Social Security: The Government Pension Offset (GPO) Alison M. Shelton Analyst in Income Security February 12, 2010 Congressional Research Service 7-5700 www.crs.gov RL32453 CRS Report for Congress Prepared for Members and Committees of Congress Social Security: The Government Pension Offset (GPO) Summary A worker is “covered” by Social Security if he or she pays into Social Security through the OldAge, Survivors, and Disability Insurance (OASDI) payroll tax for 10 years (40 quarters). Currently, 96% of all workers are covered by Social Security. The majority of non-covered positions are held by federal, state, and local government employees. The Government Pension Offset (GPO) applies to Social Security spousal benefits, which are generally payable to the spouses of retired, disabled, or deceased workers covered by Social Security. The Social Security spousal benefit is equal to 50% of the retired or disabled worker’s benefit and 100% of the deceased worker’s benefit. Social Security spousal benefits were established in the 1930s to help support wives who are financially dependent on their husbands. It has since become more common for both spouses in a couple to work, with the result that, in more cases, both members of a couple are entitled to Social Security or other government pensions based on their own work records. Social Security generally does not provide both full worker and full spousal benefits to the same individual. Similarly, in the case of a couple where both members work, Social Security does not provide two full worker benefits and two full spousal benefits to the couple. Two provisions are designed to reduce the Social Security spousal benefits of individuals who are not financially dependent on their spouses because they receive benefits based on their own work records. These are • the “dual entitlement” rule, which applies to spouses who qualify for both a Social Security benefit based on their own work histories in Social Securitycovered employment and the Social Security spousal benefit, and • the GPO, which applies to spouses who qualify for both a government pension based on their own non-Social Security-covered government employment and a Social Security spousal benefit. The GPO reduces Social Security spousal benefits by two-thirds of the pension from non-covered government employment. The GPO does not reduce the benefits of the spouse who was covered by Social Security. Opponents contend that the GPO provision is basically imprecise and can be unfair. Defenders argue it is the best method currently available for preserving the spousal benefit’s original intent of supporting financially dependent spouses, and also for eliminating an unfair advantage for spouses working in non-Social Security-covered employment compared with spouses working in Social Security-covered jobs (who are subject to the dual entitlement rule). In the 111th Congress, Representative Howard Berman has introduced H.R. 235, the Social Security Fairness Act of 2009, to repeal the GPO. Senator Dianne Feinstein has introduced a companion bill, S. 484, to repeal the GPO. This report will be updated periodically. Congressional Research Service Social Security: The Government Pension Offset (GPO) Contents Background ................................................................................................................................1 Social Security-Covered and Non-Covered Work ..................................................................1 The Dual Entitlement Rule and the GPO ...............................................................................2 Dual Entitlement Rule.....................................................................................................2 Government Pension Offset Formula...............................................................................3 Rationale and Legislative History................................................................................................4 Spouses’ Financial Dependence.............................................................................................4 Parity Between Spouses Subject to Dual Entitlement and GPO Provisions.............................5 Why a Two-Thirds Reduction?..............................................................................................6 Who Is Affected by the GPO? .....................................................................................................7 Issues........................................................................................................................................ 10 Awareness of the GPO and Retirement Preparedness ........................................................... 10 Parity Among Social Security-Covered Workers and Non-Covered Workers........................ 10 Impact on Low-Income Workers ......................................................................................... 10 GPO Reduction is Smaller thanDual Entitlement Reduction ................................................ 12 Imprecision of the Two-Thirds Offset to Non-Covered Government Pensions...................... 12 Application of the GPO to Government versus Private Pensions.......................................... 13 Cost of Eliminating the GPO............................................................................................... 13 The GPO “Last-Day” Rule........................................................................................................ 13 How Does the Last-Day Rule Affect Exemption from the GPO? ......................................... 14 Recent Legislation .................................................................................................................... 15 Tables Table 1. Dual Entitlement Formula..............................................................................................2 Table 2. GPO Formula ................................................................................................................3 Table 3. Dual Entitlement Rule Compared with Government Pension Offset ...............................4 Table 4. Mary’s Spousal Benefit, Before and After GPO Enactment ............................................5 Table 5. Number of Social Security Beneficiaries Affected by GPO, by State, Type of Benefit and Offset Status, December 2009................................................................................7 Contacts Author Contact Information ...................................................................................................... 