[House Hearing, 105 Congress]
[From the U.S. Government Publishing Office]
THE FUTURE OF SOCIAL SECURITY FOR THIS GENERATION AND THE NEXT:
IMPLICATIONS OF PROPOSALS AFFECTING FEDERAL, STATE, AND LOCAL
GOVERNMENT EMPLOYEES
=======================================================================
HEARING
before the
SUBCOMMITTEE ON SOCIAL SECURITY
of the
COMMITTEE ON WAYS AND MEANS
HOUSE OF REPRESENTATIVES
ONE HUNDRED FIFTH CONGRESS
SECOND SESSION
__________
MAY 21, 1998
__________
Serial 105-49
__________
Printed for the use of the Committee on Ways and Means
U.S. GOVERNMENT PRINTING OFFICE
52-908 cc WASHINGTON : 1999
COMMITTEE ON WAYS AND MEANS
BILL ARCHER, Texas, Chairman
PHILIP M. CRANE, Illinois CHARLES B. RANGEL, New York
BILL THOMAS, California FORTNEY PETE STARK, California
E. CLAY SHAW, Jr., Florida ROBERT T. MATSUI, California
NANCY L. JOHNSON, Connecticut BARBARA B. KENNELLY, Connecticut
JIM BUNNING, Kentucky WILLIAM J. COYNE, Pennsylvania
AMO HOUGHTON, New York SANDER M. LEVIN, Michigan
WALLY HERGER, California BENJAMIN L. CARDIN, Maryland
JIM McCRERY, Louisiana JIM McDERMOTT, Washington
DAVE CAMP, Michigan GERALD D. KLECZKA, Wisconsin
JIM RAMSTAD, Minnesota JOHN LEWIS, Georgia
JIM NUSSLE, Iowa RICHARD E. NEAL, Massachusetts
SAM JOHNSON, Texas MICHAEL R. McNULTY, New York
JENNIFER DUNN, Washington WILLIAM J. JEFFERSON, Louisiana
MAC COLLINS, Georgia JOHN S. TANNER, Tennessee
ROB PORTMAN, Ohio XAVIER BECERRA, California
PHILIP S. ENGLISH, Pennsylvania KAREN L. THURMAN, Florida
JOHN ENSIGN, Nevada
JON CHRISTENSEN, Nebraska
WES WATKINS, Oklahoma
J.D. HAYWORTH, Arizona
JERRY WELLER, Illinois
KENNY HULSHOF, Missouri
A.L. Singleton, Chief of Staff
Janice Mays, Minority Chief Counsel
______
Subcommittee on Social Security
JIM BUNNING, Kentucky, Chairman
SAM JOHNSON, Texas BARBARA B. KENNELLY, Connecticut
MAC COLLINS, Georgia RICHARD E. NEAL, Massachusetts
ROB PORTMAN, Ohio SANDER M. LEVIN, Michigan
JON CHRISTENSEN, Nebraska JOHN S. TANNER, Tennessee
J.D. HAYWORTH, Arizona XAVIER BECERRA, California
JERRY WELLER, Illinois
KENNY HULSHOF, Missouri
Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public
hearing records of the Committee on Ways and Means are also published
in electronic form. The printed hearing record remains the official
version. Because electronic submissions are used to prepare both
printed and electronic versions of the hearing record, the process of
converting between various electronic formats may introduce
unintentional errors or omissions. Such occurrences are inherent in the
current publication process and should diminish as the process is
further refined.
C O N T E N T S
__________
Page
Advisory of May 13, 1998, announcing the hearing................. 2
WITNESSES
U.S. General Accounting Office, Cynthia M. Fagnoni, Director,
Income Security Issues, Health, Education, and Human Services
Division; accompanied by John Schaefer, Senior Evaluator; and
Frank Mulvey, Assistant Director............................... 12
Congressional Research Service, Geoffrey Kollmann, Specialist,
Social Legislation, Education and Public Welfare Division...... 22
______
American Federation of State, County and Municipal Employees,
Joseph Rugola.................................................. 96
Coalition to Assure Retirement Equity, Robert E. Normandie....... 90
Coalition to Preserve Retirement Security, Robert J. Scott....... 43
Frank, Hon. Barney, a Representative in Congress from the State
of Massachusetts............................................... 11
Jefferson, Hon. William J., a Representative in Congress from the
State of Louisiana............................................. 5
Massachusetts Teachers' Retirement Board, Thomas R. Lussier...... 59
National Association of Retired Federal Employees, Bernadine A.
Jernigan....................................................... 94
National Fraternal Order of Police, Marty Pfeifer................ 56
Ohio Association of Public School Employees, Joseph Rugola....... 96
Public Employees' Retirement Association, Robert J. Scott........ 43
Public Employees' Retirement System of Nevada, George Pyne....... 66
Public Employees Retirement System of Ohio, Richard E. Shumacher. 53
Washington Metropolitan Police Department, Marty Pfeifer......... 56
SUBMISSIONS FOR THE RECORD
Bixby, Jay W., National Conference on Public Employee Retirement
Systems, letter................................................ 129
California Correctional Peace Officers Association, Donald L.
Novey, statement............................................... 105
California State Teachers' Retirement System, Sacramento, CA,
Jennifer DuCray-Morrill, statement............................. 107
Council for Government Reform, Arlington, VA, Charles G. Hardin,
statement...................................................... 111
Deutsch, Eleanor, Brooklyn, NY, letter........................... 112
Doyle, Patrick L., Commonwealth of Kentucky, Division of Social
Security, statement............................................ 113
DuCray-Morrill, Jennifer, California State Teachers' Retirement
System, Sacramento, CA, statement.............................. 107
Dyer, Herbert L., State Teachers Retirement System of Ohio,
Columbus, OH, letter........................................... 140
Fierst, Edith U., Chevy Chase, MD, statement..................... 114
Graves, Russell, National Conference of State Social Security
Administrators, Oklahoma City, OK, statement................... 131
Hardin, Charles G., Council for Government Reform, Arlington, VA,
statement...................................................... 111
International Association of Fire Fighters, Alfred K. Whitehead,
statement...................................................... 117
Johnson, Tom, National Conference of State Legislatures, letter.. 130
Kentucky, Commonwealth of, Division of Social Security, Patrick
L. Doyle, statement............................................ 113
Mikulski, Hon. Barbara A., a U.S. Senator from the State of
Maryland, statement............................................ 119
Miller, Pat N., Teachers' Retirement System of Kentucky,
Frankfort, KY, letter.......................................... 141
National Association of Police Organizations, Inc., Robert T.
Scully, statement.............................................. 120
National Committee to Preserve Social Security and Medicare,
statement...................................................... 127
National Conference on Public Employee Retirement Systems, Jay W.
Bixby, letter.................................................. 129
National Conference of State Legislatures, Tom Johnson, letter... 130
National Conference of State Social Security Administrators,
Oklahoma City, OK, Russell Graves, statement................... 131
National Education Association, statement........................ 133
National Treasury Employees Union, Robert M. Tobias, statement... 135
Novey, Donald L., California Correctional Peace Officers
Association, statement......................................... 105
O'Hare, Sally D., Palos Heights, IL, statement................... 136
Ohio, State of, Hon. George V. Voinovich, Governor, statement.... 137
Sandlin, Hon. Max, a Representative in Congress from the State of
Texas, statement............................................... 139
Scully, Robert T., National Association of Police Organizations,
Inc., statement................................................ 120
State Teachers Retirement System of Ohio, Columbus, OH, Herbert
L. Dyer, letter................................................ 140
Teachers' Retirement System of Kentucky, Frankfort, KY, Pat N.
Miller, letter................................................. 141
Tobias, Robert M., National Treasury Employees Union, statement.. 135
Voinovich, Hon. George V., Governor, State of Ohio, statement.... 137
Whitehead, Alfred K., International Association of Fire Fighters,
statement...................................................... 117
THE FUTURE OF SOCIAL SECURITY FOR THIS GENERATION AND THE NEXT:
IMPLICATIONS OF PROPOSALS AFFECTING FEDERAL, STATE, AND LOCAL
GOVERNMENT EMPLOYEES
----------
THURSDAY MAY 21, 1998
House of Representatives,
Committee on Ways and Means,
Subcommittee on Social Security,
Washington, DC.
The Subcommittee met, pursuant to notice, at 10 a.m., in
room B-318, Rayburn House Office Building, Hon. Jim Bunning
(Chairman of the Subcommittee) presiding.
[The advisory announcing the hearing follows:]
ADVISORY
FROM THE
COMMITTEE
ON WAYS
AND
MEANS
SUBCOMMITTEE ON SOCIAL SECURITY
CONTACT: (202) 225-9263
FOR IMMEDIATE RELEASE
May 13, 1998
No. SS-16
Bunning Announces Ninth
Hearing in Series on ``The Future of
Social Security for this Generation and the Next''
Congressman Jim Bunning (R-KY), Chairman, Subcommittee on Social
Security of the Committee on Ways and Means, today announced that the
Subcommittee will hold the ninth in a series of hearings on ``The
Future of Social Security for this Generation and the Next.'' At this
hearing, the Subcommittee will examine the implications of proposals
affecting Federal, State, and local government employees. These
proposals include extending mandatory Social Security coverage to all
newly hired State and local employees, and altering current law
provisions affecting the Social Security benefits of persons who
receive government pensions. The hearing will take place on Thursday,
May 21, 1998, in room B-318 Rayburn House Office Building, beginning at
10:00 a.m.
In view of the limited time available to hear witnesses, oral
testimony will be from invited witnesses only. Witnesses are expected
to include Members of Congress, the U.S. General Accounting Office,
Federal and State government employee representatives, and social
insurance experts. However, any individual or organization may submit a
written statement for consideration by the Committee and for inclusion
in the printed record of the hearing.
BACKGROUND:
Numerous Social Security reform proposals include a provision to
extend mandatory coverage to all newly hired State and local government
employees. Social Security coverage has been expanded since Social
Security's beginning. Workers in business and industry, then about 60
percent of the workforce, were the only persons covered in the initial
Social Security Act of 1935. Over time, the program's coverage has
grown to include the self-employed, nonprofit groups, agricultural and
household workers, the Armed Services, Members of Congress, and all
other Federal employees hired after 1983.
State and local governments were excluded altogether in the
original Social Security Act of 1935 to avoid raising the possible
constitutional questions of whether the Federal Government could tax
State and local governments, and because many State and local
government employees were already covered under other pension plans.
Beginning in 1950, Congress amended the law several times to make
participation in Social Security available on a voluntary basis to
employees of State and local governments. In 1983, the State and local
government option to terminate Social Security coverage was repealed
and all State and local governments participating in the system were
required to continue their participation. Beginning July 1, 1991,
Social Security coverage was made mandatory for State and local
government workers who do not participate in a retirement system for
such employment.
The Social Security Administration estimates that 96 percent of the
workforce, including 70 percent of State and local government workers,
is now covered by Social Security and that about 4.9 million State and
local government workers are not covered by Social Security. Seven
States (California, Colorado, Illinois, Louisiana, Massachusetts, Ohio,
and Texas) account for over 75 percent of non-covered payroll. Previous
surveys have found that police, firefighters, and teachers are more
likely to occupy non-covered positions.
Also impacting Federal, State, and local government employees are
two current law provisions that reduce entitlement to Social Security
benefits. These provisions, commonly known as the Government Pension
Offset (GPO) and Windfall Elimination Provision (WEP), were enacted in
1977 and 1983, respectively, in an attempt to provide Social Security
benefits which are fair to all workers, whether they work in non-Social
Security-covered government employment or in jobs under Social
Security.
Since the enactment of the GPO and WEP, government workers have
expressed concern that benefit reductions are imprecise and unfair.
Legislative proposals have been introduced which modify the way
benefits would be calculated.
In announcing the hearing, Chairman Bunning stated: ``Most
Americans are surprised to learn that not all workers are covered by
Social Security. To many, covering those State and local government
workers not covered under Social Security is an issue of simple
fairness. Yet, changing the retirement systems of many of our teachers,
firefighters, and police forces could have far reaching effects on
these workers and the long-term financing of their retirement plans.
These workers have devoted their careers to us, ensuring the safety and
sound education of ourselves and our children. Their views are very
important to this Subcommittee, and we need to listen and carefully
consider what they have to say.''
FOCUS OF THE HEARING:
The Subcommittee will receive views on proposals to extend
mandatory Social Security coverage to all newly hired State and local
government employees and altering current law provisions affecting the
Social Security benefits of persons who receive government pensions.
DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:
Any person or organization wishing to submit a written statement
for the printed record of the hearing should submit six (6) single-
spaced copies of their statement, along with an IBM compatible 3.5-inch
diskette in WordPerfect 5.1 format, with their name, address, and
hearing date noted on a label, by the close of business, Thursday, June
4, 1998 , to A.L. Singleton, Chief of Staff, Committee on Ways and
Means, U.S. House of Representatives, 1102 Longworth House Office
Building, Washington, D.C. 20515. If those filing written statements
wish to have their statements distributed to the press and interested
public at the hearing, they may deliver 200 additional copies for this
purpose to the Subcommittee on Social Security office, room B-316
Rayburn House Office Building, at least one hour before the hearing
begins.
FORMATTING REQUIREMENTS:
Each statement presented for printing to the Committee by a
witness, any written statement or exhibit submitted for the printed
record or any written comments in response to a request for written
comments must conform to the guidelines listed below. Any statement or
exhibit not in compliance with these guidelines will not be printed,
but will be maintained in the Committee files for review and use by the
Committee.
1. All statements and any accompanying exhibits for printing must
be submitted on an IBM compatible 3.5-inch diskette in WordPerfect 5.1
format, typed in single space and may not exceed a total of 10 pages
including attachments. Witnesses are advised that the Committee will
rely on electronic submissions for printing the official hearing
record.
2. Copies of whole documents submitted as exhibit material will not
be accepted for printing. Instead, exhibit material should be
referenced and quoted or paraphrased. All exhibit material not meeting
these specifications will be maintained in the Committee files for
review and use by the Committee.
3. A witness appearing at a public hearing, or submitting a
statement for the record of a public hearing, or submitting written
comments in response to a published request for comments by the
Committee, must include on his statement or submission a list of all
clients, persons, or organizations on whose behalf the witness appears.
4. A supplemental sheet must accompany each statement listing the
name, company, address, telephone and fax numbers where the witness or
the designated representative may be reached. This supplemental sheet
will not be included in the printed record.
The above restrictions and limitations apply only to material being
submitted for printing. Statements and exhibits or supplementary
material submitted solely for distribution to the Members, the press
and the public during the course of a public hearing may be submitted
in other forms.
Note: All Committee advisories and news releases are available on
the World Wide Web at `HTTP://WWW.HOUSE.GOV/WAYS__MEANS/'.
The Committee seeks to make its facilities accessible to persons
with disabilities. If you are in need of special accommodations, please
call 202-225-1721 or 202-226-3411 TTD/TTY in advance of the event (four
business days notice is requested). Questions with regard to special
accommodation needs in general (including availability of Committee
materials in alternative formats) may be directed to the Committee as
noted above.
Chairman Bunning [presiding]. The Subcommittee will come to
order.
I want to let all of our people that are going to testify
know that there is going to be a vote called very, very shortly
on the floor of the House. So, I'm going to adjourn, because
the first two panelists are Members, and they will be coming
back with me, I hope, to testify, and then we will get on with
all other testimony. We have a very long program, a lot of
people that wanted to testify today. So if you'll bear with us
for just a short period of time, we have a journal vote over on
the floor, and I'll be back immediately. So, we'll stand in
recess until I get back.
[Recess.]
Chairman Bunning. The Subcommittee will come to order.
I'm going to do my opening statement and when Ms. Kennelly
comes we'll allow her to do hers even though we may have to
interrupt some of our testimony.
Today marks our ninth hearing in a series of the future of
Social Security for this generation and the next. The
Subcommittee will examine the implications of proposals
affecting Federal, State, and local government employees. These
proposals including extending mandatory Social Security
coverage to all newly hired State and local employees and
altering current law provisions affecting the Social Security
benefits of persons who receive government pensions.
Most Americans are surprised to learn that not everyone
pays FICA, Federal Insurance Contributions Act, taxes and
receives Social Security benefits and believe it's only fair
for State and local government employees to pay the same FICA
taxes that most everyone else does. Perhaps, that is why just
about every proposal for Social Security reform, including the
recommendations of the 1994-96 Social Security Council,
includes a provision to extend mandatory coverage to all newly
hired State and local government employees.
The Social Security Administration estimates that about 5
million State and local government workers are not covered by
Social Security. Seven States--California, Colorado, Illinois,
Louisiana, Massachusetts, Ohio, and Texas--account for more
than 75 percent of these workers. Yet, changing the retirement
system of many of our teachers, firefighters and police force
could have a far-reaching effect on these workers, their
employees, and the long-term financing of their respective
retirement plans. These workers have devoted their careers to
us ensuring our safety and educating our children. Their views
are very important to this Subcommittee, and we intend to
listen carefully to what they have to say.
Also impacting Federal, State, and local government
employees are two current law provisions that reduce
entitlement to Social Security benefits. These provisions
commonly known as the GPO, government pension offset, and WEP,
windfall elimination provisions, were enacted in 1977 and 1983,
respectively, in an attempt to provide Social Security benefits
which are fair to all workers whether they work in jobs covered
by Social Security or jobs that are not covered by Social
Security.
As we consider major Social Security reform, we have the
opportunity to closely examine those current law benefit
provisions which have come under scrutiny. Since the enactment
of the GPO and the WEP, government workers have expressed
concern that benefit reductions are imprecise and unfair.
Today, we'll hear more details regarding these concerns and the
legislative proposals introduced which would modify the way
benefits would be calculated.
Let me emphasize that the purpose of this hearing series is
to fully explore all options for Social Security reform so that
when the time comes Members will be able to make informed
decisions fair to all workers and all generations. We seek
information. We do not seek to establish any particular
position. Today, we look forward to hearing the views from all
our witnesses, particularly those who have been or will be
personally affected by these proposals.
I reserve time for the Ranking Member, and I will go
immediately to our first panel and the gentleman from
Louisiana, Mr. Jefferson, and all Members can submit for the
record any opening statements that they might have.
Mr. Jefferson.
STATEMENT OF HON. WILLIAM J. JEFFERSON, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF LOUISIANA
Mr. Jefferson. Thank you very much, Mr. Chairman and
Members of the Subcommittee, and I thank you for the bipartisan
show of support this morning by providing me with my own
statement, thank you.
I'm pleased to have the opportunity to testify before the
Subcommittee regarding the government pension offset. This
issue is totally separate from the question of whether FICA
should apply to hires or not, because if it were to start today
in that direction, it still wouldn't fix the issue that we now
have which has cropped up over the years of reliance under
another system, so I don't have to state a position one way or
another on that to talk about this issue which still needs
fixing.
After the 1935 act was established, some of local
governments decided to remain outside of the system as you
pointed out. It's estimated that about 4.9 million State and
local government employees are not covered by Social Security
and, as you pointed out, many of them are in 7 States.
Many of the State and local government employees that are
covered by government pension will be unfairly affected by the
pension offset. As you may be aware, the pension offset was
originally enacted in response to perceived abuses to the
Social Security system resulting from the Goldfarb decision.
The Social Security system provides that if a spouse who worked
and paid into Social Security died, the benefits were to paid
to the surviving spouse as a survivor benefit. Men were
required to prove dependency on their spouses before they
became eligible for Social Security benefits. There was no such
requirement for women. The Goldfarb decision eliminated this
different treatment of men and women. The court, instead,
required Social Security to treat men and women equally by
paying benefits to either spouse without regard to dependency.
Many of the men who would benefit from the Goldfarb decision
were also receiving large government pensions. It was believed
that these retirees would bankrupt the system receiving
government and private pensions in addition to survivor
benefits.
To combat this perceived problem, pension offset
legislation was enacted in 1977. The legislation provided for a
dollar for dollar reduction of Social Security benefits to
spouses or retiring spouses who received earned benefits from
the Federal, State, or local retirement system. The pension
offset provisions can affect any retiree who receives a civil
pension on Social Security but primarily affects widows or
widowers eligible for survivor benefits.
In 1983, the pension offset was reduced to two-thirds of
the public employees survivor benefit. It was believed that
one-third of the pension was equivalent to pension available in
the private sector. The pension offset, which was aimed at
higher paid government employees also applies to public service
employees who generally receive lower pension benefits, and
this is the nub of the problem. These public service employees
include secretaries, school cafeteria workers, teacher aids,
teachers, and others who don't receive high salaries. The
pension offset as applied to this group is punitive, unfairly
harsh, and bad policy. While government pensions were tailored
to produce benefits that were equal to many combined, private
pension and Social Security benefits for upper level government
workers, this was not true for low-income workers such as the
employees I mentioned.
To illustrate the harsh impact of the pension offset,
consider a widow who retired form the Federal Government and
received a civil service annuity of $550 monthly. The full
widows benefit is $385. The current pension offset law reduces
the widow's benefit to $19 a month--two-thirds of the $550
civil service annuity which is $367--this is then subtracted
from the $385 widows benefit, leaving only $19. The retired
worker receives $569 instead of almost $1,000 otherwise.
Proponents of the pension offset claim that the offset is
justified because survivor benefits were intended to be in lieu
of pensions, however, if this logic was followed across the
board, people with private pension benefits would also be
subject to an offset but this is not the case. While Social
Security benefits of spouses or surviving spouses earned in
government pensions are reduced by two for every $3 earned,
Social Security benefits of spouses or surviving spouses
earning private pensions are not subject to offset at all.
My office has received letters from around the country
including one from a 68-year-old lady, Helen Emery from Fair
Oaks, California, who writes to say that ``My government
retirement, monthly, after deductions, is a very modest
$988.69. I'm sure you know this is just a fraction above the
poverty level. The government pension offset benefits will
reduce my Social Security benefits and only allow me an
additional $116 per month.'' These sorts of letters come from
people who work for sheriff's departments and from people who
work for other agencies that I've noted in my statement--I do
not have time, apparently, to go through them all.
But I do want to point out that in this Congress I've
introduced H.R. 2273. There are 161 or 162 cosponsors on the
bill. It's a bill that has a great deal of support. Senator
Mikulski has introduced a similar bill in the Senate. It limits
the pension offset to those--person to collect more than $1,200
in overall pension benefits. As you can see H.R. 2273 has a cap
on it, so it doesn't go to the high benefit pensioners, but it
will affect those small people who were never, I don't believe,
intended to be affected by the GPO, and it corrects, I think,
an inequity in the system.
So, I would urge the Subcommittee to take up this
legislation in the remaining part of this session and--as it
goes about the business of fixing the overall system, making
sure that the system is fair to everyone, that it take into
account this issue which is a very important issue, this many
people around the country have a great deal of interest in. I
thank the Subcommittee for listening to me. I appreciate your
giving me the time.
[The prepared statement follows:]
Statement of Hon. William J. Jefferson, a Representative in Congress
from the State of Louisiana
Mr. Chairman and members of the Subcommittee, I am pleased
to have the opportunity to testify regarding the Government
Pension Offset (Pension Offset).
I thank the Chairman for having a hearing on this pressing
issue. Pension Offset is an important issue to me. It is an
important issue for my constituents in Louisiana and it is an
important issue for many state and local government employees
across the nation.
As you are aware, state and local government employees were
excluded from Social Security coverage when the Social Security
System was first established in 1935. These employees were
later given the option to enroll in the Social Security System
and in the 1960's and 1970's many public employees opted to
join in.
Some local governments chose to remain out of the system.
Their employees and spouses planned for retirement according to
the rules in effect. It is estimated that about 4.9 million
state and local government employees are not covered by Social
Security. Seven states (California, Colorado, Illinois,
Louisiana, Massachusetts, Ohio and Texas) account for over 75
percent of non-covered payroll.
Many of the state and local government employees that are
covered by government pensions will be unfairly affected by the
Pension Offset.
As you may be aware, the Pension Offset was originally
enacted in response to the perceived abuses to the Social
Security system resulting from the Goldfarb decision.
The Social Security System provides that if a spouse who
worked and paid into Social Security died, the benefits were to
be paid to the surviving spouse as a survivor benefit. Men were
required to prove dependency on their spouses before they
became eligible for Social Security survivor benefits. There
was no such requirement for women.
The Goldfarb decision eliminated the different treatment of
men and women. The court instead required Social Security to
treat men and women equally by paying benefits to either spouse
without regard to dependency.
Many of the men who would benefit from the Goldfarb
decision were also receiving large government pensions. It was
believed that these retirees would bankrupt the system,
receiving large government and private pensions in addition to
survivor benefits.
To combat this perceived problem, Pension Offset
legislation was enacted in 1977. The legislation provided for a
dollar for dollar reduction of Social Security benefits to
spouses or retiring spouses who received earned benefits from a
federal, state or local retirement system. The Pension Offset
provisions can affect any retiree who receives a civil service
pension and Social Security but primarily affects widows or
widowers eligible for survivor benefits.
In 1983, the Pension Offset was reduced to two-thirds of
the public employer survivor benefit. It was believed that one-
third of the pension was equivalent to the pension available in
the private sector.
The Pension Offset aimed at high paid government employees
also applies to public service employees who generally receive
lower pension benefits. These public service employees include
secretaries, school cafeteria workers, teachers aides and
others low wage government employees. The Pension Offset as
applied to this group is punitive, unfairly harsh and bad
policy.
Government pensions were tailored to produce benefits that
were equal to many combined private pension-Social Security
policies in the private sector for upper level government
workers. However, this was not true for lower income workers
such as employees who worked as secretaries, school cafeteria
workers, teachers aides and others who generally receive lower
pension benefits.
To illustrate the harsh impact of the Pension Offset,
consider a widow who retired from the federal government and
receives a civil service annuity of $550 monthly. The full
widow's benefit is $385. The current Pension Offset law reduces
the widow's benefit to $19 a month (\2/3\ of the $550 civil
service annuity is $367, which is then subtracted from the $385
widow's benefit, leaving only $19). The retired worker receives
$569 ($550 + $19) per month.
Proponents of the Pension Offset claim that the offset is
justified because Survivor benefits were intended to be in lieu
of pensions. However, were this logic followed across the
board, then people with private pension benefits would be
subject to the offset as well. But that is not the case.
While Social Security benefits of spouses or surviving
spouses earning government pensions are reduced by $2 for every
$3 earned. Social Security benefits of spouses or surviving
spouses earning private pensions are not subject to offset at
all.
If retirees on private pensions do not have Social Security
benefits subject to offset, why should retirees who worked in
the public service?
The Pension offset has created a problem that cries out for
reform. It will cause tens of thousands of retired government
employees, including many former para-professionals, custodians
or lunch room workers, to live their retirement years at or
near the poverty level.
My office has received numerous calls, all from widows, who
are just getting by and desperately need some relief from the
Pension Offset.
The following is a letter we received from Helen J. Emery from
Fair Oaks, California.
I am a 68 year old and worked 27 years for the Government.
My government retirement monthly after deductions is a ``very''
modest $988.69. I am sure you know this is just a fraction
above poverty level. The ``windfall'' benefits law reduced my
social security benefits and only allows me an additional
$116.00 per month even though I alone paid into this Social
Security prior to working for the Government.
Effective January 1998, I became a divorced widow and the
``offset'' effecting my $724.80 widows Social Security benefits
brings my widow's benefits to zero.
I am hoping and praying that you will continue to fight
this very unjust ``offset'' law.
Millard J. Downing from Wallingford, PA wrote:
I am retired from the Agency for International Development
with a $12,000.00 a year annuity and through employment outside
of federal service have become eligible for Social Security,
age 62. Upon visiting my local Social Security Office I was
advised that normally I would be eligible for $425.00 month.
However, due to the present Pension Offset and being a federal
annuitant, my social security annuity will be reduced to
approximately $207.00 month. I do not consider this reduction
as being a fair game when all deductions for above were made
while being employed outside of federal service.
Patricia C. Cook from Metaire, LA wrote:
I get a small pension from the Jefferson Parish Sheriff's
Office ($473.00) and because of this my Soc. Sec. Check is
offset by half. I should receive close to $500.00 a month that
I put in many years of my life for and it is cut to $243.00. I
would appreciate what ever you can do about this and I hope
someone will change the other off set also. When I paid my
personal Soc. Sec. They grabbed; but when it comes to getting
it back, its another story.
During the 104th Congress, I introduced the Government
Pension Offset Repeal Bill, H.R. 2167. I have re-introduced
this important legislation in the 105th Congress as H.R. 2273.
The legislation, does not completely repeal the Pension
Offset, but provides a modification to a complete repeal. It
will allow pensioners and widows affected by Pension Offset
provisions to receive a minimum $1200 per month before offset
provisions could be imposed. The bill has 162 recorded
cosponsors. A corresponding Senate bill, sponsored by Senator
Barbara A. Mikulski (D-MD), was introduced in November of 1997.
H.R. 2273 has been referred to this committee, and I urge
my colleagues to support this legislation.
Mr. Chairman, I urge the Committee to take up this
legislation in the remaining days of the session.
Chairman Bunning. If you will remain, I'm going to let Ms.
Kennelly make her opening statement, and we would like to do
some questions if we can.
Mr. Jefferson. Thank you.
Mrs. Kennelly. Thank you, Mr. Chairman, and thank you for
the courtesy of allowing me to make my statement at this
moment.
In 1995, the Social Security Advisory Council recommended
that all newly-hired State and local employees be covered under
Social Security, and I believe today's hearing is the first
forum in which State and local employees have had the
opportunity to express to us their views on the proposal, and I
thank the Chairman for calling this hearing.
As we know, 90 percent of all workers are covered under
Social Security. Only 70 percent of State and local workers are
covered under the program. Workers who are not covered are
unevenly distributed among the States. Seven States account for
over 75 percent of the noncovered workers. With this unequal
distribution, it is important that we take a careful look at
both the impact on individual workers and the financial impact
on States and localities. We need to ask whether the benefits
for individuals increase or decrease, and we need to ask
whether the cost to States will rise. We will hear some of
those answers today.
We will also be looking at proposals to change the windfall
elimination provision and the government pension offset. These
provisions were enacted in an effort to assure consistent
benefit treatment between those who paid Social Security and
those who did not. It is argued, however, that both of these
provisions unfairly reduce Social Security benefits for
individuals who have worked in the government employment.
Several of distinguished colleagues, as Mr. Jefferson has
just done, will testify, and I look forward to hearing that
testimony. Thank you, Mr. Chairman.
Chairman Bunning. Thank you.
Bill, can I just refer to your bill that you have in, H.R.
2273?
Mr. Jefferson. Yes.
Chairman Bunning. How do you pay for the offset or how do
you propose to pay out of the trust funds for the offset or do
you just intend to use the trust funds to pay the offset
without any way to increase the trust funds? Obviously, these
people are already on their own pensions, so they're already
retired.
Mr. Jefferson. Yes. The bill doesn't propose to treat that
question, but it presumes that the answer is contained within
the overall system. We know it costs additional money, perhaps,
$200 million according to some estimates but a little less
according to others. It's a good deal of money, but it is not
so much money that it's out of bounds to be considered to be
done. It leaves a lot of people who had expectations of a
different outcome in their retirement years suffering in their
retirement years even though they had a spouse who worked the
entirety of their lives. I don't have the complete answer to
how we would fund it, but we're coming to grips, still, with
how much it costs. It's somewhere within the range I've spoken
of, I'm confident.
Chairman Bunning. Are you talking about $200 million out of
the trust funds every year to take care of everyone that's
offset?
Mr. Jefferson. Yes.
Chairman Bunning. In other words, that's the total cost
annually out of the trust funds to take care of 100 percent of
the offsets?
Mr. Jefferson. Yes. In the context of the bill, the bill
limits it to $1,200.
Chairman Bunning. In other words, up to $1,200.
Mr. Jefferson. That's right. If you let everybody go it
would be much more, but since we put a cap on it, yes, sir,
that is the result.
Chairman Bunning. We'll take a look at the bill for sure,
and we may even have a hearing on the bill to see, because that
amount of dollars to take care of the people that are being
offset--for lack of a better word--ought to be looked at, and I
guarantee you that we will take a look at the bill.
Mr. Jefferson. Well, I thank you very much for that.
Chairman Bunning. Barbara, do you have some questions?
Mrs. Kennelly. Just to follow up----
Chairman Bunning. You have a friendly question in mind.
[Laughter.]
Mrs. Kennelly. Yes.
Chairman Bunning. Not that the Chairman's wasn't friendly.
Mrs. Kennelly. Obviously, we are addressing the issue of
saving of Social Security and reform of Social Security, and
it's becoming an important issue. While we are discussing
reform you would expect that the issue you have raised would be
addressed as part of the bigger reform question.
Mr. Jefferson. That's correct. And as I said starting out,
this is totally different from the question of whether you
should start today requiring everyone to pay into a FICA
system. This is a relic of the old system where people weren't
required to do that. They made other choices, and that needs to
be addressed.
Mrs. Kennelly. And you want to put that to rest.
Mr. Jefferson. Yes.
Mrs. Kennelly. Thank you, Mr. Jefferson.
Chairman Bunning. J.D.
Mr. Hayworth. Thank you, Mr. Chairman. I just want to thank
my colleague from Louisiana, because I'm a cosponsor of his
legislation and happy to help out with your testimony this
morning in trying to get copies together.
Mr. Jefferson. Thank you, J.D.
Mr. Hayworth. Thank you very much. Nothing else, Mr.
Chairman.
Chairman Bunning. Mr. Frank, would you like to begin.
STATEMENT OF HON. BARNEY FRANK, A REPRESENTATIVE IN CONGRESS
FROM THE STATE OF MASSACHUSETTS
Mr. Frank. Thank you, Mr. Chairman. Thank you for alerting
me to the impending vote when I ran into you and saving me from
coming down. I appreciate the courtesy when we bumped into each
other.
I am a supporter of the legislation sponsored by my
colleague from Louisiana, and I also am a sponsor, myself, of a
bill that deals with the windfall elimination provision. Let me
begin by saying the bill I have introduced has full effects for
people whose combined benefits with the passage of the bill
would be $2,000 a month or less, and it would phase out at
$3,000 a month. So, if this is a windfall for people who are
making--trying to live in this society on $18,000, $19,000 or
$20,000, it is not much of a windfall, and what we have are
people who I think are being unfairly picked. They worked at
the jobs at the time they worked at them, and they qualified
for this combination of Social Security and pension and were
then told after their working years, in some cases, or toward
the end of them that they were going to suffer this reduction.
I understand it to have been aimed at people who would be
getting a windfall because they made a lot of money in one job
and then just sneaked in the effect under Social Security, and
that's why there is another piece of legislation our colleague
from Texas, Mr. Sandlin, has which would eliminate the program
entirely.
Mine is narrower than that, and while it does affect most
of the people, it does hit most of the people who would be
affected by the formula--I'm told 93 percent--I think that
shows, in effect, this is not a windfall for people who are
rolling in dough, because this is for people with $3,000 or
less, and it is only fully applicable for people who make
$2,000 or less.
The Social Security Administration has said it would cost
$3.4 billion over the next 5 years. I believe that we have the
revenues to fix this up and essentially we're talking about
people who when they went to work were told this is what they
were going to get, and it does seem to me particularly when
we're talking about people whose total income is less than
$24,000 a year that we ought to give it to them.
Chairman Bunning. OK, Mr. Frank. Let me ask you this:
Everybody that is covered under the windfall has paid into the
Social Security system?
Mr. Frank. Yes, these are people who worked----
Chairman Bunning. So, you're proposing to eliminate the
total windfall in your----
Mr. Frank. No, actually, Mr. Sandlin has a bill that would
repeal it all together which I'd vote for. Mine is a compromise
although it does cover most of the people. It would totally
eliminate it for people who make less than $2,000, and it would
phase it out till $3,000, so it's a complete fix for people
under $2,000; partial as you get close to $3,000, and if you
get any more than $3,000 a month, it doesn't help you at all.
Chairman Bunning. Thank you. Barb.
Mrs. Kennelly. Nothing.
Chairman Bunning. No questions? Thank you, Mr. Frank for
your testimony.
The second panel, if they would take their place--well,
we're going to mess up some names here. Cynthia Fagnoni.
Ms. Fagnoni. Fagnoni, right.
