Federal Reductions to Social Security Benefits of State and Local Employees: The Windfall Elimination Reduction and the Government Pension Offset Prepared by Gerri Madrid, Committee Director, Federal Budget and Taxation Revised June 2000 Two Social Security provisions result in a reduction of Social Security benefits received by beneficiaries who also receive "uncovered" government retirement benefits earned through work for a federal, state or local government employer where the Social Security payroll tax was not paid. The reductions only apply to Social Security benefits received by public retirees; they do not apply to Social Security benefits received by other benefit recipients, e.g., those received by a spouse after the death of a public retiree. Congress, in crafting the offsets, intended to ameliorate concerns that public employees who had worked primarily in uncovered, non Social Security employment, receive the same benefit as workers who had worked in covered employment throughout their career. The Windfall Elimination Provision, enacted in 1983, specifically addresses the worker's Social Security benefit. The Government Pension Offset, also enacted in 1983, reduces, and may eliminate the Social Security benefit for spouses, divorced spouses, and surviving spouses who also receive a pension from uncovered public work. There are two types of Social Security benefits: an earned benefit and a spouse's (widow's) benefit: Earned benefit: Paid to a worker who worked enough Social Security-covered employment to "earn" a benefit. Spouse's or widow's benefit: Paid to spouses or surviving spouses of Social Security pensioners who did not work enough time under Social Security to have their own earned benefit or their earned benefit is less than the spouse's benefit. The spouse's benefit is generally one-half of the benefit paid to the Social Security pensioner who is the spouse. Public pension beneficiaries who worked in public, uncovered (non-Social Security) employment but who also qualify for a Social Security benefit through other covered employment, or as a spouse of another beneficiary are subject to a reduction in their Social Security benefit. The beneficiary's public retirement benefit is generally not reduced as a result of the Social Security reduction. Even if a public retirement beneficiary takes a refund before becoming eligible for a full public retirement benefit or takes a lump-sum payment instead of a monthly benefit at retirement age, the windfall and offset reductions still may apply. However, in these cases the reduction may be minimal. The type of Social Security benefit a beneficiary will receive determines the formula used to calculate the reduction. An offset formula is used on a spouse's benefit, and a windfall elimination formula is used on an earned benefit. Government Pension Offset-Reduction of the Spousal (Widow's) Benefit The Government Pension Offset (GPO), reduces the Social Security spouse's (widow's) benefit by two-thirds (2/3) of the amount of the public retirement benefit received by the spousal beneficiary. In some cases, the offset will eliminate a Social Security benefit. The original GPO legislation enacted in 1977 required a dollar-for-dollar reduction in Social Security benefits for spouses or surviving spouses who received a pension from a federal, state, or local retirement system not covered by Social Security. In 1983, the formula was adjusted to lower the reduction to two-thirds of the government pension. Example #1: A retiree with a monthly uncovered public retirement benefit of $600 expects to supplement this retirement income with a Social Security spousal benefit of $450 (as their spouse earned a $900 worker benefit from Social Security). However, because of the government pension offset, which reduces the benefit by 2/3 of the worker's uncovered benefit, the worker's Social Security spousal benefit is reduced to $50 (see Example 1 calculation). Instead of receiving a combined monthly benefit of $1,050, the retiree receives a benefit of $650 per month. Example #1 Calculation Public Retirement Benefit $600 x 2/3 Offset Amount = $400 Social Security Before Offset $450 Offset Amount - $400 Reduced Social Security Spouse's Benefit = $50   The government pension offset does not apply to the following: Public retirement benefits, qualified for before June 30, 1983, that meet certain requirements. Public retirement benefit received on work that was covered by Social Security on the last day of employment. Increases in a public retirement benefit resulting from a purchase of service credit from employment that had been covered by Social Security. The increase due to the purchase may not be included in the benefit amount that Social Security uses to calculate the offset. Public retirement beneficiaries who are not exempt from the offset reduction and who qualified for a public retirement benefit between December 1, 1982, and July 1, 1983, may have 100 percent of their public retirement benefit (rather than two-thirds) used to determine the offset reduction by Social Security. Upon the death of a spouse who is a Social Security pensioner, uncovered public pension beneficiaries may have Social Security recalculate their spouse's benefit. Recalculated, the amount the beneficiary is eligible to receive (prior to the offset reduction) will be the full amount of the pensioner's earned benefit. Windfall Elimination Provision-Reduction of the Earned Benefit Some government employees who worked primarily in uncovered employment and who have earned an uncovered government pension may also work enough quarters