This is the accessible text file for GAO report number GAO-02-950 entitled 'Social Security Administration: Revision to the Government Pension Offset Exemption Should Be Reconsidered' which was released on August 15, 2002. This text file was formatted by the U.S. General Accounting Office (GAO) to be accessible to users with visual impairments, as part of a longer term project to improve GAO products’ accessibility. Every attempt has been made to maintain the structural and data integrity of the original printed product. Accessibility features, such as text descriptions of tables, consecutively numbered footnotes placed at the end of the file, and the text of agency comment letters, are provided but may not exactly duplicate the presentation or format of the printed version. The portable document format (PDF) file is an exact electronic replica of the printed version. We welcome your feedback. Please E-mail your comments regarding the contents or accessibility features of this document to Webmaster@gao.gov. Report to the Chairman, Subcommittee on Social Security, Committee on Ways and Means, House of Representatives: United States General Accounting Office: GAO: August 2002: Social Security Administration: Revision to the Government Pension Offset Exemption Should Be Considered: GAO-02-950: Contents: Letter: Matter for Congressional Consideration: Agency Comments: Appendix: Abbreviations: CSRS: Civil Service Retirement System: FERS: Federal Employees Retirement System: GPO: Government Pension Offset: SSA: Social Security Administration: August 15, 2002: The Honorable E. Clay Shaw Chairman Subcommittee on Social Security Committee on Ways and Means House of Representatives: Dear Mr. Chairman: This report addresses your request for information on the Government Pension Offset (GPO) exemption. Generally, Social Security benefits are payable to the spouses of retired, disabled, or deceased workers covered by Social Security. These benefits often provide income to wives and husbands who have little or no Social Security benefits of their own. If both spouses worked in positions covered by Social Security, each may not receive both the benefits earned as a worker and the full spousal benefit; rather the worker receives the higher amount of the two. However, until 1977, workers receiving pensions from government positions not covered by Social Security could receive their full pension benefit and their full Social Security spousal benefits as if they were nonworking spouses. At that time, legislation was enacted[Footnote 1] creating a GPO, to equalize the treatment of workers covered by Social Security and those with noncovered government pensions. The GPO prevented workers from receiving a full spousal benefit on top of a pension earned from noncovered government employment.[Footnote 2] However, the law provides an exemption from the GPO if an individual’s last day of state/local employment is in a position that is covered by both Social Security and the state/local government’s pension system.[Footnote 3] In these cases, the GPO will not be applied to the Social Security spousal benefit. The intent of the “last-day” exemption is unclear in the legislation. Specifically, you asked us to (1) assess the extent to which individuals retiring from jobs not covered by Social Security may be transferring briefly to jobs covered by Social Security in order to avoid the GPO, (2) estimate the impact of such transfers on the Social Security Trust Fund, and (3) identify options for addressing potential abuses of the last-day exemption. On July 9, 2002, we briefed your staff on the results of our work. This report formally conveys the final version of the document used at that briefing. This review originated from a referral to GAO’s FraudNET questioning a practice in Texas where individuals were transferring to Social Security-covered positions for one-day to avoid the GPO.[Footnote 4] To perform our work we first reviewed the GPO’s legislative history and government reports documenting the purpose of the offset and the Social Security Administration’s (SSA) policies and procedures for administering it. There is no central data on use of the GPO exemption by individuals and time constraints did not permit in-depth audit work on the approximately 2,300 state and local government retirement plans nationwide. Therefore, to assess the extent of these job transfers, we performed limited work with associations, researchers, and retirement system officials in 28 states. We selected these states either because they were authorized to operate retirement systems with both covered and noncovered positions or because their state or local government plans had a mix of covered and noncovered positions, thus offering the greatest potential for use of the last-day exemption. We also interviewed and obtained documentation from SSA headquarters and regional officials; and other federal officials knowledgeable about the subject matter, such as the Congressional Budget Office and the Internal Revenue Service. Finally, we visited and performed audit work in Texas and Georgia, two of the states where we identified use of the last-day exemption. We conducted our work from April through June 2002 in accordance with generally accepted government auditing standards. Given our time constraints we could not definitively confirm that this practice is occurring in other states. However, we were able to establish that in Texas and Georgia 4,819 individuals as of June 2002 performed work in Social Security covered positions for short periods to qualify for the GPO last-day exemption.