long run, mandatory coverage would make these  provisions obsolete.
section_title: Conclusions
paragraphs: In conclusion, there are no easy answers to the difficulties of equalizing  Social Security’s treatment of covered and noncovered workers. Any  reductions in the GPO or the WEP would ultimately come at the expense  of other Social Security beneficiaries and taxpayers. Mandating universal  coverage would promise eventual elimination of the GPO and the WEP but  at potentially significant cost to affected state and local governments, and  even so the GPO and the WEP would continue to apply for some years to  come, unless they were repealed.
Whatever the decision, it will be important to administer the program  effectively and equitably. The GPO and the 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 disparity in the application of these two provisions is yet another  source of unfairness in the final outcome. We therefore take this  opportunity to bring the matter back to your attention for further  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, Ken Stockbridge, and Michael Collins.
section_title: Related GAO Products
paragraphs: Social Security Reform: Answers to Key Questions. GAO-05-193SP.  Washington, D.C.: May 2005.
Social Security: Issues Relating to Noncoverage of Public Employees.  GAO-03-710T. Washington, D.C.: May 1, 2003.
Social Security: Congress Should Consider Revising the Government  Pension Offset “Loophole.” GAO-03-498T. Washington, D.C.: Feb. 27, 2003.
Social Security Administration: Revision to the Government Pension  Offset Exemption Should Be Considered. GAO-02-950. Washington, D.C.:  Aug. 15, 2002.
Social Security Reform: Experience of the Alternate Plans in Texas.  GAO/HEHS-99-31, Washington, D.C.: Feb. 26, 1999.
Social Security: Implications of Extending Mandatory Coverage to State  and Local Employees. GAO/HEHS-98-196. Washington, D.C.: Aug. 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.
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