Social Security: The Government Pension Offset (GPO) Alison M. Shelton Analyst in Income Security January 30, 2012 The House Ways and Means Committee is making available this version of this Congressional Research Service (CRS) report, with the cover date shown, for inclusion in its 2012 Green Book website. CRS works exclusively for the United States Congress, providing policy and legal analysis to Committees and Members of both the House and Senate, regardless of party affiliation. Congressional Research Service RL32453 CRS Report for Congress Prepared for Members and Committees of Congress Social Security: The Government Pension Offset (GPO) Summary The Government Pension Offset (GPO) may reduce Social Security spousal and survivor benefits, which are generally payable to the spouses and survivors 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 the survivor benefit is 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 a full retired-worker and a full spousal benefit to the same individual. 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 (1) a Social Security spousal benefit based on a spouse’s work history in Social Security-covered employment and (2) a Social Security retired or disabled worker benefit based on their own work histories in Social Security-covered employment; and • the GPO, which applies to spouses who qualify for both (1) a Social Security spousal benefit based on a spouse’s work history in Social Security-covered employment and (2) a government pension based on their own non-Social Security-covered government employment. 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). 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 GPO Reduction is Smaller than Dual Entitlement Reduction ................................................. 10 Parity Among Social Security-Covered Workers and Non-Covered Workers........................ 11 Impact on Low-Income Workers............................................................................................. 11 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 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 2011 ..................................................... 7 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 effectively 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 Security-covered 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 retired-worker or pension benefits. Social Security Covered and Non-Covered Work A worker is “covered” by Social Security if he or she works in “covered” employment and pays into Social Security through the Federal Insurance Contributions Act (FICA) payroll tax. A worker is entitled to Social Security disability or retired worker benefits after paying into Social Security 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 by Social Security.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 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 dated January 14, 2011, “Estimated Social Security Coverage of Workers with State and Local Government Employment,” 2008 (the most recent year for which data are available). The 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, known as “Section 218 Agreements” because they are authorized by §218 of the Social Security Act. Beginning in July 1991, state and local employees who were not members of a public retirement system were mandatorily covered by Social Security. 3 Ibid. Congressional Research Service 1 Social Security: The Government Pension Offset (GPO) 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 retirement benefits based on their own work records. Dual Entitlement Rule In the absence of the dual entitlement rule, a couple with two earners, both covered by Social Security, would receive two full primary benefits as well as two full spousal benefits. The Social Security dual entitlement rule requires that a beneficiary effectively receive the higher of the Social Security worker’s benefit or the spousal benefit, but not both. The total benefit received by a worker 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.4 Table 1 demonstrates how the Social Security dual entitlement rule is applied. Table 1. Dual Entitlement Formula John Social Security monthly worker benefit (based on worker’s earnings record) Mary $2,000 $900 Maximum Social Security spousal monthly benefit eligible to receive (based on spouse’s earnings record, equal to 50% of the spouse’s Social Security worker benefit) $450 $1,000 Actual Social Security spousal monthly benefit paid (subtract worker benefit from spousal benefit) $0 Total (worker and spousal) Social Security monthly benefits paid to John and Mary $2,000 $100 $1,000 Source: Illustrative example provided by the 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 worker benefit equal to $2,000. His wife Mary has earned a monthly Social Security worker benefit equal to $900. Both Mary and John are also eligible for spousal benefits based on the other’s earnings: John is eligible for a $450 monthly spousal benefit, and Mary is eligible for a $1,000 monthly spousal benefit. Under the dual entitlement rule, Mary’s worker benefit of $900 must be subtracted from her potential $1,000 spousal benefit, and only the difference of $100 is paid as a spousal benefit. In total, Mary will receive $1,000 monthly—$900 as a Social Security worker benefit and $100 as a Social Security spousal benefit. John would not be paid a spousal benefit because his $2,000 worker benefit based on his own earnings is higher than and more than offsets the potential $450 spousal benefit. The Social Security benefits received by the couple total $3,000 per month. 