15 Acknowledgments .................................................................................................................... 15 Congressional Research Service Social Security: The Government Pension Offset (GPO) Background Generally, Social Security spousal and survivor benefits are paid to the spouses of retired, disabled, or deceased workers covered by Social Security. The spousal benefit is equal to 50% of a retired or disabled worker’s benefit and the survivor benefit is equal to 100% of a deceased worker’s benefit. Spousal benefits are intended for individuals who are financially dependent on spouses who work in Social Security-covered positions. For this reason, but also because of the cost that would be involved, Social Security generally does not provide both full worker and full spousal benefits to the same individual. For persons who qualify for both a Social Security worker benefit (retirement or disability) based on their own work history and a Social Security spousal benefit based on their spouse’s work history, the “dual entitlement” rule caps the benefit at the higher of the worker’s own benefit or the spousal benefit to which he or she would be entitled. The Government Pension Offset (GPO) is analogous in purpose to the “dual entitlement” provision and applies to individuals who qualify for both a pension based on their own non-Social Securitycovered government work and a Social Security spousal benefit based on a spouse’s work in Social Security-covered employment.1 The intent of the dual entitlement rule and the GPO is the same—to reduce the Social Security spousal benefits of individuals who are not financially dependent on their spouses because they receive their own benefits. Social Security-Covered and Non-Covered Work A worker is “covered” by Social Security if he or she pays into Social Security through the OldAge, Survivors, and Disability Insurance (OASDI) payroll tax for 10 years (40 quarters). Approximately 96% of all workers are covered by Social Security. The majority of non-covered positions are held by government employees: most federal employees hired before 1984 and some state and local government employees. Nationwide, approximately 73% of state and local government employees are covered. 2 However, coverage varies from state to state. For example, approximately 97% of state and local employees in New York are covered by Social Security, whereas less than 3% of state and local employees in Ohio, and about 4% in Massachusetts, are covered.3 This disparity in coverage among states occurs because, while Social Security originally did not cover any state and local government workers, over time the law has changed. Most state and local government employees became covered by Social Security through voluntary agreements between the Social Security Administration (SSA) and individual states.4 Beginning in July 1991, state and local employees who were not members of a public retirement system were mandatorily 1 The GPO is often confused with the Windfall Elimination Provision (WEP), which reduces Social Security benefits that a person receives as a worker if he or she also has a government pension based on work that was not covered by Social Security. For additional information in the Windfall Elimination Provision (WEP), please refer to CRS Report 98-35, Social Security: The Windfall Elimination Provision (WEP), by Alison M. Shelton. 2 Social Security Administration, unpublished table, “Estimated Social Security Coverage of Workers with State and Local Government Employment,” 2007. 3 Ibid. 4 These agreements are known as “Section 218 agreements” because they are authorized by Section 218 of the Social Security Act. Congressional Research Service 1 Social Security: The Government Pension Offset (GPO) covered by Social Security. Those public employees who were already members of a public retirement system through their employment were not mandatorily covered because their state pensions already fulfilled the social insurance functions of Social Security. The Dual Entitlement Rule and the GPO The GPO is intended to approximate Social Security’s dual entitlement rule. The intent of both provisions is to reduce the Social Security spousal benefits of individuals who are not financially dependent on their spouses because they receive their own benefits. Dual Entitlement Rule In the absence of the dual entitlement rule, a couple with two earners, both covered by Social Security, would receive two primary benefits as well as two spousal benefits. The Social Security dual entitlement rule effectively requires that a beneficiary receive the higher of the Social Security worker’s benefit or the spousal benefit, but not both. The total benefit received by a worker therefore consists of his or her own worker benefit, plus the excess of the spousal benefit (if any) over his or her own benefit—not the sum of the two benefits. 5 Table 1 demonstrates how the Social Security dual entitlement rule is applied. Table 1. Dual Entitlement Formula John Mary Social Security monthly retirement benefit (based on worker’s earnings record) $900.00 $400.00 Maximum Social Security spousal monthly benefit eligible to receive (based on spouse’s earnings record, equal to 50% of the spouse’s Social Security retirement benefit) $200.00 $450.00 $0.00 $50.00 $900.00 $450.00 Actual Social Security spousal monthly benefit paid (subtract worker benefit from spousal benefit) Total (retirement and spousal) Social Security monthly benefits paid to John and Mary Source: Illustrative example provided by Congressional Research Service (CRS). In this example, both John and Mary have worked enough years in Social Security-covered positions (i.e., paid into Social Security) to qualify for Social Security retirement benefits. John has earned a monthly Social Security benefit equal to $900. His wife Mary has earned a monthly Social Security benefit equal to $400. Both Mary and John are also eligible for spousal benefits based on the other’s earnings: John is eligible for a $200 per month spousal benefit, and Mary is eligible for a $450 per month spousal benefit. Under the dual entitlement rule, Mary’s worker benefit of $400 must be subtracted from her potential $450 spousal benefit, and only the difference of $50 is paid as a spousal benefit. In total, Mary will receive $450 monthly—$400 as a Social Security worker benefit and $50 as a Social Security spousal benefit. John would not be 5 The dual entitlement rule requires that 100% of a Social Security retirement or disability benefit earned as a worker (based on one’s own