Chairman Bunning. John Schaefer, Frank Mulvey, and Geoffrey
Kollmann. Cynthia is the Director of Income Security Issues at
the General Accounting Office, GAO; Mr. Schaefer, Senior
Evaluator, Income Security Issues at GAO. Frank is the
Assistant Director, Income Security Issues at the GAO, and Mr.
Kollmann is the specialist in social legislation, education and
public welfare division at the Congressional Research Service.
Cynthia, if you would begin, we'd appreciate it.
STATEMENT OF CYNTHIA M. FAGNONI, DIRECTOR, INCOME SECURITY
ISSUES, HEALTH, EDUCATION, AND HUMAN SERVICES DIVISION, U.S.
GENERAL ACCOUNTING OFFICE; ACCOMPANIED BY JOHN SCHAEFER, SENIOR
EVALUATOR; AND FRANK MULVEY, ASSISTANT DIRECTOR
Ms. Fagnoni. Thank you, Mr. Chairman. Good morning, Mr.
Chairman and Members of the Subcommittee. I'm pleased to be
here today----
Chairman Bunning. Would you please pull it--that's it, so
we can hear.
Ms. Fagnoni. I'm pleased to be here today to discuss the
implications of extending mandatory Social Security coverage to
all newly hired State and local government employees.
Currently, the SSA, Social Security Administration, estimates
that about 30 percent, or 5 million of the State and local work
force is not covered by Social Security. As you are aware,
Social Security Trust Funds will be exhausted by 2032 according
to SSA estimates. To offset a part of this financial shortfall,
the Social Security Advisory Council and others favor extending
mandatory coverage to all newly hired State and local
government workers.
Today, I will focus on three issues associated with
mandatory coverage. These are: The implications of mandating
such coverage for the Social Security Program; the impact of
mandatory coverage on public employers, newly hired employees,
and the affected pension plans; and the potential legal and
administrative issues that are associated with implementing
mandatory coverage.
My observations are based on work we are currently
conducting for you, Mr. Chairman. Our work shows that in
deciding whether to extend mandatory Social Security coverage
to all newly hired State and local employees, that Congress
will need to weigh several important factors associated with
the three issues I'm going to discuss.
Regarding the first issue, implications for the Social
Security Program, we found that mandatory coverage would
benefit Social Security in several ways. Specifically,
extending mandatory Social Security coverage to States and
localities with noncovered workers would reduce the trust funds
long-term financial shortfall; increase program participation,
and simplify program administration. SSA estimates that
mandatory coverage would reduce Social Security's financial
shortfall by about 10 percent and extend the program's solvency
by 2 years. As with most other individual elements aimed at
improving long-term Social Security solvency such as raising
the retirement age, extending coverage would resolve only a
part of the trust fund solvency problem. This point has been
well recognized in various reform packages such as those
presented by the Social Security Advisory Council where a
combination of adjustments were proposed in order to extend the
program's solvency over a 75-year period.
Mandatory coverage would also increase participation in an
important national program and simplify program administration.
SSA estimates that about 95 percent of employees who are not
covered by Social Security through their jobs with State and
local governments become entitled to Social Security anyway
either through other employment or as spouses or dependents.
Individuals with dual coverage are subject to certain offsets
as we've heard--the GPO and the WEP--that reduce their Social
Security benefits. The Congress enacted these benefit reduction
provisions to reduce the unfair advantage that workers who are
eligible for pension benefits might have when they apply for
Social Security benefits.
However, in a study we recently completed for you, Mr.
Chairman, we found that SSA is often unable to determine
whether applicants should be subject to the GPO or WEP. We
estimate that failure to reduce benefits to Federal, State, and
local employees has caused $160 to $355 million in overpayments
between 1978 and 1995. Mandatory coverage would reduce such
benefit adjustments by gradually reducing the number of
employees in noncovered jobs.
With respect to the second mandatory coverage issue, we
have determined that the impacts on employers, employees, and
pension plans would vary depending on how States and localities
respond to this new requirement. If all newly hired public
employees were to receive Social Security coverage, they would
have the income protections afforded by Social Security. At the
same time, they and their employers would pay the combined
Social Security payroll tax of 12.4 percent. Each State and
locality with noncovered workers would need to decide how to
deal with this increase in retirement costs and benefits. They
could absorb the added cost and leave current pension plans
unchanged or eliminate plans completely.
From discussions we've had with State and local
representatives, we believe States and localities with
noncovered workers would likely adjust their pension plans to
reflect Social Security's costs and benefits. They could, for
example, maintain similar benefits for current and newly hired
employees or provide newly hired employees with benefits
similar to those provided through the pension plans that are
already coordinated with Social Security. Both of these
responses would likely increase costs and benefits for newly
hired employees.
On the other hand, States and localities could maintain
level retirement spending. This may require a reduction in
pension benefits. According to pension plan representatives,
each of these responses to mandatory coverage would result in
reduced contributions to current plans which could affect long-
term financing of these plans.
The third area of impact we have addressed involved legal
and administrative issues associated with mandatory coverage.
Regarding legal issues, mandating Social Security coverage for
State and local employees could elicit a constitutional
challenge. Also, States and localities have told us that they
may require up to 4 years to redesign pension formulas;
legislate changes; adjust budgets, and disseminate information
to employers and employees.
Mr. Chairman, this completes my statement this morning. I'd
be pleased to answer any questions you or the Members may have.
[The prepared statement and atttachment follow:]
Statement of Cynthia M. Fagnoni, Director, Income Security Issues,
Health, Education, and Human Services Division, U.S. General Accounting
Office
Mr. Chairman and Members of the Subcommittee:
Thank you for inviting me to testify on extending mandatory
Social Security coverage to all newly hired state and local
government employees. Currently, the Social Security
Administration (SSA) estimates that about 30 percent--or about
5 million employees--of the state and local workforce is not
covered by Social Security. As you are aware, SSA projects
Social Security revenues to fall short of expenditures starting
in 2021 and the trust funds to be exhausted by 2032. To offset
a part of the financial shortfall, the 1994-1996 Social
Security Advisory Council favored extending mandatory coverage
to all newly hired state and local government workers.
Today, I would like to focus on the implications of
mandating such coverage for the Social Security program, public
employers, newly hired employees, and the affected pension
plans. I will also address potential legal and administrative
issues associated with implementing mandatory coverage. My
testimony is based on work we are currently conducting for the
Chairman of this Subcommittee.
In summary, our work shows that mandating coverage for all
newly hired public employees would reduce Social Security's
long-term financial shortfall by about 10 percent, increase
participation in an important national program, and simplify
program administration. The impact on public employers,
employees, and pension plans would depend on how states and
localities with noncovered employees would react to these new
coverage provisions. One often-discussed option would be for
public employers to modify their pension plans in response to
mandatory Social Security coverage. We will focus on this
option. For example, many public pension plans currently offer
a lower retirement age and higher retirement income benefit
than Social Security. Social Security, on the other hand,
offers complete inflation protection, full benefit portability,
and dependent benefits, which are not available in many public
pension plans. Costs would likely increase for those states and
localities that wanted to keep their enhanced benefits for
newly hired employees. Alternatively, states and localities
that wanted to maintain level spending for retirement would
likely need to reduce some pension benefits. Regardless,
mandating coverage for public employees would present legal and
administrative issues that would need to be resolved. For
example, states and localities could require up to 4 years to
design, legislate, and implement changes to current pension
plans.
Background
The 1935 Social Security Act mandated coverage for most
workers in commerce and industry, which at that time comprised
about 60 percent of the workforce. State and local government
employees were excluded because they had their own retirement
systems and there was concern over the question of the federal
government's right to impose a tax on state governments.
Subsequently, the Congress extended mandatory Social
Security coverage to most of the excluded groups, including
state and local employees not covered by a public pension plan.
The Congress also extended voluntary coverage to state and
local employees covered by public pension plans. Since 1983,
however, public employers have not been permitted to withdraw
from the program once they are covered. SSA estimates that 96
percent of the workforce, including 70 percent of the state and
local government workforce, is now covered by Social Security.
Social Security provides retirement, disability, and
survivor benefits to insured workers and their dependents.
Insured workers are eligible for full retirement benefits at
age 65 \1\ and reduced benefits at age 62. Social security
retirement benefits are based on the worker's age and career
earnings, are fully indexed for inflation after retirement, and
replace a relatively higher proportion of the final year's
wages for low earners. Social Security's primary source of
revenue is the Old Age, Survivors, and Disability Insurance
portion of the payroll tax paid by employers and employees. The
payroll tax is 6.2 percent of earnings each for employers and
employees, up to an established maximum.
---------------------------------------------------------------------------
\1\ Beginning with those born in 1938, the age at which full
benefits are payable will increase in gradual steps from age 65 to age
67.
---------------------------------------------------------------------------
SSA estimates that 5 million state and local government
employees, excluding students and election workers, are not
covered by Social Security. SSA also estimates that annual
wages for noncovered employees total about $132.5 billion.
Seven states--California, Colorado, Illinois, Louisiana,
Massachusetts, Ohio, and Texas--account for more than 75
percent of the noncovered payroll. A 1995 survey of public
pension plans found that police, firefighters, and teachers are
more likely to occupy noncovered positions than other
employees.
Most full-time public employees participate in defined
benefit pension plans. Minimum retirement ages for full
benefits vary; however, many state and local employees can
retire with full benefits at age 55 with 30 years of service.
Retirement benefits also vary, but they are usually based on a
specified benefit rate for each year of service and the
member's final average salary over a specified time period,
usually 3 years. For example, plans with a 2-percent rate
replace 60 percent of a member's final average salary after 30
years of service. In addition to retirement benefits, a 1994
Department of Labor survey found that all members have a
survivor annuity option, 91 percent have disability benefits,
and 62 percent receive some cost-of-living increases after
retirement.
As part of our study, we examined nine state and local
defined benefit plans covering over 2 million employees. For
those plans, employer contributions ranged from 6 to 14.5
percent of payroll and employee contributions ranged from 6.4
to 9.3 percent of payroll. (See the appendix.)
Mandatory Coverage Would Benefit the Social Security Program
Extending mandatory Social Security coverage to states and
localities with noncovered workers would reduce the trust
funds' long-term financial shortfall, increase program
participation, and simplify program administration.
SSA estimates that mandatory coverage would reduce Social
Security's financial shortfall by about 10 percent--from 2.19
percent of payroll (a present discounted value of $3.1
trillion) to 1.97 percent of payroll (a present discounted
value of $2.9 trillion)--over a 75-year period.\2\ Figure 1
shows that mandatory coverage would also extend the program's
solvency by about 2 years, from 2032 to 2034. As with most
other elements of the reform proposals put forward by the 1994-
1996 Social Security Advisory Council, such as raising the
retirement age, extending mandatory coverage to newly hired
state and local employees would resolve only a part of the
trust funds' solvency problem. A combination of adjustments
will be needed to extend the program's solvency over the entire
75-year period.
---------------------------------------------------------------------------
\2\ SSA uses a period of 75 years for evaluating the program's
long-term actuarial status to obtain the full range of financial
commitments that will be incurred on behalf of current program
participants.
SSA data indicate that revenues from payroll taxes on the
newly covered workers, taxes on their benefits, and interest on
the added trust fund balances would substantially exceed
additional expenditures throughout the 75-year period. SSA
assumes that payroll tax collections for new employees would
accelerate early in the 75-year period, while benefits for
those employees would not rise significantly until later in the
period.
While Social Security's solvency problems have triggered an
analysis of the impact of mandatory coverage on program
revenues and expenditures, the inclusion of such coverage in a
comprehensive reform package would need to be grounded in other
considerations. In recommending that mandatory coverage be
included in the reform proposals, the Advisory Council stated
that mandatory coverage is basically ``an issue of fairness.''
The Advisory Council report stated that ``an effective Social
Security program helps to reduce public costs for relief and
assistance, which, in turn, means lower general taxes. There is
an element of unfairness in a situation where practically all
contribute to Social Security, while a few benefit both
directly and indirectly but are excused from contributing to
the program.''
Mandatory coverage would also simplify program
administration in the long run. SSA's Office of Research,
Evaluation, and Statistics estimates that 95 percent of
noncovered state and local employees become entitled to Social
Security as either workers, spouses, or dependents. SSA's
Office of the Chief Actuary estimates that 50 to 60 percent of
noncovered employees will be fully insured by age 62 from
covered employment.
The Congress has established the government pension offset
and windfall elimination provisions to reduce the unfair
advantage that workers who are eligible for pension benefits
based on noncovered employment might have when they apply for
Social Security benefits. The earnings histories for workers
with noncovered earnings may appear to qualify them for the
higher earnings replacement rates that Social Security assigns
to lower earners, when in fact they have substantial income
from public pension plans. With some exceptions, the government
pension offset and windfall elimination provisions require SSA
to use revised formulas to calculate benefits for workers with
noncovered employment.
However, a separate GAO study for the Chairman of this
Subcommittee indicates that SSA is often unable to determine
whether applicants should be subject to the government pension
offset or windfall elimination provisions.\3\ We estimate that
failure to reduce benefits for federal, state, and local
employees caused $160 million to $355 million in overpayments
between 1978 and 1995. In response, SSA plans to perform
additional computer matches with the Office of Personnel
Management and the Internal Revenue Service (IRS) to get
noncovered pension data in order to ensure that these
provisions are applied. Mandatory coverage would reduce benefit
adjustments by gradually reducing the number of employees in
noncovered jobs. Eventually, all state and local employees,
with the exception of a few categories of workers, such as
students and election workers, would be in covered employment.
---------------------------------------------------------------------------
\3\ Social Security: Better Payment Controls for Benefit Reduction
Provisions Could Save Millions (GAO/HEHS-98-76, Apr. 30, 1998).
---------------------------------------------------------------------------
Additionally, in 1995, SSA asked its Inspector General to
undertake a review of state and local government employers'
compliance with Social Security coverage provisions. In
December 1996, SSA's Office of the Inspector General reported
that Social Security provisions related to coverage of state
and local employees are complex and difficult to administer.\4\
The report stated that few resources were devoted to training
state and local officials and ensuring that administration and
enforcement roles and responsibilities are clearly defined. The
report concluded that there is a significant risk of sizeable
noncompliance with state and local coverage provisions. In
response, SSA and IRS, which is responsible for collecting
Social Security payroll taxes, initiated an effort to educate
employers and ensure compliance with legal requirements for
withholding Social Security payroll taxes.
---------------------------------------------------------------------------
\4\ Social Security Coverage of State and Local Government
Employees, SSA Office of the Inspector General (A-04-95-0613, Dec. 13,
1996).
---------------------------------------------------------------------------
Impact of Mandatory Coverage on Employers, Employees, and their Pension
Plans Would Vary
If all newly hired public employees were to receive
mandated Social Security coverage, they would have the income
protection afforded by Social Security. Also, they and their
employers would pay the combined Social Security payroll tax of
12.4 percent of payroll. Each state and locality with
noncovered workers would decide how to respond to the increase
in retirement costs and benefits. They could absorb the added
cost and leave current pension plans unchanged or eliminate
plans completely. From discussions with state and local
representatives, however, we believe states and localities with
noncovered workers would likely adjust their pension plans to
reflect Social Security's costs and benefits. To illustrate the
implications of mandatory coverage to employers and employees,
we examined three possible responses:
--States and localities could maintain similar benefits for
current and newly hired employees. This response would likely
result in an increase in total retirement costs and some
additional benefits for many newly hired employees.
--States and localities could examine other pension plans
that are already coordinated with Social Security and provide
newly hired employees with similar benefits. This response
would also likely increase costs and benefits for newly hired
employees.
--States and localities could maintain level retirement
spending. This response could require a reduction in pension
benefits.
According to pension plan representatives, each of these
responses to mandatory coverage would result in reduced
contributions to current plans, which could affect long-term
financing of the plans.
Maintaining Level Benefits Would Likely Increase Costs
States and localities with noncovered workers could opt to
provide newly hired employees with Social Security and pension
benefits that, in total, approximate the pension benefits of
current employees. Studies indicate that such an option could
increase retirement costs by 7 percent of new-employee payroll.
Using SSA's data and its assumption that mandatory coverage
would start January 1, 2000, a 7 percent of payroll increase in
retirement costs for newly hired employees would mean
additional costs to states and localities with noncovered
workers of about $9.1 billion over the first 5 years.
A 1980 study of the costs of providing Social Security
coverage for noncovered workers provides support for the
estimated 7 percent of payroll increase. The Universal Social
Security Coverage Study Group developed options for mandatory
coverage of employees at all levels of government and analyzed
the fiscal effects of each option. The study group used two
teams of actuaries to study over 40 pension plans. The study
estimated that costs, including Social Security taxes and
pension plan contributions, would need to increase an average
of 2 to 7 percent of payroll to maintain level benefits for
current and newly hired employees.\5\
---------------------------------------------------------------------------
\5\ The study estimate was 5 to 10 percent of payroll. We deducted
the 2.9 percent of payroll Medicare tax since it was mandated for all
newly hired state and local employees in 1986, after the study was
completed.
---------------------------------------------------------------------------
The study assumed that most newly hired employees would
have salary replacement percentages in their first year of
retirement that would be comparable to those provided to
current employees. For example, employees retiring before age
62 would receive a temporary supplemental pension benefit to
more closely maintain the benefits of the current plan. Since
Social Security benefits are fully indexed for inflation and
many pension plans have limited or no cost-of-living
protection, total lifetime benefits for many newly hired
employees would be greater than those provided to current
employees. Existing pension plan disability and survivor
benefits were also adjusted to reflect Social Security
disability and survivor benefits.
More recent studies by pension plan actuaries in Colorado,
Illinois, and Ohio also indicate the cost increase would be in
that same range. For example, a December 1997 study for a plan
in Ohio indicated that providing retirement and other benefits
for future employees that, when added to Social Security
benefits, approximate benefits for current employees would
require an increase in contributions of 6 to 7 percent of new-
employee payroll. A 1997 study for a pension plan in Illinois
indicated the increased payments necessary to maintain similar
total benefits for current and future employees would be about
6.5 percent of new-employee payroll.
The 1980 study stated that the causes of the cost increase
cannot be ascribed directly to specific Social Security or
pension plan provisions. The study also states, however, that
certain Social Security and pension plan provisions are among
the most important factors contributing to the cost increase.
Social Security is fully indexed for cost-of-living increases,
is completely portable, and provides substantial additional
benefits for spouses and dependents. In addition, pension plans
would need to provide special supplemental benefits for
employees who retire before age 62, especially in police and
firefighter plans.
The study also found that the magnitude of the cost
increase would depend on the pension plan's current benefits.
Cost increases would be less for plans that already provide
disability, survivor, and other benefits similar to those
provided by Social Security because those plans would be able
to eliminate duplicate benefits.
Matching Pension Benefits of Currently Covered Employees Would
Likely Increase Costs
About 70 percent of the state and local workforce is
already covered by Social Security. If coverage is mandated,
states and localities with noncovered employees could decide to
provide newly hired employees with pension plan benefits
similar to those provided to currently covered employees.
The 1980 study examined this option and concluded that
implementation would increase costs by 6 to 14 percent of
payroll--or 3 to 11 percent of payroll after eliminating the
Medicare tax. The study also found that most pension plans for
covered employees did not provide supplemental retirement
benefits for employees who retire before Social Security
benefits are available. For most of the examined pension plans,
the present value of lifetime benefits for employees covered by
Social Security would be greater than the value of benefits for
current noncovered employees.
Our analysis of 1995 Public Pension Coordinating Council
data also indicates that retirement costs for states and
localities covered by Social Security are higher than the costs
for noncovered states and localities. For the pension plans
that responded to the survey, the average employee cost rate
was about 9 percent of pay in covered plans, including Social
Security taxes, and 8 percent of pay in noncovered plans. The
average employer cost rate, excluding the cost of unfunded
liabilities, was about 12 percent of payroll for employers in
covered plans, including Social Security taxes, and 8 percent
of payroll for employers in noncovered plans.
These data also indicate that many employees in covered and
noncovered plans, especially police and firefighters, retire
before age 65, when covered employees would be eligible for
full Social Security benefits. Our analysis indicates that
covered employees who retire before age 65 initially have a
lower salary replacement rate than noncovered employees. The
average salary replacement rate with 30 years of service was 53
percent for members of Social Security covered plans and 64.7
percent for members of noncovered plans.
At age 65, however, Social Security covered employees have
a higher total benefit than noncovered employees. According to
the Department of Labor's 1994 survey, for example, an employee
age 65 with 30 years of service, final earnings of $35,000, and
Social Security coverage had 87 percent of earnings replaced--
51 percent by a pension plan and 36 percent by Social Security.
The same employee with no Social Security coverage had 63
percent of earnings replaced by a pension plan. We did not
compare the expected value of total lifetime benefits for
covered and noncovered employees because amounts would vary
depending on the benefits offered by each plan.
Additionally, the extent to which the experience of states
and localities with covered employees can be generalized to
those with noncovered employees is limited. According to the
1980 study, most public pension plans that coordinated with
Social Security did so in the 1950s and 1960s when Social
Security benefits and payroll taxes were much smaller. As
Social Security benefits grew, pension plan benefits remained
basically unchanged. Starting in the 1970s, however, rising
pension costs caused several large state systems to consider
reducing their relatively liberal pension benefits. In the
1980s, for example, California created an alternative set of
reduced benefits for general employees to, among other things,
reduce the state's retirement costs. Initially, general
employees were permitted to select between the higher costs and
benefits of the original plan and the lower costs and benefits
of the revised plan. Subsequently, however, newly hired general
employees were limited to the reduced benefits.
Level Retirement Spending Could Mean Reduced Benefits
Several employee, employer, and plan representatives stated
that spending increases necessary to maintain level retirement
income and other benefits for current and future members would
be difficult to achieve. They indicate that states and
localities might decide to maintain current spending levels,
which could result in reduced benefits under state and local
pension plans for many employees.
A June 1997 actuarial evaluation of an Ohio pension plan
examined the impact on benefits of mandating Social Security
coverage for all employees, assuming no increase in total
retirement costs. The study concluded that level spending could
be maintained if (1) salary replacement rates for employees
retiring with 30 years of service were reduced from 60.3
percent to 44.1 percent, (2) current retiree health benefits
were eliminated for both current and future employees, and (3)
the funding period for the plan's unfunded accrued liability
were extended from 27 years to 40 years.
Impact on Pension Plan Finances Is Uncertain
Most states and localities use a reserve funding approach
to finance their pension plans. In reserve funding, employers--
and frequently employees--make systematic contributions toward
funding the benefits earned by active employees. These
contributions, together with investment income, are intended to
accumulate sufficient assets to cover promised benefits by the
time employees retire.
However, many public pension plans have unfunded
liabilities. The nine plans that we examined, for example, have
unfunded accrued liabilities ranging from less than 1 percent
to over 30 percent of total liabilities. Unfunded liabilities
occur for a number of reasons. For example, public plans
generally use actuarial methods and assumptions to calculate
required contribution rates. Unfunded liabilities can occur if
a plan's actuarial assumptions do not accurately predict
reality. Additionally, retroactive increases in plan benefits
can create unfunded liabilities. Unlike private pension plans,
the unfunded liabilities of public pension plans are not
regulated by the federal government. States or localities
determine how and when unfunded liabilities will be financed.
Mandatory coverage and the resulting changes to plan
benefits for newly hired employees are likely to result in
reduced contributions to the current pension plan. The impact
of reduced contributions on plan finances would depend on the
actuarial method and assumptions used by each plan, the
adequacy of current plan funding, and other factors. For
example, plan representatives are concerned that efforts to
provide adequate retirement income benefits for newly hired
employees would affect employers' willingness or ability to
continue amortizing their current plans' unfunded accrued
liabilities.
Legal and Other Considerations
Mandatory coverage presents several legal and
administrative issues, and states and localities could require
several years to design, legislate, and implement changes to
current pension plans.
Legal Considerations
Mandating Social Security coverage for state and local
employees could elicit a constitutional challenge. We believe
that mandatory coverage is likely to be upheld under current
Supreme Court decisions.
Several employer, employee, and plan representatives with
whom we spoke stated that they believe mandatory Social
Security coverage would be unconstitutional and should be
challenged in court. However, recent Supreme Court cases have
affirmed the authority of the federal government to enact taxes
that affect the states and to impose federal requirements
governing the states' relations with their employees.
A plan representative suggested that the Court might now
come to a different conclusion. He pointed out that a case
upholding federal authority to apply minimum wage and overtime
requirements to the states was a 5 to 4 decision and that until
then, the Court had clearly said that applying such
requirements to the states was unconstitutional. States and
localities also point to several recent decisions of the Court
that they see as sympathetic to the concept of state
sovereignty. However, the facts of these cases are generally
distinguishable from the situation that would be presented by
mandatory Social Security coverage.
Unless the Court were to reverse itself, which it seldom
does, mandatory Social Security coverage of state and local
employees is likely to be upheld. Current decisions indicate
that mandating such coverage is within the authority of the
federal government.
States Would Require Up to 4 Years to Implement Mandatory
Coverage
The federal government required approximately 3 years to
enact legislation to implement a new federal employee pension
plan after Social Security coverage was mandated for federal
employees in 1983. According to the 1980 Universal Social
Security Coverage Study Group, transition problems for state
and local employers would be different from those faced by the
federal government. For example, benefit provisions vary among
the thousands of public employee retirement plans, as do the
characteristics of the employees covered by those plans.
Additionally, state governments and many local governments have
laws regulating pensions. The study group estimated that 4
years would be required to redesign pension formulas, legislate
changes, adjust budgets, and disseminate information to
employers and employees. Our discussions with employer,
employee, and pension plan representatives also indicate that
up to 4 years would be needed to implement a mandatory coverage
decision.
Additionally, constitutional provisions or statutes in some
states may prevent employers from reducing benefits for
employees once they are hired. These states may need to
immediately enact legislation to draw a line between current
and future employees until decisions are made concerning the
pension benefits for new employees who would be covered by
Social Security. According to the National Conference of State
Legislators, legislators in seven states, including Texas and
Nevada, meet only biennially. Therefore, the initial
legislation could require 2 years in those states.
Concluding Observations
In deciding whether to extend mandatory Social Security
coverage to all newly hired state and local employees, the
Congress will need to weigh several factors. First, the Social
Security program would benefit from mandatory coverage. The
long-term actuarial deficit would be reduced, and the trust
funds' solvency would be extended for about 2 years. However,
there are other considerations besides this relatively small
contribution to the program's solvency. Mandatory coverage
would also increase participation in an important national
program and simplify program administration.
The implications for state and local employers, employees,
and pension plans would be determined in part by employers'
responses to Social Security coverage. States and localities
with noncovered workers would likely need to increase total
retirement spending to provide future workers with pension
benefits that, when combined with Social Security benefits,
approximate the benefits provided to current workers. At the
same time, Social Security would provide newly hired employees
with benefits that are not available, or are available to a
lesser extent, under current state and local pension plans.
In addition, mandatory coverage would present legal and
administrative issues. States and localities might attempt to
halt mandatory Social Security coverage in court, although such
a challenge is unlikely to be upheld. Finally, states and
localities could require up to 4 years to implement mandatory
coverage.
Mr. Chairman, this concludes my prepared statement. At this
time, I will be happy to answer any questions you or the other
Subcommittee Members may have.
Appendix
Noncovered Employees and their Pension Plans
SSA estimates that about 4 million of the approximately 5
million state and local employees not covered by Social
Security are in the seven states with the largest number of
noncovered workers. (See table I.1.)
Table I.1: States With the Largest Number of Noncovered Workers
------------------------------------------------------------------------
Number of
noncovered
State employees (in
thousands)
------------------------------------------------------------------------
California........................................... 1,200
Colorado............................................. 200
Illinois............................................. 400
Louisiana............................................ 300
Massachusetts....................................... 400
Ohio................................................. 800
Texas............................................... 700
------------------
Total............................................ 4,000
------------------------------------------------------------------------
Source: Office of the Chief Actuary, SSA.
The nine public pension plans included in our study have
about 2 million members. For the most part, members of these
plans are not covered by Social Security. (See table I.2.)
Table I.2: Membership, Contribution Rates, and Assets for Nine Public Pension Plans
----------------------------------------------------------------------------------------------------------------
Contribution rate \1\ Net
Active Benefit ------------------------------ assets
Public pension plan members recipients (in
Employer Employee Total billions)
----------------------------------------------------------------------------------------------------------------
California State Teachers' Retirement System... 364,000 154,000 12.5% 8.0% 20.5% $74.8
Public Employees'.............................. 148,000 46,000 11.6 8.01 9.61 9.9
Teachers' Retirement System of Illinois........ 137,000 59,000 7.9 8.0 15.9 17.4
Louisiana State Employees' Retirement System... 70,000 27,000 12.0 7.5 19.5 4.3
Massachusetts State Employees' Retirement 83,000 42,000 14.5 9.0 23.5 9.6
System........................................
Massachusetts State Teachers' Retirement System 69,000 29,000 14.0 9.0 23.0 9.9
State Teachers Retirement System of Ohio....... 169,000 89,000 14.0 9.3 23.3 42.4
Public Employees Retirement System of Ohio..... 345,000 146,000 13.3 8.5 21.8 39.8
Teacher Retirement System of Texas............. 695,000 158,000 6.0 6.4 12.4 62.2
----------------------------------------------------------------
Total.......................................... 2,080,000 750,000 ........ ........ ........ $280.3
----------------------------------------------------------------------------------------------------------------
\1\ Employer rate includes contributions toward the plan's unfunded liability. Employee rate is the rate for
general employees.
Source: State and pension plan financial reports.
Chairman Bunning. Thank you very much.
Mr. Kollmann.
STATEMENT OF GEOFFREY KOLLMANN, SPECIALIST, SOCIAL LEGISLATION,
EDUCATION AND PUBLIC WELFARE DIVISION, CONGRESSIONAL RESEARCH
SERVICE
Mr. Kollmann. Thank you, Mr. Chairman. Mr. Chairman and
Members of the Subcommittee, I was asked to summarize and
briefly discuss issues concerning two provisions of current law
that can reduce or eliminate Social Security benefits payable
to government employees. The two provisions are the government
pension offset provision and windfall elimination provision.
They affect the Social Security benefits of persons who also
receive a pension from employment not covered by Social
Security--for example, the civil service retirement system for
Federal workers and State and local government employees whose
States have not chosen Social Security coverage and who are
participating in retirement plans. The purpose of both
provisions is to prevent what otherwise would be considered to
be an unfair advantage for government compared to private
sector workers.
The first provision, the windfall elimination, reduces the
Social Security benefit, earned as a worker, of the affected
individuals by applying a different formula to the computation
of their benefits. Ordinarily, the Social Security benefit
formula applies three progressive factors--90, 32, and 15
percent--to three different levels or brackets of average
monthly covered earnings. However, for a worker subject to the
windfall elimination rules, the 90-percent factor in the first
band of a benefit formula is replaced by a factor of 40
percent. The effect is to reduce their benefits by lowering the
amount of the earnings in the first bracket that is converted
to benefits.
The provision includes a guarantee, which is designed to
protect workers with low pensions, that the reduction in
benefits caused by the windfall formula cannot exceed one-half
of the noncovered pension. The provision exempts workers who
have 30 or more years of substantial employment covered under
Social Security, and lesser reductions apply to workers with 21
through 29 years of substantial covered employment.
Enacted in 1983, the purpose of this provision was to
remove an unintended advantage that the regular Social Security
benefit formula provided to persons who also had pensions from
non-Social Security covered employment. The regular formula was
intended to help workers, who spent their work careers in low-
paying jobs, by providing them with a benefit that replaces a
higher proportion of their earnings than the benefit that's
provided for workers with high earnings. However, the formula
could not differentiate between those who worked in low-paying
jobs throughout their careers and other workers who appeared to
have been low paid because they worked many years in jobs not
covered by Social Security. Those years show up as zeros in the
Social Security earnings records.
Thus, under the old law, workers who were employed for only
a portion of their careers in jobs covered by Social Security,
even highly paid ones, also received the advantage of this
weighted formula, because their few years of covered earnings
were averaged over their entire working career to determine the
average covered earnings on which their Social Security
benefits were based. The windfall elimination is intended to
remove this advantage for these workers.
Proponents of the provision say that it is a reasonable
means to prevent payment of overgenerous and unintended
benefits to certain workers who otherwise would profit from
happenstance, that is, the mechanics of the Social Security
benefit formula. Opponents of the provision believe it is
unfair, because it substantially reduces a benefit that workers
had included in their retirement plans. Others criticize how
the provision works. They say the 40-percent factor is
arbitrary and is an inaccurate way to determine the actual
windfall when applied to individual cases. For example, they
say it overpenalizes low-paid workers with short careers or
with full careers that are fairly evenly split. They also say
it is regressive, because the reduction is confined to the
first bracket of the benefit formula and causes a relatively
larger reduction in benefits for low-paid workers.
The second provision, the government pension offset,
reduces Social Security benefits' spousal benefits that is,
benefits payable as a dependent of Social Security--covered
workers to persons who receive a pension from government
employment that was not covered by Social Security. It is
intended to place spouses whose government employment was not
covered by Social Security in approximately the same position
as other workers by applying the equivalent of Social
Security's ``dual entitlement'' rule, which subtracts 100
percent of Social Security worker benefit from any Social
Security spousal benefit. To do this, it is assumed that two-
thirds of the government pension is approximately equivalent to
a Social Security benefit the spouse would receive as a worker
if his or her job had been covered by Social Security. Thus,
the provision attempts to replicate the Social Security dual
entitlement rule by requiring that two-thirds of the government
pension be subtracted from the Social Security spousal benefit.
As with the windfall elimination provision, critics say
that the GPO is not well understood and that many affected by
it are unprepared for smaller Social Security benefits than
they had assumed in making retirement plans. They also argue
that whatever its rationale, reducing everyone's spousal
benefit by two-thirds of the their government pension is an
imprecise way to estimate what the spousal would be, had the
government job been covered by Social Security. They say that
this procedure has uneven results and it may be especially
disadvantageous for surviving spouses with low income,
particularly women.
Defenders of the government pension offset maintain it is
an effective method to curtail what otherwise would be an
unfair advantage for government workers. They also point out
that Social Security's dual entitlement rule, which the
government pension offset is designed to replicate, also can
reduce the income of already low-income recipients, and that if
this issue is to be addressed, using other means or programs
that more accurately measure need and apply to the general
population would be more appropriate than changing just the
government pension offset provision.
Mr. Chairman, this concludes my testimony.
[The prepared statement follows:]
Statement of Geoffrey Kollmann, Specialist, Social Legislation,
Education and Public Welfare Division, Congresssional Research Service
Mr. Chairman and Members of the Committee, I was asked to
summarize and briefly discuss issues concerning two provisions
of current law that can reduce or eliminate Social Security
benefits payable to government employees. The two provisions
are the government pension offset provision and the windfall
elimination provision. They affect the Social Security benefits
of persons who also receive a pension from non-Social Security-
covered employment, e.g., the federal Civil Service Retirement
System (CSRS) and state and local government employees whose
states have not chosen Social Security coverage and who are
participating in a retirement plan. They do not affect
government workers whose pensions are based on Social Security-
covered employment, e.g., those with full careers under the
Federal Employees Retirement System (FERS). The purpose of both
provisions is to prevent what otherwise would be an unfair
advantage for government compared to private sector workers.
The Windfall Elimination Provision
Enacted in 1983, this provision reduces the Social Security
benefit, earned as a worker, of the affected individuals by
applying a different formula to the computation of their
benefits. Ordinarily, the Social Security benefit formula
applies three progressive factors--90%, 32%, and 15%--to three
different levels, or brackets, of average monthly covered
earnings. However, for workers subject to the Windfall
Elimination rules, the 90% factor in the first band of the
benefit formula is replaced by a factor of 40%. The effect is
to reduce their benefits by lowering the amount of their
earnings in the first bracket that is converted to benefits.
Following is an example of how the provision works in 1998:
Monthly Benefit for Worker With Average Monthly Earnings of $1,000
Regular formula
90% of first $477 $429.30
32% of $477 through $2,875 167.30
15% over $2,875 00.00
Total 583.90
``Windfall formula''
40% of first $477 $190.80
32% of $477 through $2,875 167.30
15% over $2,875 00.00
Total 358.10
The provision includes a guarantee (designed to help
protect workers with low pensions) that the reduction in
benefits caused by the windfall formula can not exceed one-half
of the pension that is based on non Social Security-covered
work. The provision also exempts workers who have 30 or more
years of ``substantial'' employment covered under Social
Security (i.e., having earned at least one-quarter of the
Social Security maximum taxable wage base for each year in
question). Also, lesser reductions apply to workers with 21
through 29 years of substantial covered employment.