4 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 spousal 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 worker 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 spousal benefit. Congressional Research Service 2 Social Security: The Government Pension Offset (GPO) Because most workers are in Social Security-covered employment, the dual entitlement scenario is more common than the GPO among two-earner couples. In 2010, approximately 6.7 million out of 34.6 million Social Security retired worker beneficiaries, or about 19%, were dually entitled (not including those whose spousal benefit was completely offset by their retired worker benefit).5 Government Pension Offset Formula The Social Security spousal or widow(er) 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 known as the GPO. The GPO reduction to Social Security spousal and widow(er) 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 or widow(er) benefit, the GPO may eliminate the entire Social Security spousal or widow(er) benefit. In December 2011, about 568,000 Social Security beneficiaries (about 1% of all Social Security beneficiaries) had spousal benefits reduced by the GPO (this figure does not include persons who were eligible for spousal benefits but were deterred from filing for them because of the GPO).6 The GPO has no effect on the amount of the Social Security benefit a worker may receive based on his or her own work in Social Security-covered employment, but it does limit the amount that can be paid to his or her spouse who has worked in non-Social Security-covered employment. Table 2 provides an example of how the GPO is applied, assuming that John worked in Social Security-covered employment while Mary spent her full career in state or local government employment that was not covered by Social Security. Table 2. GPO Formula John Social Security retired or disabled worker monthly benefit (based on worker’s earnings record) Mary $2,000 N/A Non-Social Security-covered (government) monthly pension N/A $900 Maximum Social Security spousal monthly benefit eligible to receive (based on spouse’s earnings record, equal to 50% of the spouse’s Social Security retired worker benefit) N/A $1,000 Reduction in Social Security spousal monthly benefit due to GPO (equals 2/3 of the nonSocial Security-covered pension: $900*2/3=$600) N/A $600 Actual Social Security spousal monthly benefit paid (subtract 2/3 of non-Social Securitycovered worker’s pension from Social Security spousal benefit: $1,000–$600=$400) N/A $400 $2,000 $1,300 Total monthly retirement benefits paid to John (Social Security only) and Mary (Social Security plus pension from non-covered employment) Source: Illustrative example provided by CRS. Note: N/A means not applicable. 5 Social Security Administration, Annual Statistical Supplement 2011, Washington, DC, 2011, Table 5.G2 http://www.ssa.gov/policy/docs/statcomps/supplement/2011/5g.html#table5.g2. 6 Social Security Administration, Office of Research Evaluation and Statistics, unpublished Table A, December 27, 2011. 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 retired-worker benefit of $2,000. His wife, Mary, is not eligible for a Social Security retired-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 $900 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 $1,000 based on John’s work history. Under the GPO, Mary’s potential Social Security spousal benefit is reduced by an amount equal to two-thirds of her non-Social Security-covered government pension (or $600), and the difference of $400 ($1,000 - $600) is paid to her as a Social Security spousal benefit. In total, Mary will receive retirement benefits of $1,300 per month: $900 from her noncovered pension and $400 as a Social Security spousal benefit.7 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. 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. Dually-entitled beneficiaries effectively receive the higher of the worker benefit or the 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 and is added to the beneficiary’s own worker benefit. The GPO reduction to Social Security spousal benefits is equal to two-thirds of the non-covered 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 creation of spousal benefits in the 1930s, to support spouses who are financially dependent on the working spouse. The dual entitlement rule has operated since 1939 as a gauge of financial dependence. 7 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 in approximately the same position as spouses whose jobs were covered by Social Security. 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 all three examples, it is assumed that Mary is potentially eligible for a Social Security spousal benefit of $1,000 per month, computed as 50% of her husband’s monthly Social Security benefit of $2,000. As a dually entitled retiree, under the first scenario, Mary’s $1,000 Social Security spousal benefit is reduced by her own Social Security retired-worker benefit of $900, leaving her with a net spousal benefit of $100 and a total Social Security benefit of $1,000. Under the second scenario (where Mary receives a non-covered government pension 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 $1,000, plus the noncovered pension of $900, for total monthly pension benefits of $1,900. Under the third scenario (after the GPO was enacted in 1977), Mary’s Social Security spousal