Social Security-covered earnings) be subtracted from any social Security spouasl benefit one is eligible to receive (based on a spouse’s Social Security-covered earnings). So, in cases where the spousal benefit is higher than the worker’s own benefit, the worker receives his or her own benefit plus the reduced spousal benefit, which is the difference between the spousal benefit and the worker’s own benefit. In cases where the worker’s own benefit is higher than the spousal benefit, the worker receives his or her own benefit but not the the spousal benefit. Congressional Research Service 2 Social Security: The Government Pension Offset (GPO) paid a spousal benefit because his $900 retirement benefit based on his own earnings is higher and more than offsets the potential $200 spousal benefit. The Social Security benefits received by the couple total $1,350 per month. Because most workers are in Social Security-covered employment, the dual entitlement scenario is more common than the GPO among two-earner couples. In 2008, approximately 6.5 million out of 32.3 million Social Security retired worker beneficiaries, or about 20%, were dually entitled (not including those whose spousal benefit was completely offset by their retired worker benefit). 6 Government Pension Offset Formula The Social Security spousal benefit of a person who also receives a pension from government employment (federal, state, or local) that was based on work not covered by Social Security is reduced by a provision in the law known as the GPO. The GPO reduction to Social Security spousal benefits is equal to two-thirds of the pension from non-covered government employment. If the pension from non-covered work is sufficiently large in comparison to a person’s Social Security spousal benefit, the GPO may eliminate the entire spousal benefit. In December 2009, nearly 522,000 Social Security beneficiaries, or about 1.6% of all retired worker beneficiaries, had spousal benefits reduced by the GPO (not counting those who were eligible for spousal benefits but were deterred from filing for them because of the GPO).7 The GPO has no effect on the amount of the Social Security benefit a retiree may be entitled to receive based on his or her own work under Social Security, but it does limit the amount that can be paid to a person based on his or her spouse’s work under the system. Table 2 provides an example of how the GPO is applied. Table 2. GPO Formula John Social Security retirement monthly benefit (based on worker’s earnings record) Mary $900.00 $0.00 Non-Social Security-covered (government) retirement monthly pension $0.00 $400.00 Maximum Social Security spousal monthly benefit eligible to receive (based on spouse’s earnings record, equal to 50% of the spouse’s Social Security retirement benefit) $0.00 $450.00 Reduction in Social Security spousal monthly benefit due to GPO (equals 2/3 of worker’s non-Social Security-covered pension: $400*2/3) $0.00 $266.67 Actual Social Security spousal monthly benefit paid (subtract 2/3 of non-Social Securitycovered worker’s pension from Social Security spousal benefit: $450–$266.67=183.33) $0.00 $183.33 $900.00 $583.00 Total monthly pensions paid to John (Social Security only) and Mary (Social Security plus pension from non-covered employment) Source: Illustrative example provided by CRS. 6 Social Security Administration, Annual Statistical Supplement 2009, Washington, DC, 2009, Table 5.G2 http://www.ssa.gov/policy/docs/statcomps/supplement/2009/5g.html#table5.g2. 7 Social Security Administration, Office of Research Evaluation and Statistics, Unpublished Table DE01, February 4, 2010. Congressional Research Service 3 Social Security: The Government Pension Offset (GPO) In this example, John worked enough years in Social Security-covered employment to qualify for a monthly Social Security worker benefit of $900. His wife, Mary, is not eligible for a Social Security worker benefit on her own record because she worked in a non-Social Security-covered government position and did not contribute to Social Security. Instead, Mary is eligible for a $400 government pension based on her work in a non-Social Security-covered position. Mary is also eligible for a Social Security spousal benefit of up to $450 based on John’s work history. Under the GPO, Mary’s potential Social Security spousal benefit is reduced by an amount equal to twothirds of her non-Social Security-covered government pension, or $266.67, and only the difference of $183.33 ($450 - $266.67) is paid to her as a spousal benefit. In total, Mary will receive $583.33—$400 from her non-covered pension and $183.33 as a Social Security spousal benefit. 8 Table 3 highlights the differences between the dual entitlement rule and the GPO. Table 3. Dual Entitlement Rule Compared with Government Pension Offset Dual Entitlement Rule Government Pension Offset Applies to individuals who qualify for both (a) a Social Security worker benefit (retirement or disability) based on their own work history in Social Security-covered employment and (b) a Social Security spousal benefit based on their spouse’s work history in Social Securitycovered employment. Dually-entitled beneficiaries effectively receive the higher of their worker benefit or their spousal benefit. Specifically, the Social Security dual entitlement rule requires that 100% of a Social Security retirement or disability benefit earned as a worker be subtracted from any Social Security spousal benefit one is eligible to receive. Only the difference, if any, is paid as a spousal benefit (in addition to the benefit that each worker in the couple receives based on their own covered earnings). Applies to individuals who qualify for both (a) a government pension based on non-Social Security-covered government employment and (b) a Social Security spousal benefit. based on a spouse’s Social Security-covered employment The GPO provision reduces Social Security benefits that a person receives as a spouse if he or she also has a federal, state or local government pension based on work that was not covered by Social Security. The GPO reduction in Social Security spousal benefits is equal to two-thirds of the noncovered government pension. Source: Table compiled by CRS. Rationale and Legislative History Spouses’ Financial Dependence The policy rationale for Social Security spousal benefits has been, since the inception of the program in the 1930s, to support spouses who are financially dependent on the working spouse. The dual entitlement rule has operated since the 1930s as a gauge of financial dependence. 