The purpose of this provision was to remove an unintended
advantage that the regular Social Security benefit formula
provided to persons who also had pensions from non-Social
Security-covered employment. The regular formula was intended
to help workers who spent their work careers in low paying
jobs, by providing them with a benefit that replaces a higher
proportion of their earnings than the benefit that is provided
for workers with high earnings. However, the formula could not
differentiate between those who worked in low-paid jobs
throughout their careers and other workers who appeared to have
been low paid because they worked many years in jobs not
covered by Social Security (as earnings in these years do not
show up on Social Security's records, they are shown as zeros
for Social Security benefit purposes). Thus, under the old law,
workers who were employed for only a portion of their careers
in jobs covered by Social Security--even highly paid ones--also
received the advantage of the ``weighted'' formula, because
their few years of covered earnings were averaged over their
entire working career to determine the average covered earnings
on which their Social Security benefits were based. The
Windfall Elimination Provision formula is intended to remove
this advantage for these workers.
Proponents of the provision say that it is a reasonable
means to prevent payment of overgenerous and unintended
benefits to certain workers who otherwise would profit from
happenstance, i.e., the mechanics of the Social Security
benefit formula. They maintain that the provision rarely causes
hardship because by and large the people affected are
reasonably well off, as most of them also receive government
pensions.
Opponents of the provision believe it is unfair because it
substantially reduces a benefit that workers had included in
their retirement plans. Others criticize how the provision
works. They say the arbitrary 40% factor in the formula is an
inaccurate way to determine the actual windfall when applied to
individual cases. For example, they say it over-penalizes lower
paid workers with short careers, or with full careers that are
fairly evenly split. They also say it is regressive, because
the reduction is confined to the first bracket of the benefit
formula and causes a relatively larger reduction in benefits
for low-paid workers.
The Government Pension Offset Provision
Enacted in 1977, this provision reduces Social Security
spousal benefits, i.e., benefits payable as a dependent of a
Social Security-covered worker, to persons who receive a
pension from government employment that was not covered by
Social Security. The GPO is intended to place retirees whose
government employment was not covered by Social Security and
who are eligible for a Social Security spousal benefit in
approximately the same position as other retirees whose jobs
were covered by Social Security. Social Security retirees are
subject to an offset of spousal benefits according to that
program's ``dual entitlement'' rule. That rule requires that a
Social Security retirement benefit earned by a worker be
subtracted from his or her Social Security spousal benefit, and
the resulting difference, if any, is the amount of the spousal
benefit paid. Thus, workers retired under Social Security may
not collect their own Social Security retirement benefit as
well as a full spousal benefit. The rationale is that a Social
Security spousal benefit is based on the concept of
``dependency,'' and someone who receives his or her own Social
Security benefit as a retired worker is not completely
financially dependent on his or her spouse.
The GPO replicates the Social Security dual entitlement
rule by assuming that two-thirds of the government pension is
approximately equivalent to a Social Security retirement
benefit the worker would receive if his or her job had been
covered by Social Security. Thus, the GPO requires that two-
thirds of the government pension be subtracted from the Social
Security spousal benefit, and only the resulting difference, if
any, is paid. (Implicit in this arrangement is the assumption
that the remaining one-third is equivalent to a private
pension.). Following is an example of the way the GPO works.
Before the GPO is applied, a couple's situation could be like
this:
Government Worker's Benefits
$600 = government pension
$450 = potential spousal benefit (\1/2\ $900)
Worker's Spouse's Benefits
$900 = Social Security worker benefit
After application of the GPO, the couple's situation would
be this:
Government Worker's Benefits
$600 = government pension
$50 = spousal benefit (\2/3\ $600 = $400, which
subtracted from $450 = $50)
Worker's Spouse's Benefits
$900 = Social Security worker benefit
Critics of the GPO say that it is not well understood and
that many affected by it are unprepared for a smaller Social
Security benefit than they had assumed in making retirement
plans. They also argue that, whatever its rationale, reducing
everyone's spousal benefit by two-thirds of their government
pension is an imprecise way to estimate what the spousal
benefit would be had the government job been covered by Social
Security. They say that this procedure has uneven results and
that it may be especially disadvantageous for surviving spouses
with low incomes.
Defenders of the GPO maintain that it is an effective
method to curtail what otherwise would be an unfair advantage
for government workers. The provision was phased in over six
years and now has been in the law for 21 years; therefore, they
say, there has been ample time for people to adjust their
retirement plans. They also point out that Social Security's
dual entitlement rule, which the GPO is designed to replicate,
also can reduce the income of already low-income recipients,
and that if this issue is to be addressed, using other means or
programs that more accurately measure need, and apply to the
general population, would be more appropriate than changing
just the GPO.
Chairman Bunning. Thank you both for your testimony. Let me
ask you both one simple question. In the overall
restructuring--or whatever we come up with as far as Social
Security reform is concerned--to make sure that the trust fund
remains solvent past the year 2032--or whenever the deadline is
where we can only pay 75 percent of our benefits out--do you
both think that this needs to be addressed in the overall
restructuring of the Social Security system? In other words,
both the pension offset and the offset for windfall.
Mr. Kollmann. Well, I would point out that the two
antiwindfall measures, as time goes by, and you get out toward
that 2032 figure, in many instances they won't be applicable
anymore. For example, Federal workers have been covered
mandatorily by Social Security if they were hired after 1983.
Chairman Bunning. I am speaking only of those who are
uncovered or are subject to the offsets.
Mr. Kollmann. Yes, and what I'm saying is that Social
Security's financial problems, of course, are not in the short
range since we have substantial surpluses over the next decade
or so, and the projected date of insolvency being three decades
from now, with the passage of time the effect of changing these
provisions won't have much of an effect in the out years when
Social Security really starts to face financial problems. Now,
if you----
Chairman Bunning. But it will have--if we do it 3 years
from now, it will have a direct effect on the short term
particularly for those who are getting a major offset in their
benefit presently.
Mr. Kollmann. That's correct.
Ms. Fagnoni. On the mandatory coverage issue, as we've
noted in our testimony and as you've pointed out, the proposals
to reform Social Security when they include this mandatory
coverage, are always just one piece of a whole package of
reforms, because mandatory coverage alone will not solve the
problem. If mandatory coverage were enacted, though, as we
mention in our testimony, that would accelerate the phase out
of the WEP and GPO because then new State and Federal employees
would be covered under Social Security, and, therefore, no
longer needs to be subject to the WEP/GPO.
Chairman Bunning. Do you both believe that we should
address--the offset seemed fair at the time of enactment. Do
you think it is fair now? In other words, we have an awful lot
of people that really get whacked on their Social Security
benefits because of their pension being done by State and local
government, not so much in the Federal Government, but do you
think it's fair and we should change it?
Ms. Fagnoni. We haven't examined that issue directly. It's
understandable why the WEP and GPO were enacted because----
Chairman Bunning. Well, I know the reasons at that time.
Ms. Fagnoni. Right, but they would look like a low-income
earner when they might not in fact be. One thing I would point
out: The study we did for you that we issued recently--you
asked us to look at how effectively WEP and GPO are being
administered by SSA--and what our report really shows is how
difficult those provisions are to administer.
Chairman Bunning. Well, if we're blowing $350 million out
the door for mistakes in overpayment, yes, it's important.
Ms. Fagnoni. So, they're complicated provisions to
administer. It's difficult for SSA to, check up to see that
they're applying the WEP and GPO correctly. So, in that sense,
that would be one advantage to at least mandating where these
sort of interactions----
Chairman Bunning. If we mandated coverage, how quickly
would we be able to implement doing away with the offsets? In
other words, it's going to take some transition time to do it.
Ms. Fagnoni. Yes, because the coverage would just apply to
new workers and the estimate would be that it could take up to
a whole generation of workers of 30 years for it to completely
phase out, but it would depend on what the makeup of the new
work force looked like, how quickly that really would happen.
Chairman Bunning. Well, obviously, if somebody has been
working in local, State, and municipal governments for 40 years
and they're 62, their transition is going to be very difficult,
but somebody who's just starting in employment in local, State,
or municipal governments, you would have a transition period of
20, 25 years if they stayed with it.
I appreciate your testimony.
Mrs. Kennelly.
Mrs. Kennelly. Thank you both. You indicate that the cost
to States would increase if States were to try to provide
benefits to current workers which are equal to the benefits
which would be provided to newly hired workers covered under
Social Security, and I just have a couple of questions to play
off that statement. First of all, as the Chairman and I have
been involved with disability improvements and trying to reform
and improve disability benefits, how would you compare the
disability--and I'll add survivor and spousal benefits--
available to State and local workers to the benefits available
under Social Security?
Ms. Fagnoni. Overall, one of the biggest differences seems
to be that most State and local plans provide for disability
and survivors benefits. Many of them do not provide a spousal
benefit, so there's one difference right there. One of the
biggest differences has to do with how the disability benefits
are applied; when somebody becomes eligible. Generally, under
State and local plans, they're tied to years of service and
earnings, so that, for example, one plan, one of the nine plans
we looked at, an individual would not be entitled to disability
benefits until he had worked there for 5 years. Now, under
Social Security, that's generally true that one would have to
have worked for 5 years, 20 quarters, to be eligible for DI,
Disability Insurance, but there are special provisions for
workers who are under the age of 31 who become disabled early
in their work years, and that kind of adjustment is not
generally available under the State and local plans. Studies
have indicated that younger, low-earning workers might not fair
as well under the State and local plans as they might under
Social Security, both for the disability as well as the
survivor's benefits.
Mrs. Kennelly. Thank you. Another area we've been looking
at and continue to look at is benefits for people age 62 to 65.
Would you do the same comparison of replacement rates for 62-
to-65-year-old retirees under Social Security and under State
and local plans?
Ms. Fagnoni. In terms of replacement rates----
Mrs. Kennelly. If you don't have that right----
Ms. Fagnoni. Yes, I'm not sure we have that in terms of the
difference. We do know that a number of the State and local
plans provide for earlier retirement than Social Security does,
and many of the plans that have elected to be covered under
Social Security in the past have continued to provide for that
supplemental early retirement benefit to keep people in some
kind of retirement income before Social Security retirement
eligibility kicks in.
Mrs. Kennelly. Thank you.
Thank you, Mr. Chairman.
Chairman Bunning. The gentleman from California.
Mr. Becerra. Thank you, Mr. Chairman. Can you give me a
sense as to whether you've been able to calculate the amount
that Social Security provides to those who are disabled or
become disabled, or for the surviving spouse of a Social
Security recipient; what that benefit amounts to, and how that
compares to what a State or local government pension plan might
provide?
Ms. Fagnoni. We did not look at that provision specifically
from a disability comparison. We did look more generally at how
the disability provisions vary, and one other aspect of
disability in State and local plans is that the provisions vary
widely among the plans, and the definition of disability can
vary considerably. Generally, a major distinction in the
disability definition between Social Security and State and
local plans is that under Social Security one must be disabled
and unable to have any substantial gainful activity in any kind
of job, whereas the State and local disability provisions
generally target the disability in terms of whether or not that
individual can continue to work at that specific job. Beyond
that, how disability is defined can vary widely among the
different plans. So, it's pretty difficult to compare other
than to say the provisions vary considerably.
Mr. Kollmann. I would add that Social Security benefits
vary by the person's earning history, but if you take someone
who always earned an average wage, the disability benefits are
computed as if they were age 65 when they become disabled.
Social Security replaces 42 percent of their preretirement
earnings for such a worker.
Mr. Becerra. Do you have any sense of what the State and
local government plans would replace, generally?
Mr. Mulvey. One of the things we are doing for this
Subcommittee, as you know, the several counties in Texas have
allowed the unique program, and we are looking specifically as
to the disability survivor and retirement benefits for workers
who have various earnings histories and who become disabled at
various times in their careers and comparing those to Social
Security, and we expect to have that out pretty soon, but that
work is still preliminary.
Mr. Becerra. What about the issue of survivor and spousal
survivor benefits.?
Mr. Mulvey. We were also looking at that and comparing
Social Security to those Texas plans, but we haven't finished
that work yet.
Mr. Becerra. Can you give us a general sense of what you're
finding?
Mr. Mulvey. We're still doing the analysis, but, obviously,
as was pointed out earlier, for those working who are low
income and who may be injured earlier in their lives, and so
forth, Social Security is probably going to be relatively
better for them than the alternative plans.
Mr. Becerra. What's the best way to respond to someone
who's been in a State teacher retirement fund for some time if
we should require that now State and local governments
participate in Social Security? How do you best respond to
those folks who've been in the system for a while?
Ms. Fagnoni. Those entities, those bodies that have
proposed mandated coverage as part of the Social Security
solvency fix, point to a couple of things: One that the goal--
the original goal of the Social Security Program was to aim for
universal coverage so that everybody would be covered under one
system. There is an issue that some have raised regarding the
fairness--and Mr. Bunning alluded to it in his opening
statement. People are surprised to learn that not everybody's
paying FICA taxes for their careers, so there's that element.
We've got 96 percent of the work force already in Social
Security covered jobs, and there may be questions from the
public about why everybody isn't covered, so there's that
aspect of it; the goals of the program; the perceived fairness
of having what now end up being a handful of people outside the
system. But, on the other hand----
Mr. Becerra. For that handful that have contributed and
would not have the opportunity to collect, if we mandated that
they go into a system--from here on in we mandate that people
go into the Social Security system, if you're saying to them
that it's one or the other----
Ms. Fagnoni. But it would depend on how the States respond
to the mandatory coverage requirement, and we've laid out in
our testimony some different possible options or approaches
that States could take. A State could choose to coordinate the
existing pension plan with Social Security to provide a package
of benefits that incorporate Social Security features while
also maintaining those pension features. So, it doesn't at all
mean that they would necessarily lose their current pension
benefits although that is a possibility. So, States have
various options as to how they respond to this requirement.
Mr. Becerra. Is there a problem having States respond in
various ways and having a system out there that has a myriad of
choices and selections by the various States?
Ms. Fagnoni. I would imagine that the question of State
choice might get into some issues of State sovereignty, and
basically, they don't have a choice in terms of paying the
Social Security payroll tax, but beyond that, they do have
choices as to how they manage their pension plans.
Mr. Mulvey. And private companies all have different
pension plans associated with paying Social Security, so you
might get variations among States the same as you get
variations amongst private employers.
Chairman Bunning. The gentleman's time has expired.
Mr. Ensign. No questions?
Mr. Hulshof.
Mr. Hulshof. Thank you, Mr. Chairman. Ms. Fagnoni, I'm
interested in the constitutional implications, and you
discussed the fact that mandating Social Security coverage may
present some constitutional issues. Could you highlight these
in a little more detail, please?
Ms. Fagnoni. In talking to State and local officials as
we've been doing our work, a number of them have said they
question the constitutionality of this. There would be court
challenges, and they based the questions on the issue of State
sovereignty; the authority of the Federal Government to tax
States; and the authority of the Federal Government to regulate
State employee activities. But our General Counsel's analysis
of recent Supreme Court decisions suggest that such challenges
would not be upheld; that, in fact, recent court decisions
would appear to us to uphold the Federal Government's authority
to do this type of mandatory coverage.
Mr. Hulshof. So, other than, perhaps, the resources that
would have to be committed to a court challenge, such a court
challenge is likely to fail, at least on behalf of the
Governors or the States?
Ms. Fagnoni. That's our assessment based on recent Supreme
Court decisions, yes.
Mr. Hulshof. I want to follow up on what Mr. Becerra was
asking about, in particular, mandatory coverage and some of the
transition problems and lead time. Now, I know it's tough
because you mentioned that different States have--some of
them--use a reserve funding approach to finance plans and there
are different plans out there, but could you talk just a little
about these transition problems as far as lead time and
accomplishing this mandatory coverage if we move in that
direction?
Ms. Fagnoni. Assuming mandatory coverage occurs, there
would be a number of activities that would have to occur for
the States to implement this, and some of them would have to be
occurring simultaneously that would be fairly complex, because,
first of all, it would require that the pension plans and the
employers take a look at the plans; determine how they might
want to adjust the plans given that there's now Social Security
coverage in addition. They would be needing to work with
employer and employee groups, because they would have to both
be educated as well as have some understanding and buy into the
proposals. The State legislatures would have to, ultimately,
agree to whatever's proposed in terms of what happens to the
State pension plans, and actuaries would have to come up with
cost estimates on what these new plans would cost. So, there
would be a lot of different plan design and political issues
that would have to be addressed and would take some time. To
give you some comparison, it took about 3 years for the
transition to occur from the CSRS, Civil Service Retirement
System, to the FERS Program, Federal Employees Retirement
System, for the Federal Government, and for this type of
transition at the State and local level would probably even be
somewhat more complex because of all the entities involved.
Mr. Hulshof. Thanks, Mr. Chairman. I yield back my time.
Chairman Bunning. Mr. Neal, you do not want to question?
OK.
Mr. Portman.
Mr. Portman. Thank you, Mr. Chairman. I'm sorry I couldn't
be here for all the testimony, but I want to commend the
Chairman for having this hearing; another one in a series of
hearings about Social Security, and this is an important aspect
of it, certainly, for my State of Ohio and for many of us on
the panel.
I also have a few questions for our friends at the GAO, Ms.
Fagnoni, particularly. I hear sometimes that if we just make
Social Security mandatory for new hires that it really won't
have any affect on existing plan participants or those folks
who have already retired. I know GAO's done some studies on
this. Can you tell us what GAO has learned about that?
Ms. Fagnoni. In talking to State and local officials, it is
true that the existing plan could continue for the current
workers. They might be given the option to go into a newly
developed plan that might include Social Security, but I think
the issues that people have raised with us are questions that
have to do with the fact that the contributions would not be as
great in the existing plans, what might happen, and, John,
you've got an example--we tried to look for plans where we
could make some kind of judgment on how an existing plan might
be affected if a new plan were established.
Mr. Schaefer. Basically, we've talked not only to the
States and localities that have many noncovered workers, but
we've also talked to States and localities that have changed
their current pensions plans or considered their current
pension plans in ways that would be, perhaps, similar to how
the States and localities with noncovered workers have to
change their plans. There seem to be two basic issues--there
are probably more, but at least two. You have to figure out a
way to finance their unfunded accrued liabilities. Many of
these plans have unfunded liabilities that have to be financed.
They are typically financed as a percentage of payroll and as
that closed group of employees--if you closed the current
pension plan to new members--as that closed group changes,
their payroll changes, and it becomes an issue of how to
finance the unfunded liabilities.
Mr. Portman. For both those who've already retired and
those who are within the State system.
Mr. Schaefer. Right, but there are ways--the actuaries do
an analysis and they come up with ways to do that, and there
are ways to do that. They could finance, for example, as a
percentage of total payroll not just the payroll of the closed
group of employees. But it is an issue, and at the same time
you have costs, percentage of total payroll for all covered and
noncovered employees.
Mr. Portman. Even those who are now covered under the new
system and paying payroll taxes to the new----
Mr. Schaefer. The employer would have----
Mr. Portman. Would it be double?
Mr. Schaefer [continuing]. To continue paying the unfunded
liability for the current employees as a percentage of payroll.
That unfunded liability doesn't go away because you close the
plan to new members.
The second large problem that could occur--and it depends
on the plan; each plan is different; has different
demographics; it uses different actuarial methods--but a
problem that may occur is a liquidity issue. As you close the
plan to new members, the contributions go down. You still have
people retiring, and those benefits have to be paid. So, you
could have a cash flow problem, especially in later years, but
at least the actuaries have to analyze that and come up with a
way of dealing with it, and that can result in a change in
asset allocations, because you have to go through shorter term
investments that could reduce your investment income in the out
years, so that could be another way of increasing your costs,
in essence. But, again, that will depend on each plan; each
plan will be different. Some actuaries say that's not a
problem; other actuaries say it is. It would be specific to the
plan.
Mr. Portman. Thank you. Just a general question: Those of
us who are interested in Social Security reform are looking at
models around the world, and we've talked about the Chilean
model, for instance. I've been down there a couple times, and
you learn a lot about their system which is very successful for
that country, but there are some different external
circumstances when they put that system into effect, and they
have a different approach, generally, than we would have on a
lot of their investment approaches. But there is something we
can learn, I think, from other countries. How about State and
local, particularly, State pension plans? Is there something we
can learn in your studies from the way the State public plans
are working?
Ms. Fagnoni. We have some ongoing work where we're looking
at some plans that opted out of the Social Security system
right before they could no longer opt out and are looking at
how those plans have set up their benefit structures and
whether we might learn something from that. That work is
underway right now.
Mr. Portman. Is that something GAO plans to issue a report
on?
Mr. Mulvey. Yes, it's for this Subcommittee. It's for the
Chairman.
Mr. Portman. Chairman Bunning requested it, so you're going
to do it, right.
Ms. Fagnoni. That's right.
Mr. Portman. There you go. My time is up. Thank you very
much.
Chairman Bunning. The big thing about Chile, as you all
know, they had a benevolent dictator that changed the Social
Security. If we had one, we could do it a lot easier too.
[Laughter.]
Let me talk to you about the seven major States that have
75 percent of those who are not included. Have you studied the
State plans in those seven States to the point of benefits
received in direct proportion to those that--and how many
dollars have gone in from each employee into those, and what
return they've got on their dollar compared to the return on
the dollars from the Social Security trust funds?
Ms. Fagnoni. We did not look at that sort of lifetime
benefit comparison specifically.
Mr. Schaefer. We have work underway on the, basically----
Chairman Bunning. In other words, you're not finished yet,
and you are working on that, and you will have that ready for
us? [Laughter.]
Mr. Mulvey. We have a number of studies going on. We have
another one looking specifically at the rate of return issue in
a more broad sense than simply these seven States.
Chairman Bunning. It would really help when we get into
comparisons, and it would help for us to determine whether we
think mandatory requirement is a good thing or bad thing.
I want to let you know that I'm going to submit some
questions in writing to each of you so that you can be prepared
to respond in writing, so that we can move on to the next
panel.
[The questions and answers follows:]
Responses of Cynthia M. Fagnoni to Mr. Bunning's Questions
1. You said that most full-time public employees participate in
defined benefit pension plans. Do you have information
regarding what the average monthly benefit is for these
workers?
Answer: Most public pension plans base retirement benefits
on the employee's final average salary over a specified period
of time, usually 3 years, and both the Department of Labor
(DOL) and Public Pension Coordinating Council (PPCC) studies
estimate employee retirement benefits as a percentage of final
average earnings. Table 1 shows average employee retirement
benefits, as a percentage of final earnings, in 1994, for
Social Security covered and noncovered state and local
government employees retiring at age 62 with 30 years of
service.
Table 1: Average 1994 Retirement Benefits in Defined Benefit Plans for Full-time State and Local Employees
Retiring at Age 62 With 30 Years of Service
----------------------------------------------------------------------------------------------------------------
Employees Employees covered by Social Security
covered and pension plan
Final salary only by -------------------------------------
pension Pension Social
plan plan Security \1\ Total
----------------------------------------------------------------------------------------------------------------
$15,000....................................................... 62% 50% 37% 87%
$25,000....................................................... 62 50 31 81
$35,000....................................................... 62 50 27 77
$45,000....................................................... 62 50 23 73
$55,000....................................................... 62 50 20 70
$65,000....................................................... 62 50 17 67
----------------------------------------------------------------------------------------------------------------
\1\ Excludes Social Security spousal and dependent benefits.
Source: Employee Benefits in State and Local Governments, 1994, DOL Bureau of Labor Statistics, Bulletin 2477,
May 1996.
Follow-up: You cited a DOL study that found that, in addition
to retirement benefits, all members of these plans have a
survivor annuity option, 91 percent have disability benefits,
and 62 percent have some cost-of-living increases after
retirement. Are the survivor and disability benefits provided
through the basic payroll tax, or is there an additional charge
in some or most of these plans?
Answer: Generally, employer and employee contribution rates
for public pension plans are calculated to finance plan
benefits, including disability and survivor benefits. However,
the most prevalent type of survivor benefit, joint and survivor
annuities, requires the retiree to accept a reduced benefit and
provides a percentage of that reduced benefit to the spouse
upon the retiree's death.
Follow-up: On the basis of your research, if newly hired state
and local government workers were covered under Social
Security, would those individuals be better off in terms of
total lifetime benefits, given Social Security's comprehensive
benefit package (survivors and disability benefits),
portability, and inflation protection?
Answer: Should Social Security be mandated, the effect on
newly hired employees would depend on each employee's
circumstances and any changes made to current pension plans in
response to mandatory coverage. It seems certain, however, that
some employees would receive greater lifetime benefits in
covered employment. For example, employees who work for several
years in noncovered employment but move to another job before
vesting in a noncovered pension plan may be better off with the
fully portable benefits offered by Social Security. Similarly,
employees who become fully disabled before qualifying for
disability benefits under a noncovered pension plan might be
better off with the disability benefits afforded by covered
employment.
2. Several plan representatives have told you that the spending
increases necessary to maintain level retirement income and
other benefits for current and future members will be
difficult. These states and localities might decide to maintain
current spending levels, which could result in reduced
benefits. What kind of benefit reductions might plans be faced
with if they have no choice but to cut benefits?
Answer: A June 1997 actuarial evaluation of an Ohio pension
plan concluded that level spending could be maintained if (1)
service retirement benefits are reduced (for example, salary
replacement rates for employees retiring with 30 years of
service would be reduced from 60.3 percent to 44.1 percent),
(2) retiree health benefits are eliminated for both current and
future employees, and (3) the funding period of the plan's
unfunded accrued liability is extended from 27 years to 40
years. The study also stated that additional benefit reductions
might be needed to maintain level spending if additional
investment income is not available to subsidize pension
benefits for newly hired employees.
Follow-up: In your research, did you check into the current
status of the state budgets that would be most affected? So
many states, like the federal government, are seeing the
benefit of budget surpluses. Could these surpluses assist in
paying transition costs?
Answer: Our review did not include an evaluation of state
budgets. However, state and pension plan officials noted that
spending for retirement benefits must compete for funds with
spending for education, law enforcement, and other areas. In
Ohio, for example, officials stated that the state is having
difficulty finding the additional funds for education needed to
comply with court-ordered changes in school financing. A
representative of local government officials in Ohio stated
that payroll represents 75 to 80 percent of county budgets, and
there is little chance that voters would approve revenue
increases needed to maintain level retirement benefits. He
stated that the more likely options for responding to increased
retirement costs were to decrease the number of employees or
reduce benefits under state and local pension plans.
3. You indicate that one option for states and localities with
noncovered workers is to provide newly hired employees with
Social Security and pension benefits that, in total,
approximate the pension benefits of current noncovered
employees. And that studies show that such an option could
increase retirement costs by 7 percent of new-employee payroll.
A 7-percent of payroll increase in retirement costs for newly
hired employees would mean additional costs of about $5.7
billion over the next 5 years. Is this estimate based on the
assumption that all states and localities would select this
option?
Answer: The testimony stated that applying a 7-percent of
payroll increase to newly hired state and local employees would
result in additional costs to states and localities of $9.1
billion over the first 5 years, using Social Security
Administration (SSA) data and assumptions. The statement
assumed that the 7-percent of payroll increase would apply to
all states and localities affected by mandatory coverage.
Follow-up: Under this scenario, employees retiring before age
62 would need to receive a temporary supplemental pension
benefit to more closely maintain the benefits of the current
plan, correct?
Answer: Yes.
Follow-up: Another option for states and localities, if
coverage is mandatory, is to provide newly hired employees with
pension plan benefits similar to those provided to employees
currently covered under Social Security. You point out that
retirement costs for states and localities covered by Social
Security are higher than the costs for noncovered states and
localities--9 percent versus 8 percent in terms of average
employee cost rate and 12 percent versus 8 percent in terms of
average employer cost rate. Why are these costs so much higher,
and given the increased cost, why would states and localities
choose this option?
Answer: As stated in the 1980 study, the cost increase
cannot be ascribed to any specific provisions. A major factor
is that Social Security provides additional benefits that are
not provided by most public pension plans. The 1980 study also
noted that the extent to which the experience of states and
localities with covered employees can be generalized to that of
noncovered employees is limited because many public pension
plans for covered employees were implemented in the 1950s and
1960s when Social Security payroll taxes were much lower.
However, employee groups in states and localities with both
covered and noncovered pension plans might negotiate for
revised retirement benefits that are similar to those of
employees in covered plans. Additionally, states and localities
with noncovered employees might find it necessary to provide
new employees with revised benefits that are similar to those
provided to covered employees in neighboring states and
localities to remain competitive in recruiting qualified
employees.
Follow-up: In your testimony, you cited a study that showed
that most pension plans for covered employees do not provide
supplemental retirement benefits for employees who retire
before Social Security benefits are available. You also
indicated that many employees, especially police and
firefighters, retire before age 65. Do most of these police and
firefighters try to hang on until age 62--or what happens to
these individuals if they must retire earlier than age 62?
Answer: Our analysis of PPCC data indicates that police and
firefighters retired, on average, at age 54 in noncovered plans
and age 55 in covered plans. Generally, state and local
employees in covered employment would receive a smaller
retirement benefit than employees in noncovered employment
until they reach age 62 and begin receiving Social Security
benefits.
4. You mention that most states and localities use a reserve
funding approach to finance their plans. How does this approach
work?
Answer: Under a reserve funding approach, employers--and
frequently employees--make systematic contributions toward
funding the benefits earned by active employees. These
contributions, together with investment income, are intended to
accumulate sufficient assets to cover promised benefits by the
time employees retire.
Follow-up: How many plans have unfunded liabilities?
Answer: We reported in Public Pensions: State and Local
Government Contributions to Underfunded Plans (GAO/HEHS-96-56,
Mar. 14, 1996) that funding of state and local pension plans
has improved substantially since the 1970s. Still, in 1992, 75
percent of state and local government pension plans in a PPCC
survey were underfunded. A 1997 PPCC survey indicates that plan
funding has continued to improve. The survey report stated that
of the plans responding to the question, 51 percent were more
than 90-percent funded while only 16 percent were less than 70-
percent funded.
Follow-up: How do these unfunded liabilities occur? Are these
plans audited? And how do states determine what corrective
action to take?
Answer: Unfunded liabilities occur for a number of reasons.
For example, public plans generally use actuarial methods and
assumptions to calculate required contribution rates. Unfunded
liabilities can occur if a plan's actuarial assumptions do not
accurately predict reality. Additionally, retroactive increases
in plan benefits can create unfunded liabilities. We did not
review the extent to which public plans are audited; however,
for a variety of reasons, we believe most public pension plans
are audited on a regular basis. A Government Accounting
Standards Board official stated, for example, that many states
have legal requirements for plan audits. Unlike private pension
plans, the funding requirements of public plans are not
regulated by the federal government. States or localities
decide how and when unfunded liabilities will be financed.
Follow-up: Mandatory coverage of newly hired employees would
obviously reduce contributions to these funds. What would be
the effect on these pension funds?
Answer: The effect of reduced contributions on plan
finances would depend on the actuarial method and assumptions
used by each plan, the adequacy of current plan funding, and
other factors. Under certain conditions, for example, reduced
contributions could affect a plan's liquidity over time, which
could, in turn, affect its long-term costs. In 1997, a state
legislative committee considered closing the state's defined
benefit pension plan to new members and implementing a defined
contribution plan. The employees were already covered by Social
Security; however, states and localities faced with mandatory
coverage might consider making a similar change to their
pension plans.
An actuarial analysis found that as the number of employees
covered by the plan decreased, the amount of contributions
flowing into the plan would also decrease. At the same time,
the number of members approaching retirement age was
increasing, and benefit payments were expected to increase. As
a result, external cash flow would become increasingly negative
over time. According to the analysis, the large negative
external cash flow would require that greater and greater
proportions of investment income be used to meet benefit
payment requirements. In turn, this would require the plan to
allocate larger proportions of plan assets to cash or lower-
yielding short-term assets. Once this change in asset
allocation occurred, the plan would find it increasingly
difficult to achieve the investment returns assumed in current
actuarial valuations, and costs would increase.
5. In your testimony, you point out SSA estimates that 95
percent of noncovered state and local employees become entitled
to Social Security as workers, spouses, or dependents and that
50 percent to 60 percent of noncovered employees will be fully
insured by age 62 from covered employment.
The Congress established the government pension offset
(GPO) and windfall elimination provisions (WEP) to reduce the
unfair advantage that workers who are eligible for pension
benefits based on noncovered employment might have when they
apply for Social Security benefits.
Yet the administration of these provisions (government
pension offset and windfall elimination provision) is
difficult, as you recently reported in a separate study at my
request. Would you briefly discuss the key findings of that
study?
Answer: To implement GPO and WEP, SSA needs to know which
Social Security applicants and beneficiaries are or will be
receiving pensions earned in noncovered employment. For state
and local employees, however, SSA has no independent
information to identify those who receive pensions from
noncovered state and local employment. Generally, SSA is
limited to reviewing an applicant's earnings record and asking
questions based on that record. As a result, SSA is often
unable to verify information provided by the applicant or to
detect the subsequent receipt of a pension from noncovered
employment. This undermines its ability to determine whether
applicants should be subject to WEP or GPO and has led to
overpayments. We estimated the extent of overpayments at $160
million to $355 million between 1978 and 1995. In the past, SSA
considered obtaining pension payment information directly from
state and local retirement systems; however, legal and
administrative concerns may make this approach impractical. In
response to our report, SSA is working with the Internal
Revenue Service (IRS) to revise reporting requirements for
pension income. IRS believes that a technical amendment to the
tax code is needed to allow it to obtain the necessary
information. With such information, SSA plans to perform
additional computer matches to ensure that GPO and WEP are
correctly applied.
Responses of Geoffrey Kollmann to Mr. Bunning's Questions
1. Under the government pension offset provision (GPO), how was
it determined that two-thirds of a government pension is
equivalent to the Social Security benefit the worker would have
received if his or her job had been covered by Social Security?
When the GPO was first enacted in 1977, it provided that
100% of the government pension based on employment that was not
covered by Social Security was to be subtracted from any Social
Security spousal benefit for which the worker was eligible.
Because the purpose of the GPO is to replicate Social
Security's ``dual entitlement'' rule, under which 100% of a
benefit earned as a worker is subtracted from the spousal
benefit, the notion was implicit that 100% of the government
pension is analogous to the Social Security benefit that the
worker would have received if his or her job had been covered
by Social Security.
Shortly after enactment, opponents of the GPO intensified
their criticism of the 100% offset provision. They pointed out
that government pensions typically combine the purposes of
Social Security and staff pension plans designed to supplement
Social Security. While a spouse covered under Social Security
may have his or spousal benefit reduced under the dual
entitlement rule, the rule takes into account only the Social
Security worker's benefit, not the income he or she may have
from a private pension. To address these concerns, in 1982 the
House of Representatives included in a tax bill affecting the
Virgin Islands (H.R. 7093) a modification of the offset
provision so that only one-third of the pension would be
counted. However, the proposal was dropped in the conference
with the Senate version of the bill.
P.L. 98-21, The Social Security Amendments of 1983 (the
main purpose of which was to solve Social Security's financing
crisis) provided another opportunity to amend the offset
provision. As proposed by the House, only one-third of the
government pension would be counted in computing the offset.
The Senate version of the Amendments had no such provision. In
conference, a compromise was reached where two-thirds of the
government pension would be counted, and that became final law.
Thus, it does not appear that the determination that two-thirds
of a government pension is equivalent to the Social Security
benefit the worker would have received if his or her job had
been covered by Social Security was based on particular
findings or analyses, but as a byproduct of the myriad
legislative bargaining involved with enacting urgent and
complex legislation.
Follow-up: In the Windfall Elimination Provision (WEP), how
was it determined that the 90% replacement factor in the
benefit formula should be reduced to 40%?
Follow-up: In the Windfall Elimination Provision (WEP), how
was it determined that the guarantee that the reduction in a
government worker's Social Security benefit not be more than
50% of the government pension?
The origin of the WEP was a recommendation by the 1982
National Commission on Social Security Reform (also known as
the Greenspan Commission, after its Chairman), that Congress
should modify the computation of benefits for workers who
receive pensions from non-Social Security covered employment.
