Testimony of David A. Rust
Acting Deputy Commissioner for Disability and Income Security Programs
Hearing before the
House Committee on Ways and Means
Social Security Subcommittee
January 16, 2008
Mr. Chairman, Members of the Subcommittee:
Thank you for the opportunity to discuss several Social Security issues affecting different beneficiary populations. As requested, I will discuss a proposal to extend coverage to newly hired State and local government employees. I will also discuss the Government Pension Offset provision, or GPO, and the Windfall Elimination Provision, also known as WEP, and related proposals. In addition, I will talk about various proposals to eliminate the 24- month waiting period for Medicare benefits for individuals with disabilities, to increase the special minimum benefit provision, and to increase benefits for widows and widowers. Finally, I will discuss issues concerning the substantial gainful activity measure applicable to disabled beneficiaries. Each of these ideas addresses the concerns of a segment of the Social Security beneficiary population.
Importance of Social Security
As President Bush and virtually every President since the program began have said, Social Security has been one of the most successful and important government programs. Social Security provides a safety net for the elderly and persons with disabilities, as well as survivors and dependents. Commissioner Astrue and I, along with the extraordinary Social Security workforce, share with the President and with the members of this Subcommittee a commitment to ensuring that the program continues to play this important role.
About 163 million American workers paid Social Security taxes last year. They, their families, and the millions joining the system every year, are relying on Social Security for a major portion of their future financial security. Last year, over $580 billion in benefits was paid to nearly 50 million retirees, survivors, and disabled individuals and their dependents. Thirty percent of Social Security beneficiaries are disabled or survivors—widows, widowers, and children.
I would like to now discuss the history and scope of Social Security coverage and the protections provided as a result of coverage. I will also discuss an initiative that has been included in several Social Security legislative proposals to mandatorily cover newly hired State and local government workers.
Initially, under the Social Security Act of 1935, Social Security covered less than 50 percent of the nation's workers. Over time, Congress has extended coverage so that Social Security coverage is nearly universal, with 96 percent of the nation's workforce now covered under Social Security.
The largest category of workers who remain outside the Social Security system is State and local government employees. State and local government employees were excluded from Social Security coverage until legislation enacted in 1950 allowed States to enter into voluntary agreements with the Social Security Administration (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 and, thus, these 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 had allowed States to rescind earlier decisions to elect coverage of their employees. Thus, States could no longer change their employees' status from covered to non-covered. This law also required newly hired Federal employees to be covered by Social Security.
• Legislation enacted in 1982 provided mandatory coverage under Medicare for Federal employees effective January 1, 1983. Legislation enacted in 1986 extended mandatory Medicare coverage for most State and local employees hired after March 31, 1986.
• Legislation enacted in 1990 made Social Security mandatory for most State and local employees who are not covered under a qualifying retirement system effective July 2, 1991 and later.
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; from Vermont , where only 3 percent of State employees are outside the Social Security system, to Ohio , where 97 percent of State employees are not covered by Social Security. It is estimated that 29 percent of State and local public employees are not covered by Social Security—6.8 million individuals. Most of these public employees are police, firefighters, and teachers.
The Social Security program provides a number of important features for workers and their families that are not always available in State and local government pension systems.
• Social Security provides workers and their families with portable protection from loss of earnings due to retirement, disability, or death regardless of their place of employment. Thus protection is uninterrupted for workers who change jobs in covered employment. Because Social Security and the various state pension systems are not fully integrated, an individual who moves from employment in a non-covered state job to the private sector may experience a period without disability protection. For example, a 35-year old worker who moves from a non-covered state job to a covered job would not be eligible for Social Security disability benefits until they had completed 5 years of work, because the law provides the disability benefit only to workers with "recent" work (defined as work in one-half of the preceding ten years).
• Further, Social Security provides benefits for disabled workers, as well as benefits for spouses and children of retired, disabled, and deceased workers. A worker's Social Security benefits are not reduced because of benefits payable to a spouse and children.