benefit is reduced by twothirds of her $900 non-covered government pension, leaving her with a net Social Security spousal benefit of $400 (= $1,000 – $900*2/3) and a total monthly pension benefit of $1,300 (= $900 from the non-covered pension + $400 from the Social Security spousal benefit). Table 4. Mary’s Spousal Benefit, Before and After GPO Enactment Mary works in Social SecurityCovered Position Before GPO Enactment After GPO Enactment $900 $0 $0 $0 $900 $900 $1,000 $1,000 $1,000 $900 — — — — $600 Dually Entitled Social Security retired-worker monthly benefit (based on own earnings record) Non-Social Security-covered monthly pension 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 Reduction in spousal monthly benefit due to dual entitlement rule (equal to worker’s Social Security retired-worker benefit) Reduction in Social Security spousal monthly benefit due to GPO (equals 2/3 of non-Social Congressional Research Service Mary works in Non-Social Security-Covered Position 5 Social Security: The Government Pension Offset (GPO) Mary works in Social SecurityCovered Position Dually Entitled Mary works in Non-Social Security-Covered Position Before GPO Enactment After GPO Enactment Security-covered pension) Actual Social Security spousal monthly benefit paid $100 $1,000 $400 Total monthly retirement benefits paid to Mary (Social Security spousal benefit plus either (a) Social Security retired-worker benefit or (b) non-covered pension) $1,000 $1,900 $1,300 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 $100 under the dual entitlement rule, compared with $400 under the GPO. Her total monthly retirement benefits are $1,000 under the dual entitlement rule, compared with $1,300 under the GPO. For those under dual entitlement, the Social Security spousal benefit is reduced by one dollar for every dollar of Social Security retirement benefits based on their own work histories in Social Security-covered employment. For those under the GPO, however, the Social Security 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 1950.8 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 pension from non-covered employment. 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.9 8 The dual entitlement rule has been in law since 1939 when spousal benefits were introduced. 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 (continued...) 9 Congressional Research Service 6 Social Security: The Government Pension Offset (GPO) Who Is Affected by the GPO? In 2008, the last year for which data are available, approximately 6.6 million state and local government workers (27.5% of all state and local government workers) were in non-Social Security-covered positions and may be subject to the GPO.10 A government worker who does not pay 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. 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).11 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. As of December 2011, about 568,000 Social Security beneficiaries, or about 1% 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 persons subject to the GPO, 56% were spouses and 44% were widows and widowers. About 80% of all affected persons were women.12 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 2011 Total Spouses Widows and Widowers 567,919 317,552 250,367 421,472 146,447 Alabama 4,276 1,952 2,324 3,370 906 Alaska 2,404 1,463 941 1,898 506 Arizona 7,381 3,979 3,402 5,711 1,670 Arkansas 2,929 1,502 1,427 2,295 634 California 84,849 52,012 32,837 72,000 12,849 Colorado 19,673 11,892 7,781 13,851 5,822 State Total Fully Offset Statusa Partially Offset Statusb (...continued) covered by Social Security. 10 In 2008, approximately 17.2 million state and local workers (72.5%) 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 in 2008. 11 Workers who switch from CSRS to FERS must work for five years under FERS in order to be exempt from the GPO. 12 Social Security Administration, Office of Research Evaluation and Statistics, unpublished Table DE01, December 27, 2011. Congressional Research Service 7 Social Security: The Government Pension Offset (GPO) State Connecticut Total Spouses Widows and Widowers Fully Offset Statusa Partially Offset Statusb 7,547 4,760 2,787 6,741 806 500 219 281 396 104 2,583 733 1,850 2,135 448 Florida 23,250 12,742 10,508 18,063 5,187 Georgia 15,259 7,813 7,446 11,514 3,745 Hawaii 1,888 1,003 885 1,593 295 Idaho 1,515 819 696 1,195 320 Illinois 39,942 23,873 16,069 33,873 6,069 Indiana 4,238 1,908 2,330 3,114 1,124 Iowa 1,798 872 926 1,333 465 Kansas 2,069 895 1,174 1,457 612 Kentucky 9,713 5,996 3,717 8,146 1,567 Louisiana 28,825 15,638 13,187 17,856 10,969 Maine 5,757 3,342 2,415 4,091 1,666 Maryland 8,865 3,198 5,667 7,080 1,785 29,382 17,408 11,974 21,252 8,130 Michigan 5,347 2,590 2,757 4,089 1,258 Minnesota 5,803 3,159 2,644 4,801 1,002 Mississippi 2,649 1,222 1,427 2,034 615 Missouri 12,419 7,367 5,052 10,333 2,086 Montana 1,116 604 512 857 259 Nebraska 1,211 571 640 893 318 Nevada 7,595 4,321 3,274 6,012 1,583 New Hampshire 1,985 1,113 872 1,458 527 New Jersey 4,389 1,807 2,582 3,585 804 New Mexico 3,131 1,708 1,423 2,524 607 New York 7,482 3,102 4,380 5,996 1,486 North Carolina 6,825 3,278 3,547 5,303 1,522 481 218 263 333 148 79,584 45,878 33,706 48,022 31,562 Oklahoma 3,687 1,627 2,060 2,687 1,000 Oregon 4,161 2,253 1,908 3,182 979 Pennsylvania 7,779 3,289 4,490 5,946 1,833 Rhode Island 1,666 940 726 1,431 235 South Carolina 4,259 2,112 2,147 3,306 953 836 422 414 616 220 Delaware District of Columbia Massachusetts