The Commission, which was established to develop proposals to
solve Social Security's looming financial crisis, and whose
recommendations were the basis for the 1983 Social Security
Amendments, made no specific recommendation on how this revised
computation was to be made. When legislation was crafted to put
the Commission's recommendation into effect, the Senate version
of the WEP lowered the Social Security benefit by substituting
a 32% replacement rate for the 90% replacement rate in the
Social Security benefit formula. It also included a guarantee
that the reduction in Social Security under the WEP could not
be more than one-third of the non-covered pension. The House
version lowered the Social Security benefit by substituting a
61% replacement rate for the 90% replacement rate in the
benefit formula, and specified that the reduction could not be
more than one-half of the non-covered pension. In conference,
it appears that it was agreed, in effect, to split the
difference. The House conferees apparently agreed to accept a
lower replacement rate (40%), while the Senate conferees agreed
to the guarantee that the reduction could not be more than one-
half of the non-covered pension. There is no indication in the
record that these provisions were based on particular findings
or analyses.
2. What does research by the Congressional Research Service
(CRS) show about the formulas used to determine the GPO and the
WEP?
Because the GPO and the WEP are based on the premise that
non-Social Security covered government workers should be placed
in approximately the same position as are other workers, CRS
has prepared illustrations that show how much of a government
pension (i.e., benefits earned under the federal Civil Service
Retirement System) is equivalent to a Social Security benefit.
It also tried to assess how well the two anti-windfall measures
work. It concluded that because the illustrations covered a
very wide range, it is difficult to generalize. However, the
illustrations did seem to show that for many civil service
annuitants the GPO and the WEP are inaccurate. It appears that
generally the WEP is appropriate for typical civil service
annuitants, but over-penalizes lower-paid workers with short or
evenly-split careers, while under-penalizing workers with long
Social Security-covered careers. The GPO is basically
imprecise, but in many cases this has little effect on
considerations of equity. Those likely to be adversely affected
by its inaccuracy are surviving spouses of high-paid workers,
and those who may partially escape its intended effect are
shorter-term, lower-paid workers.
3. Are there potential problems regarding proposals that
restrict the full application of the GPO and WEP to higher-
income workers?
There are three issues involved in such an approach. One is
that by applying a form of means-testing to Social Security, it
could be criticized as weakening the ``earned right'' nature of
the program. Generally, economic circumstances do not affect
Social Security benefits. To do so, opponents would argue,
would make the system appear more like welfare and therefore
erode its public support.
Another issue is how such an approach could accurately
measure economic need. Full means-testing, such as is done in
welfare programs like the Supplemental Security Income program,
require that recipients submit annually to a full accounting of
income and resources. Bills that have been introduced in
Congress whose stated purpose is to exempt low-income workers
from the GPO and WEP do so by exempting those whose combination
of Social Security and government pensions are below a
threshold amount. It appears there is a presumption that these
two sources of income correlate with low overall income. In
fact, using just these two measures of income often can be a
poor indicator of a person's economic condition. For example,
there could be substantial income from private pensions,
assets, royalties, rents, and earnings (subject, of course to
the Social Security earnings test). This caution particularly
applies with regard to family income. For example, one member
of a couple may have a substantial work history while the other
may not. Even if a worker on whose record the Social Security
spousal benefit is based is receiving a maximum benefit,
reflecting a lifetime of very high earnings, the spouse could
still receive higher benefits under this bill if his or her
government pension were low (e.g., if the government service
were of short duration). Absent some sort of direct means test
on total income, there are likely to be instances where
families with above-average incomes would receive higher
benefits. On the other hand, individuals or families whose
incomes consist almost entirely of Social Security and a
government pension could get no relief from these bills even
though their total income was considerably below average.
Another issue is fairness. For example, in the research
done by CRS mentioned earlier on the GPO, one conclusion was
that ``for short-term, lower-paid government workers, more
(emphasis added) than two-thirds of the CSRS pension should be
counted in computing the offset. Otherwise, it is possible that
spouses of high-paid Social Security-covered workers could
receive a higher spousal benefit than they would receive were
their government work covered under Social Security.'' Thus, in
regard to workers with low earnings histories, the technical
analysis of the report did not agree with the premise that the
full application of the GPO and WEP should not apply to lower-
income workers. Put another way, from the viewpoint that the
goal of the anti-windfall measures is to prevent advantages
accruing to government workers that are not available to
comparable workers in the private sector, such an approach
could create such an advantage.
This is not to say that there are not instances where the
GPO and the WEP have the effect of lowering income of already
low-income beneficiaries. However, the same effect is produced,
often to a larger degree, by Social Security's ``dual
entitlement'' rules and the weighted benefit formula that apply
to the population at large (and that the GPO and WEP are
designed to replicate). A case might be made that, if the
Congress wishes to provide additional benefits to low-income
beneficiaries, other means or programs that more accurately
measure need and apply to the general population might be more
appropriate.
Responses of Cynthia M. Fagnoni to Mr. Portman's Questions
1. In your testimony you stated on page 1 that ``Our work shows
that mandating coverage for all newly hired public employees
would reduce Social Security's long-term financial shortfall by
about 10 percent . . . .''
a. Please define ``long-term financial shortfall.''
Answer: Social Security's long-term financial shortfall is
calculated as the difference between the present value of
revenues and expenditures over a 75-year period, after
adjusting for trust fund balances. A 75-year period is used to
obtain the full range of financial commitments that will be
incurred on behalf of the great majority of current program
participants. Table 2 shows the present value of Social
Security revenues and expenditures with and without mandatory
coverage, over the 75-year period beginning January 1, 1998.
The analysis indicates that extending mandatory coverage to all
state and local employees would reduce the program's long-term
shortfall by 10 percent, from about 2.19 percent of taxable
payroll to 1.97 percent of taxable payroll.
Table 2: Present Value of Social Security Revenues, Expenditures,
Payroll, and Actuarial Balance Over 75 Years With and Without Mandatory
Coverage (Dollars in Billions)
------------------------------------------------------------------------
Without With
mandatory mandatory Change
coverage coverage
------------------------------------------------------------------------
Beginning trust fund balance..... $655.5 $655.5 $0.0
Present value of total revenues.. 18,413.4 18,934.6 521.2
Present value of total 21,983.0 22,274.7 291.7
expenditures....................
Revenue minus expenditures....... (3,569.6) (3,340.1) 229.5
Target trust fund balance \1\.... 185.4 192.7 7.3
Actuarial balance................ ($3,099.5) ($2,877.3) 222.2
Present value of taxable payroll. $141,779.0 $145,878.9 4,099.9
Actuarial balance as a percent of (2.19) (1.97) 0.22
payroll.........................
------------------------------------------------------------------------
\1\ The target trust fund balance is an amount equal to the following
year's projected expenditures.
Source: SSA, Office of the Chief Actuary.
b. Please specifically state all economic, demographic, and
other assumptions used in determining a 10-percent reduction in
this ``shortfall.''
Answer: SSA assumed that mandatory coverage would become
effective on January 1, 2000, and that the existing noncovered
workforce would be replaced by covered employees at a rate
similar to that experienced by states and localities affected
by the extension of mandatory Medicare coverage to public
employees hired after March 31, 1986. SSA's analysis used the
intermediate demographic and economic assumptions detailed in
the Board of Trustees' 1998 annual report. The intermediate
assumptions represented the Board's best estimate of the future
course of the population and the economy. Table 3 shows the
ultimate values for the intermediate assumptions that apply to
years after 2023.
Table 3: Ultimate Intermediate Economic and Demographic Assumptions Used
in the Board of Trustees' 1998 Annual Report
------------------------------------------------------------------------
Ultimate
Assumption value
------------------------------------------------------------------------
Annual percentage change in:
Average wage in covered employment......................... 4.4
Consumer Price Index....................................... 3.5
Real wage differential (percent)........................... 0.9
Unemployment rate (percent)................................ 6.0
Annual interest rate (percent)............................. 6.3
Total fertility rate (children per woman).................. 1.9
Life expectancy at birth in 2075 (combined average for men 81.7
and women) \1\............................................
Net annual immigration (thousands)......................... 900.0
------------------------------------------------------------------------
\1\ Life expectancy is assumed to continue improving throughout the
projection period.
Source: Social Security Board of Trustees Annual Report for 1998.
c. Can you explain what part of the 10-percent reduction is
attributable to reduction in administrative expenses?
Answer: SSA assumed that mandatory coverage would not
affect overall administrative costs over the 75-year period.
d. How will mandatory coverage reduce or simplify program
administration?
Answer: Should coverage be mandated, eventually all state
and local employees with the exception of a few categories of
workers, such as students and election workers, would be in
covered employment. Over time, this would reduce the number of
potential adjustments under GPO and WEP. Additionally, the SSA
Inspector General has reported that Social Security provisions
related to the coverage of state and local employees are
complex and difficult to administer and that there is a
significant risk of sizable noncompliance with state and local
coverage provisions. SSA and IRS have initiated an effort to
educate employers and ensure compliance with legal requirements
for withholding Social Security payroll taxes. Extending
coverage to all newly hired state and local government
employees would, over time, greatly reduce or eliminate this
problem.
2. Other panels that appeared before the subcommittee testified
that compound interest is a vital part of their systems'
funding. What increase would be necessary in the interest rate
paid by the U.S. Treasury to SSA to achieve the same 2-year
funding period extension as mandatory coverage for new hires
would provide?
Answer: According to SSA's Office of the Chief Actuary
(OACT), if the real annual interest rate earned by the trust
funds is increased by 0.7 percent over the 75-year period, then
the year of exhaustion would be extended an extra 2 years,
achieving the same period of extension as the provision to
cover newly hired state and local government employees
beginning in 2000. The increase in annual rates begins in 1998
and is assumed for all bonds held by the trust funds. The
ultimate real interest rate would be 3.5 percent, rather than
2.8 percent, as assumed in the 1998 Board of Trustees' report.
3. As you are aware, mandatory coverage has been extended to
other groups over the decades. Please provide us with evidence
of the effect this has had on the reduction of the shortfall
for each of these extensions and the increase in liabilities to
Social Security.
Answer: In addressing cost increases between 1940 and 1971,
the 1972 annual report of the Board of Trustees stated that the
extension of coverage to new workers had had an upward effect
on both costs and taxable payroll and, in most cases, had not
materially affected program costs as a percentage of taxable
payroll. During the period, however, expanded coverage was not
limited to newly hired employees. As a result, experience
through 1971 may not be relevant to an evaluation of the
potential financial effect of expanded coverage that is limited
to newly hired employees.
Mandatory coverage has been extended to several groups
since 1971, including federal employees hired after December
31, 1983. In recommending the extension of mandatory coverage
to nonprofit and newly hired federal employees, the National
Commission on Social Security Reform estimated a long-range
savings of 0.30 percent of payroll. According to a
representative of SSA's OACT, OACT has not estimated actual
program income and costs with and without the federal employees
hired after December 31, 1983, or for any other groups that
were added.
4. In your testimony you stated:
``For most of the examined pension plans, the present value
of lifetime benefits for employees covered by Social Security
would be greater than the value of benefits for current
noncovered employees.'' (page 8)
``We did not compare the expected value of total lifetime
benefits for covered and noncovered employees because amount
would vary depending on the benefits offered by each plan.''
(page 9)
These statements are contradictory. What is the factual and
financial basis upon which the conclusion in the first
statement was made?
Answer: The statement on page 8 refers to the 1980 study
performed by the Universal Social Security Coverage Study
Group, which analyzed a large number of plans in depth. We did
not replicate the 1980 study and calculate the expected value
of lifetime benefit offered by current pension plans.
5. In your written testimony, you refer to seven states that
have a majority of noncovered workers. Is it true that other
states such as Nevada, Alaska, Connecticut, and Kentucky have
significant percentages of workers who are not covered by
Social Security? What would the effect on systems that have
high percentages of public employees not covered by Social
Security?
Answer: SSA estimates that more than 50 percent of state
and local government employees are not covered by Social
Security in Alaska (59 percent), California (51 percent),
Colorado (63 percent), Louisiana (71 percent), Maine (54
percent), Massachusetts (86 percent), Nevada (66 percent), and
Ohio (92 percent). Other states have lower percentages of
noncovered employees. The effect on the pension plans in these
states would depend on how state and local governments with
noncovered employees respond to the additional costs and
benefits associated with Social Security coverage.
6. As a response to a question about how noncovered systems
would plan for changes brought about by mandating coverage, the
reply essentially was that it would depend on the actuarial
method used by the plan. To a small extent that is a factor,
but the real issue is how plans would deal with significant
reductions in the stream of income necessary to continue the
plans as they are now constituted. Please provide greater
detail on how large noncovered plans would be affected costwise
and the extent to which current active members and retirees
would also be affected.
Answer: The effect of reduced contributions on each plan's
finances would depend on a number of factors. However, reduced
contributions to current plans could adversely affect the
liquidity and ultimately increase the cost of some plans. In
1997, for example, a state legislative committee considered
closing a defined benefit pension plan to new members and
implementing a defined contribution plan. State employees were
already covered by Social Security; however, states and
localities faced with mandatory coverage might consider making
a similar change to their pension plans. An analysis of the
proposed change stated that as the number of employees covered
by the plan decreased, the amount of contributions flowing into
the plan would also decrease. At the same time, the number of
members approaching retirement age was increasing, and benefit
payments were expected to increase. As a result, external cash
flow would become increasingly negative over time. In turn,
this would require the plan to allocate larger proportions of
plan assets to cash or lower-yielding short-term assets. Once
this change in asset allocation occurred, the plan would find
it increasingly difficult to achieve the investment returns
assumed in current actuarial valuations, and costs would
increase.
The implications for current active members depends on how
states and localities respond to the increased costs. According
to an analysis by the Public Retirement Institute, however,
most state and local government pension plans are covered by
provisions that would preserve benefits for current employees.
The benefit guarantees cover benefit formulas, vesting,
purchase of service credit, benefit rights, and any other
provision provided in the pension agreement. The guarantees are
enforced through the courts. According to information provided
by the Government Finance Officers Association, for example,
there are implicit or explicit restrictions against benefit
reductions for employees in Alaska, California, Colorado,
Louisiana, and Nevada, among others. Employees in states that
permit benefit reductions for active employees would need to
rely on the process for changing benefits to safeguard current
benefit levels.
7. The Third Millennium Report entitled ``The Consequences of
Non-FICA Status on State and Local Pension Plans'' clearly
states that noncovered employees can expect a much higher rate
of return on contributions and that non-FICA plans are advance
funded. Further, non-FICA plans have a much higher rate of
return on their investments. When asked a question during the
hearing about what could be learned from these large state
plans, the reply was directed to an ongoing study of three
Texas counties. While those results in those counties may be
interesting, the real question still remains. What did you
learn from your studies by these large state plans that the
subcommittee should take into consideration as we move to
reform the Social Security program?
Answer: For the most part, public pension plans are reserve
funded. Under reserve funding, contributions are made toward
the present value of benefits earned by active employees,
which, together with investment income, are intended to
accumulate sufficient assets to cover promised benefits.
According to the Bureau of the Census, state and local pension
plans had accumulated assets of more than $1 trillion in 1994.
Additionally, pension plans allocate these assets among several
asset classes, including domestic and international stocks, and
the rate of return on plan assets plays a significant role in
plan funding. The Bureau of the Census estimates that, in 1994,
investment income amounted to about 61 percent of total income
for state and local pension plans. According to a 1997 PPCC
survey, the annual investment return for responding plans
averaged 13.7 percent in 1996 and 11.3 percent in the 5-year
period from 1992 to 1996.
Social Security, in contrast, is financed mostly on a pay-
as-you-go basis. Under pay-as-you-go financing, the payroll
taxes of current workers are used to pay the benefits of
current retirees and program assets are few relative to accrued
liabilities. Additionally, federal law limits Social Security
investments to interest-bearing securities of the U.S.
government or securities guaranteed by the United States. As a
result, in 1997, investment income amounted to about 9.6
percent of total income, and the program received an effective
annual interest rate of 7.5 percent on its investments.
Extending mandatory coverage to state and local employees
would involve a trade-off between the higher investment returns
earned by public retirement systems and the expanded
portability, inflation protection, and dependent and other
benefits provided by the Social Security program. Additionally,
Social Security reform proposals generally include provisions
for expanding Social Security reserves and investing some of
the trust funds in additional asset classes. We addressed
issues related to advanced funding and diversifying Social
Security investments in Social Security: Different Approaches
for Addressing Program Solvency (GAO/HEHS-98-33, July 22,
1998). We also have an assignment under way to address the
extent to which workers receive their money's worth from Social
Security.
8. Your testimony indicates that bringing in new hires in
noncovered systems would only extend the solvency of Social
Security by 2 years. Yet the damage to noncovered systems by
this action would be severe. Why was the 2-year factor
minimized so much in your report?
Answer: We focused on Social Security's actuarial deficit
over a 75-year period because that is the measure of financial
solvency used by Board of Trustees in its annual reports.
Additionally, we focused on the 10-percent reduction in the
actuarial deficit attributed to mandatory coverage of state and
local government employees because that was the method used by
the 1994-96 Social Security Advisory Council to measure the
effect of mandatory coverage on that deficit.
We showed that mandatory coverage would extend Social
Security's solvency by 2 years, assuming no other adjustments,
to emphasize the fact that mandatory coverage would resolve
only a portion of the Social Security financial shortfall and
must be coupled with other adjustments to fully resolve Social
Security's actuarial deficit over the 75-year period. Within a
final package of adjustments designed to fully eliminate Social
Security's actuarial deficit, extending Social Security to
state and local employees would eliminate 10 percent of that
deficit.
Chairman Bunning. I want to thank you for your testimony.
Our next panel includes Robert Scott, Richard Schumacher,
and Sergeant Martin Pfeifer, Thomas Lussier--is that right?
Mr. Lussier. Correct.
Chairman Bunning. Mr. Scott is the executive director of
the Public Employees' Retirement Association in Denver,
Colorado. He will be testifying on behalf of the Coalition to
Preserve Retirement Security. Mr. Schumacher is the executive
director of the Public Employees' Retirement System of Ohio.
Sergeant Pfeifer is with the Washington Metropolitan Police
Department and a Trustee on the National Board of the Fraternal
Order of Police. Mr. Lussier is the executive director of the
Massachusetts Teachers' Retirement Board. And I want to
recognize my fellow Ways and Means Committee Member, John
Ensign, to introduce the final witness on this panel.
Mr. Ensign. Thank you, Mr. Chairman. I also want to thank
you for holding this hearing and inviting me to be here, and I
want to especially thank you for allowing one of the experts
from my home State of Nevada, George Pyne. George is the
executive officer of the Public Employees' Retirement System of
Nevada, and he's joining us this morning to share, I think,
what you'll find is very important testimony.
I've been a fan of George's and what he's done with the
State of Nevada. I use it in many, many speeches and talk about
it as an example of one of the things that could possibly be
done for the future of Social Security, and because they take
advantage of that magical thing called compounding, and it's
something that we should be teaching in our schools, because
most people don't understand that growing rich slowly over time
because of compounding really works, and the State of Nevada
and their retirement system, I think, is a very, very good
example of how it can be done. So, I appreciate your allowing
me to introduce Mr. Pyne this morning, and I know that you'll
be pleased with his testimony.
Chairman Bunning. Thanks, John. Before we begin this panel,
I'd like to point out that despite our best attempts we were
unable to obtain witness representing the 1994-96 Social
Security Advisory Council. Edith Fierst who served on the
Advisory Council has provided a statement for the record.
Mr. Scott, would you please begin.
STATEMENT OF ROBERT J. SCOTT, SECRETARY TREASURER, COALITION TO
PRESERVE RETIREMENT SECURITY; AND EXECUTIVE DIRECTOR, PUBLIC
EMPLOYEES' RETIREMENT ASSOCIATION, DENVER, COLORADO
Mr. Scott. Thank you, Mr. Chairman. My name is Bob Scott,
and, as you said, I'm executive director of the Public
Employees' Retirement Association. We manage $25 billion in
assets for almost 200,000 members, retirees, and beneficiaries.
I'm testifying today as secretary treasurer of the Coalition to
Preserve Retirement Security, formerly known by the acronym of
OPPOSE. This coalition represents the interests of some 5
million public employees and retirees who do not participate in
Social Security.
The Coalition to Preserve Retirement Security believes that
the Social Security system has provided and continues to
provide an important part of the retirement benefits for the
majority of American workers, including many of our colleagues
in public service. We also believe that it is critical that the
Social Security Program be preserved and strengthened and we
applaud the bipartisan work now being done by Congress to
effect changes which will enhance the long-term stability of
Social Security.
You are here today to consider one possibility for change.
This possibility, extending mandatory participation to public
service positions not now covered, is in terms of the total
package of possible changes very small. However, it is an issue
of critical importance to the affected employees and employers.
I'd like to very briefly suggest to you four reasons--and
we think they're very strong reasons--why you should focus on
other possibilities. First, the current structure works and it
works well. The Amish say, ``If it ain't broke, don't fix it.''
I would say, ``If it ain't broke, don't break it.'' In 1990,
Congress required that all public employees be provided with
retirement plans that either included participation in Social
Security or provided comparable security and benefits
independent of Social Security. In the written materials, I've
provided you with data showing that existing public plans
independent of Social Security provide sound, well-funded
programs which include good retirement, disability, cost of
living, and survivor benefits at a very reasonable cost to the
public employer and, thus, to the taxpayer. To radically alter
these sound, efficient plans by imposing mandatory
participation would force major plan redesigns and require that
either employer costs go up, benefits go down, or both.
Second, the proposal goes against the grain of one of the
critical foundations of many of the restructuring programs;
that is to enhance the long-term viability of Social Security.
While mandatory coverage of new hires would provide a short-
term increase in cash receipts by a small amount--0.2 percent
of pay--it would increase the long-term liabilities of programs
just at the time when current projections show that the
revenues will become insufficient. The current concerns with
the long-term viability of Social Security are not the result
of noncoverage of some public workers, and their mandatory
inclusion cannot help resolve these concerns. In short, we have
not been a part of the problem, and our inclusion cannot, in
reality, contribute the solution.
Third, inclusion of noncovered public workers will, in
fact, distract from the development of effective ways to
address the fundamental needs of Social Security. As I noted
earlier, inclusion would adversely affect 5 million workers and
retirees and their families as well as thousand of public
employers. Naturally, this will foster opposition to change on
their part. As I said at the outset, we support Social Security
as a general program and want to help develop effective ways to
ensure its long-term strength. If mandatory participation is
not an issue, this group can join with you and your colleagues
to work for positive and effective change.
Finally, mandatory inclusion would add to the one of the
fundamental concerns with Social Security as it now exists. At
its inception, it was possible and practical for Social
Security to use current workers' earnings to pay for former
workers' retirement benefits. However, we are all painfully
aware of the major demographic changes that are still in
progress and which have made this form of intergenerational
transfer both inequitable and impractical. We should not add to
this inequity by creating an even greater future unfunded
liability. Let's not put more passengers on the Titanic. Let's
work together to find a way to avoid the iceberg.
In summary, we want to support effective change to enhance
the long-term viability of Social Security. In that context, we
can see no basis to support mandatory coverage of public
workers who are now covered by sound, well-funded State and
local plans that should not be replaced, but rather looked to
as examples. Thank you.
[The prepared statement follows:]
Statement of Robert J. Scott, Secretary Treasurer, Coalition to
Preserve Retirement Security; and Executive Director, Public Employees'
Retirement Association, Denver, Colorado
My name is Robert J. Scott. I am Secretary/Treasurer of The
Coalition to Preserve Retirement Security (``CPRS''). CPRS is a
Colorado Corporation formed by teachers, fire fighters, police
officers, and other state and local government employees who
elected not to join the Social Security system. The purpose of
our organization is to assure the continued financial integrity
of our members' retirement and health insurance plans by
resisting efforts to mandate Social Security coverage of public
employees. Our members are found in Alaska, California,
Colorado, Connecticut, Illinois, Kentucky, Louisiana,
Massachusetts, Minnesota, Nevada, Ohio, and Texas. With respect
to mandatory Social Security coverage, the interests of CPRS
are identical to those of approximately five million public
employees throughout the nation who remain outside the Social
Security system, as well as over one million retirees from
public retirement plans outside of Social Security.
Background
For many years after the Social Security system was
created, state and local government employees were not allowed
to participate in the system. Beginning in the 1950s, state and
local government employers could elect to have their employees
covered. Governments which elected in were also permitted to
opt out again, after notification of the intent to do so, and
the expiration of a two year waiting period.
This was the law for about three decades, until, in 1983,
there was a major revision of the Social Security and Medicare
laws, triggered primarily by a concern about the long term
solvency of these two trust funds. Congress decided not to
require state and local employees who were outside the system
to be covered, but did end the opt out for public employees who
had chosen to be covered. An ``anti-windfall'' rule was
adopted, to ensure that public employees who were covered by
Social Security and by a public plan did not receive excess
credit for Social Security purposes.
In 1986, as part of the Consolidated Omnibus Budget
Reconciliation Act of 1985 (``COBRA''), Congress determined to
require participation in the Medicare system on a ``new hires''
basis, but chose to leave public employee retirement plans in
place, and did not change the law with respect to Social
Security.
In 1990, Congress enacted a law requiring that all public
employees not covered by a state or local retirement plan
meeting specified standards must be covered by Social Security.
That law, adopted as part of the Omnibus Budget Reconciliation
Act of 1990 (the ``1990 Act''), ensures that all public
employees will be covered either under Social Security or under
a public retirement plan which provides comparable benefits.
This has proven to be an effective and workable approach.
Today, about one-third of all state and local government
employees, about five million people, are outside the Social
Security system because they are covered by public retirement
plans. Additional millions are retirees from non-Social
Security public plans, who are dependent on those plans for
all, or most, of their retirement income.
Background of this Hearing
Reasonable people differ about the date when serious
trouble really begins for the Social Security system. Although
nominally established like a funded pension system, in
practice, Social Security Trust Fund surpluses have been used
to reduce operating deficits in other parts of the federal
budget. There is an obligation for the Treasury to repay these
``borrowings'' from Social Security, but the federal government
will not be able to repay these borrowings when the time comes,
except by creating surpluses in other parts of its budget, or
by printing money.
In his 1998 State of the Union address, President Clinton
proposed a policy of ``save Social Security first,'' by which
he meant that until such time as the President and Congress
agree on a method to put Social Security on a sound footing for
the foreseeable future, all federal budget surpluses must be
applied to preserve the Social Security system. This proposal
has enjoyed considerable support on both sides of the aisle in
Congress.
When Social Security outlays begin to exceed Social
Security revenues, this will place an additional burden on the
federal budget, as Social Security becomes a net importer of
general federal revenues. If the federal operating budget is in
a healthy posture, Social Security payments could be made out
of general federal revenues, gradually repaying the Social
Security Trust Fund for amounts lent to the federal government
to cover operating deficits in the past. On the other hand, if
the federal operating budget is in deficit, then repaying the
Social Security Trust Fund will be very difficult. Proposals to
solve the long term Social Security funding problem by
increasing current Trust Fund revenues are doomed to failure
unless those Trust Fund surpluses are used in such a way as to
reduce future demands on the general fund. (In fact, increases
in current Trust Fund surpluses could actually make the long
term situation worse, if the current surpluses are not saved
and additional obligations to pay future benefits are
incurred.)
In 1994, the Bipartisan Commission on Entitlement and Tax
Reform (also known as ``the Kerrey-Danforth Commission'')
studied the problem of projected short falls in the Social
Security and Medicare Trust Funds, as well as other mid-term
and long-term deficit problems. The Commission was unable to
agree on a set of recommendations, but did valuable work in
assessing the dimensions of the problem. In an interim report
published in August, 1994, the Commission projected that with
no changes in law, by 2010 entitlement spending and interest on
the natioal debt would consume almost the entire federal
revenues; by 2020, entitlement spending alone would almost
equal the federal revenue stream; by 2030, there would not be
enough revenue to service the federal entitlement obligations,
even if no money were used for other purposes, including
payment of interest on the national debt.
In 1995 and 1996, The Advisory Council on Social Security
examined the mid-term and long-term solvency of Social Security
and the Social Security Trust Fund. The Council submitted its
report in January, 1997. Once again, there was no majority on
the Council for any single set of recommendations. Three
different proposals were put forth by different groups of
members. A majority of the Council recommended mandatory Social
Security coverage of public employees, although the three labor
members of the Council opposed this proposal ``because of the
financial burden that would be placed on workers and employers
who are already contributing to other public pension systems.''
These hearings are being held to consider the advantages
and disadvantages of mandatory Social Security coverage of
public employees as a partial solution to the long-term funding
problems of Social Security.
Mandatory Social Security Coverage is Wrong and Should not be Adopted
1. Public employees are well provided for under their public
plans; mandatory Social Security coverage will harm public
employees as well as people who have retired from non-Social
Security public plans.
Public plans do an excellent job of providing retirement
security for their members. Analyses done by public plan
fiduciaries indicate that public employees of almost any
description (in terms of salary, length of services, etc.) are
better protected under their public plan than they would be
under Social Security. For example, the Public Employees
Retirement Association (``PERA'') of Colorado produced a study
(assuming retirement in 1998 at age 62) showing that an
employee working ten years with a highest average salary of
$15,000 per year, would receive a Social Security benefit equal
to 20.6 percent of pay; the PERA employee would receive a
benefit of 22 percent. For short term employees with higher
average rates of pay, Social Security benefits are
proportionately much lower. For example, a ten year employee
with a highest salary of $60,000 per year would get a benefit
of 11.8 percent under Social Security; his PERA benefit would
be 22 percent.
Longer term employees at all rates of pay have more secure
retirements under PERA. A fifteen year employee earning a
highest average salary of $15,000 would receive 28.6 percent of
pay under Social Security--33 percent under PERA. A twenty year
$15,000 per year employee would receive 32.4 of pay under
Social Security--fifty percent of pay under PERA. At thirty
years of service, this hypothetical, relatively low pay
($15,000 per year) employee would receive 42.6 percent of pay
under Social Security, but 75 percent of pay under PERA. At
forty years of service, the respective numbers are 49.5 percent
of pay under Social Security; 100 percent for PERA.
PERA of Colorado is a good plan, but analyses of other
public plans prove that these plans also do an excellent job
for their employee-members. A comprehensive study of public
plans, prepared under the sponsorship of Third Millennium,
entitled ``Freed From FICA: How Seven States and Localities
Exempt a Million Employees from Social Security and Provide
Higher Pension Benefits to Retirees'' (March 1997) (the ``3rd
Mill Report'') compares the benefits provided under seven large
public plans with those provided under Social Security. An
employee retiring after 40 years of work at age 65 with an age
62 salary of $20,000 would receive an annual pension of $22,153
from the Public Employee Retirement System (``PERS'') of
Nevada; $17,722 from the State Teachers' Retirement System
(``STRS'') of California; $18,609 from PERS of Ohio; $18,609
from STRS of Ohio; $20,118 from the Los Angeles City Employees'
Retirement System; and $17,722 from the Maine State Retirement
System. The average for the seven plans studied was $18,951.
The Social Security benefit for a worker with the same
background would be $8,617 for a single worker and $12,926 for
married workers. As salary levels rise, public plans do an even
better job for their workers in relation to Social Security.
Relatively low paid workers need a high return on their
retirement savings in order to be able to retire with dignity.
It is small consolation that the percentage return for low paid
workers is relatively generous under Social Security, if the
dollar benefits are low. For this reason, low paid workers are
among those most adamantly opposed to trading all or a
substantial part of their current retirement benefits for
Social Security coverage. For example, the School Employees'
Retirement System of Ohio, with average member compensation of
less than $15,000 annually, has been a member of CPRS, and a
strong opponent of mandatory coverage, for almost two decades.
The Social Security Advisory Council argues at pages 19-20
of its report that ``over the course of a lifetime, it is
impossible to tell who will and who will not need [Social
Security] coverage.'' The Council suggests that Social Security
may be superior to state or local plans because of the
inflation proof aspect of Social Security, or because of the
spousal benefit and other ancillary benefits, or because of
Social Security's portability.
These claims are not supported by facts. It is not the
case, for example, that Social Security benefits are
guaranteed. At the time of the 1983 reform, Social Security
benefits were reduced, most importantly, by increasing the
normal retirement age for Social Security on a phased-in basis.
More recently, Social Security benefits were made taxable for
some recipients. Social Security's companion program, Medicare,
has also been the subject of many cost control measures.
Current pressures on the funding of Social Security may quite
possibly result in further benefit reductions.
Social Security benefits are reduced for earnings of
beneficiaries above specified levels until the beneficiaries
reach age 70. Public plan benefits are generally not reduced
for earnings.
All of the plans surveyed in the 3rd Mill Report provide
disability benefits, as do the vast majority of public plans.
The disability benefit provided by Social Security is hard to
qualify for. (Generally a worker must be unable to perform any
substantial gainful activity and the impairment must have
lasted, or must be expected to last, for at least 12 months.)
Public plans are often more generous. The average disability
benefit provided by the seven surveyed plans was $10,440
annually.
All of the plans surveyed in the 3rd Mill Report provide
pre-retirement survivor benefits, as do public plans generally.
(Six of the seven surveyed plans also provide post-retirement
survivor benefits.) For children, Social Security's survivor
benefits cease when the child turns 18. Many public plans
provide benefits after that age has been reached if the child
is a full time student. The average survivor benefit paid by
the seven surveyed plans was $6,960 annually.
Social Security provides an annual cost-of living
adjustment for its beneficiaries and so do public plans. The
seven surveyed plans all provided cost of living adjustments.
During the period from 1988 to 1992 (when inflation was largely
under control) these adjustments tended to average slightly
over three percent per year. (3rd Mill Report, page 16) Public
plans, in effect, also provide very high pre-retirement cost-
of-living adjustments, because public plan retirement benefits
are almost always based on the final or highest years of
compensation (generally a three-year or five-year period is
used for the benefit computations).
The greatest advantage of Social Security is supposed to be
its portability. Social Security benefits are 100 percent
portable after the 40 qualifying quarters have been earned.
This is particularly supposed to be an advantage for people who
move in and out of the work force. But Social Security benefits
for people who have limited years of service may be low, even
if those benefits are vested. No refunds are paid by Social
Security, even to workers who have less than 40 quarters. Most
public plans provide rapid vesting. All but one of the seven
surveyed plans in the 3rd Mill study vest in five years, and
the plan average for all seven plans was 5.71 years. Of course,
public employees are always 100 percent vested in their own
contributions and may roll those contributions over into an IRA
if no better option is available.
Most public plans afford considerable portability, even
with regard to employer contributions. Many plans allow
transfer of credits within the same state. Many plans also have
buy-in provisions whereby employees may purchase credit in a
retirement system, often with proceeds from credits earned in
another retirement system.
In the future it is highly likely that portability
provisions will be even better. There is currently pending
before the Congress the Retirement Account Portability Act of
1998, which appears to enjoy substantial support. This proposal
will facilitate roll overs between different kinds of defined
contribution plans and will also make it easier for workers to
roll over amounts from their IRAs into employer plans.
It is also the case that he Social Security system is not
well designed to meet the needs of certain public employees,
particularly fire and police. Because of the physical and
emotional stress caused by their members' work, fire and police
pension plans generally have generous disability benefits. Also
fire fighters and police officers retire earlier than most
other categories of worker, because physical conditioning is
such an important part of job qualifications. In addition, fire
fighters particularly have an average life expectancy which is
significantly below that of the general population (primarily
because of fire fighter's exposure to hazardous materials). The
rate of return from Social Security for many fire and police
workers would be far below average.
Some studies have also indicated that Social Security may
have a poor rate of return for minorities. Governments are
generally strong proponents of equal opportunity and employ
significant percentages of African American, Hispanic, and
other minority workers. These employees, like their non-
minority colleagues, receive excellent retirement benefits.
Many public plans provide several optional retirement packages
to their employees when they retire, while Social Security
provides only a life time annuity.
A January 1998 report by The Heritage Foundation entitled,
``Social Security's Rate of Return,'' indicates that a low-
income worker (average annual earnings of $12,862) born in 1975
can expect a life time rate of return of about negative one
percent, for a net loss of $13,377. A large part of this
negative rate of return is attributable to the relatively short
life expectancies of African-Americans. African-American women
generally have a positive rate of return, but nonetheless
receive far less than they would obtain from even very
conservative investments of their Social Security
contributions. The report concludes that ``Social Security
taxes impede the inter-generational accumulation of capital
among African-Americans....''