in covered employment to qualify for an earned Social Security benefit. For example, teachers and other public school personnel may work summers in covered employment and public safety professionals, who are often subject to mandatory retirement at 55, may work additional years in covered employment. For these public employees a modified benefit formula, known as the windfall elimination provision (WEP), is usually applied to their Social Security earned benefit. The WEP, enacted in 1983, became fully effective on January 1, 1986. The WEP, which was gradually phased in, is now in full effect for beneficiaries at age 62 or at disability. Workers, who reached age 62 and qualified for a public retirement benefit after 1985 but before 1990, experience a smaller reduction to their Social Security benefit. The windfall elimination reduction does not apply in any of the following situations: The beneficiary receiving an uncovered public pension benefit was age 62 or disabled before 1986. The beneficiary qualified to begin receiving a monthly public retirement benefit (including reduced service retirement) before 1986, but continued to work beyond 1986. The beneficiary has 30 or more years of "substantial" Social Security coverage. Workers with 21 to 29 years of "substantial" Social Security-covered work are not subject to the full windfall reduction. The beneficiary paid Social Security tax on their salary earned from public employment. The maximum Social Security earned benefit reduction under the WEP cannot be more than one-half (1/2) the amount of the uncovered public retirement benefit earned. The windfall elimination provision is rather complex. The Social Security Administration uses the Social Security "average indexed monthly earnings" (AIME) to calculate the earned Social Security benefit. Generally, the AIME is based on the amount of wages on which the beneficiary paid Social Security taxes during 35 years of employment. The AIME is divided into three increments, and a portion of each increment is paid as a benefit. Generally, for persons who reach age 62 in 1998, their Social Security benefit payment includes 90 percent of the first $477 of AIME, plus 32 percent of the next $2,398 of AIME, plus 15 percent of the AIME that is more than $2,875. The dollar range of each increment increases each year. (In 1998, the maximum Social Security benefit was $1,342 for retirees age 62.) For beneficiaries with uncovered public pensions the WEP reduces the first increment from 90 percent to 40 percent for beneficiaries with 20 years or less of substantial earnings under Social Security. The AIME formula is weighted to provide maximum benefits to low-wage workers. Hence, the largest percentage of earnings that translate into a Social Security benefit are calculated into the formula at the lowest wage level. The WEP reduces benefits to workers who have earned an uncovered public retirement benefit in the first increment of calculated benefits. Example #2: Social Security Benefit With and Without WEP, based on (AIME) of $1,000. Example #2 Calculation AIME Increments $0 - 477 $477 - $2,874 Benefit Formula Without Reduction $477 x 90% = $429* $523 x 32% = $167* Benefit Formula With Reduction $477 x 40% = $190* $523 x 32% = $167* Social Security Benefit $596* $357* * Social Security always rounds down to the exact dollar. The maximum reduction in 1998 was $239 per month. For beneficiaries who worked between 21 and 30 years under Social Security, and had "substantial" Social Security coverage, 5 percent is added to the first increment for each year over 20. So, if the beneficiary worked 30 years under Social Security, the beneficiary would receive 90 percent of the first increment and no reduction would occur. "Substantial" coverage applies if Social Security tax was paid on a specified amount of earnings in a given year, as shown in the table below. Substantial Coverage Under Social Security Year Substantial Earnings Year Substantial Earnings Year Substantial Earnings 1951-54 $900 1978 $4,425 1989 $8,925 1955-58 1,050 1979 4,725 1990 9,525 1959-65 1,200 1980 5,100 1991 9,900 1966-67 1,650 1981 5,550 1992 10,350 1968-71 1,950 1982 6,075 1993 10,725 1972 2,250 1983 6,675 1994 11,250 1973 2,700 1984 7,050 1995 11,325 1974 3,300 1985 7,425 1996 11,625 1975 3,525 1986 7,875 1997 12,150 1976 3,825 1987 8,175 1998 12,675 1977 4,125 1988 8,400 1999 13,425   Policy Implications Several bills have been offered in the 106th Congress that would diminish or eliminate the offsets. NCSL recently adopted policy concerning the GPO and WEP offsets, which must be approved by the full body at the 2000 Annual Meeting in July 2000. With regards to the GPO, before 1977, a husband could not get a spousal Social Security benefit unless he could prove that his wife provided half his means of support. In 1977, the U.S. Supreme Court struck down this requirement, allowing thousands of male government retirees, not covered under Social Security to become eligible for Social Security benefits as a spouse. In enacting the WEP, Congress intended to minimize the increased costs to Social Security that resulted from this unexpected benefit or "windfall" on the part of career government employees who were thought not to have contributed to Social Security. The Social Security benefit formula is calculated using "AIME", average indexed monthly earnings. The AIME formula is weighted to favor low-wage workers. Because of the weighted formula, public employees who worked sporadically or who earned very little under covered employment would appear to be low-wage workers and thus would receive a higher