8 In this example, John is not eligible for a Social Security spousal benefit because Mary’s employment was not covered by Social Security. Congressional Research Service 4 Social Security: The Government Pension Offset (GPO) Parity Between Spouses Subject to Dual Entitlement and GPO Provisions The GPO is intended to place spouses 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 spouses whose jobs were covered by Social Security and are also eligible for a Social Security spousal benefit. Before the GPO was enacted in 1977, workers who received pensions from a government job not covered by Social Security could also receive full Social Security spousal benefits even though they were not financially dependent on their spouses. The scenarios below demonstrate why the law was changed. Table 4 shows how the spousal benefit of the same individual, Mary, would vary under three scenarios: (1) as a dually entitled recipient of Social Security retirement and spousal benefits; (2) as the recipient of a non-covered government pension and Social Security spousal benefits before the GPO was enacted; and (3) as the recipient of a non-covered government pension and Social Security spousal benefits after the GPO was enacted. In each case, Mary’s earnings (and thus the Social Security retirement benefit or non-covered government pension) and the maximum spousal benefit she is eligible to receive are identical. Under the first scenario (as a dually entitled retiree), 100% of Mary’s own Social Security retirement benefit of $400 is used to offset the $450 Social Security spousal benefit for which she is eligible, leaving her with a net spousal benefit of $50 and a total Social Security benefit of $450. Under the second scenario (where Mary receives a non-covered government pension of instead of a Social Security retirement benefit), before the GPO takes effect, Mary’s Social Security spousal benefits are not reduced at all and she receives a full Social Security spousal benefit of $450, plus the non-covered pension of $400, for total monthly pension benefits of $850. Under the third scenario (when the GPO is put into effect), Mary’s Social Security spousal benefit is reduced by two-thirds of her $400 non-covered government pension, leaving her with a net spousal benefit of $183 (= $450 – $400*2/3) and a total monthly pension benefit of $583. With the GPO in place, Mary’s employment and resulting retirement benefit are used to offset her Social Security spousal benefit just as they would have been under the dual entitlement scenario. Table 4. Mary’s Spousal Benefit, Before and After GPO Enactment Mary works in Social SecurityCovered Position Dually Entitled Social Security retirement monthly benefit (based on own earnings record) Mary works in Non-Social Security-Covered Position Before GPO After GPO $400.00 $0.00 $0.00 $0.00 $400.00 $400.00 Maximum Social Security spousal monthly benefit eligible to receive (based on spouse’s earnings record), equal to 50% of the spouse’s Social Security retirement benefit $450.00 $450.00 $450.00 Reduction in spousal monthly benefit due to dual entitlement rule (equal to worker’s Social Security retirement benefit) $400.00 — — Non-Social Security-covered monthly pension Congressional Research Service 5 Social Security: The Government Pension Offset (GPO) Mary works in Social SecurityCovered Position Dually Entitled Reduction in Social Security spousal monthly benefit due to GPO (equals 2/3 of non-Social Security-covered pension) Actual Social Security spousal monthly benefit paid Total monthly benefits paid to Mary (Social Security spousal benefit plus either (a) Social Security worker benefit or (b) non-covered pension) Mary works in Non-Social Security-Covered Position Before GPO After GPO — $266.67 $50.00 $450.00 $183.33 $450.00 $850.00 $583.33 — Source: Illustrative example provided by CRS. Note: Dashes are used to represent scenarios in which either the dual entitlement rule or the GPO are not applicable. For example, in the dual entitlement scenario, Mary does not receive a non-covered government pension and, thus, the GPO does not apply. It is important to note that the reduction to Social Security spousal benefits is smaller under the GPO than it is under the dual entitlement rule: Mary receives monthly Social Security spousal benefits of $50 under the dual entitlement rule, compared with $183 under the GPO. For those under dual entitlement, the spousal benefit is reduced by one dollar for every dollar of Social Security retirement benefits based on their own work history in Social Security-covered employment. For those under the GPO, however, the spousal benefit is reduced by 67 cents for every dollar of a pension from non-covered government employment. Why a Two-Thirds Reduction? The GPO was originally established in 1977 (P.L. 95-216) and replaced an earlier “dependency test” for spousal benefits that had been in law since 1950.9 The 1977 law provided that 100% of the non-covered government pension be subtracted from the Social Security spousal benefit. If the original legislation had been left intact, the treatment of individuals affected by the dual entitlement rule and the GPO would have been identical because, in both cases, the Social Security spousal benefit would have been reduced by 100% of the retirement benefit. The GPO’s two-thirds offset to the non-government pension was established by the Social Security Amendments of 1983 (P.L. 98-21), which made a number of amendments to Social Security. One section of the House version of this law proposed that the amount used in calculating the offset be one-third of the government pension. The Senate version contained no such provision and would therefore have left standing the 100% offset that existed at the time. The conferees adopted the House bill except that the offset was fixed at two-thirds of the noncovered government pension. 10 9 The dual entitlement rule has been in law since 1939 when spousal benefits were introduced. 10 Effectively, the GPO offset formula assumes that two-thirds of the government pension is roughly equivalent to the Social Security retirement (or disability) benefit the spouse would have earned as a worker if his or her job had been covered by Social Security. Congressional Research Service 6 Social Security: The Government Pension Offset (GPO) Who Is Affected by the GPO? A government worker who does not pay paying into Social Security may potentially be affected by the GPO, if he or she is entitled to a Social Security spousal benefit based on a spouse’s work in Social Security-covered employment. In 2007, approximately 6.4 million state and local workers (29% of all state and local workers) were in non-Social Security-covered positions and may be subject to the GPO.11 Generally, employees of the federal government hired before 1984 are covered by the Civil Service Retirement System (CSRS) and are not covered by Social Security; therefore, they may be subject to the GPO (if they are spouses). 