Some people make the mistake of thinking that if mandatory
Social Security coverage is applied on a new hires basis, then
retirees and current plan participants will not be hurt. This
is not the case. Public plans provide most of their benefits
not from employer and employee contributions, but from
investment earnings on those contributions. For example, in the
Ohio STRS plan, about two-thirds of all plan benefits are paid
from plan earnings. Applying Social Security taxes to new hires
will reduce the capital stream upon which the earnings are
based. How fast this would happen depends on factors which
cannot now be determined. The most important of these factors
is the definition of a ``new hire.'' If the term is defined
conservatively, employee turnover would occur at a rate of
about six to seven percent per year. If the COBRA definition of
a ``new hire'' for Medicare purposes were to be used (many
people who change jobs even within the same government system
are considered to be new hires), the turnover rate would be a
great deal higher, at least during the initial years of the new
system.
Ohio STRS has concluded that mandatory coverage of new
hires would result in the loss of the medical plan which STRS
now provides to members and retirees. In addition, STRS
believes that it will be necessary to (1) eliminate death,
disability and survivor benefits; (2) reduce cost-of-living
adjustments from 3 percent annually to 1.6 percent; or (3)
reduce retirement benefit accruals from 2.1 percent to 1.9
percent for current members, and from 1.47 percent to 1.32
percent for future members.
These changes are highly injurious and would fall most
heavily on those already retired, who would not be in a
position to easily adjust. Retirees live throughout the nation.
This means that mandatory coverage, even on a new hires basis,
would impact people in every state, and would create additional
burdens for state and local governments throughout the nation,
especially in those states which are home to large numbers of
retirees.
2. Mandatory Social Security Coverage of Newly Hired Public
Workers Will Not Save the Social Security System; Nor Will
Mandatory Coverage Significantly Reduce the System's Problems.
The Social Security system is not in short-term trouble.
Currently surpluses in the Social Security system are being
used to fund operating deficits else where in the federal
budget, although there is now wide spread support for stopping
this practice.
The Advisory Council on Social Security expresses the
actuarial deficit over the 75 year period ending in 2070 in
terms of a percentage of payroll, i.e., 2.17 percent. (Advisory
Council Report, p. 11) In dollars, the present value of the
difference between OASDI current assets, plus OASDI tax and
interest for the 75 year period, minus the present value of
OASDI obligations is minus two trillion, five hundred and
twelve billion. (Advisory Council Report, p.198). In cash flow
terms the Advisory Council expects tax receipts to exceed outgo
through 2014. Beginning in 2015, Social Security will run a
small cash deficit, but growing each year, so that the short
fall for the year 2030 will be $611 billion, and the cumulative
short fall for the period 2015 through 2030 is estimated at
$4,512,000,000,000 (about four and one half trillion dollars).
(Advisory Council Report, p. 192) Estimates of the total long
term shortfall are in the range of $9 trillion. (There are, of
course, other unfunded federal liabilities, including Medicare
and interest on the national debt, as well as other
entitlements.) But the favorable economic trends which have
occurred since this report was prepared have almost certainly
postponed the year when cash flow problems will begin, and
reduced somewhat the extent of the long term actuarial deficit.
In their April, 1998 report, the Social Security and
Medicare Boards of Trustees announced that the OASDI Trust Fund
would remain viable through 2032 (an improvement of three years
over previous projections). Also, the Trustees now project that
Social Security will continue to generate surpluses through
2013 (an improvement of one year). OASI, by itself, will remain
viable for several additional years. The Trustees indicated, at
page seven of their report, that ``key dates are 1 to 4 years
later than shown in the 1997 report, due in large part to
better actual and expected economic performance.'' In the
several weeks since the publication of the Trustees' Report,
the economic situation has improved still further. On May 5,
1998, the Congressional Budget Office increased its surplus
projection for fiscal years 1998 and 1999 from $28 billion, to
a range of between $73 and $93 billion.
The Advisory Council estimates that in terms of a
percentage of payroll, mandatory coverage of new hires,
beginning January 1, 1998, would save about 0.22 percent, or
about ten percent of the total actuarial deficit for the period
1995 through 2070. This is largely because cash from new hire
taxes would come into the system before the obligation to pay
out benefits materialized. Of course, the obligation to pay out
benefits with respect to contributions made before 2070 would
continue long past that year.
In order to determine how to repair Social Security, it is
necessary to understand what is wrong now. Although there may
be many problems with Social Security, by far the most
important is that the system has tried to operate on a pay-as-
you-go basis. This approach worked without great strain so long
as national demographics were favorable, and the pool of
workers was growing much more rapidly than the pool of
retirees. This was the case for many decades, but it is no
longer the case.
Although there is a large Social Security Trust Fund, which
will keep Social Security in actuarial balance through about
2032 (perhaps slightly longer), this trust fund consists of
money which the federal government has promised to repay to
itself in the future. When Social Security obligations begin to
exceed tax revenues, there is no box of money that the
government can go to in order to make up the short fall. The
federal government can either print money, thereby fueling
inflation, or repay the Social Security Trust Fund out of an
operating surplus in the rest of the federal budget.
There is a third choice, which is to invest the current
Trust Fund surplus in assets which may be redeemed later. This
has not been done in the past, but there is no insurmountable
obstacle to undertaking such a policy in the future. For
example, current surpluses could be used to pay down the
national debt (thereby making it easier to create operating
surpluses in the future), or by having the federal government
invest in stocks and bonds, or by the creation of personal
savings accounts which, in the future, would reduce workers'
claims on the existing Social Security system. There are
problems and advantages in connection with all of these
approaches. But until the federal government faces up to the
fundamental difficulties of the pay-as-you-go approach, Social
Security's funding problems can only be solved on a pay-as-you-
go basis, which means, for years in which outgo exceeds
revenues, that benefits must be cut or taxes must be increased.
Many ideas have been advanced in connection with funding
Social Security. Reducing the cost-of-living adjustment
(``COLA'') for Social Security saves very large amounts of
money. In December of 1996, The Boskin Commission reported to
Congress its conclusion that the then current method of
calculating the Consumer Price Index (``CPI'') over stated the
rate of inflation by 1.1%. This conclusion was highly
controversial, but almost everyone agreed that CPI was
overstated by some factor. On April 16, 1998, The Bureau of
Labor Statistics announced the last in a series of reductions
to the CPI. These final changes will take effect on January 1,
1999, and, together with reductions that have already been
made, will total .8 of one percent. (It is hard to determine
whether the Social Security Trustees took any account of these
CPI reductions in their April, 1998 Report, but it seems
certain that they took no account of the more recent changes.)
Small reductions in CPI have enormous effects. The Advisory
Council estimated that reducing CPI by 0.5 percent, beginning
in 1998, would save 0.72 percent of payroll, or about a third
of the entire actuarial shortfall. Even if no changes in CPI
are legislated, the long term picture is already considerably
brighter than reported by the Advisory Council a year ago.
Gradually increasing the normal retirement age also results
in substantial savings, even if the adjustments are relatively
minor. Currently the normal retirement age is scheduled to
increase very gradually beginning in the year 2000. By 2027,
the normal retirement age will be 67. If the normal retirement
age were to be raised by two months a year, beginning in 2000,
capping at age 68 in 2017, the Advisory Council estimates that
this would save 0.49 percent of payroll.
Polls show that the only Social Security reform proposal
which enjoys 50 percent or more popular support is the means
testing of benefits. Th Concord Coalition suggested phasing out
benefits for those having income over $40,000 per year, capping
the reduction at 85 percent of benefits. According to the
Advisory Council, this would save 1.65 percent of payroll.
Currently Social Security benefits are free of tax for most
recipients. Other annuities are 100 percent taxable after the
beneficiary has recovered his or her basis (after-tax
contributions) in the annuity. Taxing Social Security benefits
on the same basis as other income would not be popular, but it
is difficult to argue that it would not be fair.
Eliminating the wage base cap would also raise very large
amounts of money, even though relatively few people would be
effected. This has already been done with respect to Medicare.
Mandatory Social Security coverage of new hires will not
come close to solving Social Security's problems. Even if the
Advisory Council projection of 0.22 percent of payroll is
correct, it was based on the assumption that mandatory coverage
would be imposed January 1, 1998. The earliest legislation is
expected would be next year, and there is no way state and
local governments could adjust to mandatory coverage by the
year 2000, based upon legislation enacted in 1999. Many of
those who have looked at the problem believe that it would take
state and local governments four years to adjust to the legal,
financial, and administrative problems connected with mandatory
coverage. Moreover, mandatory coverage would be the subject of
Tenth Amendment litigation, possibly causing more delay, and
making it uncertain whether revenue from mandatory coverage
would ever be realized.
In addition, there would be offsets. Some employee
contributions to public pension plans are tax deductible, but
all benefits are taxable (after the worker has recovered his or
her basis). Employee contributions to Social Security are not
tax deductible, but all benefits are tax free to most
recipients. Moreover, state and local governments would have to
raise taxes to pay their share of OASDI taxes (and perhaps some
or all of the employees' share as well) and many of these new
taxes would be deductible for federal income tax purposes.
Eventually, of course, public employees would draw out
benefits on the same basis as everyone else. If mandatory
coverage of new hires were to be imposed relatively soon,
benefits would come do for newly covered employees would begin
to come due around 2030, exactly the time when Social Security
is predicted to be in its greatest crisis, at least on an
actuarial basis.
Worst of all, of course, would be for Congress to cover new
hires, but fail to save the tax revenues. That policy is
precisely what has created the difficulties that we face today.
On the other hand, if the government does save the
surpluses in the Social Security Trust, and if the economy
continues to prosper, these factors, together with the CPI
adjustments which have already been announced. will make it
easier to face whatever is left of the problem. It would be
worth while to examine these developments before taking more
radical action.
Of course, Congress may decide to modify the current
structure of Social Security not merely to solve the funding
problem, but to provide better retirement benefits for
participants. Such action (usually described as privatization)
might increase costs for Social Security participants in order
to provide the increase in benefits. But there is no reason why
public employees should pay these costs; they are already
funding their own system.
3. Mandatory Social Security Coverage Will Harm Existing Public
Plan Participants and Retirees and This Proposal Is Not Fair.
Some people argue that mandatory Social Security coverage
should be imposed on grounds of fairness. The Advisory Council
argues, at page 19 of its Report, ``all Americans have an
obligation to participate [in Social Security], since an
effective Social Security program helps to reduce public costs
for relief and assistance, which, in turn, means lower general
taxes.'' Other people have an instinctive reaction that if
Social Security is good enough for everyone else, why shouldn't
public employees participate. It is also argued that, at least
in percentage terms, Social Security confers a high benefit on
very low paid workers, and that in the future most other wage
earners will have to subsidize this benefit. (Until recently,
almost all participants had a very positive return from Social
Security in dollar terms.)
Public retirement plans also reduce public costs for relief
and assistance in precisely the same way that Social Security
achieves that effect. Employees covered by public plans are not
candidates for welfare, SSI, or other forms of public
assistance. Public plans provide higher dollar benefits in
proportion to salary and years of service than does Social
Security. Low income workers depending entirely on Social
Security for their retirement income are virtually certain to
need public assistance.
Moreover, whereas the Social Security funding problem has
created substantial exposure to the federal government in terms
of future needs for revenue, there is no exposure to the
federal government, or to the taxpayers who support that
government, in connection with public plans, because public
plans are not insured by the Pension Benefit Guaranty
Corporation.
There is some evidence that the Advisory Council was not
that concerned with questions of fairness. In an April, 1997,
speech before the National Conference of Public Employee
Retirement Systems, Edith Fierst, a member of the Council, said
of the mandatory coverage proposal, ``We did it primarily
because it would be good for Social Security, not because it
would be good for the employees. Our interest was that if
people came into Social Security and began to pay the Social
Security tax, that helps the Social Security's trust fund, and
they won't start to draw benefits based on those contributions
for some years.''
Whether or not public employees should be in Social
Security because everyone else is depends to a considerable
extent on why the nation is having a serious conversation about
Social Security. If we were writing on a clean slate, with full
knowledge of the problems Social Security faces, and the
alternatives to Social Security which could provide greater
retirement security for the vast majority of beneficiaries, it
is highly likely that the nation would follow a model that is
much closer to the public plan model, than to Social Security
as it exists today. To the extent that Congress determines to
establish private retirement accounts for Americans, to replace
all or part of the current Social Security system, it makes no
sense whatever to move millions of public employees in the
opposite direction. This can only complicate transition
problems, and raise the ultimate cost of moving toward a
privatized system.
Public employees did not cause the current funding problems
for Social Security, nor did non-covered public employees
benefit during the many decades when almost every participant
came out of the Social Security system a winner. Social
Security surpluses have helped to disguise deficits in the
general operating budget of the federal government, primarily
during the last ten years, and public employees have
experienced lower federal income taxes (or lower federal debt
owed to third parties) or exactly the same basis as everyone
else, including Social Security participants and beneficiaries,
but no more so. If it is decided to repay the Social Security
Trust Fund in the future out of general fund surpluses, public
employees will pay their share of those surpluses through
federal income taxes and other federal taxes.
Throughout most of its history, and even today, Social
Security was an arrangement where everyone won. For example,
low-wage single workers who turned 65 in 1960 paid life-time
taxes of $4,000, [employer and employee] and received life-time
benefits of $30,100, for a positive return of $26,100 [in 1993
constant dollars] (Steuerle and Bakija, ``Retooling Social
Security for the 21st Century,'' The Social Security Bulletin,
1997, #2, at page 47, the ``Bulletin Report''.) High wage
earners received a more positive return measured in dollars,
although low-wage workers received a better return measured as
a percentage of life-time taxes to benefits. But members of
every group (low, average. and high earners, male and female,
single and married, one-earner and two-earner couples) that
turned age 65 in 1960, on average, came out big winners. High
wage single men (the least favored category) received life-time
benefits equal to almost four times life-time taxes. Factors
such as sex (women did better than men) and marital status
(married one-earner couples received life-time benefits equal
to eight-and-a-half times life-time contributions) were very
important in determining how good a deal you received. Social
Security was not a re-distributional system from high-earner to
low-earner. Everyone won; high-earners won the most in dollars;
women and married couples won the most in percentage terms.
(For purposes of these calculations, high-earners are assumed
to receive at least the maximum wage subject to Social Security
tax ($65,400 in 1997); average-earners are assumed to receive
the Social Security Administration's measure of the average
national wage ($26,700 in 1997) each year from age 21 to age
65, and low-wage earners are assumed to receive 45 percent of
this amount (about $12,000)).
This pattern continued for workers who reached age 65 in
1980. Positive returns for 1980 retirees were actually greater
than those received by their 1960 counterparts measured in
dollars; measured as a percentage of life-time contributions to
life-time taxes, however, the 1960 cohort did much better. But
every category of worker reaching age 65 in 1980 had a
substantially positive rate of return.
For the most part, this pattern also continues for those
who reached age 65 in 1995. For the first time, however, there
are projected to be losers. Average-income and high-income
single males who retire in 1995 will, on average, receive less
in benefits than they and their employers paid in taxes. All
other categories of workers, including high-earner categories,
will receive positive rates of return, though not as high,
measured either in dollars or percentages, as they would have
received in the past.
For those reaching age 65 in 2010, most single male workers
will have a negative rate of return (single male low-earners
will essentially break even) and single women, other than low-
wage single women, will also lose. Married couples are
projected to have positive rates of return for this age
category, with the exception of high-wage two-earner, couples,
who will experience substantial losses.
For those reaching age 65 in 2030, exactly the same
categories are projected to win and lose, although losses will
be greater, measured in dollars, and positive rates of return
will be low for most of the categories of winners.
Social Security has never been a system of income transfer
from relatively rich to relatively poor, nor will it be such a
system in the future. To some extent, within members of the
same generation, Social Security will become a transfer system
from single to married, especially single-earner married.
Nor does Social Security pay a benefit that low-wage people
can live on. The average low-earner retiring at age 65 in
January 1996 would receive a monthly benefit of $537. (Fast
Facts and Figures about Social Security, The Social Security
Administration: 1996, page 16) Any additional support that is
necessary in paid out of the general fund, in the form of SSI
benefits. Income taxes of public employees support the general
fund on the basis as everyone else.
The average annual salary for a full time state or local
government employee, nation wide, in October 1995, was $33,464.
(Statistical Abstract of the United States: 1997: page 326) For
all full time workers in 1995, the average annual salary was
$40,367 for men, and $26,547 for women. (Statistical Abstract,
page 474) (The average of these two amounts is $33,457.) Public
employees are squarely in the mid-range of all Americans in
terms of their compensation. If public employees were to be
brought within the system, there is no way that they would
``subsidize'' the benefits for any other group.
For most public employees, their rights in their retirement
plan represent a substantial portion of their life time
savings. In 1989, the median American household had a net worth
of approximately $42,000, much of this tied up in the equity in
their home. Forty-two thousand dollars is not a large cushion.
For middle income public employees, the security provided by
their public retirement plan is all that makes possible a
retirement with dignity.
But it will not be possible for public plans to maintain
their current benefit structure, if mandatory coverage is
imposed, even for existing plan participants and existing
retirees. As discussed above, page 5, Ohio STRS has estimated
that mandatory coverage on a new hires basis would require the
elimination of health care benefits, and would also require the
reduction or elimination of cost-of-living adjustments, or
normal retirement benefits, or the elimination of ancillary
benefits for plan participants. (These estimates assume a
relatively restrictive definition of ``new hire;'' If the COBRA
definition were used, the situation would be much worse.) The
average Ohio STRS retiree lives 25 years; three years of
retirement are paid for by employee contributions; six years
are paid for by employer contributions; sixteen years are paid
for by earnings on investments.
Other systems report similar problems. For example, PERA of
Colorado projects an end to plan improvements for current
participants and retirees, and new hires would receive a
combined Social Security and PERA benefit that would be
slightly less than half of the current PERA benefit.
At page 20 of its report, the Advisory Council puts forth,
as one argument for mandatory coverage, that a high proportion
of state and local government workers will receive Social
Security benefits because of non-government work which they
perform, or through their spouses. A Council of Social Security
experts should very well know, but fail to acknowledge, that
state and local government workers do not receive any unfair
advantage from remaining outside of the Social Security system
for most, or part, of their career. In 1983, as part of the
overall Social Security reforms enacted in that year, Congress
adopted an anti-windfall rule, which has the general effect of
reducing any Social Security benefit that the employee might
otherwise be entitled to in accordance with a formula based on
the period of time during which the employee was not covered by
Social Security. This adjustment is made because Social
Security is bottom weighted--that is, Social Security tends to
provide relatively high benefits for workers who have
relatively low career average earnings. Another rule which is
applicable to non-covered government workers, known as the
spousal offset rule, reduces the spousal benefit which would
otherwise be payable to these workers.
4. Mandatory Social Security Coverage Has the Same Adverse
Effects As Do Unfunded Mandates.
In recent years Congress has rightly been concerned about
the effects on state and local governments of imposing costly
federal requirements on those governments, without providing
the necessary money. The Unfunded Mandate Reform Act of 1995
passed over-whelmingly in both the House and the Senate.
The cost mandatory coverage on a new hires basis would be
over $100 million in the first year for Ohio, and almost $200
million for California. When fully phased in, California's
annual cost would be over $2 billion, and states such as Texas,
Colorado, Illinois, Massachusetts, and Louisiana would face
annual costs in the hundreds of millions of dollars. Even
states like Washington, Florida, Georgia, Connecticut,
Kentucky, Michigan, and Minnesota, which are not commonly
thought of as non-Social Security states, would face costs in
excess of $100 million per year.
The burden caused by these extra costs would fall most
heavily on those who can afford it least, such as large cities
which have substantial low-income populations. In a March 15,
1998 article, The Washington Post discussed a report by the
Milton S. Eisenhower Foundation. (See, ``Rejuvenation of
Cities: Was It Just Cosmetics?,'' page A3) The report concluded
that ``Most adults in many inner-city neighborhoods are not
working in a typical week.'' Two-third of children fail to
achieve basic reading levels. Child poverty. segregation, and
imprisonment have all risen.
Buzz Bissinger, author of the recent book, ``A Prayer for
the City,'' reaches similar conclusions when he discusses the
energetic reform efforts of Philadelphia Mayor Ed Rendell,
which he views largely as a failure. Bissinger concludes that
wide-spread improvement may be possible for New York, because
immigration keeps the population up, and because that city is
awash in money from Wall Street. But many other cities, like
Atlanta, Cleveland, Detroit, Miami, and Newark, among other,
have no such advantages, and are far less likely to be able to
re-define themselves in ways that benefit the poorer
neighborhoods.
On March 12, 1997, bi-partisan representatives of the
National Governors' Association testified before a joint
session of the House and Senate Budget Committees, urging
Congress not to enact federal tax cuts which would force state
or local tax hikes. Mandatory Social Security coverage would be
worse, a federal tax hike which would also force state and
local tax hikes.
Chairman Bunning. Mr. Schumacher.
STATEMENT OF RICHARD E. SCHUMACHER, EXECUTIVE DIRECTOR, PUBLIC
EMPLOYEES RETIREMENT SYSTEM OF OHIO
Mr. Schumacher. Thank you, Mr. Chairman, Members of the
Subcommittee. I appreciate the opportunity to give testimony
this morning.
The potential extension of mandatory Social Security
coverage to all or any portion of Ohio's public employees is a
serious concern to the Public Employees' Retirement System,
PERS, of Ohio. PERS was established by the Ohio legislature in
1933. The retirement system is a multiemployer plan covering
3,700 public employers and 638,000 members and benefit
recipients. We currently have over $47 billion in assets.
PERS provides retirement, disability, and survivor
benefits, also, health care coverage. Our program is a defined
benefit plan and is prefunded through employee and employer
contributions. The major source of significant revenue is
investment income. At our inception, the legislature
established a social contract with all of Ohio's public
employees. Fiscally sound prefunding was one of the important
covenants. The funds are to be available when retirement is
requested. The 1994-96 Advisory Council of Social Security
stated, and I quote, ``In the past, efforts to deal with Social
Security's financial difficulties have generally featured
cutting benefits and raising tax rates on a pay-as-you-go
basis. Further, all three plans favored by the Council endorse
the practice of partial, advanced funding.'' As the baby boomer
generation begins to retire, heavy pressure will be exerted on
pay-as-you-go plans, and the results could be disastrous.
The major difference between a prefunded plan and a pay-as-
you-go plan is investment income. Over 80 percent of the
benefits paid by PERS come from investment earnings. Mandating
public employee new hires into Social Security would severely
affect State and local pension systems. Focusing on new hires
alone creates the illusion that no one else would be affected.
That is a false assumption. All systems in Ohio would be faced
over time with cutting benefits to current, active members and
retirees. Boards could be faced with harmful choices to reduce
or eliminate health care. The fiscal impacts on this proposal
on State and local retirement plans would be significant. Costs
would be shifted from the Federal Government to State and local
governments. Remember, over 80 percent of our benefit
disbursements are paid by investment income. The loss of
contributions results in fewer funds to invest. This means less
investment earnings, longer funding periods, and higher
contribution rates.
Another tragic consequence is the unfunded mandate that
would be imposed on State and local governments. The important
legislation on unfunded mandates that came from the House Ways
and Means Committee in 1995 is extremely relevant today on the
issue of mandatory coverage. State and local government
officials appreciated your actions then and urge that the same
commitment continue today. If our contribution rate was
decreased by 12.4 percent for Social Security, we would need an
additional 6- to 7-percent increase in contributions to provide
a comparable level of benefits. Who is going to pay the
increased cost? It will be shared by workers and their
employers. Workers will get less take home pay, and employer
costs will increase. Taxpayers will pay more.
Since 1935, various changes have been enacted to mandate
large sectors of employees into Social Security, generally,
driven by the need for additional cash flow to pay benefits.
Each time, the basis for the change was to, supposedly,
strengthen the program. Each time, it has failed. Merely
including more participants does not improve the program's
long-term stability. It may for a couple of years, but as
retirements increase, greater and greater resources are needed.
It is reported that the unfunded liability for Social
Security is in excess of $9 trillion. Each revision of Social
Security has focused on raising additional revenue and or
raising the retirement age. Perhaps, this time, it is prudent
to focus on liabilities, but the legislative fix looking to
increase short-term cash flow, requiring newly hired public
employees to be under the Social Security Program would cause a
substantial increase in long-term Social Security liabilities
and in taxpayers' liabilities in the State of Ohio as well as
many other States and their subdivisions.
It seems unwise to financially and administratively disrupt
our plans for the purpose under consideration by this
Subcommittee. Indeed, requiring newly hired public workers and
their employers to participate in Social Security would
constitute a tax increase on millions of Americans.
Many public plans financed by taxpayers and public workers
are operating in a sound and prudent fiscal manner. Rather than
imposing mandatory Social Security, our successes should be
studied for ideas to use in restructuring Social Security.
Thank you.
[The prepared statement follows:]
Statement of Richard E. Schumacher, Executive Director, Public
Employees Retirement System of Ohio
The potential extension of mandatory Social Security
coverage to all or any portion of Ohio's public employees is a
serious concern to Public Employees Retirement System of Ohio
(PERS).
PERS was established by the Ohio Legislature in 1933.
Benefits were first paid January 1938. The Retirement System is
a multiemployer plan covering 3,700 public employers (includes
all departments of state and all levels of local government),
and 638,000 members and benefit recipients. PERS provides
retirement, disability and survivor benefits, and health care
coverage. Our program is a defined benefit plan and is pre-
funded through employee and employer contributions. The major
source of significant revenue is investment income.
At our inception, the legislature established a social
contract with all of Ohio's public employees. Based on that
contract, steps were taken to secure future benefits. Fiscally
sound pre-funding was one of the important covenants. The funds
are collected over a person's working career to be available
when retirement is requested.
The 1994-1996 Advisory Council of Social Security, in its
1997 Report, stated:
``In the past, efforts to deal with Social Security's
financial difficulties have generally featured cutting benefits
and raising tax rates on a pay-as-you-go basis....''
``Historically, Social Security has been financed on a
current pay-as-you-go basis.... All three plans favored by the
Council endorse the practice of partial advance funding....''
As the baby boomer generation begins to retire, heavy
pressure will be exerted on pay-as-you-go plans and the result
could be disastrous. All plans have already experienced a large
drop in the ratio of active workers to retirees to fund
retirement benefits.
The major difference between a pre-funded plan and a pay-
as-you-go plan is investment income. Over 80% of the benefits
paid by PERS come from investment earnings. Currently our
system collects about 22% of covered payroll in employee and
employer contributions.
Mandating public employee new hires into Social Security
would severely affect state and local pension plans. Focusing
on new hires alone, creates the illusion that no one else would
be affected; that is a false assumption. All systems in Ohio
would be faced over time with cutting benefits to current
active members and retirees. Boards could be faced with harmful
choices to reduce or eliminate health care. The fiscal impact
of this proposal on state and local retirement plans would be
significant; costs would be shifted from the federal government
to state and local governments. Reduction of our contributions
would severely restrict investment income sources. Remember,
over 80% of our benefit disbursements are paid by investment
income. The loss of contributions results in fewer funds to
invest. This means less investment earnings, longer funding
periods, and higher contribution rates.
Another tragic consequence is the unfunded mandate that
would be imposed on state and local governments. The important
legislation on unfunded mandates that came from the House Ways
& Means Committee in 1995 is extremely relevant today on the
issue of mandatory coverage. State and local government
officials appreciated your actions then and urge that the same
commitment continue today.
If our contribution rate was decreased by the 12.4% to fund
Social Security, we would need an additional 6-7% increase of
covered payroll to provide comparable benefits. A survey
indicates a higher average total cost for Social Security
integrated plans at 26% versus non Social Security covered
plans of 22%. Who is going to pay for the increased cost? It
will be shared by workers and their employers. Workers will get
less take home pay and employers' costs will increase--
taxpayers will pay more.
Since 1935, various changes have been enacted to mandate
large sectors of employees into Social Security, generally
driven by the need for additional cash flow to pay benefits.
Each time the basis for change was to supposedly strengthen the
program. Each time it has failed. Merely including more
participants does not improve the program's long term
stability. It may for a couple of years, but as retirements
increase, greater and greater resources are needed.
It is reported that the unfunded liability for Social
Security is in excess of $9 trillion. Each revision of Social
Security has focused on raising additional revenue and/or
raising the retirement age. Perhaps this time it is prudent to
focus on the liabilities. The 638,000 members and beneficiaries
of our system do not cause liabilities for Social Security. But
the legislative fix--looking to increase the short term cash
flow--requiring newly hired public employees to be in the
Social Security program--would cause a substantial increase in
long term Social Security liabilities and in taxpayer
liabilities in the state of Ohio as well as many other states
and their subdivisions.
It seems unwise to financially and administratively disrupt
these plans for the purpose under consideration by the
Subcommittee. Indeed, requiring newly hired public workers and
their employers to participate in Social Security would
constitute a tax increase on millions of Americans. Many public
plans financed by taxpayers and public workers are operating in
a sound and prudent fiscal manner. Rather than imposing
mandatory Social Security--a new tax on America--our successes
should be studied for ideas to use in restructuring Social
Security.
Chairman Bunning. Sergeant Pfeifer.
STATEMENT OF MARTY PFEIFER, SERGEANT, WASHINGTON METROPOLITAN
POLICE DEPARTMENT; AND DISTRICT OF COLUMBIA TRUSTEE, NATIONAL
FRATERNAL ORDER OF POLICE
Mr. Pfeifer. Good morning, Mr. Chairman, distinguished
Members of the House Subcommittee on Social Security. My name
is Sergeant Marty Pfeifer, and I'm a 26-year veteran with the
Metropolitan Police Department in Washington, DC and currently
serve as the elected Trustee from the District of Columbia on
the National Board of the Fraternal Order of Police which is
the largest organization of law enforcement professionals in
the Nation representing over 272,000 members.
In addition, in 1995, I served as chairman of the District
of Columbia Retirement Board which provides retirement benefits
for police officers, fire fighters, teachers, and judges in the
District of Columbia, none of whom participate in Social
Security. Since 1996, I have chaired the Investment Committee
of the board which now manages approximately $5 billion in
assets.
I am here this morning to discuss fairness; fairness to
those officers, public safety officials, and other public
employees who have chosen not to contribute to Social Security.
We understand there are proposals being considered that would
require the inclusion of all public sector employees in the
Social Security system.
The Fraternal Order of Police vehemently opposes any Social
Security reform measures that include mandatory Social Security
participation. Employees in nine Social Security covered
jurisdictions represent a sizeable portion of State and local
government work forces. According to OPPOSE, over 3.9 million
full-time employees are affected. Social Security coverage
varies considerably, of course, by employee group, but it
should be noted that according to the Public Pension
Coordinating Council, 76 percent of public safety personnel do
not participate in Social Security.
If the Federal Government imposes mandatory Social Security
participation, even if only restricted to new hires, it not
only comprises severely the financial solvency of existing
pension and retirement plans, the cost to State, localities,
and the individual employees would be immense. Both the
employee and his or her employer would each be required to pay
an additional 6.2 percent of payroll into Social Security. This
amount would be in addition to the contribution already paid by
the employer and the employee into the State or local
retirement system.
I cannot overestimate the damage that would be done to
State and local governments and families of the employees if
the Federal Government forces them to pay a new tax of 12.4
percent. Collected data shows that the first year cost to
employers, local and State governments, of covering newly hired
employees would be over $771 million. The newly hired employees
would be responsible for an equal amount making the cost in the
first year of over $1.5 billion. The total annual cost to
employers for covering employees not currently covered under
Social Security would be about $8.5 billion. When the employee
share is counted, that amount rises to over $17 billion per
year.
For example, Mr. Chairman, of the over 240,000 State and
local employees in the State of Kentucky, more than 61,000,
many of whom are law enforcement officers do not currently
participate in Social Security. The annual cost of mandating
participation is approximately $80.9 million a year.
Federally mandated participation in Social Security is not
a minor issue. Such a mandate would adversely affect millions
of employees and impose billions of dollars in additional cost
to State and local governments who are trying to stretch every
dollar. Many retirement and pension plans for public sector
employees have been specifically designed and refined on the
assumption that local governments would not be required to
participate in Social Security. This was a reasonable
assumption since local governments have never been required to
pay into the system adopted in 1935 for those who chose to
participate.
An important consideration for law enforcement and other
public safety officers is a much earlier retirement age than
other more typical government employees. Local and State
retirement plans take this early retirement into consideration;
Social Security does not. As this Subcommittee is aware, the
Advisory Council on Social Security recommended that extended
to all newly hired State and local government employees as a
way to raise 10 percent of the money needed to rebalance the
program. The Council's report failed to address the impact that
mandatory participation would have on the employers and the
employees at the State and local levels of government.
The Fraternal Order of Police understands that reforming
Social Security is necessary and certain steps need to be taken
if we are to avoid the expected shortfall in 2030. Sometimes
these proposals sound good on the surface but after careful
consideration are revealed to be unsound policies with damaging
consequences. We believe that mandating the inclusion of all
public sector employees into the Social Security system falls
into this category.
This is about fairness, Mr. Chairman. It is unfair to
change the rules 63 years later because the Federal Government
is looking for an easy way to fund Social Security without
making hard choices. The State and local governments who chose
not to participate in Social Security did not create this
problem nor did the nearly 4 million employees who do not pay
into the system, but all of them would be paying a hefty price
for their previous decision to create their own retirement
plans. Destroying the retirement programs of these hard working
Americans and raiding the budgets of State and local
governments should not be a part of the Federal Governments
solution.
Mr. Chairman, I want to thank you and the Members of the
Subcommittee for the opportunity to appear here today. I'd be
pleased to answer any questions.
[The prepared statement follows:]
Statement of Marty Pfeifer, Sergeant, Washington Metropolitan Police
Department; and District of Columbia Trustee, National Fraternal Order
of Police
Good morning, Mr. Chairman and distinguished Members of the
House Subcommittee on Social Security. My name is Sergeant
Marty Pfeifer and I am a 26 year veteran with the Washington
Metropolitan Police Department and currently serve as the
elected Trustee from the District of Columbia on the National
Board of the Fraternal Order of Police, which is the largest
organization of law enforcement professionals in the nation,
representing over 272,000 officers.
In addition, in 1995 I served as Chairman of the District
of Columbia Retirement Board, which provides retirement
benefits for law enforcement officers, teachers, fire fighters
and judges in the District of Columbia--none of whom
participate in the Social Security system. Since 1996, I have
chaired the Investment Committee of that Board, managing
approximately $5 billion in assets.
I am here this morning to discuss fairness. Fairness to
those officers, public safety officials and other public
employees who have chosen not to contribute into the Social
Security system. We understand that there are proposals being
considered which would require the inclusion of all public
sector employees in the Social Security system.
The Fraternal Order of Police vehemently opposes any Social
Security reform measures that include mandatory Social Security
participation.
Employees in non-Social Security-covered jurisdictions
represent a sizable portion of the State and local government
workforce. According to OPPOSE, an organization opposed to
mandatory Social Security coverage with which the F.O.P. works
on this issue, over 3.9 million full-time employees are
affected.
Social Security coverage varies considerably, of course, by
employee group, but it should be noted that, according to the
Public Pension Coordinating Council (PPCC), seventy-six percent
(76%) of public safety personnel do not participate in Social
Security.
If the Federal government imposes mandatory Social Security
participation, even if only restricted to new hires, it not
only compromises severely the financial solvency of extent
pension and retirement plans, the cost to States, localities,
and the individual employees would be immense. Both the
employer and his or her employer would each be required to pay
6.2% of payroll into the Social Security trust fund. This
amount would be in addition to the contribution already paid by
the employer and the employee into the State or local
retirement system.
I cannot overestimate the damage that would be done to
State and local governments and the families of the employees
if the Federal government forces them to pay a new tax of
12.4%.
Collected data shows that the first year cost to
employers--local and State governments--of covering newly hired
employees would be over $771 million. The newly hired employees
would be responsible for an equal amount, making the cost of
the first year coverage over $1.5 billion. The total annual
cost to employers for covering employees not currently covered
would is $8.5 billion. When the employees' share is counted,
that amount rises to over $17 billion per year.
