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. Initially, public employers could opt in and out of the Social Security  program under these provisions. Current Provisions Seek Fairness but Pose Administrative Challenges

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 fairness issues that arise with noncovered public  employees, the Congress has enacted two provisions: (1) the Government  Pension Offset (GPO) regarding spouse and survivor benefits, and (2) the  Windfall Elimination Provision (WEP) regarding retired worker benefits. The resulting disparity in the application of these two provisions is yet  another source of unfairness in the calculation of Social Security benefits  for public employees. Provisions Cause Confusion and Frustration

The GPO and the WEP have been a continuing source of confusion and  frustration for the more than 7.3 million government workers affected. Critics of the measures contend that the provisions are basically  inaccurate and often unfair. Some Social Security Proposals Would Affect Public Employees

In recent years, various proposals to change Social Security have been  offered that would affect public employees. According to Social Security actuaries’ 2005 estimate, requiring all newly  hired state and local government employees to begin paying into the  system 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.”
Another advantage of mandatory Social Security coverage is that it could  improve benefits for the affected workers, but it could also increase  pension costs for state and local governments. Also, the GPO and the WEP would no longer apply and so could be phased  out over time. Conclusions

In conclusion, there are no easy answers to the difficulties of equalizing  Social Security’s treatment of covered and noncovered workers. 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 many  years to come unless they were repealed. As long as the GPO and the WEP remain in effect, it will be important to  administer the provisions as effectively and equitably as possible. SSA has  found it difficult to administer these provisions because they depend on  complete and accurate reporting of government pension income, which is  not currently available. Social Security: Coverage of Public Employees and Implications for  Reform. Social Security: Implications of Extending Mandatory Coverage to State  and Local Employees.
Why GAO Did This Study

Social Security covers about 96 percent of all U.S. workers; the vast majority of the remaining 4 percent are public employees. Although these noncovered workers do not pay Social Security taxes on their government earnings, they may still be eligible for Social Security benefits through their spouses' or their own earnings from other covered employment. Social Security has provisions--the Government Pension Offset (GPO) and the Windfall Elimination Provision (WEP)--that attempt to take noncovered employment into account when calculating the Social Security benefits for public employees. However, these provisions have been difficult to administer and critics contend that the provisions themselves are often unfair. The Committee asked GAO to discuss the issues regarding the coverage of public employees under Social Security, the provisions to take noncovered employment into account, and the proposals to modify those provisions.

What GAO Found

There are no easy answers to the difficulties of equalizing Social Security's treatment of covered workers and noncovered public employees. About one-fourth of public employees--primarily state and local government workers--are not covered by Social Security and do not pay Social Security taxes on their government earnings. Nevertheless, these workers may still be eligible for Social Security benefits through their spouses' or their own earnings from other covered employment. To address concerns with how noncovered workers are treated compared with covered workers, Social Security has provisions in place to take noncovered employment into account and reduce Social Security benefits for public employees. To be administered fairly and accurately, both these provisions require complete and accurate reporting of government pension income, which is not currently available. The resulting disparity in the application of the provisions is a continuing source of confusion and frustration for affected workers. Thus, various changes that would affect the GPO and WEP provisions have been proposed, such as: eliminate the GPO and WEP provisions. This would simplify administration and avoid concerns about unfair treatment among public employees. However, any reductions in the GPO or the WEP would widen Social Security's financial gap and would raise concerns about unfair treatment of public employees compared with other workers. Extend mandatory coverage. If all newly hired state and local government employees who are not currently covered were to become covered, the need for the GPO and WEP could be phased out over time. In 2005, Social Security actuaries estimated that mandating coverage for these employees would reduce the 75-year actuarial deficit by about 11 percent. While mandatory coverage could enhance retirement benefits for the affected workers, it could also result in significant costs to the affected state and local governments. As long as the GPO and the WEP remain in effect, it will be important to administer the provisions effectively and equitably based on accurate and complete information on both covered and noncovered employment.