12 Most federal workers first hired into federal service after 1983 are covered by the Federal Employees’ Retirement System (FERS), which includes Social Security coverage. Thus, although FERS retirees are not subject to the GPO, they, like all covered workers in the private sector, may be subject to the Social Security dual entitlement rule. At the end of 2009, approximately 558,000 federal workers (18% of the federal workforce) participated in CSRS and were potentially subject to the GPO, whereas 2.1 million (82%) participated in FERS and were potentially subject to the dual entitlement rule.13 As of December 2009, about 522,000 Social Security beneficiaries, or about 1.6% of all beneficiaries, had spousal benefits reduced by the GPO (not counting those who were potentially eligible for spousal benefits but were deterred from filing for them because of their expectation that the GPO would eliminate the spousal benefit). Of these 56% were spouses; 44% were widows and widowers. About 79% of all affected were women.14 Table 5 below provides a breakdown of the affected beneficiaries by state and type of benefit. Table 5. Number of Social Security Beneficiaries Affected by GPO, by State,Type of Benefit and Offset Status, December 2009 Spouses Widows and Widowers Fully Offset Statusa Partially Offset Statusb 521,702 293,948 227,754 387,556 134,146 Alabama 4,146 1,894 2,252 3,278 868 Alaska 2,121 1,285 836 1,676 445 Arizona 6,664 3,595 3,069 5,158 1,506 Arkansas 2,811 1,474 1,337 2,218 593 California 77,610 48,204 29,406 66,097 11,513 State Total Total 11 At the same time, approximately 17.3 million state and local workers (73%) were in covered employment and may be subject to the dual entitlement rule. Social Security Administration, unpublished table, Estimated Social Security Coverage of Workers with State and Local Government Employment, 2007. 12 Workers who switch from CSRS to FERS must work for five years under FERS in order to be exempt from the GPO. 13 Federal Retirement Thrift Investment Board, October, 2009, http://www.frtib.gov/pdf/minutes/MM-2009OctAtt1.pdf, and Office of Personnel Management, Employment and Trends, January 2009, Table 8, http://www.opm.gov/ feddata/html/empt.asp. 14 Social Security Administration, Office of Research Evaluation and Statistics, unpublished Table DE01, February 4, 2010. Congressional Research Service 7 Social Security: The Government Pension Offset (GPO) Fully Offset Statusa Partially Offset Statusb Total Spouses Widows and Widowers 17,658 10,845 6,813 12,739 4,919 6,711 4,224 2,487 5,986 725 463 201 262 363 100 2,591 739 1,852 2,160 431 Florida 21,752 11,963 9,789 16,841 4,911 Georgia 13,885 7,180 6,705 10,531 3,354 Hawaii 1,865 1,018 847 1,591 274 Idaho 1,399 768 631 1,098 301 Illinois 36,284 21,859 14,425 30,675 5,609 Indiana 3,998 1,806 2,192 2,953 1,045 Iowa 1,765 880 885 1,315 450 Kansas 1,969 850 1,119 1,377 592 Kentucky 8,560 5,264 3,296 7,141 1,419 Louisiana 25,674 13,925 11,749 15,768 9,906 Maine 5,214 3,025 2,189 3,713 1,501 Maryland 8,486 3,173 5,313 6,826 1,660 26,199 15,670 10,529 18,686 7,513 Michigan 5,070 2,443 2,627 3,864 1,206 Minnesota 5,817 3,216 2,601 4,784 1,033 Mississippi 2,507 1,178 1,329 1,935 572 Missouri 11,227 6,646 4,581 9,376 1,851 Montana 1,044 561 483 806 238 Nebraska 1,165 567 598 862 303 Nevada 6,696 3,801 2,895 5,324 1,372 New Hampshire 1,831 1,009 822 1,307 524 New Jersey 4,345 1,797 2,548 3,560 785 New Mexico 3,028 1,686 1,342 2,450 578 New York 7,529 3,180 4,349 6,069 1,460 North Carolina 6,295 3,093 3,202 4,949 1,346 457 207 250 319 138 73,242 42,698 30,544 43,287 29,955 Oklahoma 3,526 1,562 1,964 2,583 943 Oregon 3,906 2,113 1,793 2,976 930 Pennsylvania 7,632 3,303 4,329 5,851 1,781 Rhode Island 1,516 847 669 1,300 216 South Carolina 3,898 1,910 1,988 3,030 868 State Colorado Connecticut Delaware District of Columbia Massachusetts North Dakota Ohio Congressional Research Service 8 Social Security: The Government Pension Offset (GPO) State South Dakota Total Spouses Widows and Widowers Fully Offset Statusa Partially Offset Statusb 815 405 410 616 199 5,028 2,523 2,505 3,944 1,084 Texas 58,335 34,406 23,929 38,126 20,209 Utah 2,186 1,101 1,085 1,549 637 574 314 260 448 126 Virginia 7,630 3,066 4,564 5,775 1,855 Washington 5,276 2,564 2,712 3,990 1,286 West Virginia 1,204 552 652 793 411 Wisconsin 3,184 1,664 1,520 2,496 688 Wyoming 479 242 237 357 122 8,435 5,452 2,983 6,640 1,795 Tennessee Vermont Outlying areas and foreign countries Source: Social Security Adminstration, Office of Research, Evaluation and Statistics, February 4, 2010 a. Individuals received no Social Security spousal benefit because the reduction in their Social Security spousal benefit (a reduction equal to two-thirds of the pension from non-covered government employment) was greater than the Social Security spousal benefit itself. Either the non-covered pension was large, or the potential Social Security spousal benefits were small. b. Individual received a partial Social Security spousal benefit because the reduction in the Social Security spousal benefit (a reduction equal to two thirds of the pension from non-covered overnment employment) was less than the Social Security spousal benefit itself. In December 2009, the average monthly non-covered government pension amount for persons affected by the GPO was $1,937 ($1,736 for women and $2,697 for men).15 The average preoffset Social Security spousal benefits at that time were $661 per month overall ($728 for women and $406 for men).16 In December 2009, the average reduction caused by the GPO was $539 ($575 a month for women and $400 for men).17 For 74% of those with spousal benefits reduced by the GPO, the GPO reduction was large enough to fully offset any potential spousal benefit (either because the non-covered pension was large or the potential Social Security spousal benefits were small).18 In December 2009, the average Social Security spousal benefit after application of the GPO was $122 per month ($153 a month for women and $6 a month for men). 