Social Security: Issues Regarding the Coverage of Public Employees
Published: 2007-11-06T00:00:00

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 remaining 4 percent are public employees. Although these noncovered workers do not pay Social Security taxes on their government earnings, they may still be eligible for Social Security benefits through their spouses' or their own earnings from other covered employment. Social Security has provisions--the Government Pension Offset (GPO) and the Windfall Elimination Provision (WEP)--that attempt to take noncovered employment into account when calculating the Social Security benefits for public employees. However, these provisions have been difficult to administer and critics contend that the provisions themselves are often unfair. The Committee asked GAO to discuss the issues regarding the coverage of public employees under Social Security, the provisions to take noncovered employment into account, and the proposals to modify those provisions.
section_title: What GAO Found
paragraphs: There are no easy answers to the difficulties of equalizing Social Security's treatment of covered workers and noncovered public employees. About one-fourth of public employees--primarily state and local government workers--are not covered by Social Security and do not pay Social Security taxes on their government earnings. Nevertheless, these workers may still be eligible for Social Security benefits through their spouses' or their own earnings from other covered employment. To address concerns with how noncovered workers are treated compared with covered workers, Social Security has provisions in place to take noncovered employment into account and reduce Social Security benefits for public employees. To be administered fairly and accurately, both these provisions require complete and accurate reporting of government pension income, which is not currently available. The resulting disparity in the application of the provisions is a continuing source of confusion and frustration for affected workers. Thus, various changes that would affect the GPO and WEP provisions have been proposed, such as: eliminate the GPO and WEP provisions. This would simplify administration and avoid concerns about unfair treatment among public employees. However, any reductions in the GPO or the WEP would widen Social Security's financial gap and would raise concerns about unfair treatment of public employees compared with other workers. Extend mandatory coverage. If all newly hired state and local government employees who are not currently covered were to become covered, the need for the GPO and WEP could be phased out over time. In 2005, Social Security actuaries estimated that mandating coverage for these employees would reduce the 75-year actuarial deficit by about 11 percent. While mandatory coverage could enhance retirement benefits for the affected workers, it could also result in significant costs to the affected state and local governments. As long as the GPO and the WEP remain in effect, it will be important to administer the provisions effectively and equitably based on accurate and complete information on both covered and noncovered employment.

section_title: Letter
paragraphs: I am pleased to be here today to discuss the issues regarding Social  Security coverage of public employees and the possible effects of reform.  Social Security covers about 96 percent of all U.S. workers; the vast  majority of the remaining 4 percent who are not covered are public  employees. Moreover, 9 in 10 of the public employees not covered by  Social Security are state and local government workers. Although these  noncovered workers do not pay Social Security taxes on their government  earnings, they may still be eligible for Social Security benefits through  their spouses’ or their own earnings from other covered employment. To  address concerns with how noncovered workers are treated compared  with covered workers, Social Security has provisions in place to take  noncovered employment into account when calculating Social Security  benefits for public employees, but the provisions have been difficult to  administer. This situation poses difficult issues of fairness. It has also been  a source of confusion and frustration for the workers these provisions  affect. Thus, some have proposed eliminating these provisions.  Alternatively, as part of Social Security reform, others have proposed  extending mandatory coverage to all state and local government  employees who are not currently covered; under mandatory coverage, the  need for these provisions would be phased out over time.
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, about one-fourth of public employees are not covered by  Social Security for various historical reasons. As a result, these employees  do not pay Social Security taxes on earnings from their noncovered jobs.  Nevertheless, these employees can still be eligible for Social Security  benefits based on their spouses’ or their own earnings from covered  employment. Currently, Social Security has two provisions in place that  attempt to ensure these workers’ noncovered employment is taken into  consideration when calculating their Social Security benefits: (1) the  Government Pension Offset (GPO), which affects spouse and survivor  benefits, and (2) the Windfall Elimination Provision (WEP), which 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 noncovered earnings and receipt of noncovered pensions.  Implementation of some of our recommendations has improved the  availability and tracking of key information for federal retirees, and we  have estimated that this tracking 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 reforms that would affect public  employees have been proposed. 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. Other proposals would  make Social Security coverage mandatory for all state and local  government employees. In 2005, Social Security actuaries estimated that  mandating coverage 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. Also, the  GPO and the WEP would no longer apply to newly hired public employees  and so could be phased out over time. However, mandatory coverage  could increase retirement costs for state and local governments.
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 the worker’s year of birth. Social Security retirement  benefits are based on the worker’s age and career earnings, are fully  indexed for price 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. This Social Security tax is 6.2 percent of earnings up to an  established maximum, paid by both employers and employees.
