Social Security: Congress Should Consider Revising the Government Pension Offset 'Loophole'
Published: 2003-02-27T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The Government Pension Offset (GPO) exemption was enacted in 1977 to equalize the treatment of workers covered by Social Security and those with government pensions not covered by Social Security. Congress asked GAO to (1) assess the extent to which individuals retiring from jobs not covered by Social Security may be transferring briefly to covered jobs in order to avoid the GPO, and (2) estimate the impact of such transfers on the Social Security Trust Fund.
section_title: What GAO Found
paragraphs: Because no central data exists on use of the GPO exemption by individuals in approximately 2,300 state and local government retirement plans nationwide, GAO could not definitively confirm that this practice is occuring in states other than Texas and Georgia. In those two states, 4,819 individuals had performed work in Social Security-covered positions for short periods to qualify for the GPO last-day exemption. In Texas, teachers typically worked a single day in nontechnical positions covered by Social Security, such as clerical or janitorial positions. In Georgia, teachers generally agreed to work for approximately 1 year in another teaching position in a school district covered by Social Security. Officials in both states indicated that use of the exemption would likely continue to grow as awareness increases and it becomes part of individuals' retirement planning. For the cases GAO identified, increased long-term benefit payments from the Social Security Trust Fund could be $450 million over the long term and would likely rise further if use of the exemption grows in the states GAO visited and spreads to others. SSA officials acknowledged that use of the exemption might be possible in other state and local government retirement plans that include both those positions covered by Social Security and those not. The GPO "loophole" raises fairness and equity concerns for those receiving a Social Security pension and are currently subject to the spousal benefit offset. In the states we visited, individuals with a relatively minimal investment of work time and Social Security contributions can gain access to potentially many years of full Social Security spousal benefits. The last-day exemption could also have a more significant impact if the practice grows and begins to be adopted by other states and localities. Considering the potential for abuse, our report presented options for revising the GPO exemption, such as changing the last-day provision to a longer minimum time period or using a proportional approach based on the number of working years spent in covered and noncovered employment for determining the extent to which the GPO applies.

section_title: Letter
paragraphs: I am pleased to be here today to discuss Social Security’s Government  Pension Offset (GPO) exemption. As you know, the GPO was enacted in  1977 to equalize the treatment of workers covered by Social Security and  those with government pensions not covered by Social Security. In short,  the GPO prevents workers from receiving a full Social Security spousal  benefit on top of a pension earned from government employment not  covered by Social Security. However, the law provides an exemption from  the GPO if an individual’s last day of state/local government employment  is in a position that is covered by both Social Security and their state/local  pension system. In these cases, the GPO will not apply, and Social Security  spousal benefits will not be reduced.
Last year, you asked us to (1) assess the extent to which individuals  retiring from jobs not covered by Social Security may be transferring  briefly to covered jobs in order to avoid the GPO, and (2) estimate the  impact of such transfers on the Social Security Trust Fund. To complete  our work, we first reviewed the GPO’s legislative history and government  reports documenting the purpose of the offset and the Social Security  Administration’s (SSA) policies and procedures for administering it. We  also performed limited work with associations, researchers, and  retirement system officials in 28 states. Finally, we performed audit work  in Texas and Georgia, two of the states where we identified use of the last- day exemption. On August 15, 2002, we reported to you on the results of  our work. Today I will discuss the findings of our review.
In summary, because no central data exists on use of the GPO exemption  by individuals in approximately 2,300 state and local government  retirement plans nationwide, we could not definitively confirm that this  practice is occurring in states other than Texas and Georgia. In those two  states, 4,819 individuals had performed work in Social Security-covered  positions for short periods to qualify for the GPO last-day exemption. In  Texas, teachers typically worked a single day in nonteaching positions  covered by Social Security, such as clerical or janitorial positions. In  Georgia, teachers generally agreed to work for approximately 1 year in  another teaching position in a school district covered by Social Security.  Officials in both states indicated that use of the exemption would likely  continue to grow as awareness increases and it becomes part of  individuals’ retirement planning. For the cases we identified, increased  long-term benefit payments from the Social Security Trust Fund could be  about $450 million over the long term and would likely rise further if use  of the exemption grows in the states we visited and spreads to others. SSA  officials acknowledged that use of the exemption might be possible in  other state and local government retirement plans that include both those  positions covered by Social Security and those not.
