Assistant Deputy Commissioner
Disability and Income Security Programs
Hearing before the
House Ways and Means
Subcommittee on Social Security
June 9, 2005
Thank you for inviting me to discuss the idea of mandatory Social Security coverage for State and Local government employees as well as the Windfall Elimination Provision, or WEP, and the Government Pension Offset, or GPO.
Mandatory Social Security Coverage
State and local government employees were excluded from Social Security coverage from 1935 until 1951 because there was a constitutional question of the Federal government's authority to tax State and local governments. Legislation enacted in 1950 provided that, beginning in 1951, States were allowed to enter into voluntary agreements with SSA to provide Social Security coverage to public employees not under a retirement system. This authority is in section 218 of the Social Security Act; thus, the agreements are referred to as section 218 agreements.
After the 1950 legislation, there were a number of changes that expanded coverage of State and local government employees. The major changes were:
- The 1954 amendments made coverage available to State and local employees covered under a retirement system, at the election of the employer and employees.
- In 1983, Congress repealed a provision that allowed States to rescind earlier decisions to elect coverage of their employees.
- Legislation enacted in 1986 provided mandatory coverage under Medicare for all State and local employees hired after March 31, 1986.
- Legislation enacted in 1990 made Social Security mandatory for State and local employees who are not under a retirement system.
Currently, all 50 States, Puerto Rico, and the Virgin Islands have a section 218 agreement with SSA. Because the coverage is voluntary, the extent of Social Security coverage varies from State to State. It is estimated that 28 percent of State and local public employees are not covered by Social Security. Most of the public employees not covered are police, firefighters, and teachers.
Extending Social Security coverage to newly hired State and local government employees favorably affects the long-range (75 year) solvency of Social Security. This change, if it were applied to new employees hired in 2005 and later, would reduce the long-range OASDI deficit by about 0.21 percent of taxable payroll. This would address about 11 percent of the 75 year program deficit. This change would initially bring in payroll tax revenue with little effect on benefit payments. However, in the longer term, because of benefit payments to these workers, the estimated improvement in the annual balance (cash flow) in the 75th year is only 0.1 percent of taxable payroll.
More than seventy percent of the people who would be affected by mandatory coverage work in seven States (California, Ohio, Texas, Massachusetts, Illinois, Colorado, and Louisiana). There are over 700 State and locally administered retirement plans in these seven States.
Supporters of this change note that extending Social Security coverage to newly hired State and local government employees would improve the protection of those who have jobs in covered employment before or after their government employment. Thus, this change would improve the portability of their pension coverage.
Further, Social Security includes a number of features that may not be found in some State and local retirement plans, such as annual cost-of-living increases, benefits for disabled workers and benefits for spouses and children of retired, disabled, and deceased workers.
However, critics of such a change note that extending mandatory Social Security coverage would adversely affect the funding of some State and local government defined benefit pension plans. This would be particularly true if the retirement plan was already underfunded (had insufficient assets to pay promised benefits) and/or relied on new employee's contributions to fund current retirees' benefits. (A 1998 GAO report found that many public pension plans have unfunded liabilities.)
State and local governments could be expected to oppose mandatory Social Security coverage of newly hired employees, especially on the grounds of cost. Concerns have been expressed that many public employers would not be able to absorb the higher costs. If that happened, State and local governments would need to raise taxes or cut spending on other services.
I would like to begin by drawing a distinction between the GPO provision and the WEP. Like the WEP, the GPO affects workers who receive pensions based on employment not covered by Social Security. GPO is often confused with the WEP. For ease of discussion, when referring to government employment, I am referring to all levels of Federal or State government employment that are not covered by Social Security.
The GPO affects government retirees who are eligible for both:
- A pension based on their own work in a Federal, State, or local government job that was not covered by Social Security, and
- A Social Security spouse's or surviving spouse's benefit based on their husband's or wife's work in covered employment.
Under the GPO, a person's Social Security spouse's or surviving spouse's benefit is reduced by an amount equal to two-thirds of the amount of the person's government pension based on work not covered by Social Security. As of June 2004, about 399,000 beneficiaries had their benefits fully or partially offset due to the GPO. The GPO provision removed an advantage that some government workers had before the GPO was enacted. Before GPO, a person who worked in a government job that was not covered under Social Security could receive, in addition to a government pension based on his or her own earnings, a full Social Security spouse's or surviving spouse's benefit.
However, a person who works in a job that is covered under Social Security is subject to an offset under the dual entitlement provision. This provision, which has applied since 1940 when benefits were first payable to a worker's family members, requires that Social Security benefits payable to a person as a spouse or surviving spouse be offset by the amount of that person's own Social Security benefit. Thus, dually entitled beneficiaries receive the equivalent of their own worker's benefit or the spouse's/surviving spouse's benefit, whichever is higher.
The GPO acts as a surrogate for the dual-entitlement offset for workers receiving a government pension based on work not covered under Social Security because, if that work had been covered, any spouse's or surviving spouse's benefit would have been reduced by the person's own Social Security worker's benefit.