19 Note that the total Social Security benefit received by a couple would be a larger amount, that is, the (reduced) Social Security spousal benefit plus the primary worker’s own Social Security benefit (which is not reduced by the GPO). By contrast, in 2008, the dual entitlement rule affected approximately 6.5 million beneficiaries. Of these, 43% were spouses and 57% were widow(er)s. About 6.2 million (98%) of all affected 15 Ibid., Table G209, February 4, 2010. Data is limited to those beneficiaries for whom the offset amount is available. Ibid., Table G309, February 4, 2010. Data is limited to those beneficiaries for whom the offset amount is available. 17 Ibid., Table G609, February 4, 2010. Data is limited to those beneficiaries for whom the offset amount is available. 18 Ibid., Table G105, February 4, 2010. Data is limited to those beneficiaries for whom the offset amount is available. 19 Ibid., Table G509, January 12, 2009. Data is limited to those beneficiaries for whom the offset amount is available. 16 Congressional Research Service 9 Social Security: The Government Pension Offset (GPO) were women. 20 Among dually entitled workers, the average Social Security benefit received was $1,032.21 Of this, $572 was the retired worker component of the benefit. The spousal benefit component was $459 (after reduction for dual entitlement). 22 For the average dually entitled worker, therefore, the spousal benefit comprised almost 45% of the total Social Security benefit received. Issues Opponents argue that the GPO is not well understood and that it harms lower-income workers. Defenders of the GPO maintain that it helps ensure that only financially dependent spouses receive the Social Security spousal benefit, while curtailing what otherwise would be an unfair advantage for non-Social Security-covered government workers. Awareness of the GPO and Retirement Preparedness 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. Supporters of the provision say it has been law for more than 30 years (it was enacted in 1977); therefore, people have had ample time to adjust their retirement plans. P.L. 108-203, passed in 2004, included a provision that seeks to ensure that SSA and government employers notify potentially affected individuals about the effect of the GPO. Currently the SSA’s personalized mailings to workers entitled “Your Social Security Statement” contain a paragraph explaining the GPO. Parity Among Social Security-Covered Workers and Non-Covered Workers The majority of state and local government workers, and federal employees since 1983, are covered by Social Security. Some argue that eliminating the GPO would be unfair to government employees in Social Security-covered positions who are potentially subject to the dual entitlement provision (instead of the GPO). Impact on Low-Income Workers There is disagreement about the original intention of the GPO, which was enacted in 1977. Some argue that the original purpose was to prevent higher-paid workers from reaping over-generous spousal benefits. Others contest this, saying that the GPO was never targeted to a particular income group. 20 Social Security Administration, Annual Statistical Supplement, 2009, Table 5.G2, available at http://www.ssa.gov/ policy/docs/statcomps/supplement/2009/5g.html#table5.g2. The term “dually entitled” applies only to those who receive spousal benefits. If an individual’s own worker benefit is greater than his or her spousal benefit, that person receives the higher worker benefit and is not considered “dually entitled.” Administrative data do not provide the number of people in this latter category. 21 Ibid., Table 5.G3. 22 Ibid. Congressional Research Service 10 Social Security: The Government Pension Offset (GPO) Opponents of the GPO argue that the provision hurts lower- and middle-income workers such as teachers, and in some circumstances is sufficient to throw these workers into poverty. Opponents also say that the GPO is especially disadvantageous for surviving spouses. A unpublished 2007 CRS analysis found that the common criticism that the GPO penalizes lower earners more than higher earners may not be accurate. The CRS analysis showed a great variation in outcomes.23 In general, however, and holding other factors constant, the analysis found that low earners and some other individuals experience a much smaller offset to spousal benefits under the GPO than they would experience under the dual entitlement rule if the same work had been covered by Social Security. Others, including higher earners, experience a slightly larger offset to spousal benefits under the GPO than they would experience if the same work had been covered by Social Security and they had been subject to the dual entitlement rule. Other evidence of the effect of the GPO on low earners comes from statistics produced by the SSA. While 74% of those affected by the GPO have their benefits fully offset, only 33% of those with non-covered pensions of less than $1,000 per month had their benefits fully offset, compared with 82% of those with non-covered pensions between $1,000 and $1,999 and nearly 100% of individuals with non-covered pensions over that amount.24 Among the group of individuals whose spousal benefits were completely eliminated by the GPO, less than 13% of those had a noncovered pension amount of less than $1,000 per month. 25 Thus, if the non-covered pension amount is a reflection of the approximate earnings levels of individuals affected by the GPO26, a greater percentage of those with lower earnings receive at least a partial Social Security benefit relative to the overall GPO-affected population. On average, private sector workers, who are affected by the dual entitlement rule, earn less than their counterparts in state and local government who are affected by the GPO. July 2007 data from the Bureau of Labor Statistics indicate that state and local government workers earned on 23 How an individual would be affected by the GPO versus the dual entitlement rule is determined by several key variables, including the relative earnings level of the individual, the timing of the worker’s non-covered employment during his or her career, and the number of years in non-covered employment. The primary difference between outcomes among high- and low-earners is driven by the fact that a worker’s Social Security benefit (the basis for the dual entitlement offset, which reduces the spousal benefit by 100% of this amount) is progressive, while pensions from non-covered government employment (the basis for the GPO reduction, which reduces spousal benefits by 2/3 of this amount) generally provide a pension that is the same fixed percentage of earnings