The GPO “loophole” raises fairness and equity concerns for those  receiving a Social Security pension and are currently subject to the  spousal benefit offset. In the states we visited, individuals with a relatively  minimal investment of work time and Social Security contributions can  gain access to potentially many years of full Social Security spousal  benefits. The last-day exemption could also have a more significant impact  if the practice grows and begins to be adopted by other states and  localities. Considering the potential for abuse, our report presented  options for revising the GPO exemption, such as changing the last-day  provision to a longer minimum time period or using a proportional  approach based on the number of working years spent in covered and  noncovered employment for determining the extent to which the GPO  applies.
subsections: section_title: Background
paragraphs: The Social Security Act requires that most workers be covered by Social  Security benefits. Workers contribute to the program via wage deductions.  State and local government workers were originally excluded from Social  Security.
Starting in the 1950s, state and local governments had the option of  selecting Social Security coverage for their employees or retaining their  noncovered status. In 1983, state and local governments in the Social  Security system were prohibited by law from opting out of it. Of the  workers in the roughly 2,300 separate state and local retirement plans  nationwide, about one-third are not covered by Social Security.
In addition to paying retirement and disability benefits to covered  workers, Social Security also generally pays benefits to spouses of retired,  disabled, or deceased workers. If both spouses worked in positions  covered by Social Security, each 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. In contrast, until 1977, workers receiving  pensions from government positions not covered by Social Security could  receive their full pension benefit and their full Social Security spousal  benefits as if they were nonworking spouses. At that time, legislation was  enacted creating the GPO, which prevented workers from receiving a full  spousal benefit on top of a pension earned from noncovered government  employment. However, the law provides an exemption from the GPO if an  individual’s last day of state/local employment is in a position that is  covered by both Social Security and the state/local government’s pension  system. In these cases, the GPO will not be applied to the Social Security  spousal benefit.
section_title: Nationwide Extent of Transfers to Avoid the GPO Unknown, but Expected to Grow
paragraphs: While we could not definitively confirm the extent nationwide that  individuals are transferring positions to avoid the GPO, we found that  4,819 individuals in Texas and Georgia had performed work in Social  Security-covered positions for short periods to qualify for the GPO last-day  exemption. Use of the exemption may grow further as the practice  becomes more rapidly institutionalized and the aging baby-boom  generation begins to retire in larger numbers. SSA officials also  acknowledged that use of the exemption might be possible in some of the  approximately 2,300 state and local government retirement plans in other  states where such plans contain Social Security-covered and noncovered  positions.
section_title: Use of GPO Exemption in Texas is Growing
paragraphs: Officials in Texas reported that 4,795 individuals at 31 schools have used  or plan to use last-day employment to take advantage of the GPO  exemption. In 2002, one-fourth (or 3,521) of all Texas public education  retirees took advantage of this exemption.
In most schools, teachers typically worked a single day in a nonteaching  position covered by Social Security to use the exemption.
Nearly all positions were nonteaching jobs, including clerical, food  service, or maintenance. Most of these employees were paid about $6 per  hour. At this rate, the Social Security contributions deducted from their  pay would total about $3 for the day. We estimate that the average annual  spousal benefit resulting from these last-day transfers would be about  $5,200.
School officials also reported that individuals are willing to travel to take  these jobs—noting one teacher who traveled 800 miles to use the last-day  provision. Some schools reported that they charge a processing fee,  ranging from $100-$500, to hire these workers. These fees are a significant  source of revenue—last year one school district collected over $283,000 in  fees.
Our work shows that use of the exemption in Texas has increased since  1990, which was the earliest use reported to us.
In one school district, for example, officials reported that use of the  exemption grew from one worker in 1996 to 1,050 in 2002. Another school  district that began offering last-day employment in 2002 had received over  1,400 applications by June of that year from individuals seeking to use the  exemption.
Use of the exemption is likely to grow further, according to trends in  Texas teacher retirements and information from school officials.
There were about 14,000 teacher retirements in 2002, as opposed to 10,000  in 2000. At one university we visited, officials have scheduled workdays  for imminent retirees, through 2005, to work in covered employment, an  indication of the rapid institutionalization of this practice. The GPO  exemption is also becoming part of teachers’ regular retirement planning  process as its availability and use is publicized by teaching associations  and financial planners (via Web sites, newspapers, seminars, etc.) and by  word-of-mouth. One association’s Web site we identified lists the names  and telephone numbers of school officials in counties covered by Social  Security and how to contact those officials for such work. A financial  planner’s Web site we identified indicated that individuals who worked as  little as 1 day under a Social Security-covered position to quality for the  GPO exemption could earn $150,000 or more in benefits over their  lifetime.
section_title: In Georgia, Workers Obtain GPO Exemption by Transferring Positions
paragraphs: In Georgia, officials in one district reported that 24 individuals have used  or plan to use covered employment to take advantage of the GPO  exemption. Officials told us that teachers generally agreed to work for  approximately 1 year in another teaching position in a school district  covered by Social Security to use the GPO exemption. These officials told  us that they expect use of the exemption to increase as awareness of it  grows.