As the Subcommittee has noted, there have been proposals to extend mandatory Social Security coverage to newly hired State and local government employees. Such a change would bring additional revenue into the Social Security system and thereby improve actuarial balance in the near-term.
Supporters of this change note that extending Social Security coverage to all 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. As noted above, this change would both improve the portability of their pension coverage and provide a number of features that may not be found in some State and local retirement plans.
On the other hand, 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. Since coverage would require the states to pay the employer share of the FICA tax, this would mean an immediate 6.2 percent increase in payroll costs. Most states simply could not afford to finance Social Security payments and maintain their current pension systems.
GPO and WEP
The GPO and the WEP are provisions that affect the amount of Social Security benefits payable to individuals who also receive a pension based on their own work in employment not covered under Social Security. These workers are primarily Federal, State, and local government employees.
As the Social Security program evolved, Congress realized that changes had to be made to preserve the intent to treat covered and non-covered workers equitably. Thus, in 1977, the law was changed to incorporate the GPO, and in 1983, the WEP provision was enacted. As I will explain, the GPO provision replicates the offset in spousal benefits that applies to covered workers, while the intent of the WEP is to maintain the progressive nature of the benefit computation. For ease of discussion, when referring to government employment, I am referring to all levels of Federal, State, or local government employment that are not covered by Social Security.
I would like to begin by providing some historical context for the discussion of the GPO. Since 1940, when monthly benefits were first paid by Social Security, there has been an offset that reduces any benefit an individual qualifies for as a spouse or surviving spouse by the amount of his or her earned benefit, based on his or her own work. This offset recognizes that an individual who works long enough to be insured under the program was not completely dependent on his or her spouse for support and should not qualify for a full spouse's benefit in addition to his or her own worker's benefit.
The GPO affects government retirees who are eligible for both:
• A pension based on his 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 his or her husband ' s or wife's work in covered employment.
Under GPO, an individual ' s Social Security spousal benefits are reduced by two-thirds of the amount of his or her non-covered pension. For non-covered government employees, the GPO acts as a surrogate for the spousal offset that applies to workers whose jobs are covered by Social Security. If that work had instead been covered, any spouse or surviving spouse benefit would have been reduced by the person ' s own Social Security worker ' s benefit. The GPO approximates this treatment for government workers so that all spouses and surviving spouses are treated similarly, regardless of whether their jobs were covered under Social Security or not.
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 worked in covered employment had his or her Social Security benefit as a spouse or surviving spouse offset by the amount of his or her own Social Security worker's benefit.
A key difference between the GPO and the Social Security benefit offset provision applied to spouses in covered employment is the amount of the offset. Under the spousal offset applicable to covered workers, there is a dollar-for-dollar reduction, while under GPO the reduction is only two thirds.
Consider three married women. In each case, the woman's husband had a career covered by Social Security and has a Social Security primary benefit of $1,000 per month. Thus, the potential monthly benefit for each woman is $500 as a spouse and $1,000 as a widow.
• Ann has never worked outside the home, and therefore is not eligible for benefits based on her own work. When Ann reaches full retirement age, she will receive one-half of her husband's benefit, or $500 per month. If he dies before she does, Ann's surviving spouse's benefit would be $1,000. Ann was dependent on her spouse for support and is the kind of person Congress had in mind when they enacted spouse's benefits in 1939.
• Bea has worked as a real estate agent; she paid Social Security taxes and has been covered under Social Security for her entire career. She is eligible at full retirement age for a $600 monthly benefit based on her own work, while, as noted previously, her spouse is eligible for $1000 monthly. The spousal offset applicable to covered workers would affect Bea. The potential spouse's benefit she could get would be $500, but since she gets $600 based on her own work, she cannot receive any benefit as a spouse (fully offset). If her spouse dies before she does, Bea would get $400 monthly as a widow making her total monthly benefit $1,000.
• Cleo spent her career as a teacher in employment not covered by Social Security, and is eligible for a monthly pension of $600 from this work. Cleo is subject to the GPO. In her case, we will offset her Social Security benefit as a spouse ($500) by two-thirds of the amount of her government pension ($400). As a result, she will get a $100 monthly spouse's benefit from Social Security. If her husband dies before she does, her Social Security benefit would increase to $600 per month. Her total monthly benefit would be $1,200.