One of Social Security’s most fundamental principles is that benefits  reflect the earnings on which workers have paid Social Security taxes.  Thus, Social Security provides benefits that workers have earned, in part,  due to 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 live shorter lives to  those who live longer. These effects result from the program’s focus on  helping ensure adequate incomes. Such effects depend, to a great extent,  on the universal and compulsory nature of the program.
According to the Social Security trustees’ 2007 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 2.2 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 some  government employers had their own retirement systems. In addition,  there was concern over the question of the federal government’s right to  impose a tax on state governments. However, the remaining three-fourths  of public employees are now covered by Social Security, as well as  virtually all private sector workers.
The 1935 Social Security Act mandated coverage for most workers in  commerce and industry; at that time, such workers comprised about 60  percent of the workforce. Subsequently, the Congress extended Social  Security coverage to most of the excluded groups, including many state  and local employees, military personnel, members of Congress, and  federal civilian employees hired after January 1, 1984.
In 1950, Congress enacted legislation allowing voluntary coverage to state  and local government employees not covered by public pension plans, and  in 1955, extended voluntary coverage to those already covered by plans as  well. Initially, public employers could opt in and out of the Social Security  program under these provisions. Since 1983, however, public employers  have not been permitted to withdraw from the program once they have  opted in and their employees are covered. Also, in 1990, Congress made  coverage mandatory for most state and local employees not covered by  public pension plans. Nevertheless, the most recent data from SSA  indicates that in 2005, about 6.8 million state and local government  employees were still not covered by Social Security. Coverage varies  widely across states. In some states, such as New York and Vermont,  virtually all government employees are covered; in other states, such as  Massachusetts and Ohio, less than 5 percent of government employees are  covered. Seven states—California, Colorado, Illinois, Louisiana,  Massachusetts, Ohio, and Texas—account for nearly 70 percent of the  noncovered state and local government payroll.
In addition, SSA estimates that about half a million federal government  employees are not covered. These are civilian employees hired before  January 1, 1984, who continue to be covered under the Civil Service  Retirement System.
Most full-time public employees participate in defined benefit pension  plans. Minimum retirement ages for full benefits vary, but 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 generally 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. State and local government workers also  generally have a survivor annuity option and disability benefits, and many  receive 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. There  has been little movement toward adopting defined contribution plans as  the primary pension plans for state and local workers, but such plans have  become fairly universally available as supplemental voluntary tax-deferred  savings plans.
section_title: Current Provisions Seek Fairness but Pose Administrative Challenges
paragraphs: 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. According to SSA, nearly all noncovered state and  local employees become entitled to Social Security as spouses,  dependents, or workers. However, their noncovered status for the bulk of  their earnings 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, the Congress has enacted two provisions: (1) the Government  Pension Offset (GPO) regarding spouse and survivor benefits, and (2) the  Windfall Elimination Provision (WEP) regarding retired worker benefits.  Both provisions apply only to those beneficiaries who receive pensions  from noncovered employment. However, the provisions have been  difficult to administer because they depend on having complete and  accurate information on noncovered earnings and pensions—information  that has proven difficult to get. Also, the 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. 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.
Under the WEP, enacted in 1983, SSA must use a modified formula to  reduce the Social Security benefits people receive when they have had a  lengthy career in noncovered employment. 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, as the formula replaces a relatively higher  proportion of wages for low earners than for high earners, and those with  lengthy careers in noncovered employment appear on SSA’s records as  low earners.
subsections: section_title: Provisions Are Difficult to Administer
paragraphs: To administer the GPO and WEP, SSA needs to know whether  beneficiaries receive pensions from noncovered employment. However,  SSA cannot apply these provisions effectively and fairly because it lacks  this information. In a report we issued in 1998, we recommended that SSA  perform additional computer matches with the Office of Personnel  Management to get noncovered pension data for federal retirees. In  response to our recommendation, SSA performed the first such match in  1999 and planned to continue to conduct the matches on a recurring basis.  We estimated that correcting the errors identified through such matches  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 extent it can for federal employees.  The resulting disparity in the application of these two provisions is yet  another source of unfairness in the calculation of Social Security benefits  for public employees.
