GAO-11-318SP: Income security: Social Security needs data on pensions from noncovered earnings to better enforce offsets and ensure benefit fairness, resulting in estimated $2.4-$2.9 billion savings over 10 years

Income security

Social Security needs data on pensions from noncovered earnings to better enforce offsets and ensure benefit fairness, resulting in estimated $2.4-$2.9 billion savings over 10 years

Why Area Is Important

The Social Security Administration (SSA) needs accurate information from state and local governments on retirees who receive pensions from employment not covered under Social Security. SSA needs this information to fairly and accurately apply the Government Pension Offset (GPO), which generally applies to spouse and survivor benefits, and the Windfall Elimination Provision (WEP), which applies to retired worker benefits. Information on receipt of pensions from noncovered employment is not available to SSA for many state and local pension benefits, even though it is for federal pension benefits from the federal Office of Personnel Management. The resulting disparity in the application of the provisions is a continuing source of confusion and frustration for affected workers. Providing information on the receipt of state and local noncovered pension benefits to SSA via tax data could help the agency more accurately and fairly administer the GPO and WEP and could save nearly $3 billion over 10 years, according to estimates by the Office of Management and Budget.

Social Security covers about 96 percent of all U.S. workers; the vast majority of the remaining 4 percent are public employees who work for federal, state, and local government. In the case of state and local government employees, about one-fourth, or about 7 million, have jobs that are not covered by Social Security. Although these workers do not pay Social Security taxes on their noncovered government earnings, they may still be eligible for Social Security benefits through their spouses' or their own earnings from other jobs that Social Security does cover. Social Security's GPO and WEP provisions attempt to take noncovered employment into account when calculating the Social Security benefits. However, these provisions have been difficult to administer because SSA does not have the pension data it needs to perform these calculations accurately.

One of Social Security's most fundamental principles is that benefits reflect the earnings on which workers have paid Social Security taxes. At the same time, Social Security helps ensure that its beneficiaries have adequate incomes. Social Security's benefit provisions redistribute income in a variety of ways−from those with higher lifetime earnings to those with lower ones and from those without dependents to those with dependents. Such distributional effects depend, to a great extent, on the universal and compulsory nature of the program. Noncovered employment has unintended effects on these distributional outcomes. Accordingly, Social Security uses the GPO and WEP to take noncovered employment into account.

The GPO provides an offset for spouses with noncovered earnings that is similar to an offset that applies, in effect, to spouses with covered earnings. Under Social Security's benefit provisions, workers may be entitled to (1) retired worker benefits based on their own covered earnings or to (2) spouse or survivor benefits based on their spouses' covered earnings. However, they are not entitled to receive both, only the higher of the two. In effect, spouses with covered earnings are subject to an offset equal to 100 percent of their spouse or survivor benefits if their retired worker benefits are higher. Similarly, the GPO reduces the Social Security spousal benefit for workers who also receive a worker's pension from noncovered employment.

The WEP provides an offset to retired worker benefits and accounts for the fact that workers with noncovered pensions have higher lifetime earnings than the covered earnings on which their benefits are calculated. Social Security's benefit formula replaces a relatively higher proportion of wages for low earners than for high earners, which helps ensure adequate retirement incomes. Workers with lengthy careers in noncovered employment appear on SSA's records as low earners even when they are not because those records do not reflect noncovered earnings. Without the WEP, 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.

What GAO Found

In an April 1998 report, GAO found that SSA did not have the information it needed on beneficiaries' receipt of state and local noncovered pensions, even though it did have such information for federal pension benefits. As a result, a disparity in the application of the provisions existed. GAO recommended that SSA work with the Internal Revenue Service (IRS) to revise the reporting of pension information on IRS Form 1099R, so that SSA would be able to identify people receiving a pension from noncovered employment, especially in state and local governments. However, IRS did not believe it could make the recommended change without new legislative authority. In May 2003, June 2005, and November 2007, GAO suggested that Congress consider giving IRS the authority to collect the information that SSA needs on government pension income. The Senate Finance Committee proposed a version of the Social Security Protection Act of 2004 that contained such a provision, but this provision was not included when the final version of the bill was passed and signed into law.

Critics of the GPO and WEP contend that the provisions are inaccurate and often unfair. For example, critics of the GPO contend that the reduction is imprecise and could be based on a more rigorous formula. According to an analysis conducted by the Congressional Research Service, the GPO formula slightly overestimates the benefit 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. However, accounting for such effects of differences in lifetime earnings would involve having complete records of noncovered earnings, which SSA does not have. In contrast, to implement the current provisions, SSA only needs to determine whether a beneficiary is receiving a pension based on noncovered earnings.

Extending mandatory coverage for all state and local workers has been proposed among other options for addressing Social Security's long-term financial deficit. While this would eventually make the GPO and WEP offsets obsolete, they would still be needed for many years to come for existing employees and beneficiaries.

Actions Needed

GAO continues to believe that it is important to apply these laws consistently and equitably. Specifically, GAO continues to suggest that 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.

The President's 2011 budget's proposals for terminations, reductions, and savings contains a provision that would address the need for more complete and accurate information on noncovered state and local pensions, and it estimates savings of $2.9 billion over 10 years. The Congressional Budget Office's 2009 Budget Options, Volume 2, has a similar provision and estimates savings of $2.4 billion over 10 years.

Framework for Analysis

The information contained in this analysis is based on the related GAO products listed under the "Related GAO Products" tab.

Area Contact

For additional information about this area, contact Charles Jeszeck at (202) 512-7215 or jeszeckc@gao.gov.

Related GAO Products

Social Security Reform: Answers to Key Questions
http://www.gao.gov/products/GAO-05-193SP

GAO-05-193SP: Published: May 2, 2005. Publicly Released: May 2, 2005.