portion of their covered earnings under an unaltered AIME benefit calculation. Congress, under the impression that public employees who worked the majority of their careers in well compensated uncovered public employment, enacted the WEP to provide a disincentive to "double dipping." Inherent in their assumptions was the idea that public employees who had not paid into the system over their lifetime of work should not receive the same weighted benefit as workers who did work a lifetime in covered employment. Efforts to reform the WEP are supported by federal retirees, state and local employees who work predominately in uncovered work and public employee unions and employee organizations. In the case of the reduction to spousal benefits under the GPO, it was thought that a person who worked in a government job long enough to become entitled to a government pension was not completely dependent on their spouse, therefore in retirement not completely reliant on the spousal benefit. Opponents of the offset argue that the GPO unfairly penalizes spouses, primarily women, who worked in lower-wage uncovered government employment. Non-teaching public school personnel and state government administrative and maintenance employees who may move in and out of the uncovered workforce due to familial responsibilities are often cited by GPO reformers as workers unfairly burdened by the reduction to spousal benefits. Opponents of both the WEP and GPO argue that the reductions are unfair to lower-wage public employees who receive a lower uncovered public pension benefit, because the greatest reductions are suffered by the lowest Social Security earners. That is, the reduction in WEP is on the first $477 of earnings. In many states and localities, a worker is vested and eligible to receive a pension after completing only five years of service. Hence in the case of GPO, the government employee may receive a minimal pension from his or her own employment and also suffers the spousal reduction. Proponents of eliminating or diminishing the reductions have argued that both the GPO and WEP assume that public employees in uncovered employment are career employees and make no adjustments for employees who may move in and out of public sector employment or who may qualify for only a minimal uncovered government pension. Opponents further argue that income replacement rates for civil service retirees are lower than in the private sector, thus sharpening the impact of the offsets. Many proponents of reform of the GPO in particular argue that women will be helped most by reform of the provisions. Supporters of the status quo maintain that reform of the GPO and the WEP will allow public employees to "double dip" and will increase costs to Social Security. Heightened awareness of the insolvency facing Social Security under its current structure has lessened support for reform of GPO and WEP. Federal, state and local employee groups and unions have long argued against the offset provisions. As of late, state and local governments and public pension systems have been relatively silent on the issues. When enacted these groups were vocal in their opposition to the legislative proposals. Legislatures may want to consider policy on the offset provisions in order to maintain retirement earnings for uncovered federal, state and local employees receiving government pensions. In particular, police and fire as well as teachers, are the most often affected by the offset provisions. Of the bills currently before the Congress, several have substantial support. HR 860 sponsored by Representative Barney Frank (D-MA) and 120 co-sponsors would change WEP to apply only to individuals whose combined monthly income from Social Security and their government pension exceeds $2,000. For individuals with benefits between $2,000 and $3,000 per month, the provision would apply on a graduated scale. For those receiving more than $3,000, the WEP formula would apply as it currently exists. HR 1217 sponsored by Representative William Jefferson (D-LA) and 236 co-sponsors would partially repeal GPO so that those receiving government pensions would be entitled to a larger portion of their spouse's Social Security benefit. Retirees with combined government pension and Social Security spousal benefit of less than $1,200 a month would not have their Social Security benefit reduced. The 2/3 offset would continue to apply to retiree Social Security benefits in excess of $1,200 combined monthly benefit. Similar proposals offered in the Senate, see S. 717 and S. 8, would also apply the GPO only to Social Security benefits in excess of $1,200 a month and would adjust this amount for inflation over time. For more information, contact Gerri Madrid at (202) 624-8670 Sources: AARP. The Government Pension Offset (GPO). 1999. AARP. The Windfall Reduction (WEP). 1999. California State Teachers' Retirement System. The Government Pension Offset and the Windfall Elimination Provision. Unpublished pamphlet. 1999. Coalition to Preserve Retirement Security. Windfall and Offset Provisions. 1999. National Association of Retired Federal Employees. Social Security Government Pension Offset. Pamphlet. April 1998. National Association of Retired Federal Employees. Social Security Windfall Elimination Provision. Pamphlet. April 1998. Social Security Administration. Government Pension Offset: A Law That Affects Social Security Spouse's or Widow's Benefits. Pamphlet. January 1993. Social Security Administration. A Pension From Work Not Covered by Social Security. Pamphlet. January 1993.

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