[Footnote 5] Texas officials reported 4,795 individuals; Georgia officials reported an estimated 24 cases. SSA officials also acknowledged that use of the exemption might be possible in some of the approximately 2,300 state and local government retirement plans in other states where such plans contain Social Security covered and noncovered positions. In Texas, teachers typically worked a single day in a nonteaching position covered by Social Security, such as a clerical or janitorial position. Based on an hourly wage of about $6, these individuals in Texas typically paid a total of $3 in Social Security taxes. In Georgia, teachers generally agreed to work for approximately one year in another teaching position in a school district covered by Social Security. Officials in both states indicated that use of the exemption would likely continue to grow as awareness increases and it becomes part of individual’s retirement planning. For the cases we identified in Texas and Georgia, increased long-term benefit payments from the Social Security Trust Fund could be about $450 million.[Footnote 6] This figure was calculated by multiplying the number of last-day cases reported in Texas and Georgia (4,819) by SSA data on average annual offset amount ($4,800) and the average life expectancy upon receipt of spousal benefits (19.4 years). These estimated payments would likely increase as use of the exemption grows. Options for addressing potential abuses of the GPO exemption include (1) changing the last day provision to a longer minimum time period or (2) using a proportional approach based on the number of working years as a government employee spent in covered and noncovered employment for determining the extent to which the GPO applies. The first option would require only small changes to administer and has precedent in 1987 legislation that required federal employees who transferred from the Civil Service Retirement System (CSRS) to the Federal Employees Retirement System (FERS) to remain in FERS for 5 years before retirement to be exempt from the GPO. The second option may represent a more calibrated approach to determining benefits for individuals who have made contributions to the Social Security system for an extended period of their working years. However, SSA has noted that a proportional approach would take time to design and would be administratively burdensome to implement, given the lack of complete and reliable data on noncovered Social Security employment. The GPO “loophole” raises fairness and equity concerns for those receiving a Social Security pension and are currently subject to an offset of their spousal Social Security benefits. In the states we visited, individuals with a relatively small investment of work time and only minimal Social Security contributions can gain access to potentially many years of full Social Security spousal benefits by using the GPO exemption. Also, providing full spousal benefits to individuals who receive government pensions and made only nominal contributions to the Social Security system runs counter to the nation’s efforts to address the solvency and sustainability of the Social Security program. Finally, the last-day exemption could have a more significant impact if the practice grows and begins to be adopted by other states and localities. Matter for Congressional Consideration: Considering the potential for abuse of the last-day exemption and the likelihood for its increased use, we believe timely action is needed. We are making a matter for congressional consideration that the last- day GPO exemption be revised to provide for a longer minimum time period. This action would provide an immediate “fix” to address possible abuses of the GPO exemption identified in our review. Agency Comments: We provided a draft of this briefing to SSA officials for comment on July 3, 2002. On July 8, 2002, SSA provided oral comments on our draft briefing. SSA generally agreed with our briefing’s findings and provided several technical comments, which we incorporated where appropriate. We also provided a draft of this report to the Commissioner of Social Security for comment. On August 7, 2002, we obtained written comments on our draft report from SSA. SSA generally agreed with our report’s findings and provided several technical comments, which we incorporated where appropriate. We are sending copies of this report to relevant congressional committees and other interested parties and will make copies available to others upon request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff have any questions about this report, please contact me on (202) 512-7215 or Daniel Bertoni on (202) 512-5988. Patricia M. Bundy, Jamila L. Jones, Daniel A. Schwimer, Anthony J. Wysocki, and Jill D. Yost also made key contributions to this report. Sincerely yours, Barbara D. Bovbjerg Director, Education, Workforce, and Income Security Issues: Signed by Barbara D. Bovbjerg: [End of section] Appendix: [See PDF for image] [End of section] FOOTNOTES [1] Public Law 95-216, Section 334 (1977). [2] Currently, the reduction in spousal benefits is two-thirds of the amount of their public pension. [3] Exemption due to “The Last Day of Employment” Covered Under Social Security - State/Local or Military Service Pensions (SSA’s Program Operations Manual System, GN 02608.102). [4] FraudNET is a service maintained by GAO’s Office of Special Investigations. GAO subsequently determined that use of the GPO last- day exemption is permitted under the law. [5] Technically, individuals could have used this exemption since its passage in 1977. However, nearly all of the transfers we identified in Texas and Georgia occurred in the last several years. [6] This estimate may over/under estimate costs due to the use of averages, the exclusion of inflation/cost-of-living/net present value adjustments, lost investment earnings by the Trust Funds, and other factors that may affect the receipt of spousal benefits. GAO’s Mission: The General Accounting Office, the investigative arm of Congress, exists to support Congress in meeting its constitutional responsibilities and to help improve the performance and accountability of the federal government for the American people. GAO examines the use of public funds; evaluates federal programs and policies; and provides analyses, recommendations, and other assistance to help Congress make informed oversight, policy, and funding decisions. 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