North Dakota Ohio South Dakota Congressional Research Service 8 Social Security: The Government Pension Offset (GPO) State Tennessee Total Spouses Widows and Widowers Fully Offset Statusa Partially Offset Statusb 5,390 2,663 2,727 4,219 1,171 Texas 64,338 37,152 27,186 41,211 23,127 Utah 2,292 1,121 1,171 1,606 686 622 348 274 489 133 Virginia 7,808 3,036 4,772 5,877 1,931 Washington 5,591 2,782 2,809 4,202 1,389 West Virginia 1,261 575 686 819 442 Wisconsin 3,296 1,717 1,579 2,606 690 Wyoming 511 251 260 373 138 9,762 6,307 3,455 7,698 2,064 Vermont Outlying areas and foreign countries Source: Social Security Administration, Office of Research, Evaluation and Statistics, December 27, 2011. a. Individual received no 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 government employment) was greater than the Social Security spousal benefit itself. Either the non-covered pension was large, or the potential Social Security spousal benefit was small. b. Individual received partial Social Security spousal benefits because the reduction in the Social Security spousal benefit (a reduction equal to two thirds of the pension from non-covered government employment) was less than the Social Security spousal benefit itself. In December 2011, the average non-covered government pension amount for persons affected by the GPO was $2,065 per month ($1,858 for women and $2,882 for men).13 The average pre-offset Social Security spousal benefit at that time was $704 per month ($772 for women and $436 for men).14 In December 2011, the average reduction caused by the GPO was $573 per month ($609 a month for women and $428 for men).15 In December 2011, the average Social Security spousal benefit after application of the GPO was $131 per month ($162 a month for women and $7 a month for men).16 For 74% of those with spousal or widow(er) benefits reduced by the GPO, the GPO reduction was large enough to fully offset any potential spousal or widow(er) benefit (either because the non-covered pension was large or the potential Social Security spousal benefit was small).17 Note that the total Social Security benefit received by a couple would be a larger amount, that is, the 13 Ibid., Table G209, December 27, 2011. Data are limited to those beneficiaries for whom the offset amount is available. 14 Ibid., Table G309, December 27, 2011. Data are limited to those beneficiaries for whom the offset amount is available. Includes persons entitled to spousal/widow(er) benefits only and those dually entitled to spousal/widow(er) and worker benefits. For a dually entitled beneficiary, the pre-offset Social Security benefit is the difference between the larger spousal/widow(er) benefit and the smaller worker benefit. 15 Ibid., Table G609, December 27, 2011. Data are limited to those beneficiaries for whom the offset amount is available. 16 Ibid., Table G509, December 27, 2011. Data are limited to those beneficiaries for whom the offset amount is available. Amounts may not add due to rounding. 17 Ibid., Table G105, December 27, 2011. Data are limited to those beneficiaries for whom the offset amount is available. Congressional Research Service 9 Social Security: The Government Pension Offset (GPO) Social Security spousal benefit (after the GPO reduction) plus the primary worker’s own Social Security benefit (which is not reduced by the GPO). In comparison, in 2010, the dual entitlement rule affected approximately 6.7 million beneficiaries. About 6.5 million (98%) of all affected beneficiaries were women.18 Of these women, 44% were spouses and 56% were widow(er)s. Among dually entitled workers, the average Social Security total benefit (retired worker plus spouse or survivor benefit) received was $1,053.19 Of this amount, $588 was the retired worker component of the benefit. The spousal benefit component was $465 (after reduction for dual entitlement).20 For the average dually entitled worker, therefore, the spousal benefit comprised about 44% 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 government workers who are not covered by Social Security. 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 sought to ensure that SSA and government employers notify potentially affected individuals about the effect of the GPO. The SSA’s personalized mailings to workers, entitled “Your Social Security Statement,” contained a paragraph explaining the GPO and the WEP. SSA recently announced that it will suspend mailing annual statements due to budget constraints, and the future status of these statements is unclear.21 GPO Reduction is Smaller than Dual 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 spousal benefits for every dollar received from a Social Security retired-worker benefit, whereas those under the GPO face a 66.7% offset to spousal benefits for every dollar received from a non18 Social Security Administration, Annual Statistical Supplement, 2011, Tables 5.G1 and 5.G2, available at http://www.ssa.gov/policy/docs/statcomps/supplement/2011/5g.html#table5.g1. 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. 19 Ibid., Table 5.G3. 