Testimony of Martin H. Gerry
for Disability and Income Security Programs
Hearing before the
House Ways and Means
Subcommittee on Social Security
July 20, 2004
Thank you for inviting me to discuss the Windfall Elimination Provision, or WEP, and proposals that would modify or eliminate the current formula, and, specifically H.R. 4391, the Public Servant Retirement Protection Act. This bill would replace the current WEP benefit formula with a formula that would take into account a worker's non-covered earnings as well as covered earnings. The proposed modifications to the WEP raise a number of technical issues that should be considered.
The WEP is not well understood, so today, I would like to take some time to describe the purpose of this provision, how it works, and issues that should be evaluated when considering legislative changes to this provision. I will also discuss SSA's efforts to educate individuals about the impact that a pension from non-covered work can have on their Social Security benefits.
However, before I discuss the WEP, I would like to briefly discuss the government pension offset (GPO) provision. The GPO also affects workers who receive pensions based on employment not covered by Social Security and 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 is 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 December 2003, about 390,000 beneficiaries had their benefits fully or partially offset due to the GPO.
In enacting the GPO, Congress intended 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. 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. The result of the GPO is that spouses and surviving spouses are treated similarly, regardless of whether their jobs are covered under Social Security or not.
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 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 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 for retired workers), 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. (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, 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 eliminates this potential "windfall" by providing for a different, less heavily weighted benefit formula to compute benefits for such persons.
Computation of the WEP Benefit
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 2004 is:
90 percent of the first $612 of AIME, plus
32 percent of the next $3,077 of AIME, plus
15 percent of AIME above $3,689.
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 both scenarios, the 32 and 15 percent factors are the same.)
For a worker first eligible in 2004, the maximum WEP reduction is $306 per month. Unlike the GPO, the WEP can never eliminate a person's Social Security benefit.
WEP does not apply to workers who have 30 or more years of substantial earnings under Social Security at all. For workers who have 21-29 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. In order to lessen this confusion, SSA has made revisions to the Social Security Statement that highlight and make clearer that the WEP and GPO may affect a worker's future 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 a benefit calculator that allows workers to estimate the effects that WEP may have on their monthly benefit.
Additionally, SSA offices nationwide provide pre-retirement seminars to 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 provides that all Social Security Statements issued after December 31, 2006 will 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 higher Social Security benefits 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.
Each of these approaches raises issues that I would like to discuss. Let me start with the elimination of the WEP. If the WEP did not apply, approximately 680,000 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 two such bills. H.R. 4234, the more recently introduced bill, would exempt an individual from WEP if his or her combined benefits were less than $2,500 per month when he or she is first eligible for both Social Security and a non-covered pension. Workers with combined amounts of $3,334 or higher would be fully subject to the WEP in the same manner as under current law. And for those whose combined amounts are between $2,500 and $3,334 per month, the WEP would be phased in. This change is estimated to have a 5-year cost of $7.8 billion; the 10-year cost would be $18.7 billion; and the long range cost would be 0.01 percent of taxable payroll.
Because the threshold amounts of $2,500 and $3,334 are not indexed for future years, over time, more workers would have combined amounts exceeding $3,334 and thus would be fully subject to the WEP because their non-covered pensions and their Social Security rates will rise in nominal dollars. It is not clear if this effect is intended. Also, because of the link between the application of the WEP and a dollar amount of the person's monthly income from Social Security and the government pension, some have said that this change would be introducing a form of "means test" for Social Security benefits.
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. 4391, as introduced by Representative Brady. Under this bill, a hypothetical primary benefit would first be computed based on all of the worker's 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.
I would like to commend Representative Brady and the co-sponsors of this bill for the thoughtful approach developed for eliminating the "windfall" that would otherwise accrue to workers with pensions from non-covered employment.
However, SSA has a number of concerns with the bill. The primary issue is that the computation would consider 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.
An analysis of the records of individuals with non-covered earnings indicated that there are many individuals who have gaps in their non-covered earnings patterns. It appears likely that, in many cases, those individuals remained in non-covered employment during those "gaps." An evaluation of the largest 155 non-covered Federal and State/local government employers showed that for about 30 percent of these employers there was either a complete gap for one year or more, or for one year or more there were substantially lower non-covered earnings posted relative to a surrounding year.
- Of the 47 employers that seemed to have a problem, 32 had a problem in one of the years in the period 1984-1986.