For example, Mr. Chairman, of the over 240,000 State and
local employees in the State of Kentucky, more than 61,000--
many of whom are law enforcement officers--do not currently
participate in Social Security. The annual cost of mandating
participation is approximately $80.9 million a year.
Federally mandated participation in Social Security is not
a minor issue. Such a mandate would adversely affect millions
of employees and impose billions of dollars in additional costs
to the State and local governments who are trying to stretch
every needed dollar at the local level.
Many retirement and pension plans for the public sector
employee have been specifically designed and refined on the
assumption that local governments would not be required to
participate in the Social Security system. This was a
reasonable assumption since local governments have never been
required to pay into the system--adopted in 1935 for those who
chose to participate. An important consideration for law
enforcement and other public safety officers is an much earlier
retirement age than other, more typical, government employees.
Local and State retirement plans take this early retirement
into consideration. Social Security does not. In the event
mandatory participation is imposed, how are public safety
officers supposed to live between the time that they retire and
the age at which they qualify to collect Social Security?
As this Subcommittee is doubtlessly aware, the Advisory
Council on Social Security recommended that Social Security be
extended to all newly hired State and local government
employees as a way to raise ten percent (10%) of the money
needed to rebalance the program. The Council's report failed to
address the impact that mandatory participation would have on
employers and employees at the State an local level of
government.
The Fraternal Order of Police understands that reforms in
the Social Security system are necessary and that certain steps
need to be taken if we are to avoid the expected budget
shortfall in 2030. Sometimes, proposals sound good on the
surface, but after examiniation are revealed to be unsound
policy with damaging consequences. We believe that mandating
the inclusion of all public sector employees falls into this
category.
This is about fairness, Mr. Chairman. It is unfair to
change the rules sixty-three years later because the Federal
government is looking for an easy ways to earn revenue and
``save'' Social Security without making hard choices. The State
and local governments who chose not to participate in Social
Security did not create this problem, nor did the nearly four
million employees who do not pay into the system. But all of
them would be paying a hefty price for their previous decision
to create their own retirement plans. Destroying the retirement
programs of these hard-working Americans and looting the
budgets of State and local governments should not be part of
the Federal government's solution.
Mr. Chairman, I want to thank you and the members of this
distinguished Subcommittee for the opportunity to appear before
you today. I would be pleased to answer any questions.
Chairman Bunning. Thank you.
Mr. Lussier.
STATEMENT OF THOMAS R. LUSSIER, EXECUTIVE DIRECTOR,
MASSACHUSETTS TEACHERS' RETIREMENT BOARD
Mr. Lussier. Mr. Chairman, Members of the Subcommittee, my
name is Tom Lussier. I'm the executive director of the
Massachusetts Teachers' Retirement System. We administer
retirement, survivor, and disability benefits for nearly
110,000 active, inactive, and retired public school teachers
and administrators. We enrolled our first member on July 1,
1914.
It is our opinion that expanding Social Security taxes will
result in higher costs to all Massachusetts taxpayers; reduced
benefits for all future Massachusetts teachers; unintended
reductions in critical public services, and the destruction of
our current retirement systems. Worse, it is our belief that
this enormous price, paid by our taxpayers and public servants,
will produce no appreciable, positive result on behalf of the
Social Security Program.
The problems that bring us together for this hearing are
not dissimilar from those that have been successfully
confronted by public plans throughout the country. In 1987,
Massachusetts ultimately faced the reality that a pay-as-you-go
financing program was irresponsible and threatened the
stability of our State budget and the retirement security of
our dedicated public employees. Over a period of time, we have
adopted and funded actuarially sound funding schedules, and
we've repealed regressive legalist restrictions on the
investment of system assets. As a result, the MTRS has seen its
original 40-year funding schedule reduced by 10 years. Our
system which in 1987 was less than 40 percent funded, by some
estimates, is currently more than 85-percent funded.
In our view, it is totally unreasonable to assume that
Massachusetts or any other State which finds itself in a
similar situation will be able to maintain a comprehensive
benefit program and absorb the additional employer costs
resulting from forced Social Security coverage. The actuary for
the Massachusetts Public Employer Retirement Administration
Commission has reported that the Social Security benefit is 43
to 75 percent below the Massachusetts superannuation retirement
benefit depending on salary. Normal cost payments by employers
in Massachusetts are currently trending downward. In fact, for
employees hired after July 1, 1996, these costs range between 2
and 4 percent of salary. The present Social Security employer
rate is 6.2 percent. Thus, for new employees only,
Massachusetts government employers would be required to make an
additional payment under Social Security of between 2.2 and 4.2
percent of payroll just to pay their Social Security tax.
Inevitably, the passage of mandatory Social Security
coverage will result in the repeal of current retirement
benefits. Although there is a temptation to assume that a
supplemental retirement program would be developed to bridge
the gap between the level of Social Security benefits and those
currently provided by our system, it is pure speculation as to
what form such a program might take.
Some have suggested that imposing mandatory Social Security
coverage on all State and local government employees is a
simple matter of fairness. Since fairness is a difficult
quality to evaluate, consider these questions: Massachusetts
has provided retirement benefits for its public school teachers
since 1914. Is it fair to undermine that commitment in order to
ever so slightly improve the short-term cash flow of a pay-as-
you-go Social Security system that will provide our public
employees reduced benefits at higher costs? The Massachusetts
legislature has crafted a public retirement program that
responds to the unique characteristics of vastly different
jobs, risks, and responsibilities. Is it fair to force the
abandonment of such a program in order to fund a less secure
one-size-fits-all program? The implementation of mandatory
Social Security will increase the cost of providing retirement
benefits for the Commonwealth and most of its cities and towns.
Is it fair for the Congress to impose such a tax on our State
and municipalities? The Unfunded Mandate Reform Act of 1995
received overwhelming support throughout the Congress. Is it
fair to be against unfunded Federal mandates except for this
one?
In closing, please accept my most sincere best wishes in
your endeavor to strengthen and prudently fund the Social
Security Program. Over the years, many of us who have opposed
mandatory Social Security have been incorrectly seen as anti-
Social Security. The Social Security Program is an American
treasure, and it must be preserved and strengthened. For nearly
20 years, my mother's monthly Social Security check was her
most significant means of support. Her Social Security benefit
allowed her as it does millions of other Americans the
opportunity to live independently and with dignity. We owe it
to her and to countless people like her to preserve and to
protect the Social Security system. However, I would
respectfully suggest to you that it would be wrong to honor
that commitment by causing Massachusetts and other States to
break their commitments made to their members and to their
public retirement systems. Thank you, Mr. Chairman.
[The prepared statement follows:]
Statement of Thomas R. Lussier, Executive Director, Massachusetts
Teachers' Retirement Board
My name is Thomas R. Lussier. I am the Executive Director
of the Massachusetts Teachers' Retirement Board (MTRB), a
position that I have held since November of 1984. I served as
the First Deputy Commissioner of the Massachusetts Division of
Public Employee Retirement Administration during 1983 and 1984
after having been elected to four terms in the Massachusetts
House of Representatives. I served as a member of the
Massachusetts Retirement Law Commission from 1984 through 1987
and am currently an elected member of the Executive Committee
of the National Council on Teacher Retirement.
The MTRB administers retirement, survivor and disability
benefits for nearly 110,000 active, inactive and retired public
school teachers and administrators who comprise the membership
of the Massachusetts Teachers' Retirement System (MTRS). The
MTRS, originally known as the Massachusetts Teachers'
Retirement Association, was established by the Massachusetts
General Court in 1914. Our first member was enrolled on July 1,
1914. The MTRS is one of the 106 contributory retirement
systems that serve the public employees of the Commonwealth of
Massachusetts. Collectively, the Massachusetts public
retirement community represents nearly half a million
employees, retirees and beneficiaries who remain outside of the
Social Security System. The assets of these systems exceed $30
billion.
On behalf of the members of the MTRB and our membership,
let me first fully endorse the very comprehensive testimony
that has been submitted by Robert J. Scott on behalf of The
Coalition to Preserve Retirement Security (CPRS). We are active
members of the CPRS and are proud to be part of such a positive
effort on behalf of millions of public employees and their
beneficiaries. To supplement the message of the CPRS, I want to
specifically express our very serious concerns with regard to
the negative impact that will most certainly result should
Congress opt to mandate Social Security coverage on
Massachusetts public school teachers and administrators. In
general, our concerns could easily be echoed by the
administrators and trustees of each of the Commonwealth's other
105 retirement systems on behalf of their active and retired
members.
It is our opinion, that expanding Social Security taxes and
coverage to Massachusetts teachers and to all other public
employees will result in higher costs to all Massachusetts
taxpayers, reduced benefits for all future Massachusetts
teachers and other public employees, unintended reductions in
critical public services such as education and public safety,
and the destruction of our retirement systems as we currently
know them. Worse, it is our belief that this enormous price,
paid by our taxpayers and public servants, will produce no
appreciable positive result on behalf of the Social Security
program. In fact, the long-term liabilities associated with
expanding Social Security coverage to all State and local
government employees will inevitably far exceed the short-term
gains that can appear to make this alternative attractive.
Brief Background
The Social Security program was established in 1935, 21
years after the first teacher was enrolled in the MTRS. The
program covered all private sector employees and specifically
excluded state and local government employees. Public employees
not covered by a public retirement system were allowed
voluntary participation in the Social Security program in 1950;
those covered by a public retirement system were allowed
voluntary participation in the program in 1954. Participating
state and local governmental units could also withdraw from the
program.
Since 1983, the Social Security Act has been amended to
preclude the withdrawal of state and local governmental units;
to require that all public employees hired after March 31, 1986
be covered by Medicare health insurance, with matching employer
and employee contributions; to require as of 1991 that all
public employees not covered by a state or local retirement
plan be covered by Social Security or another plan which
provides comparable retirement benefits; and to implement anti-
windfall provisions to ensure that public employees who also
had employment that was covered by Social Security did not
receive excess credit for Social Security purposes.
Today, approximately five million Americans are outside of
the Social Security system because they are covered by a public
retirement plan. Additionally, there are millions of public
retirees who rely on the financial strength and continuity of
public plans for their retirement income and security.
The success of public retirement systems should serve as a model for
Social Security reforms.
The problems which bring us together for this hearing are
not dissimilar from those that have been successfully
confronted by public plans throughout the country. In 1976, a
special Massachusetts study found:
``Under the present pay-as-you-go arrangement, the future
costs of Massachusetts pension benefits are scheduled to
increase dramatically from 12.1 percent of state-local employee
payrolls in fiscal year 1978 to 31.9 percent in fiscal 1993.\1\
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\1\ Report of the Funding Advisory Committee and the Retirement Law
Commission to the Governor and General Court of Massachusetts, October
1976.
---------------------------------------------------------------------------
In 1977, one of the first public hearings that I
participated in as a young state legislator concerned the
relative merits of abandoning a ``Pay-As-You-Go'' financing
program for an actuarially sound funding program. At the time,
numerous groups argued that future funding was unnecessary and
that valuable state and local tax dollars could be better spent
on far more immediate needs. In fact, the National Retired
Teachers Association published a legislative alert which
reported that ``it would seriously damage the economy of the
Commonwealth to drain off hundreds of millions of dollars for
funding. We believe that the interests of present public
retirees, with an average pension of $4,500 being eroded by
inflation, take precedence over some hypothetical retiree of
the 21st century.'' \2\
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\2\ Massachusetts Legislative News, NRTA/AARP Newsletter, January
6, 1977.
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As late as June of 1985, the Massachusetts Senate Committee
on Ways and Means reported:
``It is irresponsible for a state or individual to ignore
the fiscal implications of ballooning payments that must be
made... Since FY1975, the state's appropriation for pension
costs (including both state and teachers' pensions) have
increased by 163.2 percent, which is an average increase of
about 10.4 percent per year, compounded... pensions have been
growing about 10 percent faster than the entire state budget.''
\3\
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\3\ Massachusetts Senate Committee on Ways and Means, Fiscal Year
1986 Budget Recommendations, June, 1985.
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In 1987, Massachusetts ultimately faced the reality that a
``Pay-As-You-Go'' financing program was fiscally irresponsible
and threatened the retirement security of all of the
Commonwealth's dedicated public employees. Over a period of
time we have adopted and funded actuarially sound funding
schedules; we have repealed regressive ``Legal List''
restrictions on the investment of system assets; we have
repealed an arbitrary cap on system benefits; and we have
diligently monitored the potential for abuse, especially in the
area of disability retirement benefits.
As a result, the MTRS has seen its original 40 year funding
schedule reduced by 10 years; our system, which in 1987 was
less than 40% funded, by some estimates is currently more than
85% funded. Other Massachusetts systems have totally erased
their unfunded actuarial liability. We have seen modest
improvements in benefits; greater opportunities for
portability; and, as we speak, our Legislature is considering
legislation to provide teachers with an enhanced benefit based
on a formula that more properly accounts for years of dedicated
service.
In a recent report prepared for the U. S. General
Accounting Office, the Massachusetts Public Employee Retirement
Administration Commission wrote:
``The Massachusetts experience represents a transition from
`pay as you go' funding to actuarially sound financing over a
relatively short period. Present retirees and employees, as
well as future employees, can be confident that a sound pension
system will exist guaranteeing their hard-earned benefits.
Rather than jeopardizing those benefits through forced Social
Security, the federal government should look to the
Commonwealth as an example...''
Massachusetts offers its teachers and other public employees a sound
retirement system; mandatory Social Security coverage will result in
higher costs to Massachusetts taxpayers, will reduce benefits for all
future teachers and other public employees and will result in
unintended reductions in critical public services.
The Massachusetts contributory retirement law (Mass. Gen.
Laws, Chap. 32), which sets forth the benefits provided by each
of the Commonwealth's 106 retirement systems, guarantees a
sound retirement program for all Massachusetts public
employees. The Social Security Advisory Council implies that
public employees need Social Security benefits in order to
offset deficiencies in public retirement plans. The facts don't
support such a view.
According to a recent analysis completed by the actuary for
the Massachusetts Public Employee Retirement Administration
Commission, the Social Security benefit is 43-75% below the
Massachusetts superannuation retirement benefit depending on
salary. The Commission has concluded that ``...replacing the
Massachusetts benefit structure with the Social Security
benefit structure substantially diminishes the purchasing power
of our retirees.'' A closer look at the full program clearly
supports such a proposition:
Massachusetts pension benefits are guaranteed. The
Massachusetts retirement law establishes a contract with each
member that prevents the reduction of retirement benefits. In a
1974 advisory opinion, the Massachusetts Supreme Judicial Court
stated: ``...the `contract' is formed when a person becomes a
member by entering the employment, and he is entitled to have
the level of rights and benefits then in force preserved in
substance in his favor without modification downwards. ...When
we speak of the level of rights and benefits protected by 25(5)
we mean the practical effect of the whole complex of
provisions...'' \4\
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\4\ Opinion of the Justices, 364 Mass. 847 (1974-74) Opinion of the
Justices to the House of Representatives.
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A Massachusetts retirement allowance is not
reduced for post-retirement income from any source other than a
Massachusetts governmental unit.
Massachusetts provides both job related and non-
job related disability benefits for members. A Massachusetts
public employee receives 72% of current salary plus an annuity
in the case of a job related illness or injury. For 1997, the
average MTRS job related disability benefit was $32,000; the
average non-job related disability benefit was $14,000
annually.
The Massachusetts retirement law provides pre-
retirement survivor benefits, pre-and post-retirement
accidental death benefits, and each retiree has the option of
providing a survivor benefit at the time of retirement. In
certain instances, additional survivor benefits are available
to minor children until age 22 if the child is a full-time
student.
Although they could be better, Massachusetts
generally provides cost-of-living adjustments for its retirees
and survivors. A recently enacted amendment provides for an
annual cost-of-living adjustment equal to the CPI or 3%
whichever is lower, payable on the first $12,000 of a member's
benefit. For teachers, the Massachusetts Legislature is
currently considering establishing a minimum pension benefit
for all teachers who retired with a minimum of 25 years of
service. In a 1997 report entitled, ``Retirement Benefits for
the 21st Century: An Actuarial Appraisal of Retirement
Alternatives'' the MTRB called upon the Legislature to enact a
purchasing power protection plan in order to guarantee the
long-term financial security of every Massachusetts retired
teacher. As we get closer to attaining our goal of full
funding, post-retirement benefit protection will only get
better.
Since all Massachusetts public retirement systems
are governed by a common law, retirement benefits are totally
portable within the Commonwealth. In addition, since the MTRS
allows relatively inexpensive purchases of service credit for
of out-of-state teaching, for certain non-public school
teaching service, and for military service, our members enjoy
the benefits of a highly portable system. Should the Congress
pass the recently introduced Retirement Account Portability Act
of 1998, important barriers to portablitiy between private and
public plans will be removed.
Massachusetts retirement benefits, as is the case
in virtually all public retirement plans, have been designed to
meet the unique needs of our membership. Although this is
particularly true for public safety employees, Massachusetts
has also provided better benefits at lower retirement ages for
individuals who are engaged in certain hazardous or high risk
non-public safety careers. The Massachusetts Legislature is
currently considering providing enhanced benefits to teachers
who have served 25 years or more. In the context of education
reform, many have suggested that it is in the best interest of
our children to allow teachers to retire before they suffer the
burnout that frequently comes at the end of a 35 or 40 year
career.
In our view, it is totally unreasonable to assume that
Massachusetts, or any other State which finds itself in a
similar situation, will be able to maintain such a
comprehensive benefit program and absorb the additional
employer cost resulting from forced Social Security coverage.
Additionally, Massachusetts employees, who currently make
contributions ranging from 5 to 12% depending on their
membership date and group classification, can ill afford to pay
an additional 6.2% for Social Security coverage.
In the report prepared for the U. S. General Accounting
Office, the Massachusetts Public Employee Retirement
Administration Commission wrote:
``Normal cost payments by employers in Massachusetts are
trending downward... Ultimately, for employees hired after 7/1/
96, these costs would range between 2% and 4% of salary. The
present Social Security employer rate is 6.2%. Thus, for new
employees only, Massachusetts' governmental employers would be
required to make an additional payment under Social Security of
between 2.2% and 4.2% of payroll. Consequently, between $210
and $410 million would be required to meet these additional
costs.''
Inevitably, the passage of mandatory Social Security
coverage will result in the repeal of our current retirement
benefits for all future Massachusetts teachers and other public
employees. Although there is a temptation to assume that a
supplemental retirement program would be developed to bridge
the gap between the level of Social Security benefits and those
currently provided by our system, it is pure speculation as to
what form such a program might take.
To illustrate the severity of our concerns, please consider
the following summaries of three possible outcomes:
Option 1. Since our anticipated employer normal cost
contribution for new members is currently less than the Social
Security tax, it is fair to assume that any supplemental
program will be designed as a defined contribution plan with no
employer contribution. Such a program would leave future
Massachusetts teachers and public employees with no disability
protection, a significantly higher retirement age, and the
potential for dramatically lower retirement income.
Option 2. Since the 106 Massachusetts public retirement
systems are governed by one law, there is a tremendous amount
of equality across the broad spectrum of Massachusetts
governmental units with regard to retirement benefits. All
employees currently enjoy the total portability of benefits
amongst our numerous systems. Let us assume that the
Legislature will opt to allow each governmental unit to respond
to mandatory Social Security coverage in its own way.
Portability, one of the goals of the proponents of mandatory
coverage, will be destroyed and we will have a disjointed
system of the ``haves'' and the ``have-nots.'' Who will have
more success recruiting the best public servants--the affluent
community that offers a rich supplemental retirement program or
the older urban community that is forced to choose between
police salaries and police retirement benefits?
Option 3. Teacher retirement costs are currently the
responsibility of state government. Let's assume that the
Commonwealth, faced with the obligation to continue to fund the
normal cost for current members of the MTRS as well as the
system's actuarial unfunded liability, establishes a
supplemental program for all Massachusetts teachers. Is it
possible that the Legislature would fund any employer
contribution to the supplemental program and absorb the 6.2%
Social Security tax? It is our belief that the Legislature
would opt to do neither. Future teachers would be left with a
defined contribution plan with no employer contribution from
the state and every local government would be faced with a
totally new obligation equal to 6.2% of their teacher payroll.
Mandatory Social Security coverage will then have resulted in
the unintentional reduction of critical local services and/or
will result in a greater tax burden at the local level.
Applying mandatory Social Security coverage to newly hired teachers and
other public employees does not advance the cause of fairness;
mandatory coverage imposes a significant unfunded mandate.
Some have suggested that imposing mandatory Social Security
coverage on all State and local government employees is a
simple matter of fairness. Arguing that all Americans have an
obligation to financially support the Social Security system,
proponents of mandatory Social Security believe that everyone
should pay his or her fair share.
First, let me suggest that all Americans, including those
who are currently exempt from mandatory participation,
contribute to the Social Security system. As American consumers
we all participate in the economic activity that allows private
employers to pay Social Security taxes on behalf of their
employees. In addition, countless public employees, including
myself, have contributed to the Social Security system.
Notwithstanding those contributions, many of us who choose
public service as our primary career, may never qualify for one
dollar of Social Security benefits.
Secondly, fairness is a difficult quality to evaluate.
Consider these questions:
Massachusetts has provided retirement benefits for its
public school teachers since 1914. For 21 years before the
Social Security system even existed, Massachusetts was
responsibly fulfilling its obligation to public school
teachers. For nearly four generations, Massachusetts taxpayers
and our members have invested in the future of our retirement
program. Is it fair to undermine that commitment in order to
ever so slightly improve the short-term cash flow of a pay-as-
you-go Social Security system that will provide our public
employees reduced benefits at higher costs?
The Massachusetts Legislature has crafted, and continues to
enhance, a public retirement program for Massachusetts public
employees that responds to the unique characteristics of vastly
different job risks and responsibilities. Is it fair to force
the abandonment of such a program in order to fund a less
secure, ``one size fits all'' program?
The implementation of mandatory Social Security will
increase the cost of providing retirement benefits for the
Commonwealth and most of our cities and town. The increased
cost will result in higher state and local tax burdens,
significantly reduced retirement protection, critical
reductions in essential public services or some combination of
all of the above. Is it fair for the Congress to impose such a
tax on our State, our cities and our towns? To force lesser
benefits on dedicated public employees? To unintentionally
reduce essential local services?
The Unfunded Mandate Reform Act of 1995 received over-
whelming support throughout the Congress. Congress was properly
concerned about passing the cost of expensive federal mandates
onto State and local governments. Is it fair to be against
unfunded federal mandates... except for this one?
It has also been suggested that current members of our
public retirement systems will not be effected by imposing
mandatory Social Security coverage on new employees. Our
experience causes us to be concerned about this suggestion as
well.
For example: A 43 year old teacher in Springfield,
Massachusetts, with 18 years of service in the MTRS, seeks and
receives a promotional opportunity as a vice principal in the
Hartford, Connecticut school system. Since she's a vested
member of the MTRS, she leaves her funds on deposit and begins
her commute to Hartford. After five years of experience in
Connecticut, she applies for and receives a principalship back
in Massachusetts. She returns home and works until her ultimate
retirement.
Today, this teacher would take a refund of her
contributions from the Connecticut Teachers' Retirement System,
purchase her five years of out-of-state service in the MTRS and
ultimately retire with essentially a career of uninterrupted
creditable service. Were mandatory Social Security coverage to
be applied in this instance, how would she be effected? As a
new employee in Connecticut, she would have contributed to
Social Security. When she subsequently returns to
Massachusetts, what is she? If she's deemed to be exempt from
Social Security because she's a vested member of the MTRS, will
her five years of Social Security contributions in Connecticut
ever benefit her? If she's deemed to be a new Massachusetts
employee and therefore mandated into Social Security, will she
be able to once again become active in the MTRS? Is it possible
that she and her employer could be forced to fund current MTRS
and Social Security contributions? Most importantly, when she
ultimately retires what level of benefits will she actually be
entitled to? Will the offset and anti-windfall provisions of
Social Security negatively impact her ability to combine her
public pension with Social Security?
This is one current member who will undoubtedly be effected
by the adoption of mandatory Social Security. Let us not forget
that there could be millions like her throughout America.
Conclusion
In closing, please accept my most sincere best wishes in
your endeavor to strengthen and prudently fund the Social
Security program. Over the years, many of us who have opposed
mandatory universal Social Security coverage have been seen as
anti-Social Security. At times, some have opted to tear down
the system as a justification for continuing to exclude public
employees. In my view, such a course is wrong. The Social
Security program is an American treasure and it must be
preserved and strengthened.
My Mother died last August at the age of 83. For nearly 20
years, her monthly Social Security check was her most
significant means of support. A Social Security benefit allowed
her, as it does millions of other Americans, the opportunity to
live independently and with dignity. We all owe it to countless
people just like her to preserve and protect the Social
Security system. However, I would respectfully suggest to you
that we would be wrong to honor that commitment by causing
Massachusetts and other States to break the commitments made to
the members of their public retirement systems.
Thank you for the opportunity to participate in today's
hearing.
Chairman Bunning. Mr. Pyne.
STATEMENT OF GEORGE PYNE, EXECUTIVE OFFICER, PUBLIC EMPLOYEES'
RETIREMENT SYSTEM OF NEVADA
Mr. Pyne. Thank you, Mr. Chairman. Mr. Chairman, Members of
the Subcommittee, my name is George Pyne. I am the executive
officer of the Public Employees' Retirement System of Nevada.
By way of background, nearly 100,000 people within the State of
Nevada are members or recipients of benefits from the Public
Employees' Retirement System. In a State with under 2 million
residents, we estimate our retirement system has some financial
impact on 1 out of every 5 Nevadans.
Mr. Chairman, I have yet to talk to a member of our system
who does not have serious reservations about the cost impact
and threat to retirement security this proposal brings to
thousands of current and future members of our PERS, Public
Employees' Retirement System. The numbers speak for themselves.
Consider that Nevada PERS already provides adequate
replacement income for career employees at a cost of only 18.45
percent of payroll. Should we be forced to overlay the cost of
Social Security on our current plan structure, it is estimated
Nevada employers and new hires share in the first-year cost of
$27 million for mandatory coverage. This increases to $157
million in the 5th year. Given that our present member payroll
is $2.3 billion this represents a significant increase in the
amount targeted for payment of retirement benefits. Even if
Social Security were not a direct overlay on our current
benefit structure but rather combined with reduced PERS
benefits, the costs are prohibitive. For regular members of our
plan the contribution rate needed to maintain current benefit
levels when combined with Social Security is estimated to go
from 18.45 percent of payroll to 27.1 percent. In our opinion,
this shows the relative inefficiency of the pay-as-you-go
funding structure of Social Security.
Continuing the scenario of maintaining level benefits at an
increased cost, let's further explore what this means to the
average Nevada PERS member: The teacher who teaches our
children; the police officer that protects our neighborhoods.
New hires would be burdened with a higher cost for the same
benefits as their fellow employees. They must also suffer the
potential consequences of the additional cost to their employer
who will face difficult decisions about revenues to fund the
added tax. Does the employer raise taxes to cover the cost or,
perhaps, cut the very public services the employer is in the
business of providing or fail to give cost-of-living
adjustments to employees? We respectfully believe that in
Nevada, employers would not seek to widen their revenue base by
raising taxes, so the alternatives would be service reductions
or no cost-of-living adjustments.
Mr. Chairman, the impact of a pay reduction is significant
but also must be viewed as merely the first hit on our members'
income. As employers seek to fund their half of the added cost,
other benefits that aren't guaranteed such as health care may
need to be reduced. This would impose a serious strain on the
economic stability of the member and upon his standard of
living, and I must emphasize, for no additional benefits.
The alternative of cutting services to fund benefits is
also not likely as Nevada is one of the fastest growing States
in the nation and as more people come into our State, more
public services are required, not less. From a timing
perspective, this unfunded mandate could not come at a worse
time. As government grows, so too grows the cost of government,
and it is clear that in Nevada workers will bear the brunt of
the weight of funding to bring some form of Social Security to
our retirement system.
We also must be mindful that significant differences exist
in the dates of retirement eligibility and other plan features
for PERS and Social Security and because changes in Social
Security are beyond the control of the State of Nevada, how
often would we need to redesign our benefit program and at what
cost to our employees, employers, and taxpayers if our goal is
to maintain benefits similar to our current structure.
Current plan members are rightfully concerned that because
most benefits come from earnings on investments, reduction of
contribution income into our present plan will threaten their
own retirement security as well. New revenue sources would need
to be found and most likely in the form of higher contribution
rates.
Finally, the Nevada legislature may decide on reduced PERS
benefits and contribution levels for new hires to fund the
additional Federal tax, but now the bottom line poses a threat
to their retirement security.
Mr. Chairman, we recognize the important role Social
Security plays in the financial security of millions of
Americans, however, we respectfully suggest that mandatory
Social Security for State and local government employees will
not accomplish any of the long-term funding goals of Social
Security and will create tremendous economic burdens for public
workers they can ill afford. Thank you, Mr. Chairman.
[The prepared statement follows:]
Statement of George Pyne, Executive Officer, Public Employees'
Retirement System of Nevada
As the Executive Officer of the Public Employees'
Retirement System of Nevada (PERS), my statement provides the
Nevada perspective on mandatory Social Security coverage and
its effect on our members, benefit recipients, employers and
taxpayers in Nevada. A summary of our plan provisions and
funding structure will serve as a backdrop to discussions of
the cost impact and benefit structure differences between PERS
and Social Security as it exists today.
The Nevada Legislature established PERS in 1947. At the
time of PERS' creation, state and local government employees
were prohibited from participating in Social Security. The
mission of the system was at that time, and is today, to
provide a retirement program that meets the income replacement
needs of Nevada's public employees at retirement. The Nevada
State Legislature recognized that a pension plan meeting this
objective also serves to attract and retain qualified employees
whose training and experience benefit all Nevadans.
In contrast, Social Security is a program designed as a
``safety net'' to guarantee a level of income above the poverty
level. The difference in the objectives of these two programs
is most noticeable when one considers the higher percentage of
pre-retirement income that non-FICA pension plans such as
Nevada replace at retirement.
Nevada PERS' Benefits Structure
Presently, more than 70,000 state and local government
employees are members of PERS. We have over 19,000 benefit
recipients receiving various types of allowances from PERS.
Nevada provides a comprehensive benefit program to its members
and beneficiaries which includes service retirement,
disability, and pre-retirement survivor benefits. In a state
whose population is approximately 1.8 million, we estimate the
System has some financial impact on 1 out of every 5 Nevadans,
and infuses over $300 million annually into the Nevada economy.
Service Benefit:
Prominent features of our plan include 5 year vesting (as
opposed to 40 quarters under Social Security) and a 2.5%
multiplier for each year of service up to 30 years. This
translates into replacement of pre-retirement income of up to
75 percent. Benefits are calculated using the average of a
retirees' highest 3 years of earnings, insuring the initial
benefit amount accounts for recent cost of living increases.
After retirement, cost of living adjustments from 2%-5% are
paid annually based upon the number of years a person is
retired. Therefore, like others in our industry, we take
exception to the Social Security Advisory Council's suggestion
that Social Security is superior to state and local pension
plans.
Regarding portability, Nevada provides 100% intrastate
portability amongst Nevada employers, and further allows
members to purchase up to 5 years service credit without regard
to previous public service, thereby enhancing their retirement
benefit.
Public Safety Benefit:
Our pension plan also recognizes the need for earlier
retirement eligibility for its police and fire members. A 1987
study recognized that physical ability declines with age and a
youthful more vigorous front-line public safety work force is
needed to protect the public. Social Security provides no
flexibility to offer early retirement to address this important
public safety issue.
Disability and Survivor Benefits:
In addition to service retirement eligibility beginning at
age 65 with 5 years of service, disability benefits are payable
to members with 5 or more years of service who become disabled
from the performance of their job or a comparable job. Survivor
benefits may be payable for the lifetime of the surviving
spouse, and until age 23 for dependent children if they remain
in school.
Financing Nevada PERS Benefits
Our investment program plays an integral role in funding
the benefits of the System. Unlike Social Security, PERS is
funded on an actuarial reserve basis. This means contributions
paid to the System today are set aside and invested to fund
future benefits. In fact, the great majority of benefits paid
by PERS come from return on investment. This focus on
investment performance is amplified by the reduction in the
ratio of active members to benefit recipients as America ages.
Without this funding mechanism in place, delivery of benefits
with certainty into the future is threatened.
Nevadans can ill afford the financial burden associated
with mandatory coverage. Nevada is among the fastest growing
states in the nation with an annual population growth rate of
over 5%. As population grows, so to grows the need for
additional public services. Our public employee population is
increasing at a rate of 4% annually to address this growing
need for public service. Recent estimates by the System's
actuary project the first year cost of covering new hires of
the System under Social Security to be approximately $27
million. After 5 years, the cumulative cost will increase to
$157 million and to $384 million after 10 years.
Considering these costs, overlaying Social Security on our
current benefit structure results in significantly higher
actuarially determined contribution rates. Expressed as a
percentage of payroll, contribution rates for new hires would
increase from 18.45% and 27.95% to 30.85% and 40.35% for
regular members and public safety members respectively.
Obviously this is cost prohibitive.
By replacing our current benefit structure with one which
attempts to mirror current PERS benefits but with payments from
two sources, PERS and Social Security, overall cost is reduced
but not back to our current contribution rates. Under the
scenario where benefits remain the same, contribution rates
still increase to 27.1% for regular members and 40.2% for our
police/fire members. This shows that Social Security does not
buy as much replacement income at retirement as does PERS.
Moreover, employees in this scenario would be taking a 6.2% pay
cut in the form of a FICA tax contribution just to maintain
their current benefit levels.
If our objective is to keep overall plan costs identical to
current rates and be cost neutral to both the employee and
employer, as both share in the costs, benefit levels would be
reduced significantly. It is estimated the service time
multiplier for new hires would be 1%. For a career employee of
30 years the resulting benefit would not serve as adequate
replacement income when combined with Social Security.
Impact of Mandatory Coverage
Mandatory coverage of new hires is likely to have an
adverse impact on current members of the System as well. Our
actuarial analysis is not complete. However, it appears the
lack of new entrants will increase the unfunded liabilities and
extend the time period in which to fully fund promised
benefits. Because our System pre-funds benefits, the influx of
new member contributions is important to maintain a flow of
funds to be invested that will support future benefits. Our
actuarial method depends on these contributions to avoid
underfunding. If the amount of funds are inadequate to support
the benefit structure, contribution rates for current plan
members will have to be increased. Benefits for current plan
members cannot be reduced because Nevada courts have ruled PERS
benefits to be a property right. The state's contractual
obligation requires benefits to be maintained or replaced with
equal or greater benefits.
An unfunded mandate like Social Security will require a
drastic redesign of a pension plan that does exactly what it is
intended to do, provide Nevada's public employees a reasonable
base income at retirement. PERS Board and the Nevada
Legislature will face tough choices regarding contribution
rates, benefit levels, and amortization periods. Additionally,
the Nevada Legislature must look at services provided to our
taxpaying public, and perhaps make reductions in those services
to free up the funds to pay for this costly benefit change. All
this happens at a time in Nevada where we must increase
services due to our greatly expanding population base. The
general funds of every public employer in the state will be
affected by any increase in the contribution rates.
No matter how we look at it, individual plan members are
likely to suffer the most from mandatory coverage. Contribution
rates will either increase with no real increase in benefits,
or benefits will diminish for the same overall cost that
existed prior to mandatory coverage. Other considerations
involve the additional costs in administration of a second tier
of benefits for new hires to include pre-retirement counseling,
record keeping, and benefit determination.
In summary, we are opposed to mandatory Social Security of
state and local government employees. It would cause serious
disruption to our well-founded, well-funded and well-designed
public employees' retirement system.
Chairman Bunning. Thank you, Mr. Pyne. I'm going to start
off the questioning with Sergeant Pfeifer, because some of the
things that he said are really critical. You said that 76
percent of public personnel do not participate in Social
Security. Now, you also raised an excellent point which is that
law enforcement and other public safety officers retire at a
much earlier age than more typical government employees. I'm
wondering what happens to those safety officers that are
covered under Social Security. Do their plans which may be a
combination of Social Security and an employer pension, pay
some type of transition benefits until Social Security kicks
in?