regardless of the earnings level. As earnings rise, if the earnings are from non-covered employment then the pension from this employment rises proportionately; if the earnings are from covered employment, then the Social Security benefit, which is progressive, rises less than proportionately. Hence for high earners, the GPO offset to spousal benefits, which is 2/3 of non-covered pensions which rise proportionately as income rises, becomes more significant than the dual-entitlement offset to spousal benefits which involves a 100% offset to the Social Security benefit which rises more slowly as income rises. In general, any combination of variables (earnings level, timing of non-covered employment, number of years in noncovered employment) that increases the size of the non-covered government pension more than it increases the size of the Social Security benefit (assuming the same earnings were covered by Social Security) would make the dual entitlement rule more advantageous than the GPO. 24 CRS calculations based on Table 1, “Estimated Number of Beneficiaries Affected by the Government Pension Offset (GPO), by Current Offset Status and Non-Covered Government Pension Amount, Limited to Those Beneficiaries For Which the Offset Amount is Available, December 2009,” produced by the Social Security Administration’s Office of Research, Evaluation and Statistics, February 4, 2010. 25 Ibid. 26 Clearly this figure does not incorporate other sources of income, such as private pensions and investment income. Congressional Research Service 11 Social Security: The Government Pension Offset (GPO) average $25.08 per hour compared with the national average of $20.62 per hour and the private sector average of $19.92 per hour.27 Regarding concerns about pushing those affected by the GPO into poverty, in 2001 the poverty rate among those affected by the GPO was approximately 6.0%, whereas the poverty rate for those affected by the dual entitlement rule was approximately 8.9%.28 The poverty rate for all Social Security beneficiaries age 65 and older was about 8.5%. For comparison purposes, the poverty rate for the general population at that time was approximately 11.3%. GPO Reduction is Smaller thanDual Entitlement Reduction Table 4 shows that the reduction to Social Security spousal benefits is smaller under the GPO than it is under the dual entitlement rule. Those under dual entitlement face a 100% offset to the Social Security-covered pension, whereas those under the GPO face a 66.6% offset to the nonSocial Security-covered pension. In the example shown in Table 4, the result was a $50 spousal benefit under dual entitlement compared with a $183.33 spousal benefit under the GPO (both persons also received a $400 benefit based on their own work). If these non-Social Securitycovered workers had been covered by Social Security, they would have been subject to the dual entitlement rule instead of the GPO, and their spousal benefits would have been lower. Imprecision of the Two-Thirds Offset to Non-Covered Government Pensions Opponents point out that whatever the rationale for the GPO, reducing everyone’s spousal benefit by two-thirds of their government pension is an imprecise way to estimate what the spousal benefit would have been if the government job had been covered by Social Security. If two-thirds of the government pension were in fact a good proxy for Social Security retirement benefits, there would be no significiant difference in outcomes between the dual entitlement rule compared with the GPO. As noted above, however, (see the previous section, “Impact on Low-Income Workers”), there is great variation in outcomes. The GPO may lead to a smaller offset relative to the dual entitlement rule for low earners than for high earners. Ideally, opponents argue, the way to compute the offset to replicate the dual entitlement rule would be to apply the Social Security benefit formula to a spouse’s total earnings, including the non-covered portion, and reduce the resulting Social Security spousal benefit by the proportion of total earnings attributable to non-covered earnings. Currently, however, the SSA does not have complete records of non-covered earnings histories. Although SSA started collecting W-2s in the 27 U.S. Department of Labor, Bureau of Labor Statistics, National Compensation Survey: Occupational Earnings in the United States, 2008, August 2009. Table 1, http://www.bls.gov/ncs/ocs/sp/ncbl1308.pdf. 28 Poverty rates were calculated by David Weaver of the Social Security Administration’s Office of Retirement Policy using the March 2001 Current Population Survey (CPS). Poverty status is taken directly from the CPS and is thus subject to errors in the reporting of income. The sample for the GPO and dually entitled poverty rates only includes persons for whom SSA administrative records could be matched. The sample size for the GPO poverty rate is relatively small (130 cases). The poverty rates for the Social Security beneficiary population age 65 and over and for the general population do not require matched data and are based completely on CPS data. Updated data for this comparison are not available. Congressional Research Service 12 Social Security: The Government Pension Offset (GPO) early 1980s, the initial records were sometimes incomplete. The Social Security benefit formula requires a full 35 years of earnings data. Application of the GPO to Government versus Private Pensions Some question why the GPO provision applies only to spousal benefits received by government workers who are not themselves covered by Social Security. They wonder why the GPO does not apply to workers in the private sector who receive both Social Security and private, employersponsored pensions based on their work for employers who provide separate defined benefit and/or defined contribution pensions. Generally, the private sector employment on which the private pension is based would be covered by Social Security, and therefore the dual entitlement rule (which the GPO is meant to replicate) would instead take effect to reduce any Social Security spousal benefits for which the worker might be eligible. As noted earlier, in many cases the dual entitlement rule would produce a higher reduction in spousal benefits than does the GPO. Cost of Eliminating the GPO Some argue that weakening or eliminating the GPO would be costly at a time when neither Social Security nor the federal budget is in sound financial condition. The SSA has projected the 10-year cost of repealing the GPO to be about $42 billion. 