About One-Fourth of Public Employees Are Not Covered by Social Security

About one-fourth of public employees do not pay Social Security taxes on  the earnings from their government jobs. Even though noncovered employees may have many years of earnings on  which they do not pay Social Security taxes, they can still be eligible for  Social Security benefits based on their spouses’ or their own earnings in  covered employment. Current Provisions Seek Fairness but Pose Administrative Challenges

To address the fairness issues that arise with noncovered public  employees, Social Security has two provisions—the Government Pension  Offset, to address spouse and survivor benefits, and the Windfall  Elimination Provision, to address retired worker benefits. Both provisions  depend on having complete and accurate information that has proven  difficult to get. Under the GPO provision, enacted in 1977, SSA must reduce Social  Security benefits for those receiving noncovered government pensions  when their entitlement to Social Security is based on another person’s  (usually a spouse’s) Social Security coverage. Some Reform Proposals Would Affect Public Employees

In recent years, various Social Security reform proposals that would affect  public employees have been offered. Some proposals specifically address  the GPO and the WEP and would either revise or eliminate them. Still  other proposals would make coverage mandatory for all state and local  government employees. Critics of the measures contend that they are basically inaccurate and  often unfair. If the GPO were  eliminated or reduced for spouses who had paid little or no Social Security  taxes on their lifetime earnings, it might be reasonable to ask whether the  same should be done for dually entitled spouses who have paid Social  Security on all their earnings. According to Social Security actuaries, doing so for all newly hired state  and local government employees would reduce the 75-year actuarial  deficit by about 11 percent. There is an element of unfairness in a situation where practically all  contribute to Social Security, while a few benefit both directly and  indirectly but are excused from contributing to the program.”
Moreover, mandatory coverage could improve benefits for the affected  beneficiaries, but it could also increase pension costs for the state and  local governments that would sponsor the plans. For example, Social Security offers automatic inflation  protection, full benefit portability, and dependent benefits, which are not  available in many public pension plans. Alternatively, states and localities that wanted  to maintain level spending for retirement would likely need to reduce  some pension benefits. Still, in the long run, mandatory coverage would make these  provisions obsolete. Mandating universal  coverage would promise eventual elimination of the GPO and the WEP but  at potentially significant cost to affected state and local governments, and  even so the GPO and the WEP would continue to apply for some years to  come, unless they were repealed. Federal Workforce: Effects of Public Pension Offset on Social Security  Benefits of Federal Retirees.
Why GAO Did This Study

Social Security covers about 96 percent of all U.S. workers; the vast majority of the rest are state, local, and federal government employees. While these noncovered workers do not pay Social Security taxes on their government earnings, they may still be eligible for Social Security benefits. This poses difficult issues of fairness, and Social Security has provisions that attempt to address those issues, but critics contend these provisions are themselves often unfair. The Subcommittee asked GAO to discuss Social Security's effects on public employees as well as the implications of reform proposals.

What GAO Found

Social Security's provisions regarding public employees are rooted in the fact that about one-fourth of them do not pay Social Security taxes on the earnings from their government jobs, for various historical reasons. Even though noncovered employees may have many years of earnings on which they do not pay Social Security taxes, they can still be eligible for Social Security benefits based on their spouses' or their own earnings in covered employment. To address the issues that arise with noncovered public employees, Social Security has two provisions--the Government Pension Offset (GPO), which affects spouse and survivor benefits, and the Windfall Elimination Provision (WEP), which affects retired worker benefits. Both provisions reduce Social Security benefits for those who receive noncovered pension benefits. Both provisions also depend on having complete and accurate information on receipt of such noncovered pension benefits. However, such information is not available for many state and local pension plans, even though it is for federal pension benefits. As a result, the GPO and the WEP are not applied consistently for all noncovered pension recipients. In addition to the administrative challenges, these provisions are viewed by some as confusing and unfair. In recent years, various Social Security reform proposals that would affect public employees have been offered. Some proposals specifically address the GPO and the WEP and would either revise or eliminate them. Such actions, while they may reduce confusion among affected workers, would increase the long-range Social Security trust fund deficit and could create fairness issues for workers who have contributed to Social Security throughout their working lifetimes. Other proposals would make coverage mandatory for all state and local government employees. According to Social Security actuaries, mandatory coverage would reduce the 75-year actuarial deficit by 11 percent. It could also enhance inflation protection, pension portability, and dependent benefits for the affected beneficiaries, in many cases. However, to maintain the same level of spending for retirement, mandating coverage would increase costs for the state and local governments that sponsor the plans, and would likely reduce some pension benefits. Moreover, the GPO and the WEP would still be needed for many years to come even though they would become obsolete in the long run.