Testimony of Robert M. Wilson,
for Legislation and Congressional Affairs,
Social Security Administration
Hearing before the
Subcommittee on Social Security
Committee on Ways and Means
May 1, 2003
Mr. Chairman, Members of the Subcommittee:
Thank you for the opportunity to discuss the Government Pension Offset provision, or GPO, and the Windfall Elimination Provision, also known as WEP. These provisions are not well understood, so today, I would like to take some time to describe the purpose of these provisions, how they work, and issues that should be evaluated when considering legislative changes to them.
I would first like to describe the GPO provision and discuss why it was enacted in 1977. For ease of discussion, when referring to government employment, I am referring to employment at all levels of Federal or State government that is not covered by Social Security.
The GPO affects government retirees who are eligible for two retirement benefits:
- 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.
If the GPO applies, the 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 December 2002, about 376,000 beneficiaries had their benefits fully or partially offset due to the GPO. Of those, 27 percent were men and 73 percent were women.
The intent of Congress when the GPO was enacted, was to assure that when determining the amount of a spousal benefit (e.g., wife's, husband's, widow's, widower's), individuals working in non-covered employment would be treated in the same manner as those who work in covered employment. The GPO provision removed an advantage that some government workers had before the GPO was enacted. Until then, 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 the 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 the 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. The result of enactment of the GPO is that spouses and surviving spouses are treated similarly, regardless of whether their jobs are covered under Social Security or not.
Two-Thirds GPO Reduction
As noted previously, although the GPO provision is intended to accomplish the same purpose as the offset under the dual entitlement provision, the amount of the reduction under the GPO is different:
- Under the dual entitlement provision, there is a dollar-for-dollar reduction -- if a person gets a Social Security retirement benefit of $600 based on his or her own work, then $600 is subtracted from any Social Security benefit the person would get as a spouse.
- Under the GPO, there is a two-thirds reduction. If a person gets a pension of $600 based on her own work in government, then two-thirds of it ($400) is subtracted from any Social Security benefit he or she would get as a spouse.
I would like to use an example that may help to clarify how the dual-entitlement offset applies to a widow and compare that to a similarly situated widow who is also entitled to a government pension. Ms. Jones is receiving a Social Security retirement benefit of $900 per month based on her own work. The amount she is potentially eligible for as a widow is also $900. The amount of her Social Security retirement benefit is subtracted from her widow's benefit, resulting in her widow's benefit being fully offset under the dual entitlement provision; she receives only her own Social Security retirement benefit of $900.
The other widow, Ms. Smith, is in a comparable situation, but Ms. Smith worked for the government, and her pension is $900. Potentially, she too, is eligible for a Social Security widow's benefit of $900. However, the GPO provision reduces the $900 widow's benefit by two-thirds of the $900 pension (i.e., $600). After subtracting the $600 offset, the $300 result is the amount of the Social Security widow's benefit payable in addition to her $900 government pension.
In this case, Ms. Jones, who worked only in covered employment, receives a total of $900, and Ms. Smith, who worked in government employment, receives a total of $1,200. As you can see, because the reduction under the GPO is not as large as under the dual entitlement provision, the government worker is better off than the person who worked in employment covered only by Social Security.
|Dual Entitlement-Ms. Jones||GPO-Ms. Smith|
|Social Security Worker's Benefit = $900||Worker's Government pension = $900|
|Social Security Widow's Benefit = $900||Social Security Widow's benefit = $900 (before offset)|
|Total Widow's Benefit Payable = $0||GPO formula 2/3 of $900 = $600|
|Worker's Government pension = $900|
|Total Social Security Payable = $900||Widow's Benefit ($900 - $600) = $300|
|Total Pension & Social Security = $1200 (after offset)|
"Last Day Test" Legislation
I would also like to discuss an issue that has received much attention in the last couple of months-the so-called "last day test" used in the GPO provision. The criterion used in the law to determine whether the government pension is based on work not covered by Social Security is to determine the coverage status on the last day of government employment. If the last day is not covered by Social Security, then the GPO reduction applies.
The present "last day test" allows certain workers eligible for a government pension based on non-covered State and/or local government employment to also receive full Social Security spouse's and/or surviving spouse's benefits by working only one day in covered employment. As GAO has testified before this Subcommittee, in these situations, Social Security contributions of less than $5 can result in lifetime benefits of nearly $100,000. As you know, section 418 of H.R. 743 (the "Social Security Protection Act of 2003," which passed the House of Representatives on April 2, 2003) would require that State and local government workers be covered by Social Security throughout their last 60 months of employment with the government entity in order to be exempt from the government pension offset provision.
The Social Security Administration supports this provision in H.R. 743 as a way to improve the equity of the application of the GPO provision. Essentially the same proposal is included in President Bush's Fiscal Year 2004 Budget. Under present law, the vast majority of government employees affected by the GPO are not able to use the last day test because of the structure of the States' retirement systems. By replacing the last day test with a requirement that an individual's last 60 months of government employment must be covered, the provision would more equitably apply the GPO to all non-covered workers in a uniform and consistent manner. It would also provide more equitable and consistent treatment between workers in covered and non-covered employment for eligibility to Social Security spouse's and surviving spouse's benefits.