According to Georgia officials, their need to address a teacher shortage  outweighs the risk to individual schools of teachers leaving after 1 year.  Officials in fast-growing school systems reported they needed to hire  teachers even if they only intended to teach for 1 year. However, some  schools reported that they have had teachers leave shortly after being  hired. For example, in one district, a teacher signed a 1-year contract to  teach but left after 61 days, a time sufficient to avoid the spousal benefit  reduction. In some of the applications for school employment we  reviewed, individuals explicitly indicated their desire to work in a county  covered by Social Security in order to obtain full Social Security spousal  benefits.
section_title: Transfers to Avoid the GPO May be Possible Nationwide
paragraphs: Use of the GPO exemption might be possible in other plans nationwide.  SSA officials told us that some of the approximately 2,300 state and local  government retirement plans—where such plans contain Social Security- covered and noncovered positions—may offer individuals the opportunity  to use the GPO exemption. Officials representing state and local  government retirement plans in other states across the country also told  us that their plans allow covered and noncovered Social Security  positions, making it possible for workers to avoid the GPO by transferring  from one type of position to the other. For example:    An official in a midwestern state whose plan covers all state government  employees, told us that it is possible for law enforcement personnel  (noncovered) to take a covered job in the state insurance bureau  (covered) just before retiring.
In a southern state with a statewide retirement plan for school employees,  teachers and other school professionals (noncovered) can potentially  transfer to a job in the school cafeteria (covered) to avoid the GPO.
A retirement system official from a north central state reported hearing of  a few cases where teachers had taken advantage of the exemption by  transferring to jobs in other school districts covered by Social Security.
Finally, in a western state with a statewide retirement plan, workers could  move from one government agency (noncovered) to a position in another  agency (covered).
section_title: Cost of Transfers to the Social Security Trust Fund is Growing, but Options Exist to Address Potential Abuse
paragraphs: The transfers to avoid the GPO we identified in Texas and Georgia could  increase long-term benefit payments from the Social Security Trust Fund  by about $450 million. We calculated this figure by multiplying the number  of last-day cases reported in Texas and Georgia (4,819) by SSA data on the  average annual offset amount ($4,800) and the average retirees life  expectancy upon receipt of spousal benefits (19.4 years). We believe that  these estimated payments would likely increase as use of the exemption  grows.
Our prior report identified two options for addressing potential abuses of  the GPO exemption. The first option, as proposed in H.R. 743, is to change  the last-day provision to a longer minimum time period. This option would  require only small changes to administer and would be less burdensome  than other methods for SSA to administer. Also, this option has precedent.  Legislation in 1987 required federal employees transferring between two  federal retirement systems, the Civil Service Retirement System (CSRS)  and Federal Employees Retirement System (FERS), to remain in FERS for  5 years before they were exempt from the GPO. We found that most of the  jobs in Texas last for about 1 day, so extending the time period might  eliminate many of the exemption users in Texas.
The second option our report identified is to use a proportional approach  to determine the extent to which the GPO applies. Under this option,  employees who have spent a certain proportion of their working career in  a position covered by Social Security could be exempt from the GPO. This  option may represent a more calibrated approach to determining benefits  for individuals who have made contributions to the Social Security system  for an extended period of their working years. However, SSA has noted  that using a proportional approach would take time to design and would  be administratively burdensome to implement, given the lack of complete  and reliable data on noncovered Social Security employment.
section_title: Conclusions
paragraphs: The GPO “loophole” raises fairness and equity concerns for those  receiving a Social Security pension and currently subject to an offset of  their spousal Social Security benefits. The exemption allows a select group  of individuals with a relatively small investment of work time and only  minimal Social Security contributions to gain access to potentially many  years of full Social Security spousal benefits. The practice of providing full  spousal benefits to individuals who receive government pensions but who  made only nominal contributions to the Social Security system also runs  counter to the nation’s efforts to address the solvency and sustainability of  the Social Security program.
Based on the number of people reported to be using the loophole in Texas  and Georgia this year, the exemption could cost the Trust Fund hundreds  of millions of dollars. While this currently represents a relatively small  percentage of the Social Security Trust Fund, costs could increase  significantly if the practice grows and begins to be adopted by other states  and localities.
Considering the potential for abuse of the last-day exemption and the  likelihood for its increased use, we believe timely action is needed.  Accordingly, our August 2002 report includes a Matter for Congressional  consideration that the last-day GPO exemption be revised to provide for a  longer minimum time period. This action would provide an immediate  “fix” to address possible abuses of the GPO exemption identified in our  review.
Mr. Chairman, this concludes my prepared statement, I will 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, Patrick DiBattista, Patricia M. Bundy, Jamila L.  Jones, Daniel A. Schwimer, Anthony J. Wysocki, and Jill D. Yost.