20 Ibid. 21 Social Security Administration at https://secure.ssa.gov/apps10/public/reference.nsf/links/03292011051744pm. Congressional Research Service 10 Social Security: The Government Pension Offset (GPO) Social Security-covered pension. In the example shown in Table 4, the result was a $100 Social Security spousal benefit under dual entitlement compared with a $400 spousal benefit under the GPO (both persons also received a $900 retirement benefit based on their own work histories). Parity Among Social Security-Covered Workers and Non-Covered Workers The majority of state and local government workers, and federal employees since 1984, are covered by Social Security. Some argue that eliminating the GPO would be unfair to government employees in Social Security-covered positions, who would continue to be subject to the dual entitlement provision. As discussed above, for those under dual entitlement, the Social Security 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 Social Security spousal benefit is reduced by 67 cents for every dollar of a pension from non-covered government employment. 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. 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.22 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 22 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 to an individual than the GPO. Congressional Research Service 11 Social Security: The Government Pension Offset (GPO) 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 Social Security Administration data on the program. While 74% of those affected by the GPO have their benefits fully offset, about 30% of those with non-covered pensions of less than $1,000 per month had their benefits fully offset, compared with 29% of those with non-covered pensions between $1,001 and $1,999 and nearly 100% of individuals with non-covered pensions over that amount.23 Among the group of individuals whose spousal benefits were completely eliminated by the GPO, less than 11% of this group had a non-covered pension amount of less than $1,000 per month.24 Thus, if the non-covered pension amount is a reflection of the approximate earnings levels of individuals affected by the GPO,25 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. The Bureau of Labor Statistics reports that state and local government workers earned on average $26.08 per hour in 2010, compared with the national civilian worker average of $21.29 per hour and the private sector average of $20.47 per hour.26 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%.27 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%. 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 significant difference in outcomes between the dual entitlement rule compared with the GPO. As noted above (see the previous section, “Impact on Low-Income Workers”), 23 CRS calculations based on data provided by the Social Security Administration’s Office of Research, Evaluation and Statistics, unpublished Table I, December 27, 2011. 24 Ibid. 25 Clearly this figure does not incorporate other sources of income, such as private pensions and investment income. 26 U.S. Department of Labor, Bureau of Labor Statistics, National Compensation Survey: Occupational Earnings in the United States, 2010, May 2011,Table 1, http://www.bls.gov/ncs/ncswage2010.pdf. 27 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) however, 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 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 does not apply to the spousal benefits received by the spouses of private sector workers, who may receive private, employer-sponsored pensions (defined benefit or defined contribution) in addition to Social Security benefits. Generally, the private sector employment on which the private pension is based would be covered by Social Security. 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 a beneficiary 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.28 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.29 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 very 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 28 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. 29 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. Congressional Research Service 13 Social Security: The Government Pension Offset (GPO) 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. 108-203.30 As discussed 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.31 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, an 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 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 her last day of work within the same retirement system, she is exempt from the GPO, even if she files 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 she previously retired from and new contributions are made by either the employee or employer to the non-covered pension system, her last-day exemption from the GPO will be revoked and she 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 30 For more information on H.R. 743, see CRS Report RL32089, The Social Security Protection Act of 2004 (H.R. 743), by Dawn Nuschler. 31 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) 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 he switched to a covered position in the same retirement system as his prior government work for at least the final 48-month period of his employment and his last day of employment was before March 2, 2009, he would be exempt from the GPO. • Their last day of government service occurs after March 3, 2009, and they work their last 60 months in a Social Security-covered position within the same retirement system. All other individuals receiving government pensions based on non-covered employment would be subject to reductions in Social Security spousal benefits under the GPO. Acknowledgments This report was originally written by Laura Haltzel. Congressional Research Service 15