As noted, the GPO is intended to serve the same purpose as the spousal offset applicable to covered workers, but GPO applies to people who receive a non-covered pension instead of a Social Security retired worker's benefit. Had Cleo, instead, worked in employment covered by Social Security, she would not receive a wife's benefit (as was the case with Bea) and would receive less in a widow's benefit, as we see when we contrast benefits for Bea. As shown in the example, in some cases, the GPO may be more generous than the spousal offset applicable to covered workers.
Several bills have been introduced in this Congress that would eliminate or modify the GPO. A bill introduced by Representative Berman (H.R. 82) includes a provision that would completely eliminate the GPO. Over 5 years, this proposal is estimated to cost $17.6 billion; over 10 years, the estimated cost increases to $41.7 billion. The long-range cost is estimated to be 0.06 percent of taxable payroll.
Representative Lewis has included, as part of a comprehensive solvency bill (H.R. 1090), 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 $4.6 billion over 5 and $11.0 billion over 10 years. This change is estimated to increase the long-range cost of the program by 0.02 percent of taxable payroll.
A bill introduced by Representative Wynn (H.R. 2988) would change the GPO reduction to equal the amount by which the combined monthly Social Security benefit and the pension exceed $1,200. The cost of this proposal is estimated at $2.9 billion over 5 years, and $6.1 billion over 10 years. The long-range cost is estimated to be negligible.
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 what was seen as "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 person who receives a pension based on non-covered employment, it primarily affects government workers. (The WEP does not affect the Social Security benefits payable to survivors of government workers.)
The purpose of the WEP is to remove an advantage that the weighting in the regular Social Security benefit formula would otherwise provide for persons who have pensions from non-covered employment. This weighting is intended to help workers who spend 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. The weighting in the formula recognizes that lower earners are less likely than other workers to have pension income or significant savings.
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 in these years.
Without the WEP, a worker who spent a substantial part of his or her career in employment not covered by Social Security would appear to be a career low-earner and would be treated as a low-lifetime earner for Social Security benefit purposes; such a worker would inappropriately 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. For a worker first eligible in 2008, the maximum WEP reduction is $355 per month. Unlike the GPO, the WEP can never eliminate a person's Social Security benefit.
The WEP does not apply at all to workers who have 30 or more years of “substantial earnings” under Social Security. The annual minimum earnings required for a year to qualify as a year of substantial earnings has increased over time. For 2008, the minimum earnings threshold is $18,975. For workers who have 21 to 29 years of substantial covered earnings under Social Security, the reduction under the WEP is phased out gradually.
As of December 2007, the WEP affects 954,000 retired and disabled workers and an additional 82,000 auxiliary beneficiaries (total of 1,036,000 beneficiaries). Virtually all of those affected (98.5 percent) are retired, rather than disabled, workers. A majority of workers affected are men (65 percent). Based on a study using 2001 data, 96.5 percent of workers age 65 or older who are subject to the WEP have incomes above the poverty level.
A number of bills have been introduced in this Congress that would eliminate, modify or replace the WEP computation. One bill (H.R. 82 by Representative Berman) includes a provision that would completely eliminate the WEP. Over 5 years, this proposal is estimated to cost $16.7 billion; over 10 years, the estimated cost increases to $40.1 billion. The long-range cost is estimated to be 0.05 percent of taxable payroll.
Representative Frank has introduced a bill (H.R. 726) that would provide for no WEP reduction if the combined amount of the worker's non-covered pension and Social Security benefits is below $2,500 per month. A graduated WEP reduction would apply if the combined amount is $2,500 or more. This proposal is estimated to cost $7.9 billion over the next 5 years, $19.0 billion over 10 years, and increase long-range costs by 0.02 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. 2772, 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. It is estimated that enactment of H.R. 2772 would increase program costs by $1.7 billion over the first 5 years; the 10-year cost would be $4.6 billion. The long-range cost of the program would increase by 0.01 percent of taxable payroll.