Mr. Pfeifer. Typically, what happens is the benefits are
coordinated with Social Security so that the plan will carry
you a certain number of years. Let's say you retire at age 55,
they carry you the additional 10 years with your current
retirement plan at a level--in the good plans which are
funded--at a higher level. Then, once you get to the age where
you hit Social Security there will be an offset and Social
Security will pick up a piece of that, so that the expense to
the local or the State government will decrease once you hit 65
and you integrate with Social Security.
Chairman Bunning. But they will maintain the same level of
benefits. In others words, say they're getting $1,000, and they
hit 65, what benefit would they then receive? Would they
receive more than $1,000 or would they receive the same benefit
when Social Security is included?
Mr. Pfeifer. When Social Security kicks in, in some plans,
and it varies--because all these plans vary according to how
they're structured--in some plans, the $1,000 would be reduced
to reflect the contribution provided by Social Security, and
because you've touched on that, what we're really talking about
here are replacement rates and how much of your income you're
going to replace at the time you retire.
Chairman Bunning. That's right. That's what I'm trying to
find out.
Mr. Pfeifer. Individual plans do not always keep pace with
inflation. They do not have escalators built in like Social
Security does with the CPI, Consumer Price Indexes. So, some of
these plans--let's say if you retire at a relatively generous
benefit at 60 percent of your salary the day you retire. If you
have no CPI provision in there that continues to keep you up
with the cost of living and you live 20 years more, and the
inflation rate is only the current 2.5 or 3 percent today,
you've lost about 60 percent of your earning capacity if you
have absolutely no CPI in there. So, what happens is you have
to go out and get another job to augment that if that's the
case. If you're fortunate enough to have an escalator in there
which will keep you up with inflation like Social Security
does, then you're much better off, and that's one of the
positive features of Social Security, the fact that you do have
CPI built into it, so that you're always staying relatively
current with the cost of living.
Chairman Bunning. Do you know what the average age of the
police officers and the safety officers retirement is?
Mr. Pfeifer. It would vary from State from State. Generally
speaking, now, it would be somewhere between 50 and 55 years.
Chairman Bunning. The reason I ask that is I have a police
officer who happens to be my field representative, and he
retired very early and became a member of my staff, and now
he's paying Social Security and will not only get his
retirement from the police but he will get Social Security
added on top of that when he becomes old enough to retire from
public service in the congressional office.
How does a disability plan--and I'm staying with this
before I let others inquire--how do the disability plans
offered police and fire fighters by their State and local
retirement plans differ from the Social Security Disability
Program?
Mr. Pfeifer. Generally speaking, of course, varying from
locality to locality, State to State, the disability provisions
vary widely. The disability provision for Social Security
itself is a very high bar to get over, because you have to be
almost totally and permanently disabled, and you cannot really
be employable per se.
Chairman Bunning. You do have to be permanently disabled.
Mr. Pfeifer. That's Social Security. Now, in public safety,
the bar is lowered, because consideration is given to the fact
that if a officer is injured in the line of duty and is no
longer fit to perform public safety jobs such as riding a scout
car on the street, riding the back step of a firetruck, then we
need to make a provision to compensate the member as much as
possible and make them whole.
Chairman Bunning. Do they have percentages of disability
and things like that?
Mr. Pfeifer. Percentages of disability vary widely. Again,
it could vary--some plans--from 20 percent depending on the
extent of the disability up to about two-thirds disability.
Chairman Bunning. And that would include of the salary that
you were making at the time that you were partially or
permanently disabled?
Mr. Pfeifer. Of the base salary. Now, the key thing to
consider when you look at disability is because it is
disability income, that is not taxable. So, that is tax free,
so whatever percentage you get, unless you change it today or
sometime soon, is going to be tax free. If you retire on an
optional retirement or a standard retirement then you pay taxes
on that money. So, someone who retires, let's say, on a----
Chairman Bunning. Except if you live in Kentucky, you
don't.
Mr. Pfeifer. I might have to move there. [Laughter.]
So, if you retire on disability, you pay no Federal tax. In
most cases, you pay no State tax. If I retired on the same
amount on a optional retirement, as we call it, I would pay
Federal tax, and I would be in the 28-percent tax bracket,
probably, so I'd be paying a significant amount.
Chairman Bunning. I'm going to submit some questions to
others that are at the table in writing, and I would appreciate
your participation.
[The questions and answers follow:]
Responses of Sgt. Marty Pfeifer to Mr. Bunning's Questions
1) Should mandatory coverage of newly hired employees be
enacted, potentially resulting in a lowering of retirement
benefits and/or salaries? What would be the impact on the
ability for safety officers to recruit new hires?
No, the National Fraternal Order of Police vehemently
opposes any Social Security reform measures that include
mandatory participation of public employees, newly hired or
otherwise.
The answer for this is simple; it is a question of fairness
to those law enforcement officers, public safety officials and
other public employees who have chosen not to participate in
the Social Security system. All are much better served, in
terms of benefits and retirement income, than they would have
been or would be, if the Federal government mandated Social
Security participation. To do so endangers the plans and the
retirements of employees currently in other public pension
systems and may jeopardize the ability of local law enforcement
to fulfill their public safety mission.
Social Security coverage varies considerably by employee
group, but according to the Public Pension Coordinating Council
(PPCC), seventy six percent (76%) of public safety personnel do
not participate in the Social Security program. These employees
represent a sizable portion of the State and local government
workforce, approximately 3.9 million full-time employees.
If the Federal government imposes mandatory Social Security
participation, even if restricted to new hires (a term which
does not have a clear definition), it not only compromises
severely the financial solvency of existing pension and
retirement plans, but does not consider the immense cost to
States, localities, and the individual employees. Both the
employee and his or her employer would each be required to pay
6.2% of payroll into the Social Security trust fund. This
amount would be in addition to the contribution already paid by
the employer and the employee into the State or local
retirement system.
I cannot overstate the damage that would be done to State
and local governments and the families of the employees if the
Federal government forces them to pay a new tax of 12.4%.
Collected data shows that the first year cost to
employers--local and State governments--of covering newly hired
employees would be over $771 million. The newly hired employees
would be responsible for an equal amount, making the cost of
the first year of coverage over $1.5 billion. The total annual
cost to employers for covering employees not currently covered
under Social Security would be $8.5 billion. When the
employees' share is counted, that amount rises to over $17
billion per year.
For example, of the over 240,000 State and local employees
in the State of Kentucky, more than 61,000--many of whom are
law enforcement officers--do not currently participate in
Social Security. The annual cost of mandating participation
would be approximately $80.9 million a year.
Federally mandated participation in Social Security is not
a minor issue. Such a mandate would adversely affect millions
of employees and impose billions of dollars in additional costs
to State and local governments who are trying to stretch every
dollar at the local level.
In real terms, this means that local and State government
officials would be under tremendous pressure to change these
pension systems, pitting the public safety officers against
elected officials--something that no one wants. Even if the
current pension systems, which would be extremely difficult to
change, were maintained a Social Security tax on employees and
their government employers would negatively impact public
safety operations. The added financial burden at the local and
State level could result in layoffs, reduced pay or other
benefits, no cost-of-living increases and could reduce
purchases of necessary equipment and technology, or even a
combination of these consequences. Too many law enforcement
agencies in our nation are forced to ``make do'' as it is, and
adding this new unfunded Federal mandate would inflict greater
hardship on the State and local governments budgetary concerns.
Also of great concern to our membership is States who can
change their pension systems without going through the
collective bargaining process. Facing public pressure against
tax increases, the legislatures in these States would likely
change them, making them much less beneficial to public safety
employees. State and local government pension contributions to
these systems are likely to be reduced, probably dollar for
dollar for allocation to Social Security taxes.
Congress and the Administration should carefully weigh any
proposal that would cut the take-home pay of public safety
officers--even if just the new hires--by 6.2%, the additional
amount they would have to pay out under the mandatory
participation plan. Would we retain or recruit the best
officers if current pension systems are severely curtailed--
reducing substantially or eliminating the much-needed
provisions relating to early retirement, line-of-duty
disability and early death benefits--so that the total
percentage of both the employing agency and employee
contributions remain about the same, once Social Security taxes
are factored in? Would we get the very best officers if the
employing agency also reduces the future pay raises or freezes
cost-of-living or other increases, in order to pay its portion
of the new Social Security tax? The answer is obviously not.
Imposition of this tax would negatively affect government
expenditures on policing innovations, technology and crime-
fighting equipment. It could severely curtail current public
safety pension systems, giving employees in these plans, police
and firefighters, much less protection than they have now. A
new, mandatory tax for Social Security will hurt efforts to
recruit and retain the best of public safety officers possible.
The Advisory Council on Social Security recommended that
Social Security be extended to all newly hired State and local
government employees as a way to raise ten percent (10%) of the
money needed to rebalance the program, without defining the
term ``new hire.'' The Council's report also failed to address
the impact that mandatory participation would have on employers
and employees at the State and local level of government.
Many retirement and pension plans for public sector
employees have been specifically designed and refined on the
assumption that local governments would not be required to
participate in the Social Security system. This was a
reasonable assumption since local governments have never been
required to pay into the system, which was adopted in 1935 for
those who chose to participate.
Also of great concern to law enforcement officers are the
very limited disability, death and early retirement benefits of
Social Security as compared to current pension systems for
public safety officers. Simply put, the Social Security system
is not designed to meet the needs of law enforcement officers
and other public safety employees.
Active law enforcement officers are typically younger
people. The physical and psychological stress of the job and
inherent danger of police work often result in early
retirement, and, on no few occasions a job-related disability
is part of the reason. In the past fifty years, State and local
governments have developed pension systems which acknowledge
and incorporate the very different needs of police, fire and
other public safety professionals. These systems take into
account that law enforcement officers often undergo a career
change in middle age, usually in their late forties to early
fifties. In many police departments, a large percentage of law
enforcement officers will be sufficiently disabled at all ages
for varying lengths of time and thus be unable to perform their
official duties. Therefore, the governments which employ these
officers have recognized that public safety officers need
certain protections and benefits which reflect the unique
nature of their jobs.
Social Security, on the other hand, provides no comparable
disability retirement benefits for public safety professionals.
Social Security requires that an employee be completely unable
to perform any substantial and gainful employment. This means
that a person unable to perform regular and continuous duties
as a law enforcement officer, who would, under current local
and State plans, receive some disability benefit to supplement
a subsequent career at a lower salary, would receive nothing
under Social Security.
Additionally, there are others who will not be able to
continue performing the duties of a law enforcement officer
after reaching middle age (some departments even institute
mandatory retirement ages), because of the physical rigors and
psychological demands of police work. Such retirements are
``early'' for other careers, but nor for the public safety
professional. They would receive NO Social Security benefits.
Also of particular concern to public safety professionals
is the much lower death benefits provided by Social Security.
Most current retirement death benefits pay between fifty and
seventy-five percent (50-75%) of an officer's salary.
2) Comments on the GAO Testimony
We found the arguments advanced by GAO to be unpersuasive
in making the case for mandatory coverage. They acknowledge the
existence of a ``cross over point,'' about 2050, after which
the cost of benefits paid to the public employees will exceed
the amount received in taxes.
They contend that mandatory participation is a matter of
``fairness.'' We would strongly disagree, especially on the
following points made by GAO in their testimony:
Many public employees in non-covered systems receive Social
Security benefits as a result of other covered service.
This is false. In 1983, Congress adopted the so-
called ``windfall elimination provision'' and ``government
pension offset'' (for spousal benefits), which were expressly
designed to prevent public employees from receiving benefits
that are out of proportion to their contributions. In fact,
both adopted provisions unfairly overpenalize employees who
participate in government pension plans in lieu of Social
Security. GAO argues--in the very same testimony--that it is
difficult to administer the ``windfall elimination provision''
and ``government pension offset.'' It estimated that total
overpayments ranged from $160 to $355 million.
Mandatory participation would be fair because Social
Security reduces the need for public assistance to the elderly.
Public plans also relieve society from the need to
provide assistance to the elderly, and do so more effectively
than Social Security, whose beneficiaries do need SSI (funded
out of general revenues) because Social Security benefits are
not great enough to support them.
The GAO report also fails to address the special needs of
law enforcement and other public safety officers addressed
above.
3) Just as each of you want to protect your citizens'
retirement income security, we too have a responsibility for
all Americans. Finding a solution that works and is fair isn't
going to be easy.
The Fraternal Order of Police appreciates the complexity of
this issue and shares the Subcommittee's commitment to
fairness.
We strongly believe that requiring public pensions be
scrapped in favor of Social Security coverage, which is less
suited to the needs of many public employees, especially public
safety officers, is unfair. Unfair and, in the long run, will
have negligible impact on the Social Security system.
In short, we do not see any compelling reason why a
Federally mandated program which has managed itself into
periodic solvency crises is superior to local and State plans
designed to meet the special needs of the public employee.
Every indication is that these employees are better served by
their own plans and would lose a great deal of benefits if
forced into Social Security. If fairness is really an issue,
then why penalize individuals by forcing them to lose their
greater benefits in order to pay for the Social Security
behemoth?
The Social Security program is an important source of
future retirement protection for millions of Americans, and it
requires a long-term solution, not the short-term politically
palatable fixes that have been tried in the past. Public
pension plans like those in California, Colorado,
Massachusetts, Nevada, Louisiana, Ohio, Texas and other States
can provide models for reform.
Mandating participation in Social Security is not the right
solution, nor does it represent meaningful reform. The GAO
testimony and their final report reflects that bringing in new
hires would extend solvency for only two years--a minimal
impact at best.
In addition, State and local plans which are not covered by
Social Security would sustain severe financial damage if they
are now required to participate. This would result in less
benefits for not only the ``new hires'' whose participation
would be mandatory, but for current members and retirees in a
number of the States. Existing systems would be required to
alter their asset allocation models, resulting in lower yields
therefore accelerating financial impact.
If this is about fairness, Mr. Chairman, we believe it is
unfair to change the rules sixty-three years later because the
Federal government is looking for an easy way to fund Social
Security without making hard choices. The State and local
governments who chose not to participate in Social Security did
not create this problem, nor did the nearly four million
employees who do not pay into the system. But all of them would
be paying a hefty price for their previous decision to create
their own retirement plans. Destroying the retirement programs
of these hard-working Americans and raiding the budgets of
State and local governments should not be part of the Federal
government's solution.
4) Your plans are also going to be impacted by demographics.
How are your State Legislators or Retirement Boards focusing on
this issue and what actions are they considering? Do you expect
you will see benefit cuts in the future, even without mandatory
coverage?
Demographics are only one factor in considering the
financial health of a plan. Many other factors such as
investment guidelines, which are often determined by statute,
asset allocation, and benefits structure all have a direct
impact on a plans' ability to deliver on benefits promised.
The vast majority of plans that cover public safety
employees are ``defined benefit'' plans. These ``DB'' plans
that are fully funded and have well constructed investment
programs allow for changing demographics within the plan
structure. Asset liability and strategic asset studies
performed every three to five years ensure that appropriate
changes are made in a timely fashion.
Plans that are underfunded such as Social Security face
serious problems in delivering the benefits promised to the
participants and beneficiaries of their respective plans. These
structural problems that have gone unaddressed for decades
require immediate attention.
Often, the ways chosen to address these structural problems
are to reduce benefits, increase funding or terminate the plan.
In the case of Social Security, a combination of increased
funding and some modification of benefits would be the most
appropriate remedy.
Given that the life expectancy of both men and women has
increased significantly since Social Security was created over
sixty years ago, it would seem appropriate to increase the
normal retirement age (NRA) before qualifying to receive
certain benefits. Although this is technically a reduction in
benefits, if Americans are given sufficient time to plan and
invest, I believe this is a reasonable option.
A more aggressive investment approach would also be a way
to improve the financial stability of Social Security. This
means allowing the investment of Social Security assets in
capital markets that until now has not been permitted.
Increased investment returns over an extended period of time
dramatically improves the financial health of any plan.
The Federal Government as the Plan Sponsor also has a duty
to educate the public about the benefits that Social Security
can provide and the risk associated with more aggressive
investment vehicles such as stocks and corporate bonds.
Americans should know that they must plan and carefully invest
to accomplish their individual retirement goals.
Unfortunately, for many Americans, Social Security is their
only retirement plan. Some form of ``forced savings'' must be
made mandatory for every worker so they have a variety of ways
to fund their retirement years. Social Security was never
intended to be the only source retirement benefits for
Americans. Personal Savings Accounts, 401 Ks and IRAs are all
appropriate vehicles to accomplish this goal.
In conclusion, if reasonable modifications are made to
Social Security such as increasing the Normal Retirement Age,
improved investment performance, and a requirement for all
Americans to participate in some form of ``Forced Savings''
program in addition to Social Security, I believe it that
Social Security can be made solvent without a significant
reduction in benefits.
Every American must be aware that they are responsible for
retirement planning and that early planning combined with an
effective investment program will provide sufficient income
during their golden years.
Responses of George Pyne to Mr. Bunning's Questions
1. You mention that the majority of your benefits paid by your
system come from return on investment of your retirement fund.
Who manages that fund and how is the fund invested currently?
The PERS investment program is designed to generate
earnings to fund the System's benefits while minimizing
investment risk. By establishing a well-diversified portfolio,
PERS has strengthened control over the achievement of those
objectives. Through the prudent person standard, the Retirement
Board has established investment objectives and policies which
recognize future funding requirements based on current
membership demographics.
The investment objective of PERS is to:
produce a total return from investments which,
over the long term, exceeds the rate of inflation (CPI) by 3%
by capturing market returns within each asset class;
invest so the short-term volatility of the returns
will not cause PERS to alter its long-term investment program;
structure an investment program which is
sufficiently uncomplicated to control PERS' ability to
consistently meet return and risk objectives, and
maintain an investment program which operates in
compliance with the Public Pension Principles
PERS' investment portfolio is managed by external
investment firms in compliance with the above objectives. PERS
employs a number of institutional investment firms to manage
its assets. Each of these firms is charged with a specific
style mandate and market benchmark. Currently 19 firms manage
23 portfolios for the System. A list of assets managed by each
firm follows the response to this question.
One of the key determinants of risk and return is asset
allocation. PERS employs a ``conservative'' asset mix which is
designed to provide stable returns through a variety of market
environments. Our target asset allocation is:
[GRAPHIC] [TIFF OMITTED] T2908.001
Nevada PERS Investment Managers
------------------------------------------------------------------------
Asset Size
in Millions
Hired Mandate of Dollars
(8/98)
------------------------------------------------------------------------
Alliance Capital............... 1986 S&P 500 Index.... $ 815
............................. 1996 Value Index...... $ 337
............................. 1998 Growth Equity.... $ 388
Atlanta Capital................ 1998 Growth Equity.... $ 277
Axe-Houghton................... 1987 Intl. Equity $ 792
Index.
Bank of New York............... 1997 Securities ...........
Lending.
............................. 1997 STIF Fund........ $ 9
Barclays Global Inv............ 1986 S&P 500 Index.... $ 817
Baring Asset Management........ 1997 Intl. Bonds...... $ 456
Bradford & Marzec.............. 1997 Active Bonds..... $ 513
Brinson Partners............... 1990 Intl. Bonds...... $ 661
Dresdner RCM................... 1997 Active Bonds..... $ 631
Invesco Realty Advisors........ 1992 Real Estate...... $ 390
J&W Seligman................... 1998 Value Equity ...........
Funded 9/98.
L&B Real Estate................ 1989 Real Estate...... $ 255
Loomis, Sayles--Detroit........ 1994 Value Equity..... $ 328
Nicholas Applegate............. 1976 Active Bonds..... $1,059
Pathway Capital................ 1986 Alternative $ 106
Investments.
Patterson Capital.............. 1987 Active Bonds..... $ 540
Payden & Rygel................. 1997 Active Bonds..... $ 555
PM Realty Advisors............. 1986 Real Estate...... $ 296
............................. 1991 Mortgages........ $ 4
State Street Research.......... 1987 Active Bonds..... $1,067
Callan Associates.............. 1983 Investment ...........
Consultant.
------------------------------------------------------------------------
TOTAL PERS FUND................ ....... ................. $10,296
------------------------------------------------------------------------
2. Nevada, like a number of other States, cannot reduce
benefits for current plan members because Nevada courts have
ruled retirement benefits to be a property right. In addition,
your State's population base is expanding. How would these
factors influence decisions of your State Legislators, should
mandatory coverage be enacted for newly hired employees?
Public pension benefits as property rights and Nevada's
expanding population are two of several factors that would
influence decisions of Nevada lawmakers if mandatory coverage
of newly hired state and local government employees is enacted.
Nevada courts adopted the legal theory that its public
employees have a contractual (or vested) right to retirement
benefits which can not be diminished unless replaced by
benefits of equal or greater value. The courts have further
ruled that members of our system vest in the benefit structure
in place at their time of hire.
Given the above legal framework, the benefits of members
hired prior to the effective date of mandatory coverage cannot
be diminished or impaired. Unfortunately, the cost to maintain
their present benefit package is likely to increase if
mandatory coverage of new hires is enacted. This effect is
based on our financing structure, which anticipates future
members of the system will share with current members in the
payment of the System's accumulated liabilities. Currently,
that payment is approximately 3.6% of payroll for regular
members and 6.02% for police and fire members. Future members
will not contribute towards the current System's unfunded
liability if they are mandated under Social Security because
they would participate in a new plan that is coordinated with
Social Security. The lack of new hires coming into the plan
will result in higher contribution rates, both for the
employees and public employers, because an ever-diminishing
group will be contributing to the system.
Additionally, due to the funding inefficiency of Social
Security ($1 invested in PERS provides a much greater return
than $1 invested in Social Security) benefit equality cannot be
sustained without significant additional cost to the people of
the State. To serve as an illustration of this point, consider
the following ramifications for newly hired employees if they
are mandated under Social Security:
Maintain Current Benefit Levels:
If the goal of the Nevada Legislature is to maintain
current benefit levels when PERS benefits are combined with
Social Security contribution rates would increase from 18.75%
to 27.1% of payroll for regular members.\1\
---------------------------------------------------------------------------
\1\ A significant cost to a state whose payroll is approximately
$2.3 billion.
---------------------------------------------------------------------------
Maintain Current Cost Levels:
If the Legislature wanted to retain current budgetary
pension costs only 6.05% would be available for PERS funding.
This results in a service multiplier of between .7% to .9% (our
current multiplier is 2.5%) and a drastic reduction in income
replacement levels when PERS is combined with Social Security.
New hires will be faced with substantially higher costs for
benefits similar to current employees, or lower benefits for
the same cost. In either instance there is little or no room
for them to participate in payment of the System's liabilities.
The problem is further exacerbated by Nevada's expanding
population base. Our actuarial projections anticipate an
accelerated growth rate for our system which translates into
lower contribution rates. The positive result of this growth is
negated if new hires are mandated under Social Security.
3. GAO did a great deal of work, as you heard in Ms. Fagnoni's
testimony, analyzing State and local retirement systems. Her
staff met with many of your representatives. I want to give you
the opportunity to comment on her testimony or GAO's responses
to the questions that were asked of them. Do any of you have
any comment you would like to make in response to the GAO
testimony?
It is clear from the GAO report that the principal
motivation behind Social Security reform is to address Social
Security's financial shortfall. The GAO estimates that
mandatory coverage would extend the trust fund's solvency by 2
years. This ``so-called benefit,'' however, would come at a
tremendous cost to taxpayers, employers, and employees in their
respective states and local jurisdictions--and eventually to
Social Security when benefits come due.
To say as the GAO report does on page 21 under Conclusions
that ``the implications for mandatory coverage are mixed''
downplays the serious disruption mandatory coverage will bring
to the taxpayers, public employees and public employers of
Nevada. First, consider the impact on contribution rates. In
order to provide the same retirement package for new employees
as current employees, retirement costs would not just
``increase'' they would rise to a cost prohibitive level. In
our plan that cost is approximately 9% of payroll! There is
also no mention in the GAO report of the psychological and
emotional impact on thousands of public employees who will be
forced away from the financial security of our present plan to
the financial insecurity of Social Security and its extremely
inefficient means of funding benefits. Neither does it consider
one fundamental principle behind the establishment of our
pension plan, to attract and retain qualified public servants.
How does a Social Security benefit incent an individual to
choose public sector employment? The answer is: it does not.
The GAO report seems to dismiss all of this by further
concluding that ``Social Security would provide future
employees with benefits that are not available, or are
available to a lesser extent, under current state and local
pension plans.'' This implies that Social Security provides
better benefits than public pension plans, which is clearly not
the case.
Nevada PERS provides a comprehensive program of service,
disability, and survivor benefits to its members and
beneficiaries. Our examination shows that overall we provide a
superior benefit package which includes five year vesting,
intrastate portability, high income replacement ratios, and
funded cost-of-living increases to all benefit recipients
ranging from 2%-5% compounded annually. Nevada's program
provides more comprehensive benefits and provides more
retirement income at a lower cost than does Social Security.
Nevada's pension system also addresses the unique needs of the
public safety sector such as earlier retirement, an element of
coverage sorely lacking in the Social Security system. This
will be discussed in great detail below.
The GAO reported cited the 1994-1996 Social Security
Advisory Council's conclusion that mandating new hires under
Social Security is ``an issue of fairness.'' It is their
contention that those of us who do not contribute to Social
Security often receive benefits from periods of covered
employment or as a dependent of a covered worker and that
somehow this isn't ``fair.'' This position ignores that, as
covered workers, these individuals did participate in Social
Security and are subject to the Windfall Elimination Provision
(WEP), just as beneficiaries are subject to the Government
Pension Offset (GPO). These programs address the issue of
``fairness'' as addressed by the Social Security Advisory
Council.
If the Social Security Administration finds it difficult to
determine whether someone is subject to the WEP or GPO, less
drastic measures (than mandating Social Security coverage)
could be taken to address this problem. One suggestion is to
revise Form 1099R to include a code which indicates a retiree's
income is from a governmental pension plan. This would help
identify those individuals subject to offset.
There are other issues of ``fairness'' that weren't
addressed in the GAO report. At the time of Nevada PERS
creation in 1947, public employees were prohibited from
participation in Social Security. Today, Nevada enjoys a
financially sound retirement program that guarantees an
adequate pension at retirement for its public employees. It is
fundamentally unfair for the federal government to force upon
our state an unfunded mandate resulting in either the same
benefits at greater cost, or reduced benefits for Nevada's
public employees. I question the fairness of Congress imposing
such taxes on states, cities, and towns, whose local services
would be reduced and whose public employees would likely incur
benefit cuts.
Regarding issues concerning the public safety sector, the
Nevada Legislature determined it is the public policy of the
State of Nevada to allow early retirement for police officers
and firemen as compared to miscellaneous government employees.
This policy is founded on the need to have a younger more
physically agile workforce to meet the demands placed on our
public safety occupations. Social Security contains no such
program. Is it fair to take this benefit away from our public
safety employees when early retirement is the legislated policy
of the State of Nevada? Moreover, many Social Security reform
proposals would extend the normal retirement age past the age
67 threshold.
Policy decisions related to survivor benefits and
disability retirement for all of Nevada's public employees have
also been addressed by the Nevada Legislature. It is simply a
matter of ``fairness'' that the rules are not now changed in
the middle of the game to the detriment of all Nevadans.
4. Just as each of you want to protect your citizens'
retirement income security, we too have that responsibility for
all Americans. Finding a solution that works and is fair to
each generation of Americans isn't going to be easy.
As you have well pointed out, many of your plans replace a
higher percentage of pay than does Social Security. GAO, at my
request, is taking a look at certain local plans in more detail
to assess what Congress might learn from these plans as we
consider Social Security reform. Based on the success of so
many of your State and local retirement plans, what lessons can
we learn from your plans that might work in a solution for
Social Security?
The most important lesson that can be learned from public
pension plans is that investments should play a key role in
funding the benefits for Social Security. Unlike Social
Security, public pension plans are funded on an actuarial
reserve basis. This means the investment return on
contributions paid to the system is used to fund future
benefits. In fact, the great majority of benefits paid by
public plans comes from return on investments.
I would suggest that a new Social Security System could
look much like today's public pension fund with a well-
diversified portfolio designed to generate earnings needed to
fund future benefits while minimizing risk. An independent
board (or boards--to diversify control of the asset base) could
be established to manage the assets of the fund which would
include a mix of equity and fixed income securities. The boards
would establish investment objectives and policies with an eye
on future plan liabilities. They would act as fiduciaries for
the benefit of Social Security participants.
Public pension plan boards have other functions as well. In
addition to investment policy they also formulate
administrative policy and recommend plan design changes to
their respective state legislators. By keeping abreast of both
economic and demographic changes over time, public plan boards
are responsive to the needs of their members and beneficiaries.
I believe it beneficial if an independent board(s) for Social
Security had similar authority.
5. Your plans are also going to be impacted by demographics.
How are your State Legislators or Retirement Boards focusing on
this issue and what actions are they considering? Do you expect
you will see benefit cuts in the future, even without mandatory
coverage?
Our State Legislature and Retirement Board are very mindful
of changes in plan demographics. From our perspective,
demographics are those elements intrinsic to our plan
population; including the ratio of active members to retirees,
mortality experience, average entry age, average retirement
age, etc. The System performs an actuarial valuation each year
and a comprehensive experience study every three to five years,
to keep abreast of changes in plan demographics. Based on these
reviews, assumptions for future plan experience are modified
and contribution rates adjusted to maintain the fiscal
integrity of our plan.
This process, coupled with benefits that are funded on an
actuarial reserve basis works well over time. Demographic
changes are evaluated frequently and considered in funding the
system on the actuarial reserve basis. As I indicated earlier
however, mandatory coverage would change all this and cause a
significant disruption to the well-founded structure of our
pension plan.
Again, thank you for the opportunity to respond to your
questions regarding mandatory Social Security coverage.
Sincerely,
George Pyne
Executive Officer
Chairman Bunning. Mr. Portman--excuse me, Mr. Neal, first.
Mr. Neal. Thank you, Mr. Chairman. I have a question for
Mr. Lussier. First, I want to thank Mr. Lussier for that wisdom
he imparted as a son of Massachusetts to the Subcommittee; a
former member of the legislature and you've guys have done a
terrific job.
Mr. Lussier. Thank you.
Mr. Neal. In your testimony, Tom, you spoke of what would
happen in terms of higher State and local costs if this
alteration was made in the Social Security initiative. Would
you elaborate on that?
Mr. Lussier. Sure. In order, simply, to provide Social
Security--based on the employer costs for a new member of our
system being on average somewhere between 2 and 4 percent, we
could see right on the surface that to go from that number, 2
or 4 to 6, is an increase before we even talk about building
any kind of a supplemental as been suggested as a possibility.
As a result, we would suggest that what would most likely
happen is that we would end up with some form of a defined
contribution plan that would be totally funded by employees and
would ultimately provide lower benefits to the employees. We
also suggest that because of the unique responsibility that the
State has assumed for our system for teachers, that there is a
huge possibility that the State, obviously, maintaining its
commitment to the existing teacher population might opt to
provide some sort of a supplemental program, but we think it's
more than likely that the Social Security tax component of that
would be shifted back to the local cities and towns which would
be a total increase of 6.2 percent on cities and towns for
teacher costs which they have never borne since the teacher
system was established and since it has always been an
obligation of the Commonwealth. So, that we think that the
effect at the local level could be two pronged. It could be
higher costs to provide the benefits that are provided through
our many local systems in Massachusetts for their own employees
plus the addition of the cost for teachers being shifted from
the State to the locals as the State views this as an
opportunity to get out from under that new obligation.
Mr. Neal. Given Proposition 2.5 back in Massachusetts.
Mr. Lussier. That's right. Given the local----
Mr. Neal. You didn't vote for that legislature, did you?
Mr. Lussier. No, not at all. [Laughter.]
In fact I had a rather contentious election over that one.
Given the limitations on local tax levies and the
improbability of voters voting to raise those levy limits to
fund this kind of a benefit, I think you would see that that
extra cost would come out of essential services. It would come
out of public safety; it would come out of education, and the
other services that are provided based on our local property
tax base.
Mr. Neal. Thanks, Tom.
Thanks, Mr. Chairman.
Chairman Bunning. Mr. Portman.
Mr. Portman. Thank you, Mr. Chairman, and thanks for the
testimony from around the country and from our safety officers.
Mr. Schumacher, good to see you again from my State of Ohio. I
have a lot of questions, and I also would ask the Chairman if I
could submit some for the record.
Chairman Bunning. Without objection.
[The questions and answers follow:]
Responses of Richard E. Shumacher to Mr. Portman's Questions
1. You mention that over 80% of the benefits paid by your plan
come from investment earnings and that your system collects
about 22% of covered payroll in employee and employer
contributions. Who oversees the investments of the fund and how
is the fund invested?
Answer: The Ohio legislature created the Public Employees
Retirement System (PERS) in 1933. The legislation provides that
the funds of the system are invested by the system for the
exclusive benefit of its members and beneficiaries.
The investment duties of the board are set by statute.
Until 1997 the system operated under a legal list of
investments. Since 1997 investments are made subject to the
prudent person standard. The System's internal professional
investment staff manages the investment activities. About 8% of
the assets in international investments are managed through
external managers. The funds are invested in U.S. equities,
U.S. fixed income, real estate, and international equities. The
board's investment policy provides for an allocation of the
various asset classes. The asset allocation is calculated to
determine the optimal mix of asset classes to provide the
necessary long-term returns needed to fund the accruing long-
term projected liabilities. Portfolio risk is a part of this
consideration. The current asset allocation target is U.S.
equity, 35%; international equity, 18%; U.S. fixed income, 35%;
real estate, 11%; and cash, 1%.
Follow-up question. Mandatory coverage of newly hired State and
local employees would likely result in a lowering of receipts
to that fund. What impacts do you see that having in the State
of Ohio?
Follow-up answer: As previously pointed out, over 80% of
the benefit payments for PERS are financed by investment
earnings. Mandatory coverage of newly hired state and local
employees would divert the cash flow from the retirement system
to Social Security. If we reduce the flow of funds available
for investment, we will reduce investment earnings. For our
pension plan to continue the same benefit payouts with such
reduction, employee and/or employer rates would have to be
increased by 6-7% of covered payroll. The rate increases are an
unfunded mandate on state and local governments to maintain the
status quo of the benefit payment. The increased rates would
not produce any additional retirement or ancillary benefits.
The reduction in investment income requires higher contribution
rates to provide the same benefit.
2. GAO did a great deal of work, as you heard in Ms. Fagnoni's
testimony, analyzing State and local retirement systems. Her
staff met with many of your representatives. I want to give you
the opportunity to comment on her testimony or GAO's responses
to the questions that were asked of them. Do any of you have
any comment you would like to make in response to the GAO
testimony?
Answer: I commend the Government Accounting Office (GAO)
for doing a thorough job in researching and writing the
Implications of Extending Mandatory Coverage to State and Local
Employees.
Perhaps the most striking information is the similarity
between their cost analysis and that of the individual state
and local government pension plans of the increased cost for
moving Social Security uncovered employees into the mandatory
coverage. Our actuary has indicated that there would be a five
to seven percent cost increase to cover the individuals in
Social Security and to maintain our current level of benefits.
The GAO publication indicates that it would be a seven percent
increase in cost. In most cases, this increased cost would be
spent with the individuals receiving the same total benefits as
they are currently receiving under the individual state and
local government plans. It is noted in the report that the
inclusion of state and local government pension plans is
estimated to extend the Social Security Administration solvency
by only two years.
It appears that the major emphasis in the move to mandatory
Social Security coverage is on the short-term cash flow
increases. We are unable to discern from the report what
increased long-term liabilities for those employees being
mandated in would add to future payouts. In her comments, Ms.
Fagnoni stated ``As with most other elements of the reform
proposals put forward by the 1994-1996 Social Security Advisory
Council, such as raising the retirement age, extending
mandatory coverage to newly hired state and local employees
would resolve only a part of the trust funds' solvency
problem.'' This is an indication that mandatory coverage of new
hires may not be a wise solution for the funding problem. It
could be that the future short-term cash inflow is increased,
but that future liabilities are increased by a greater degree.
A review of promised benefits versus the sources of income
(contribution rates and other income) shall be made to
determine that assets are adequate to provide for the benefit
payout stream. If assets are inadequate to meet the stream of
payments, a fundamental flaw exists and adding more people will
not provide long-term stability or solvency.
3. Just as each of you want to protect your citizens'
retirement income security, we too have that responsibility for
all Americans. Finding a solution that works and is fair to
each generation of Americans isn't going to be easy.