- For only 4 of the 47 employers, the "gap year" was for 1990 or later.
In addition, although State and local governments were supposed to file Forms W-2 for non-covered earnings for the years 1978-81, compliance for this period was generally inconsistent with regard to State and local entities because there were no enforcement activities.
With respect to a worker's non-covered earnings for years before 1978, it is questionable whether information about these earnings would still be available. The earnings in question would be for periods that are 27 or more years ago and employers are only required to keep records for the last 4 years. It would be a substantial workload for SSA to try to develop this information which would be needed to calculate the Social Security benefit under the bill. In addition, it could be quite burdensome for the government employers to access this information-if it still exists.
Further, there could be questions concerning willingness to cooperate, particularly when the agency needed records the employee might have, because including additional non-covered earnings in the computation could only serve to lower his or her benefit amount payable under the bill. Conversely, the benefit would be higher without such earnings. For example, 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 counted. Counting such pre-1978 non-covered earnings in some cases but not others, based on availability, would not be equitable.
As indicated previously, the bill would be effective for those on the rolls, necessitating a recomputation of benefits for all current beneficiaries affected by the WEP in order to determine if they would receive higher benefits under the change. This would require SSA to review the benefits of up to 680,000 retired and disabled workers currently affected by the WEP to determine if their monthly benefits should be adjusted.
If the worker had non-covered earnings before 1978, these reviews would require SSA to attempt to obtain information from the former employer regarding those earnings. 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. We estimate that implementation of H.R. 4391, including development of pre-1978 non-covered earnings (when available), would require more than 2,600 workyears ($190 million) over 5 years. Further, the necessary systems changes would be significant and would require at least 18 months to implement.
The bill appears to recognize the problem associated with obtaining pre-1978 non-covered earnings. Although the effect of the bill language is not clear, it gives the Commissioner of SSA the responsibility for developing a "method" for determining the amount of non-covered wages used to determine the worker's pension. The Commissioner would have some latitude in determining what is reasonable, but the non-covered wage amounts determined for the year in question must be derived from employment records or from other information received by SSA.
We believe that the intent of this special language in the bill is to permit SSA to "deem" non-covered earnings to a worker's earnings record when such earnings are not available. It is not clear exactly how this would be done. Possibilities might include using the average earnings amount for the specific position held by the employee that year. Under this approach, SSA would need to verify the job position (e.g., janitor, teacher, bus driver) for each worker for each year in question. There would also be an issue of how to compute the average. That is, would the average earnings amount be based on the average at the State level for that position or at the level of the specific employing entity? (There are over 2,300 State and local government entities.) There is also a question of whether such historical average earnings data would be available for the myriad of different positions employed by State and local governments.
Another possibility might be to calculate a deemed earnings amount based on years of earnings that SSA does have on its records for the individual. However, because a worker's pre-1978 earnings would often be early in a person's career, the subsequent earnings used to compute the average would likely be higher than the actual amount of pre-1978 earnings. Therefore, the person's actual pre-1978 earnings would be lower than the deemed amounts assigned to those years. Because inclusion of additional non-covered earnings could only lower the Social Security benefit payable, the worker may well object if he or she believes that the deemed earnings amounts are too high-even if he or she does not have proof otherwise.
An additional point is that the bill provides for individuals to be guaranteed present law, if higher, for many years into the future. Thus, a worker who just recently became employed in a non-covered job at, say, age 22, would be allowed to retain the present-law WEP rules, if a higher benefit would result, 40 years in the future when he or she claimed Social Security benefits. Consequently, SSA would need to maintain two alternative WEP calculations for many decades to come.
SSA's Office of the Chief Actuary estimates that enactment of H.R. 4391 would increase program costs by $2.6 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 at least some, if not 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.
H.R. 4391 proposes significant changes to the manner in which the WEP is calculated. These changes are intended to better target the effect of the offset so that the amount of the resulting reduction in benefits more closely approximates the individual facts in each case. 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 readily available for all cases, making it difficult for SSA to equitably administer the provisions of the bill. In addition, the workloads that would be generated by passage of such legislation would be tremendous and take years for SSA to complete.
I want to again thank the Chairman and the Subcommittee for giving me this opportunity to discuss the WEP and GPO provisions and to share SSA's analysis on legislation before the Congress. As always, SSA would welcome the opportunity to provide assistance to the Members and is 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.