Legislation Affecting GPO
Several bills have been introduced that address the GPO. A bill introduced by Representative McKeon (H.R. 147) includes a provision that would completely eliminate the GPO. Over five years, this proposal would cost nearly $11.6 billion; over 10 years, the estimated cost increases to $32.2 billion. The long-range cost is estimated to be significant--0.06 percent of taxable payroll.
Representative Shaw has included, as part of the Social Security Guarantee Act of 2005, a provision that would reduce the offset from two-thirds of the amount of the person's government pension to one-third. The proposal would cost about $3.5 billion over 5 years and $9.6 billion over 10 years. This change is estimated to increase the long-range cost of the program by 0.02 percent of taxable payroll.
In the last session of Congress, Representative Jefferson introduced H.R. 887, which would have exempted an individual from GPO if his or her combined non-covered pension and Social Security benefits were less than or equal to $2,000 per month (indexed). A dollar-for-dollar offset would have applied only to the amount of combined benefits in excess of $2,000 per month, with the proviso that the offset could not be more than two-thirds of the amount of the non-covered pension. The cost of this proposal was estimated at $7.8 billion over five years, and $21.4 billion over 10 years. The long-range cost was estimated to be 0.02 percent of taxable payroll.
Windfall Elimination Provision
I would now like to discuss the WEP provision. The Social Security Amendments of 1983 (P.L. 98 21) included the WEP provision as a means to eliminate "windfall" Social Security benefits for retired and disabled workers receiving pensions from employment not covered by Social Security. Generally, while the WEP applies to any pension based on non-covered employment, it primarily affects government workers. (The WEP does not affect the Social Security benefits payable to survivors of workers who received pensions based on non-covered employment.)
The purpose of the WEP was to remove an advantage that the weighting in the regular Social Security benefit formula would otherwise provide for persons who have substantial pensions from non-covered employment. This weighting is intended to help workers who spent their lives in low paying jobs by providing them with a benefit that is relatively higher in relation to their prior earnings than the benefit that is provided for higher-paid workers.
However, benefits are based on average earnings in employment covered by Social Security over a working lifetime (35 years for retired workers). In determining average earnings for Social Security benefit purposes, years with no covered earnings are counted as years of zero earnings, as if the person had not worked at all. Without the WEP, a worker who spent a substantial part of his or her career in employment not covered by Social Security would be treated as a low-lifetime earner for Social Security benefit purposes and receive the advantage of the weighted benefit formula. The WEP provides for a different, less heavily weighted benefit formula to compute benefits for such persons.
Under the regular (non-WEP) benefit computation rules, a three step weighted benefit formula is applied to a worker's average indexed monthly earnings (AIME) to determine his or her primary insurance amount (PIA). The PIA is the monthly benefit amount payable to a retired worker first entitled at the full retirement age or a disabled worker. The PIA formula applicable to workers who reach age 62 or become disabled in 2005 is:
90 percent of the first $627 of AIME, plus
32 percent of the next $3,152 of AIME, plus
15 percent of AIME above $3,779.
Under the WEP computation, a worker who is receiving a pension from non-covered earnings generally receives 40 percent of the first $627 instead of the 90 percent provided to workers whose entire careers were in covered employment. The 32 and 15 percent factors are the same for workers affected by the WEP and those that are not.
For a worker first eligible in 2005, the maximum WEP reduction is $313.50 per month-or the difference between 90 percent and 40 percent of $627. Unlike the GPO, the WEP can never eliminate a person's Social Security benefit.
WEP does not apply at all to workers who have 30 or more years of substantial earnings under Social Security. For workers who have 21 to 29 years of substantial covered earnings under Social Security, the reduction under the WEP is phased out gradually.
The WEP provision includes a guarantee designed to help protect workers with relatively low pensions based on non-covered employment. This guarantee provides that the reduction in Social Security benefits can never exceed one half the amount of the pension based on non-covered work.
Educating the Public
As you can see, the WEP and GPO provisions are complicated and, consequently, there have been misunderstandings about who is affected. You may recall from last year's testimony that SSA has made revisions to the Social Security Statement highlighting and making clearer the potential impact of WEP and GPO on a worker's Social Security benefit if he or she receives a pension based on non-covered employment. The Statement refers individuals to SSA publications that explain how benefits can be affected by the WEP and GPO. It also refers individuals to an SSA website, which was recently revised to make sure that there is ample information and links to fact sheets that explain the impact of the GPO and WEP. The website includes benefit calculators that allow individuals to estimate the effects that WEP or GPO may have on their monthly benefit.
Additionally, SSA offices nationwide provide pre-retirement seminars to government employees who request them. If government employees request the seminar, we inform them of the potential impact that WEP and GPO may have on their monthly Social Security benefit.
As you know, the Social Security Protection Act of 2004 (SSPA) required SSA to make a disclosure form available for State and local government employers to use to notify new non-covered employees of the potential effect of this work on their Social Security benefits. This provision was effective January 1, 2005. As we considered our implementation strategy for this provision, I met with representatives of several interested groups (some of them are here today as witnesses) to get their input and hear their concerns.