Purpose of the WEP
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. (The provision does not affect the Social Security benefits payable to survivors of workers who received pensions based on non-covered employment.)
The purpose of the provision was to remove an unintended 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 whole 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, because benefits are based on average earnings in employment covered by Social Security over a working lifetime (35 years), a worker who has spent part of his or her career in employment not covered by Social Security appears to have lower average lifetime earnings than he or she actually had. (Years with no covered earnings are counted as years of zero earnings for purposes of determining average earnings for Social Security benefit purposes.) Without the WEP, such a worker would be treated as a low-lifetime earner for Social Security benefit purposes and inappropriately receive the advantage of the weighted benefit formula. The WEP provision eliminates the potential "windfall" by providing for a different, less heavily weighted benefit formula to compute benefits for such persons.
Computation of the WEP Reduction
Let me explain how the reduction under the WEP is computed. To do this, I first need to explain how the regular (non-WEP) benefit formula works. Under the regular 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 2003 is:
90 percent of the first $606 of AIME, plus
32 percent of the next $3,047 of AIME, plus
15 percent of AIME above $3,653.
Under the WEP computation, the 90.percent factor applied to a worker's average earnings in the first band of the Social Security benefit formula generally is replaced by a factor of 40 percent for workers who are receiving a pension from non-covered employment.
- Under the regular Social Security benefit formula, a worker would receive 90 percent, or $545, of the first $606 of his or her average indexed monthly earnings.
- Under the WEP formula, that worker would generally receive 40 percent--$242--of the first $606 of AIME.
- Under both scenarios, the 32 and 15 percent factors are the same.
For a worker first eligible in 2003, the maximum WEP reduction is $303 per month. Unlike the GPO, the WEP can never eliminate a person's Social Security benefit.
For workers who have 30 or more years of substantial earnings, the WEP does not apply at all. The reduction under the WEP is phased out gradually for workers who have 21-29 years of substantial covered earnings under Social Security.
However, 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.
As of December 2002, the WEP reduced the Social Security benefits of
Proposal to Improve Administration of the WEP and GPO
The President's FY 2004 Budget includes a proposal that would improve the administration of the WEP and GPO by improving the coordination of reports of pension payments based on employment not covered by Social Security. This change would give SSA the ability to independently verify whether beneficiaries have pension income from employment not covered by Social Security. When a person applies for Social Security benefits, he/she is required to tell SSA if they are receiving a pension based upon non-covered employment. SSA then obtains verification of the pension and applies the WEP and/or GPO accordingly. SSA largely relies on the applicant to correctly inform us that he/she is entitled to a non-covered pension.
SSA has an ongoing computer-matching program with the Office of Personnel Management (OPM) that matches persons receiving Social Security benefits with persons receiving a pension from OPM based on non-covered employment. However, SSA does not have any similar program to identify Social Security beneficiaries who are also receiving pensions based on non-covered work for a State or local government.
A past study of SSA's administration of the WEP and GPO provisions by the General Accounting Office (GAO) found that there are many beneficiaries who are not subjected to the WEP and GPO because SSA does not know they are receiving pensions based on non-covered employment.
With respect to the issue of Social Security coverage for State and local government employees, approximately 6.3 million such employees are not covered by Social Security. This group represents 28 percent of the 22.6 million employees who work for State and local governments. There is much variation in the extent of Social Security coverage-both within States and between States. For example, about 70 percent of all non-covered State and local government employees work in seven States.
With this change, SSA would be able to obtain data on pensions based on non-covered work in a more timely and consistent manner. The proposal would thereby improve SSA's stewardship over the program and the Social Security trust funds. SSA's Office of the Chief Actuary estimates that this change would reduce program costs by $2.2 billion over the first 10 years.
In conclusion, let me note that Congress established the WEP and GPO provisions to prevent workers who spent a portion of their careers in employment not covered by Social Security from receiving more favorable treatment under Social Security than comparable workers who had worked a lifetime in covered employment. Congress' intention was to provide fair and equitable benefits under Social Security for workers in both covered and non-covered employment.
A number of proposals have been advanced to change the WEP or GPO provisions. Some proposals would eliminate the provisions entirely. Other proposals would provide higher Social Security benefits for government workers whose pensions from non-covered employment, in combination with their Social Security benefits, are below certain levels. These latter proposals focus on providing higher Social Security benefits to public sector retirees, who were not covered by Social Security during their years in government work, simply because their combined public pension and Social Security benefits are deemed to be "too low." However, in doing so, these proposals would reinstate the favored treatment afforded many workers in non-covered employment prior to enactment of the GPO and the WEP. Further, these proposals all share a common element-all would significantly increase the cost of the OASDI program.
Finally, because changes to the GPO and the WEP would be costly, we believe that at this time, any significant changes in the GPO or WEP should only be considered as part of the broader context of comprehensive reform of the Social Security program. Given that the program is not in actuarial balance, it seems appropriate that significant changes should be evaluated only when considering other elements in the future modernization of Social Security.
I want to again thank the Chairman and the Subcommittee for giving me this opportunity to discuss the GPO and WEP and to share SSA's analysis on the legislation before this Subcommittee. As always, I would be more than happy to provide assistance to the Members and more than willing to work with you to provide any additional information you request. I would be glad to answer any questions you might have concerning the WEP and GPO provisions.