The President's FY 2008 budget included a proposal aimed at improving SSA's ability to administer the GPO and WEP. Currently, SSA relies primarily on the beneficiary to report information about the receipt or amount of a pension based on non-covered employment.
SSA does have in place a computer matching agreement with the Office of Personnel Management (OPM) to identify Social Security beneficiaries who are receiving a pension from non-covered Federal government employment. However, efforts to develop similar matching agreements with State and local governments have not been as successful. In part, this is due to the difficulty in identifying the more than 2,600 State and local government entities that provide pensions to government retirees.
The proposal in the President's budget seeks to address this issue by establishing a mandatory system for collecting data on pension income from non-covered State and local employment. This change would improve the equity in the application of these provisions because it would improve SSA ' s ability to identify State and local government retirees receiving pensions based on non-covered work in a manner similar to SSA ' s present ability to identify persons receiving Federal pensions based on non-covered work.
This change is estimated to save $0.5 billion over the first 5 years and $2.5 billion over 10 years in benefit costs.
Other Provisions and Benefit Issues
Special Minimum Primary Insurance Amount
As mentioned earlier, the Social Security benefit formula is weighted in favor of low-wage workers. In 1972, Congress enacted the special minimum primary insurance amount (PIA) to increase benefit adequacy for regular long-term, low-earning covered workers and their dependents or survivors. The special minimum PIA was seen as a way to reward low-earning workers without providing the “windfalls” that would have resulted from raising the regular minimum benefit that then existed to a much higher level than would have otherwise occurred under the 1972 Act. (The regular minimum benefit provision was subsequently eliminated for workers reaching age 62, becoming disabled, or dying after 1981.)
The special minimum benefit was designed to phase out over time—although it is not clear from the legislative history that this was Congress' explicit intent. The phase out results primarily because the value of the regular PIA formula, which is indexed to wages prior to benefit eligibility, has increased faster than that of the special minimum PIA, which is indexed to inflation. As wages continue to grow faster than inflation, this phase out will continue. Beginning with workers who attain age 62 in 2010, i t is estimated that the special minimum PIA will always be lower than the PIA computed under the regular benefit formula. (Only about 1,000 individuals were awarded the special minimum in 2007.)
There are a number of possible approaches for increasing the special minimum benefit. For example, the dollar amount for each year of coverage in excess of 10 (now $36.07) could be increased; the maximum number of years counted could be increased beyond 30; and/or the amount of the special minimum could be wage indexed (rather than price indexed) for years prior to the year of the worker's eligibility. While all of these modifications would increase benefits to low-earning individuals, they would also increase program expenditures and delay or eliminate the phase out of the special minimum benefit provision.
Benefits for Women
While Social Security benefit computations are gender-neutral, there are several aspects of the program that have proven helpful to women. One such element is the Social Security benefit formula. As noted earlier, this formula has been structured in favor of low earners since the program's creation. Though many changes have been enacted over the years, this feature has been maintained by Congress.
Another important feature of the program is the automatic cost-of-living adjustments (COLAs), enacted in 1972. Women's greater life expectancy makes COLAs especially important. The purpose of the COLA is to maintain the purchasing power of an individual ' s monthly benefits. For example, a $100 monthly payment that began in 1975 would have increased to $407 today due to COLAs.
A third feature is the benefits that Social Security provides to the family members of retired, disabled, and deceased workers. This aspect of the program can be key to women. Women are more likely to receive spouse's or widow's benefits than men because their lower earnings often result in them being eligible for higher spouse's or widow's benefits than the worker's benefits they would receive on their own record. (As explained earlier, because of the spousal offset provision, the total benefit payable is equal to the higher of the benefit as a worker based on the person's own earnings or the benefit as a spouse or surviving spouse.)
Benefits for wives and widows were added to the program in 1939 in recognition of the important role that the then new Social Security program could play in providing economic security for women. For this same reason, benefits were subsequently added for divorced wives and for disabled widows.