SSPA also required that Social Security Statements issued after December 31, 2006 contain language to explain the maximum potential effects of the WEP and GPO to any person whose records indicate that they may be subject to those provisions. We are currently examining ways to use our administrative records of non-covered earnings to identify individuals whose benefits are likely to be affected by the GPO or WEP.
Legislation Affecting WEP
A number of bills have been introduced that would change the WEP. These proposals include:
- eliminating the WEP entirely;
- providing less of a WEP reduction (or no reduction) for government workers whose pensions from non-covered employment, in combination with their Social Security benefits, are below certain levels; and
- replacing the WEP benefit formula with an alternative computation.
Let me start with the elimination of the WEP. If the WEP were eliminated, approximately 738,000 retired and disabled workers would see their benefits increase. It is estimated that elimination of the WEP would have a 5-year cost of $10.8 billion and a 10-year cost of $29.7 billion. The long-range cost would be significant - estimated to be 0.06 percent of taxable payroll.
The second type of proposal that has been introduced would provide less of a WEP reduction, or no WEP reduction, if the combined amount of the worker's non-covered pension and Social Security benefits is below a certain threshold. Representative Frank has introduced such a bill (H.R. 1690). This bill would exempt an individual from WEP if his or her combined benefits were less than $2,500 per month (indexed) when he or she is first eligible for both Social Security and a non-covered pension. The legislation provides for graduated implementation of this provision on amounts above $2,500 monthly. Such a proposal would cost $20.4 billion over the next 10 years and increase long-range costs by 0.03 percent of taxable payroll.
The third type of bill that has been introduced would replace the current WEP formula with an alternative computation. This is the approach embodied in H.R. 1714, as introduced by Representative Brady. Under this bill, a hypothetical primary benefit would first be computed based on all of the worker's available covered and non-covered earnings after 1950. This hypothetical benefit would then be multiplied by the proportion of the worker's total earnings that were covered under Social Security to obtain the primary benefit payable to the worker.
The bill also includes a guarantee provision that would ensure that workers whose government pension is based on non-covered earnings in the year of enactment or earlier would receive no less than the benefit under the present law WEP provision. The bill would apply to beneficiaries already on the rolls, as well as to future beneficiaries.
SSA's Office of the Chief Actuary estimates that enactment of H.R. 1714 would increase program costs by $2.7 billion over the first 5 years; the 10-year cost would be $7.0 billion. The long-range cost of the program would increase by 0.01 percent of taxable payroll. These cost estimates assume that only the available non-covered earnings data on SSA's records, for years 1978 and later, would be used in calculating the proposed benefit. The actuaries used this assumption because they believed that the availability of non-covered data for years before 1978 would be problematic for many non-covered workers. To the extent that workers' pre-1978 non-covered earnings are available and could be included in the proposed benefit computation, the cost of the bill would be somewhat lower.
Let me first commend Rep. Brady for his efforts to find ways to replace the current WEP with an approach that is intended to more accurately reflect an individual's complete earnings history. And we have appreciated the opportunity to work with his and other congressional offices on legislation affecting the WEP. However, we continue to be concerned about some aspects of this bill. The primary issue is that the computation would count non-covered earnings after 1950, but SSA only has records of non-covered earnings beginning in 1978, when it began receiving Form W-2 information from employers, and some of these records are incomplete-particularly for the years soon after SSA began collecting this earnings information.
We are concerned about the availability of records documenting pre-1978 earnings. Unfortunately, the data needed for these calculations - much of it wages paid to individuals as many as 30 or more years ago - will not be available for many cases, making it difficult for SSA to equitably administer the provisions of the bill. While the bill includes provisions for "deeming" non-covered earnings when such earnings are not available, these provisions would be complex to administer, and would result in a benefit not based on the individual's true earnings. Because the bill would apply to those on the rolls as of the effective date, SSA would be required to review the benefits of more than 738,000 retired and disabled workers affected by the WEP to determine if their monthly benefits should be adjusted. In addition, the workloads that would be generated by passage of such legislation would be tremendous and take years for SSA to complete.
We are also concerned about willingness to cooperate on the part of individuals who would be affected by this provision, because we would be seeking evidence of earnings that would only serve to lower the benefit amount payable under the bill. A worker whose non-covered earnings were entirely before 1978 would fully avoid the WEP reduction under the proposed computation if those earnings were not disclosed by the worker or otherwise determined by SSA.
Because of the large volume of recomputations required and associated manual actions, the workload impact on SSA would be substantial-and would create delays in other workloads.
While we have raised a number of concerns with this bill, we look forward to working with the committee on these issues.
I want to again thank the Chairman and the Subcommittee for giving me this opportunity to discuss the Social Security coverage for State and local government employees and the related topics of WEP and GPO. As always, SSA welcomes the opportunity to work with you to provide any additional information you need as you continue to look at these complex and important issues. I would be glad to answer any questions you might have.