29 Such a move could also lead to demands for repeal of the dual entitlement rule to ensure parallel treatment for those working in Social Security-covered employment. Eliminating the dual entitlement rule would cost approximately $500 billion over a five-year period.30 The GPO “Last-Day” Rule A burgeoning controversy arose in the 108th Congress with the revelation that a growing number of state and local government workers had been making use of a little-known provision of the law that allowed them to escape the application of the GPO if they switched jobs at the end of their government careers. Until recently, the law granted an exception to the GPO if, on the last day of one’s government service, he or she worked in a Social Security-covered position. On August 15, 2002, the Government Accountability Office (GAO) released a report that found that, as of June 2002, 4,819 individuals in Texas and Georgia had switched to Social Security-covered positions to avoid the application of the GPO to their Social Security spousal benefits. The GAO projected that the cost to the program for these cases could be about $450 million. On February 11, 2004, the House of Representatives agreed to Senate amendments and passed H.R. 743, the Social Security Protection Act of 2003, which became P.L. 108-203.31 As discussed 29 Social Security Administration, Memorandum from Bert M. Kestenbaum and Tim Zayatz of the Office of the Chief Actuary, “Estimated Additional OASDI Benefit Payments Resulting From Several Proposals to Modify the Windfall Elimination Provision and the Government Pension Offset—INFORMATION,” October 26, 2007. 30 Social Security Administration, Memorandum from Bert Kestenbaum of the Office of the Chief Actuary, “Estimated Additional OASDI Benefit Payments from Proposals to Eliminate or Change the Dual-Entitlement Offset Provision— INFORMATION,” April 17, 2003. 31 For more information on H.R. 743, see CRS Report RL32089, The Social Security Protection Act of 2004 (H.R. 743), by Dawn Nuschler. Congressional Research Service 13 Social Security: The Government Pension Offset (GPO) below, P.L. 108-203 eliminated the last-day exception clause by requiring those workers switching from non-covered positions to Social Security-covered positions to work in the covered position for at least 60 months (five years) before being exempt from the GPO.32 The new GPO provision became effective for Social Security spousal benefit applications filed after March 31, 2004. How Does the Last-Day Rule Affect Exemption from the GPO? Any current Social Security beneficiary who is receiving spousal benefits and is exempt from the GPO because they retired from their non-covered position in government under the last-day rule would continue to be exempt from the GPO. Individuals may still be exempt from the GPO if: • They applied for Social Security spousal benefits before April 1, 2004, and work their last day in a Social Security-covered position within the same retirement system. In this case, the individual who receives a Social Security spousal benefit before April 1, 2004, could continue to work in a non-covered position and still make use of the last-day rule when he or she retires from government employment, regardless of how far in the future the retirement occurs. • Their last day of government service occurred before July 1, 2004, and they worked their last day in a Social Security-covered position within the same retirement system. In other words, if a worker switched from non-covered government work to Social Security-covered work for their last day of work within the same retirement system, they are exempt from the GPO, even if they file for Social Security benefits at a later date. However, if a worker returns to work in a non-covered position in the same retirement system that they previously retired from and new contributions are made by either the employee or employer to the non-covered pension system, his or her last-day exemption from the GPO will be revoked and they will be subject to the new 60-month requirement for exemption from the GPO. • Their last day of government service occurs on or after July 1, 2004, and before March 2, 2009, and they work a total of 60 months in a Social Security-covered position within the same retirement system. The required 60-month period of Social Security-covered employment would be reduced by the number of months the worker performed in Social Security-covered employment under the same retirement system prior to March 2, 2004. However, in no case can the 60-month requirement be reduced to less than one month. For example, a teacher who is currently working in a non-covered position but who previously worked for 12 months in a Social Security-covered position under the same retirement system would have the 60-month requirement reduced to 48 months. The remaining months to be worked (in this case 48 months), must be worked consecutively and after March 2, 2004. Thus, if she switched to a covered position in the same retirement system as her prior government work for at least the final 48-month period of her employment and her last day of employment was before March 2, 2009, she would be exempt from the GPO. 32 This five year period for GPO exemption is consistent with that required of federal employees converting from CSRS to FERS. Congressional Research Service 14 Social Security: The Government Pension Offset (GPO) • Their last day of government service occurs after March 3, 2009, and they work their last 60 consecutive months in a Social Security-covered position within the same retirement system. In this case, the entire 60-month period must be worked after March 2, 2004. All other individuals receiving government pensions based on non-covered employment would be subject to reductions in Social Security spousal benefits under the GPO. Recent Legislation In the 111th Congress, Senator Dianne Feinstein and Representative Howard Berman have introduced companion bills, S. 484 and H.R. 235, entitled the Social Security Fairness Act of 2009. Both bills would eliminate the GPO for Social Security benefits payable for months after December 2009. The last bill passed that modified the GPO eliminated a controversial exemption from the GPO known as the last-day rule. The last-day rule is described in a preceding section. H.R. 743 from the 108th Congress was passed into law (P.L. 108-203) on March 2, 2004. Author Contact Information Alison M. Shelton Analyst in Income Security ashelton@crs.loc.gov, 7-9558 Acknowledgments This paper was originally written by Laura Haltzel. Congressional Research Service 15