Statement of Geoffrey Kollmann
Specialist in Social Legislation, Education and Public Welfare Division
Congresssional Research Service

Testimony Before the Subcommittee on Social Security
of the House Committee on Ways and Means

Hearing on "The Future of Social Security for this Generation and the Next" -
Proposals Affecting Federal, State, and Local Government Employees

May 21, 1998

Mr. Chairman and Members of the Committee, I was asked to summarize and briefly discuss issues concerning two provisions of current law that can reduce or eliminate Social Security benefits payable to government employees. The two provisions are the government pension offset provision and the windfall elimination provision. They affect the Social Security benefits of persons who also receive a pension from non-Social Security-covered employment, e.g., the federal Civil Service Retirement System (CSRS) and state and local government employees whose states have not chosen Social Security coverage and who are participating in a retirement plan. They do not affect government workers whose pensions are based on Social Security-covered employment, e.g., those with full careers under the Federal Employees Retirement System (FERS). The purpose of both provisions is to prevent what otherwise would be an unfair advantage for government compared to private sector workers.

The Windfall Elimination Provision

Enacted in 1983, this provision reduces the Social Security benefit, earned as a worker, of the affected individuals by applying a different formula to the computation of their benefits. Ordinarily, the Social Security benefit formula applies three progressive factors -- 90%, 32%, and 15% -- to three different levels, or brackets, of average monthly covered earnings. However, for workers subject to the Windfall Elimination rules, the 90% factor in the first band of the benefit formula is replaced by a factor of 40%. The effect is to reduce their benefits by lowering the amount of their earnings in the first bracket that is converted to benefits. Following is an example of how the provision works in 1998:

Monthly Benefit for Worker With Average Monthly Earnings of $1,000

The provision includes a guarantee (designed to help protect workers with low pensions) that the reduction in benefits caused by the windfall formula can not exceed one-half of the pension that is based on non Social Security-covered work. The provision also exempts workers who have 30 or more years of "substantial" employment covered under Social Security (i.e., having earned at least one-quarter of the Social Security maximum taxable wage base for each year in question). Also, lesser reductions apply to workers with 21 through 29 years of substantial covered employment.

The purpose of this provision was to remove an unintended advantage that the regular Social Security benefit formula provided to persons who also had pensions from non-Social Security-covered employment. The regular formula was intended to help workers who spent their work careers in low paying jobs, by providing them with a benefit that replaces a higher proportion of their earnings than the benefit that is provided for workers with high earnings. However, the formula could not differentiate between those who worked in low-paid jobs throughout their careers and other workers who appeared to have been low paid because they worked many years in jobs not covered by Social Security (as earnings in these years do not show up on Social Security's records, they are shown as zeros for Social Security benefit purposes). Thus, under the old law, workers who were employed for only a portion of their careers in jobs covered by Social Security -- even highly paid ones -- also received the advantage of the "weighted" formula, because their few years of covered earnings were averaged over their entire working career to determine the average covered earnings on which their Social Security benefits were based. The Windfall Elimination Provision formula is intended to remove this advantage for these workers.

Proponents of the provision say that it is a reasonable means to prevent payment of overgenerous and unintended benefits to certain workers who otherwise would profit from happenstance, i.e., the mechanics of the Social Security benefit formula. They maintain that the provision rarely causes hardship because by and large the people affected are reasonably well off, as most of them also receive government pensions.

Opponents of the provision believe it is unfair because it substantially reduces a benefit that workers had included in their retirement plans. Others criticize how the provision works. They say the arbitrary 40% factor in the formula is an inaccurate way to determine the actual windfall when applied to individual cases. For example, they say it over-penalizes lower paid workers with short careers, or with full careers that are fairly evenly split. They also say it is regressive, because the reduction is confined to the first bracket of the benefit formula and causes a relatively larger reduction in benefits for low-paid workers.

The Government Pension Offset Provision

Enacted in 1977, this provision reduces Social Security spousal benefits, i.e., benefits payable as a dependent of a Social Security-covered worker, to persons who receive a pension from government employment that was not covered by Social Security. The GPO is intended to place retirees whose government employment was not covered by Social Security and who are eligible for a Social Security spousal benefit in approximately the same position as other retirees whose jobs were covered by Social Security. Social Security retirees are subject to an offset of spousal benefits according to that program's "dual entitlement" rule. That rule requires that a Social Security retirement benefit earned by a worker be subtracted from his or her Social Security spousal benefit, and the resulting difference, if any, is the amount of the spousal benefit paid. Thus, workers retired under Social Security may not collect their own Social Security retirement benefit as well as a full spousal benefit. The rationale is that a Social Security spousal benefit is based on the concept of "dependency," and someone who receives his or her own Social Security benefit as a retired worker is not completely financially dependent on his or her spouse.

The GPO replicates the Social Security dual entitlement rule by assuming that two-thirds of the government pension is approximately equivalent to a Social Security retirement benefit the worker would receive if his or her job had been covered by Social Security. Thus, the GPO requires that two-thirds of the government pension be subtracted from the Social Security spousal benefit, and only the resulting difference, if any, is paid. (Implicit in this arrangement is the assumption that the remaining one-third is equivalent to a private pension.). Following is an example of the way the GPO works. Before the GPO is applied, a couple's situation could be like this:

After application of the GPO, the couple's situation would be this:

Critics of the GPO say that it is not well understood and that many affected by it are unprepared for a smaller Social Security benefit than they had assumed in making retirement plans. They also argue that, whatever its rationale, reducing everyone's spousal benefit by two-thirds of their government pension is an imprecise way to estimate what the spousal benefit would be had the government job been covered by Social Security. They say that this procedure has uneven results and that it may be especially disadvantageous for surviving spouses with low incomes.

Defenders of the GPO maintain that it is an effective method to curtail what otherwise would be an unfair advantage for government workers. The provision was phased in over six years and now has been in the law for 21 years; therefore, they say, there has been ample time for people to adjust their retirement plans. They also point out that Social Security's dual entitlement rule, which the GPO is designed to replicate, also can reduce the income of already low-income recipients, and that if this issue is to be addressed, using other means or programs that more accurately measure need, and apply to the general population, would be more appropriate than changing just the GPO.