In our testimony before the Subcommittee on Social Security, House  Committee on Ways and Means, in May 2003 and again in June 2005, 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, a task that 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. As long as the GPO and WEP remain in effect, we  continue to believe that the IRS should be given the authority to collect the  information that SSA needs on government pension income to administer  these provisions accurately and fairly.
section_title: Provisions Cause Confusion and Frustration
paragraphs: The GPO and the WEP have been a continuing source of confusion and  frustration for the more than 7.3 million government workers affected.  Critics of the measures contend that the provisions are basically  inaccurate and often unfair. For example, critics of the GPO contend that  the two-thirds reduction is imprecise and could be based on a more  rigorous formula. According to a recent analysis conducted by the  Congressional Research Service, the GPO formula slightly overestimates  the reduction that some individuals (particularly higher earners) would  otherwise receive if they worked in Social Security-covered employment,  and greatly underestimates the reduction that others (particularly lower  earners) would receive. In the case of the WEP, opponents 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.
section_title: Some Social Security Proposals Would Affect Public Employees
paragraphs: In recent years, various proposals to change Social Security have been  offered that would affect public employees. Some proposals specifically  address the GPO and the WEP and would either revise or eliminate them.  Other proposals would make Social Security coverage mandatory for all  state and local government employees.
subsections: section_title: Some Proposals Focus on the GPO or the WEP
paragraphs: 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 current SSA estimates, eliminating the GPO entirely would  cost $41.7 billion over 10 years and increase the long-range deficit by  about 3 percent. Similarly, SSA estimates that eliminating the WEP would  cost $40.1 billion, also increasing 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 manner similar to how it treats  dually entitled spouses, who qualify for Social Security benefits on both  their own and their spouses’ work records. 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 who 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’ 2005 estimate, requiring all newly  hired state and local government employees to begin paying into the  system would reduce the 75-year actuarial deficit by about 11 percent.
Expanding coverage to currently noncovered 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, benefit payments would increase as the newly covered workers  started to collect benefits; however, overall, this change would represent a  small net gain for solvency.
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 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.”
Another advantage of mandatory Social Security coverage is that it could  improve benefits for the affected workers, but it could also increase  pension costs for state and local governments. The effects on public  employees and employers would depend on how states and localities  changed their noncovered pension plans in response to mandatory  coverage.
For example, by gaining coverage, workers would benefit from Social  Security’s automatic inflation protection, full benefit portability, and  dependent benefits, which are not available in many public pension plans.  Also, the GPO and the WEP would no longer apply and so could be phased  out over time.
With mandatory coverage, the costs for state and local governments would  likely increase, adding to the fiscal challenges that already lie ahead for  many. If states and localities provided pension benefits that are similar to  the benefits provided employees already covered by Social Security,  studies indicate that their retirement costs could increase by as much as  11 percent of payroll. Alternatively, states and localities that wanted to  maintain level spending for retirement under mandatory coverage would  likely need to reduce some pension benefits. Thus, while workers’ benefits  may be enhanced in some ways by gaining Social Security, their total  contribution rate may increase, and the benefits they receive under their  previously noncovered pension plans may be reduced.
Additionally, states and localities could require several years to design,  legislate, and implement changes to current pension plans, and mandating  Social Security coverage for state and local employees could elicit  constitutional challenges. Also, mandatory coverage would not  immediately address the issues and concerns regarding the GPO and the  WEP, as these provisions would continue to apply to existing employees  and beneficiaries for many years to come before eventually becoming  obsolete. Finally, state and local governments would have to administer  two different systems–one for existing noncovered employees and another  for newly covered employees—until the provisions no longer applied to  anyone or were repealed.
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 many  years to come unless they were repealed.
As long as the GPO and the WEP remain in effect, it will be important to  administer the provisions as effectively and equitably as possible. SSA has  found it difficult to administer these provisions because they depend on  complete and accurate reporting of government pension income, which is  not currently available. The resulting disparity in the application of these  two provisions is a continuing source of unfairness for Social Security  beneficiaries, both covered and noncovered.
section_title: Matter for Congressional Consideration
paragraphs: GAO has previously recommended that the Congress consider giving IRS  the authority to collect the information that SSA needs on government  pension income to administer the GPO and WEP provisions accurately and  fairly. GAO continues to believe that this important issue warrants further  consideration by the Congress.
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: Contacts and Acknowledgments
paragraphs: For further information regarding this testimony, please contact Barbara  D. Bovbjerg, Director, Education, Workforce, and Income Security Issues  at (202) 512-7215 or bovbjergb@gao.gov. Contact points for our Offices of  Congressional Relations and Public Affairs may be found on the last page  of this statement. Individuals making key contributions to this testimony  include Michael Collins and Margie Shields.
section_title: Related GAO Products
paragraphs: State and Local Government Retiree Benefits: Current Status of Benefit  Structures, Protections, and Fiscal Outlook for Funding Future Costs.  GAO-07-1156. Washington, D.C.: September 24, 2007.
State and Local Governments: Persistent Fiscal Challenges Will Likely  Emerge within the Next Decade. GAO-07-1080SP. Washington, D.C.: July  18, 2007.
Social Security: Coverage of Public Employees and Implications for  Reform. GAO-05-786T. Washington, D.C.: June 9, 2005.
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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