In addition to expanding the scope of protection Social Security provides for women, over the years Congress has enacted legislation to increase the level of this protection. For example, there have been significant changes in widow(er)'s benefits, including raising the amount of benefits for a widow(er) from 75 percent to as high as 100 percent of the worker's benefit. In addition, in 1983, benefits for disabled widow(er)s were raised from as little as 50 percent of the worker's benefit to 71.5 percent.
Congress has long recognized that women, particularly widows, are a vulnerable group of beneficiaries. The poverty rate for women aged 65 and over in 2004 was 12.0 percent (in comparison to 7.0 percent for aged men). At the same time, the poverty rate for aged widows was 15.4 percent.
Consideration is now being given to possible changes to the Social Security program. Some changes would affect larger groups of individuals and have high costs, while others would be targeted towards more limited groups and have smaller costs. Regardless, it is important that proposals that increase costs should only be considered, given that the program is not presently in long-range actuarial balance, in the context of a comprehensive plan that balances Social Security.
24-Month Medicare Waiting Period
Individuals must wait 24 months from their month of entitlement to Social Security disability benefits to become eligible for Medicare. As reflected in the legislative history, there are several reasons for this Medicare waiting period. One reason is to limit the cost to the Medicare trust funds. Another is to avoid overlapping private health insurance protection for individuals who continue to be eligible for group insurance for a period of time following the onset of disability. Congress provided that there is no Medicare waiting period for individuals with end-stage renal disease or ALS (Lou Gehrig's disease).
There are several bills pending in Congress that would eliminate the Medicare waiting period. H.R. 154, “Ending the Medicare Waiting Period Act of 2007,” would phase out the 24-month waiting period for all disability beneficiaries by 2017. It would also immediately eliminate the waiting period for beneficiaries with life-threatening conditions. H.R. 685, “Social Security and Medicare Improved Burn Injury Treatment Access Act of 2007,” would eliminate the 24-month waiting period for disabled beneficiaries with disabling burn injuries.
However, eliminating this waiting period is expected to be very costly. Elimination would also cause administrative difficulties due to the number of disability beneficiaries who would qualify for Medicare retroactively. We do not have cost estimates for the proposed legislation.
Substantial Gainful Activity (SGA)
A number of provisions in title II of the Social Security Act are designed to encourage work by individuals who receive Social Security Disability Insurance (DI) benefits. These work-incentive provisions generally provide for either disregarding certain amounts of income (e.g., impairment-related work expenses and unsuccessful work attempts) or continued eligibility for DI benefits and Medicare. However, one feature of the DI program has received significant criticism as a disincentive to work.
A DI beneficiary who has completed a trial work period (TWP) (generally 9 months of work) will lose all of his or her DI benefits if his or her earnings exceed the level for substantial gainful activity (SGA). It has been argued that this abrupt loss of benefits actually discourages individuals who otherwise would work from working. One remedy that has been identified for this problem may be found in the Supplemental Security Income (SSI) program.
Prior to 1987, rules relating to SGA for individuals on the benefit rolls were the same regardless of whether they received DI or SSI benefits. Congress enacted a provision that continues SSI benefits as long as the amount of earnings under the regular SSI offset rules allows payment. That is, benefits are reduced $1 for every $2 of earnings (after other exclusions). Thus, rather than an abrupt ending of benefits because earnings were above the SGA level, SSI benefits are reduced commensurate with the amount of an individual's earnings and other income. For comparison purposes, the monthly SGA level in 2008 is $940 (DI benefits stop at this amount) while the earnings level at which SSI benefits stop for an individual who has no other income is $1,359.
By conducting the BOND, SSA will learn if this benefit offset would encourage more DI beneficiaries to return to work and should result in savings to the Social Security trust fund. We are excited about the BOND, and optimistic that the results will enable Congress to have sufficient additional information for its consideration in deciding how to encourage and keep individuals with disabilities working.
I want to again thank the Chairman and the Subcommittee for giving me this opportunity to discuss several aspects of Social Security coverage. As always, we welcome 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.