As you have well pointed out, many of your plans replace a
higher percentage of pay than does Social Security. GAO, at my
request, is taking a look at certain local plans in more detail
to assess what Congress might learn from these plans as we
consider Social Security reform. Based on the success of so
many of your State and local retirement plans, what lessons can
we learn from your plans that might work in a solution for
Social Security?
Answer: Social Security is a major factor in the lives of
many older citizens of our country. It needs to be viable and
financially sound. There are two distinctively different
philosophies for funding pension benefits, pay-as-you-go and
pre-funding. Under the pay-as-you-go scenario, current
contributions collected are used to meet current benefit
payments. The long-term effect is the need for greater and
greater current contributions to meet rising expenditures. To
cover benefit payments for an aging population, extreme
pressure is put on increasing inflows.
Using a pre-funding philosophy, contributions are collected
and invested. This technique adds a second source of funding.
Therefore, the contributions are not the only source of funds
to meet payouts. Accumulating assets over a person's working
career to provide old age benefits is a good example of
maintaining generational equity. When the Ohio legislature
created PERS, it delegated the funding of benefits and
investment of assets to the retirement system. The state of
Ohio, itself, is not involved in the investment of retirement
system assets. The basic position is that rates charged to
provide benefits must generate sufficient assets to cover the
liabilities as they come due. It is imperative that today's
collections grown through investment earnings, meet tomorrow's
liabilities.
4. Your plans are also going to be impacted by demographics.
How are your State Legislators or Retirement Boards focusing on
this issue and what actions are they considering? Do you expect
you will see benefit cuts in the future, even without mandatory
coverage?
Answer: The retirement board focuses on demographics during
each annual actuarial review. Once every five years a review is
done which is the basis for changing assumptions to reflect
demographic trends. Liabilities are due over the long-term,
therefore, the funding criteria mirrors this long-term period.
By beginning with a sound funding policy, year-to-year changes
are minimal. For example, the pending retirements of the baby
boomer generation are not cause for alarm in our system. The
impact will be an increase in cash outflows which will come
from the assets accumulated for this purpose.
Absent mandatory Social Security, we do not expect any
benefit cuts. However, if there is mandatory coverage, our
system will be unable to continue its current ancillary benefit
structure.
5. How are your contribution rates for employees determined so
that funds are available to pay promised benefits?
Answer: The retirement board establishes contribution rates
on the basis of actuarial studies. The actuarial studies are
performed to determine the future liabilities for benefits
established by state statutes. The studies, among other
factors, take into consideration the demographics of plan
members. Also developed are economic assumptions, i.e., market
returns, wage inflation, etc. The result of this effort is a
rate structure that will fund retirement benefits over working
careers.
It should be noted that the employee and employer
contribution rates for PERS have been stable over the last 25
years. While the rates have not increased, there have been
benefit enhancements added.
6. What benefit programs do the contributions support?
Answer: Besides the vested retirement benefits (age and
service retirement, disability, survivor benefits), PERS
provides non-vested health care coverage to its retirants and
beneficiaries. Through varying techniques, we can provide a
health care coverage program funded by employer contributions
which are included in the current rate structure. If mandatory
Social Security coverage were forced upon this system, because
of the reduction in our funding base, this ancillary program
would need to be severely curtailed or abandoned.
Cost of living increases (equal to the CPI change but not
to exceed three percent) of pension payments are funded under
the current rate structure. Again, reductions in our coverage
base could require a reduction in the cost of living allowance
payments. The overriding discipline for PERS is that adequate
funds must be generated to meet the promised liabilities.
Mr. Portman. Let me, just begin by making a comment and
then ask a couple of questions of the Ohio system and feel free
to chime in from other States or from the other safety officer
plans. My general comment is that we've got a Social Security
system that needs reform, and I'm for reform as is the
Chairman, that's why we're having these hearings, and, yet, I
think it would be an irresponsible thing to simply get an
infusion of funds, immediate funds, by taking employees who are
currently in systems that work--that are prefunded; that invest
in the market; that do all of the things that many of us think
we ought to be doing in Social Security--and throwing them into
Social Security without any promise, frankly, that Social
Security's going to do those things.
So, I have real concerns about the proposals that we've
seen both from the Advisory Committee, Senator Moynihan's
proposal, and so on, because I think that they are probably
going in the wrong direction. In fact, we need more flexibility
in our plans. I'm a big proponent of more flexibility in our
pension plans as well through the private sector. In any case,
that's kind of the perspective I bring to this which probably
doesn't surprise anyone on the panel.
I also happen to be from Ohio where we have a system that
works, and that's where I want Mr. Schumacher, to spell it out
a little more, because in your testimony you didn't have time
to get into some of Ohio's plan. I think it's important for
people to understand that the contribution rate is about 23.3
percent of payroll now. Is that correct, when you include the
employer contribution and the employee contribution?
Mr. Schumacher. Mr. Chairman, Mr. Portman, it's 21.8
percent.
Mr. Portman. So, it's a relatively high percentage. We're
not saying the reason our State employees and teachers and so
on don't want to get into the Federal plan is because they are
concerned about paying more payroll taxes. It's more in terms
of how the plan works, the benefits, and the soundness of it
fiscally. The funds are invested. Can you tell us a little more
about how those funds are invested?
Mr. Schumacher. Yes, the State legislature has given the
retirement systems in Ohio a prudent person rule and the
individual boards set up an asset allocation program with a
very keen sense of the risk of the portfolio and the
maximization of return. The return on investments is a major
income stream for the----
Chairman Bunning. Could you pull the mike to you so that
the recorder can hear you better. Thank you.
Mr. Schumacher. The income stream is a major source of
earnings for the State of Ohio and that funds a great deal of
our benefits. Yesterday, I did review with our board
terminations in the State of Ohio in our pension plan for the
month of April. The individuals who were terminated over
various working careers and retirement careers had paid in,
including interest furnished by earnings, of about $4 million.
The payout by the system for those individuals over their
retirement years was $28 million.
Mr. Portman. That's a successful plan. Again, I think when
you look at the short-term benefit of including mandatory
coverage, it's obvious, but in the longer term, you will not
see benefits to Social Security and it's because these folks
are going to retire also, and they're going to be a strain on
the system eventually. So I think it's a short-term fix that
isn't a responsible, structural change in Social Security that
we would really need.
Let me just ask you quickly on the taxation. How are those
benefits taxed?
Mr. Schumacher. The benefits are taxed under the Internal
Revenue Code 100 percent.
Mr. Portman. Fully taxed for Social Security.
Mr. Schumacher. Fully taxed.
Mr. Portman. And how about at the State level.
Mr. Schumacher. The same taxation applies at the local
level with the exception that survivor benefits are not taxed
in the State of Ohio.
Mr. Portman. One other question I have on the plan. You
mentioned briefly that it covers more than just retirement
income, and if you could talk a little, particularly, on the
health care side, what it provides and what the impact on the
health care benefits were there to be mandatory coverage?
Mr. Schumacher. Yes, health care in Ohio is not a mandated
benefit. It is a benefit that is provided to be given at the
option of the retirement board. Currently, we provide for two
PPOs and various health care--Medicare, HMOs--and this is done
at zero cost to the original retirement and at a contributing
cost for the spouse under the age of 65 of $60 a month; over
age 65, of $20 a month.
Mr. Portman. Again, an attractive plan and it's working. I
would just make a general comment that probably we could learn
something at the national level from some of these State plans
as we asked GAO earlier.
I would make one other comment which is that the Unfunded
Mandate Relief Act did not go through this Subcommittee. I wish
it had, but this Subcommittee is very interested in that issue
and has used that discipline that we got 3 years ago through
that act. It actually came through the government--then called
the Government Operations Committee, now, Government Reform and
Oversight Committee, but it is certainly the intent of this
Congress, this majority in Congress, not to impose unfunded
mandates. That's another good point that I, frankly, hadn't
thought through until I heard your testimonies this morning.
Thank you all for your testimony. Thank you, Mr. Chairman.
Chairman Bunning. Mr. Collins.
Mr. Collins. Thank you, Mr. Chairman. As a followup to Mr.
Portman, Mr. Schumacher, noticing that the contributions are
equivalent to 23 percent--at least 14 and then matching from
the employer--how does the actual retirement check from your
plan compare to an equal worker of same time, same salary range
under Social Security?
Mr. Schumacher. The basic annuity formula is 2.1 percent
per year of employment. A person with 30 years of employment
can retire at any age on a straight life benefit of 63 percent
of their final average salary; that's the average of the
highest 3 years of income. If they wish, they can take a joint
survivor benefit or they can take a benefit over other lives
and as much of 100 percent of what they receive to their spouse
or to the beneficiary.
Mr. Collins. How would that compare to a worker earning
equal pay on their Social Security check that you would know?
Mr. Schumacher. I do not know the answer to that question.
Mr. Collins. Yes, sir.
Mr. Scott. I think if you take an average worker who earns
$35,000 a year, under our system that worker would get 75
percent of pay after 30 years of service. So, that's somewhere
in the neighborhood of $25,000, $26,000, $27,000, $28,000.
Social Security ceiling is in the neighborhood of $12,000, I
believe, now.
Mr. Collins. Quite a bit of difference. Mr. Scott, you
mentioned that most State and local plans offer considerable
portability.
Mr. Scott. That's correct.
Mr. Collins. How does this work and what is your outlook
for increased portability?
Mr. Scott. Well, I think portability is probably one of the
big issues that our industry--whether it's private sector
retirement or public--has to deal with. I mean, it's weak
across the whole environment, and, of course, Social Security
provides complete portability. We've been working on that, and
we've put in place, for example, interest on refunds several
years ago; we allow people to buy into the system. If they come
in and they've got some money, they buy into the system for
public or private sector service. We also have what we call a
hybrid; that is if you come to PERA, Public Employees
Retirement Association, and you work for, say, 5 or 10 years
and you walk out of the system, we will give you your money
back, which is at 8 percent, plus we'll match that; give you 2
percent of the employer contribution and then interest at 80
percent of our assumed rate which gives you 8 percent interest.
So, on your money you would be taking 32 percent return on that
money as you walk out the door. The unfortunate part of that is
that most younger people take it and it's gone. As people have
more years of service, they generally will take it and roll it
over which you've allowed them to do through the Tax Codes.
Now, if you leave the money with PERA--and this is an
encouragement to do so--we will, when you retire, give you your
8 percent plus 50 percent match of 4 percent, and then we'll
annuitize that because you don't have the full defined benefit.
And, so that calculation actually gives you a better benefit
than the defined benefit does until you reach 20 years of
service, and that annuitized amount is protected completely for
cost of living; it gives you access to our retirement health
care. So, we think we're making some strides there, and, of
course, the big argument is defined benefit versus defined
contribution, but that's the way we deal with it.
Mr. Collins. OK, very good. Thank you, Mr. Chairman.
Chairman Bunning. Thank you. I have just one more question
I'd like to ask all the panel. Mr. Pyne, I'd like for you to
start us off. As you know there are many options being
considered for the Social Security reform. One option being put
forth by both Democrats and Republicans alike is to create
personal retirement savings accounts. If Social Security were
to be reconfigured to include such accounts, would State and
local employees want to participate?
Mr. Pyne. First of all, I think what's admirable about that
is at least the dialog has to do with advanced funding and
recognizing the fact that you need to build wealth and the way
to do it, not unlike our plans, is to use the power of
compounding and the investment markets and advance fund
benefits. What you're really doing there, then, is you're
becoming more like us in the public sector because that's
exactly what we do is advance fund benefits. Now, we do it on a
defined benefits basis not so much on a personal retirement
account type of a basis, but, at the same time, we're already
there, so it would just seem, from my perspective, that we're
sort of where I think Social Security needs to go. So, it's not
advantageous for us to be moved into that type of an
environment. So, I think we're just fine right where we are.
Our public employees can participate in 457 plans and plans of
that sort which essentially have the same features, I think, of
these personal retirement accounts.
Chairman Bunning. Would anyone else in the panel like to
comment about it?
Mr. Pfeifer. Mr. Chairman, I think, from my personal
perspective, that would be a very positive innovation, and the
reason I say that is because, as I understand it, the way
Social Security is invested, you're invested, basically, in
long-term fixed income instruments of the U.S. Government. Now,
in a diversified retirement plan such as mine and such as the
others sitting around this table, we not only buy fixed income
from the United States, we buy U.S. equities, international
equities, and a variety of other investment instruments that
improve the performance of those funds and improve the
investment returns so that you're able to grow the money over
time and payout a very generous benefit, hopefully, at the end
of the time, because you have so much time to deal with.
The only downside I would see with that is the personal
retirement savings accounts, just as with the defined
contribution plans, there's a certain responsibility that the
employer--in this case, I assume it would be the Federal
Government would have--to educate the individuals who
participate in that particular option to make sure they know
some of the basics of investing so they invest the money
prudently and get what they expect. Obviously, certain
individuals would be adverse to risk; certain individuals would
be willing to take more risk, so I think that's something that
would have to be very carefully looked at, but I think that
would be a very positive innovation.
Chairman Bunning. Anyone else? I thank the panel for their
participation, and we look forward to dealing with you again.
We may submit questions in writing for you to answer for the
record. Thank you.
[The questions and answers follow:]
Responses of Robert J. Scott to Mr. Bunning's Questions
You make the point that public plans do a good job providing
for retirement security for their members. For example, in
Colorado, a 15-year employee earning a high of $15,000 would
receive 28.6% of pay under Social Security when he retired, as
opposed to 33% under the Colorado plan. You also challenge the
Social Security Advisory Council's assertion that Social
Security's protection is superior to State and local plans over
the course of a lifetime. Would you provide more detail as to
how you reach this conclusion?
It is well established that most public plans provide a
strong retirement benefit for their employees at virtually all
levels of compensation and all periods of covered service. (We
have enclosed copies of a study done by Third Millennium on
this subject, but there is a great deal of other evidence that
supports this point as well.) These better benefits are
possible because of the greater investment return on public
pension plan contributions compared to Social Security.
Those who try to argue that Social Security provides better
protection over the course of a lifetime generally argue that
Social Security provides better ancillary benefits, such as
survivor benefits and disability benefits, and Social Security
also provides better portability. Also, Social Security
benefits are adjusted for the cost-of-living.
In our written testimony to the Social Security
Subcommittee (pages 3-4) we covered this topic at length.
Ancillary benefits of public plans are generally better than
those provided by Social Security. Not only are dollar benefits
generally higher, but public plan disability benefits may be
easier to qualify for. Disability benefits for public safety
workers, such as fire and police officers, are superior in
public plans to benefits provided by Social Security. Social
Security survivor benefits for children cut off at age 18.
Public plan benefits often extend through college, if the
surviving child is a full-time student.
Public plans also provide cost-of-living adjustments for
retired workers. In general, the post retirement cost-of-living
adjustment is comparable to the Social Security adjustment,
except for periods of unusually high inflation. (See, for
example, the Third Millennium study, page 16) Public plans
account for inflation that occurs during a career by basing
benefits on an employee's high three or five year compensation,
or on his final three or five years of compensation.
The portability issue is discussed in response to question
two.
You mention that most State and local plans offer considerable
portability. How does this work and what is your outlook for
increased portability in the future?
Some people argue that Social Security's greatest advantage
is that it is completely portable. It is true that all workers
who accumulate the required 40 quarters are entitled to some
benefit under current law, although many workers who are in and
out of the work force during their careers may receive only a
very low benefit measured in dollars. (Those workers having
fewer than 40 quarters receive no monthly retirement benefit
and no refund of contributions paid.) It is not true, however,
that workers are guaranteed a specific benefit through Social
Security. Unlike public and private plans, where an employee is
vested in a specific ``accrued benefit,'' Social Security
benefits may be modified by Congress in ways that are either
beneficial or adverse to workers, and those workers have no
contractual protection. Benefits in the Social Security
program, and other entitlement programs, such as Medicare, have
been modified in the past to reduce benefits for current and
future participants
Public plan participants are always 100 percent vested in
their own contributions, and interest at a reasonable rate is
added. Most public plans use rapid vesting schedules for
qualifying for a monthly retirement benefit. Generally the
vesting requirement is five years; see Third Millennium study,
page 14. Employees are always free to roll over their vested
account balance into an IRA, in lieu of any monthly benefit
from the public retirement system.
Colorado PERA is a defined benefit plan that really is a
hybrid because it includes some of the attractive portability
features of a defined contribution plan. Employees who
terminate PERA-covered employment before retirement age may
elect a refund that includes their own contributions (8 percent
of salary) plus interest, and a 25 percent match on that
amount. The employee may elect instead to leave the account in
PERA and receive at retirement a refund that includes
additional accumulated interest plus a 50 percent match, or a
lifetime monthly benefit. The lifetime monthly benefit, if
elected, is the greater of the benefit based on the defined
benefit formula (2.5 percent of high-three-year salary per year
of service) or a money purchase benefit calculated by
annuitizing the employee contributions plus interest and a 50
percent match. PERA will propose state legislation in 1999 that
would increase the matching levels from 25%/50% to 50%/100%.
Colorado's hybrid features recognize that many employees
covered by PERA will not retire in a job covered by PERA. These
employees have good choices that they can make at termination
that will enable them to build up a sufficient retirement
income, in or out of PERA. The State Teachers' Retirement
System of Ohio has a similar hybrid feature in its defined
benefit plan.
PERA's Board of Trustees would also like to propose to the
Colorado Legislature that a small portion of future employer
contributions be allocated as a partial match to voluntary
contributions that employees make to their own 401(k), 457
plan, or 403(b) plan accounts. This may start in 2001, unless
Social Security for new hires is mandated, in which case it may
not be possible at all.
Public employees in any state can continue earning service
credit if they transfer from one job to another within the same
system. Some retirement systems within the same state allow
service years to be carried into the new system under
reciprocity agreements. In addition, most states permit
employees to ``buy in'' past service credits into their
retirement plan, often by using money accumulated in a previous
employer's plan. According to a survey of 105 plans conducted
by the Public Retirement Institute, about 92 percent of
statewide public pension plans allow the purchase of service
credits.
Colorado PERA for example allows any employee with at least
one year of earned PERA service to buy other years earned
through prior public or private sector service, provided they
are not currently vested for benefits in the previous
employer's plan. For employees hired in 1999 or later, federal
law limits the number of private sector years that can be
purchased to five years. The five year cap is not expected to
be a problem for most employees, but Colorado would support an
increase or elimination of the cap, if proposed in Congress.
H.R. 3788, the ``Retirement Security for the 21st Century
Act,'' by Reps. Portman and Cardin, would enhance the ability
of all public employees to purchase service. The bill would
allow rollovers from IRC section 457 and 403(b) plans into
public defined benefit plans to purchase service. Currently,
rollovers to purchase service are only allowed from 401(a) or
401(k) plans, pursuant to federal law. As a result, employees
usually purchase service credits in their public plan with
after-tax moneys.
3. In your testimony, you discuss the importance of how ``new
hire'' would be defined, if mandatory coverage for new hires
were to be enacted. Would you provide more detail as to why
this definition is important and what the impacts are?
The definition of the term ``new hire'' will have a
substantial effect on the turnover rate. The most important
issue is whether or not the term ``new hire' will refer only to
employees who are not employed by the state or local government
in any capacity on the date when Social Security coverage for
new hires becomes effective, or whether it will also apply to
employees who change jobs within a system, in other words,
lateral transfers.
The resolution of this question will affect the short-term
cost of mandatory Social Security coverage to government
employers. It will also have effects on pension plan assets;
the greater the number of new hires, the lower the amount of
new money which is contributed to the pension plan. In
addition, there may be a ``lock in'' effect for some employees
who may be reluctant to change jobs if such a change would
result in having to pay the Social Security tax.
4. GAO did a great deal of work, as you heard in Ms. Fagnoni's
testimony, analyzing State and local retirement systems. Her
staff met with many of your representatives. I want to give you
the opportunity to comment on her testimony or GAO's responses
to the questions that were asked of them. Do any of you have
any comment you would like to make in response to the GAO
testimony?
We were pleased to see that the GAO report acknowledges the
existence of a cross over point, after which the cost of
benefits paid to public employees will exceed the amount
received in taxes. GAO estimated the cross over point to be
2050. (Page 9 of the report)
We were also pleased to see GAO acknowledge (page 20) that
administrative problems would require at least a four year lead
time for public employers to adjust to a system of mandatory
coverage for new hires.
We found the arguments which GAO discussed in favor of
mandatory coverage to be unpersuasive. GAO discussed the so-
called ``fairness'' issue, for the most quoting or referring to
arguments made by others. This issue of fairness is discussed
at great length in my written testimony, pages 7-10.
It is hard to believe, at this point in time, that anyone
knowledgeable can argue that mandatory coverage is fair simply
because many public employees in non-covered systems receive
Social Security benefits as a result of other covered service.
The windfall elimination provision adopted in 1983 and the
government pension offset (for spousal benefits), which were
expressly designed to prevent public employees from receiving
benefits that are out of proportion to their contributions,
should dispose of this point once and for all. But the argument
appears at page 10 of the GAO report.
GAO also quotes others as arguing that mandatory coverage
would be fair because Social Security reduces the need for
public assistance to the elderly, or because the parents of
public employees may receive Social Security benefits. But
public plans also relieve society from the need to provide
assistance to the elderly, and may do this more effectively
than Social Security, some of whose beneficiaries do need SSI
(funded out of general revenues) because Social Security
benefits are not great enough to support them. If the parents
of public employees receive Social Security, it is presumably
because those parents made Social Security contributions.
Moreover, the children of public employees will generally make
Social Security contributions, even through their parents
receive no benefits or reduced benefits.
The GAO also argued that it is difficult to administer the
Windfall Elimination Provision and the Government Pension
Offset, and ``estimated ... total overpayments to be between
$160 million and $355 million over the period 1978 to 1995.''
In the context of the Social Security funding deficit, as well
as the harm that would be done to public plans by mandatory
coverage, the amounts cited are trivial. The report noted that
additional data matches by SSA, with cooperation from non-
covered retirement systems, will be implemented to improve
administration of the WEP and GPO reductions. The GAO also
believes that there is a significant risk that some state and
local employees will not be covered under either a public plan
or by Social Security, as required by OBRA 1990. From our
experience, there is no significant risk of noncoverage. SSA,
the IRS, and state and local officials have developed manuals
and other programs to help make sure every employee is covered
under an approved plan. This is no reason to mandate Social
Security coverage for state and local workers.
As for the financial benefits of mandatory coverage, GAO
largely relies on the estimates of others that mandatory
coverage would solve about 10 percent of Social Security's
actuarial problem. If true, this is because contributions will
be received throughout the 75-year period, while many of the
liabilities accruing because of those contributions will not
have been paid. In any event, if contributions are not saved,
rather than used to fund operating costs of the government,
mandatory coverage will not help Social Security at all, except
perhaps during a relatively brief period when no benefits are
being paid.
5. Just as each of you want to protect your citizens'
retirement income security, we too have that responsibility for
all Americans. Finding a solution that works and is fair to
each generation of Americans isn't going to be easy.
As you have well pointed out, many of your plans replace a
higher percentage of pay than does Social Security. GAO, at my
request, is taking a look at certain local plans in more detail
to assess what Congress might learn from these plans as we
consider Social Security reform. Based on the success of so
many of your State and local retirement plans, what lessons can
we learn from your plans that might work in a solution for
Social Security?
CPRS takes no position on whether on not Social Security
should be subject to structural reform, or what the nature of
that reform should be if it occur. Of course we are willing to
share our experience in devising and funding our retirement
plans, for whatever relevance that experience may have.
Colorado PERA, like most public plans, is a defined benefit
plan. Plan contributions are pooled for investment purposes,
allowing for great diversity of investment and eliminating the
possibility that a particular employee could be adversely
effected by poor investment choices. Also, while public plans
generally provide rapid vesting, there are some plan
forfeitures of employer contributions by short term employees,
and these forfeitures help meet the funding requirements of the
plan.
Unlike Social Security, however, state and local retirement
plans are funded. Most benefits, and many plan improvements,
are paid for out of investment earnings on contributions. In my
written testimony, I pointed out that STRS of Ohio estimated
that the average retired employee lived for 26 years after
retirement. Three years of benefits are paid for out of
employee contributions, six years are paid for out of employee
contributions, seventeen years of retirement benefits are paid
for out of investment earnings on contributions.
Earlier I pointed out that Colorado PERA and most other
public plans do an excellent job of providing ancillary
benefits and cost-of-living adjustments for retired workers.
Many of these benefits are paid for out of earnings on
investments.
It is important to be aware that ancillary benefits and
cost-of-living adjustments are easier to provide because of the
defined benefit structure of most public plans. Most proposals
for restructuring Social Security envision private individual
accounts, in which retirement benefits are based on the amount
in the account at retirement. It would certainly be possible to
provide ancillary benefits and cost-of-living adjustments under
such a structure, but it would be difficult if most of the
funds are contained in individual accounts.
If there were no pooling of investment and risk, ancillary
benefits would have to be provided out of the employee's
individual account, probably by some form of insurance. This
would reduce the value of the employee's retirement account and
would require regulation of the insurance providers to deal
with such issues as adverse selection.
Cost-of-living adjustments could be purchased as part of an
annuity, but there would be no way for the retiree to achieve
cost-of-living adjustments, or other plan improvements, from
favorable post-retirement investment experience. Public plans,
with their large pool of assets and defined benefit structure,
are able periodically to provide plan improvements for retirees
and current plan participants out of favorable investment
experience. At the same time, contribution rates for many
public plans have been reduced slightly over the last decade.
It is well worth noting that women face special problems
under an individual account system. Many women go in and out of
the work force, reducing lifetime contributions to a retirement
plan. Also women generally live longer than men, meaning the
proceeds of a defined contribution account would have to last
them longer.
People who go in and out of the work force also see their
benefits reduced under Social Security and defined benefit
public plans, but probably not to the same extent as would be
the case in a defined contribution plan. Moreover, Social
Security and most public plan benefits are provided in the form
of a lifetime annuity, and are adjusted for inflation pre-and
post-retirement. These factors tend to mitigate the effects of
having a shorter career. Colorado PERA encourages its members
to contribute on a voluntary basis to defined contribution
plans, to foster increased portability and to help supplement
their basic income during retirement.
6. Your plans are also going to be impacted by demographics.
How are your State Legislators or Retirement Boards focusing on
this issue and what actions are they considering? Do you expect
you will see benefit cuts in the future, even without mandatory
coverage?
Colorado PERA and other public plans are funded on an
actuarially sound basis. Contributions are fairly level as a
percentage of payroll. This level-cost funding helps assure
over the long term that benefits promised will be paid when
they become due. PERA's trustees and independent consulting
actuary compare actuarial experience against assumptions every
year, and actuarial assumptions about mortality, salary
increases, turnover, etc., are usually adjusted every five
years based on significant changes in trends. Public plans use
reasonable assumptions about the rate of investment return in
funding plan liabilities; the average assumption is about 8
percent per year.
Public plans and private plans have recognized for years
that the ratio of active employees to benefit recipients has
decreased, and will continue to do so. In contrast to Social
Security, no benefit reductions or contribution rate increases
are expected to be necessary to pay benefits. In the absence of
mandatory Social Security, Colorado PERA will be able to pay
plan benefits that are provided by Colorado statute without
contribution rate increases. Over the years, as progress has
been made in amortizing unfunded actuarial accrued liabilities,
plan benefit provisions have been improved at times.
On behalf of all the members of the Coalition to Preserve
Retirement Security, thanks again for the opportunity to
provide information to the Subcommittee on this important
issue.
The final panel we'll hear from testimony: Robert
Normandie? Normandie--oh, I can see it better out there, OK.
Ms. Jergen, is that fair?
Ms. Jernigan. Jernigan.
Chairman Bunning. Jernigan. And Joseph Rugola.
Mr. Rugola. Very good, Mr. Chairman. Thank you.
Chairman Bunning. OK. Robert is chairman of the Coalition
to Assure Retirement Equity. Ms. Jernigan is a chapter member
of the National Association of Retired Federal Employees, and
Joseph is the international vice president of the American
Federation of State, County, and Municipal Employees and is the
executive director of the Ohio--what is this, Rob?
Mr. Portman. You represent greater Ohio, so I thought it
was appropriate. [Laughter.]
Chairman Bunning. OK--and is the executive director of the
Ohio Association of Public School Employees.
Mr. Normandie, go ahead.
STATEMENT OF ROBERT E. NORMANDIE, CHAIR, COALITION TO ASSURE
RETIREMENT EQUITY
Mr. Normandie. Mr. Chairman and Members of the
Subcommittee, I'm Robert Normandie, legislative researcher for
the National Association of Retired Federal Employees. However,
I'm here today testifying as chair of the Coalition to Assure
Retirement Equity, CARE; a coalition of 41 organizations
representing millions of Federal, State, and local government
retirees and employees.
CARE was formed in 1991 to specifically address the Social
Security government pension offset, GPO, which had been enacted
as part of the Social Security amendments in 1977. Since
December 1982 when the law went into effect, some 271,000
Federal, State, and local retirees have been affected by the
GPO.
The GPO has particularly affected the economic well-being
of thousands of women by severely reducing or eliminating their
Social Security widow's benefits. I personally have heard from
hundreds over the past several years, and their stories have a
lot of similarities. Many worked in lower-level jobs and
receive moderate pensions and may have worked part time or full
time after raising their children. When they go to the Social
Security office to apply for benefits, usually as widows, they
are shocked and dismayed to find out about the GPO. The widows'
benefit they expected to receive is drastically reduced or
eliminated, and they really do not know how they are going to
survive on a pension that barely pays the rent. The reaction of
everyone is the same: They all feel they have been penalized
because they worked for the government. If they had worked in
the private sector, say for IBM, they could receive a company
pension and still get their husbands' Social Security. In
addition, if they had also worked in the private sector and
earned enough Social Security credits, they find that their own
Social Security benefit is reduced by 50 percent or more by the
windfall elimination provision.
The WEP, enacted as part of the 1983 Social Security
amendments, has affected some 356,000 government retirees since
1986. The GPO and WEP were a part of the 1977 and 1983
congressional efforts to curtail the costs of the Social
Security Program in the context of long-term solvency. The GPO
applied Social Security's dual entitlement provision to all
government pension programs that covered workers not covered by
Social Security. Initially, this meant Social Security spouse
benefits would be offset by 100 percent of the non-Social
Security covered government pension. This was changed to two-
thirds in 1983 on the basis that one-third of the pension was
equivalent to a private sector pension.
The Social Security Subcommittee in a 1996 information
paper on GPO and the WEP said, ``There is nothing magical about
the two-thirds figure, and it is the source of much
controversy. In fact, there is tremendous variance in the
actual individual equivalent depending on length of government
career and average salary.'' The paper also quoted a 1990
Congressional Research Service analysis that stated Social
Security was the equivalent of 51 percent of the civil service
benefit of an average retiree in 1990 which would support at
least a one-half offset rather than two-thirds. The House, in
fact, had passed a provision that would have reduced the offset
to one-third. This occurred just prior to Congress' reduction
of the offset from 100 percent to two-thirds.
This same Congressional Research Service analysis concluded
by stating, ``The part of the CSRS, Civil Service Retirement
System, benefit, that can be considered to be the equivalent of
Social Security covers a very wide range depending on the
circumstances of each individual. Because of this variability,
all inclusive conclusions about the generosity and fairness of
CSRS benefits and the general equity of the two Social Security
antiwindfall measures, GPO and WEP, are probably inappropriate.
The various illustrations indicate, however, that the
antiwindfall measures miss the mark considerably for many civil
service retirement system annuitants.
In summary, the GPO and WEP have had a devastating effect
on the retirement incomes of many Federal, State, and local
government retirees. It is hoped, Mr. Chairman, that your
Subcommittee will seriously consider changes to the GPO and WEP
provisions of the Social Security Act to provide a more
equitable solution. Thank you.
[The prepared statement follows:]
Statement of Robert E. Normandie, Chair, Coalition to Assure Retirement
Equity
Mr. Chairman and members of the Subcommittee, I am Robert
E. Normandie, legislative researcher for the National
Association of Retired Federal Employees. I am here today
testifying as Chair of the Coalition to Assure Retirement
Equity (CARE), a coalition of 41 organizations representing
millions of federal, state and local government retirees and
employees.
CARE was formed in 1991 to specifically address the Social
Security Government Pension Offset (GPO) which had been enacted
as part of the Social Security Amendments of 1977. Since
December of 1982, when the law went into effect, some 271,000
federal, state and local retirees have been affected by the
GPO.
At the time of formation of the coalition a House bill to
repeal the GPO had been introduced and bills to either repeal
or amend the GPO have continued to be introduced in each
subsequent Congress. The Windfall Elimination Provision (WEP)
bill introduced by Rep. Barney Frank last year is the first
such bill, to my knowledge, that has addressed the WEP.
The GPO has particularly affected the economic well being
of thousands of women by severely reducing or eliminating their
Social Security widow's benefits. I personally have heard from
hundreds of women over the past several years and their stories
have a lot of similarities. Many worked in lower level jobs and
receive moderate pensions and may have worked part time, or
full time, after raising their children.
When they go to the Social Security office to apply for
benefits, usually as widows, they are shocked and dismayed to
find out about the GPO. The widow's benefit they expected to
receive is drastically reduced or eliminated, and they really
do not know how they are going to survive on a pension that
barely pays the rent.
The reaction of every one is the same. They all feel they
have been penalized because they worked for the government. If
they had worked in the private sector, say for IBM, they could
receive a company pension and still get their husband's Social
Security.
In addition, if they had also worked in the private sector
and earned enough Social Security credits they find that their
own Social Security benefit is reduced by 50% or more by the
WEP. The WEP, enacted as part of the 1983 Social Security
Amendments, has affected some 356,000 government retirees since
1986.
The GPO and WEP were part of the 1977 and 1983
Congressional efforts to curtail the costs of the Social
Security program in the context of long term solvency. The GPO
applied Social Security's dual entitlement provision to all
government pension programs that covered workers not covered by
Social Security. Initially this meant Social Security spouse
benefits would be offset by 100% of the non-Social Security
covered government pension. This was changed to two-thirds in
1983 on the basis that one-third of the pension is equivalent
to a private sector pension.
The Social Security Subcommittee in a 1996 information
paper on GPO and WEP said ``there is nothing magical about the
two-thirds figure, and it is the source of much controversy. In
fact, there is tremendous variance in the actual individual
equivalent depending on length of government career and average
salary.'' The paper quoted a 1990 Congressional Research
Service (CRS) analysis that stated Social Security was the
equivalent of 51% of the civil service benefit of an average
retiree in 1990 which would support at least a one-half offset
rather than two-thirds. The House, in fact, had passed a
provision that would have reduced the offset to one-third. This
occurred just prior to Congress' reduction of the offset from
100% to two-thirds.
This same CRS analysis concluded by stating, ``the part of
the CSRS [Civil Service Retirement System] benefit that can be
considered to be the equivalent of Social Security covers a
very wide range, depending on the circumstances of each
individual. Because of this variability, all-inclusive
conclusions about the generosity and fairness of CSRS benefits,
and the general equity of the two Social Security anti-windfall
measures [GPO and WEP], are probably inappropriate. The various
illustrations indicate, however, that the anti-windfall
measures miss the mark considerably for many CSRS annuitants.''
In addition to proposals to reduce the GPO to one-third or
one-half, one House bill in a prior Congress would have
eliminated the offset for retirees whose combined monthly
government pension and spousal Social Security benefits were
below $300. For those with combined pensions and Social
Security between $300 and $900 the bill would have increased
the offset rate gradually to the full two-thirds.
CARE has supported Rep. William Jefferson's GPO bills that
would eliminate the offset for any government retiree whose
combined monthly pension and spousal Social Security benefits
are $1,200 or less. If the combined amount is over $1,200 then
only that amount over the $1,200 would be subject to the two-
thirds offset. Rep. Jefferson's bill has 161 cosponsors which
indicates a fair amount of support.
Rep. Frank's bill would eliminate the WEP for any
government retiree who has combined monthly pension and Social
Security spousal benefits of $2,000 or less. For those with
combined amounts between $2,000 and $3,000 the WEP is phased
in. This bill would increase the Social Security benefits of
about 93% of those who are currently affected by the WEP.
Realizing the inequity of the WEP, Dr. Robert J. Meyers,
former Chief Actuary of the Social Security Administration, has
proposed that the percentage in the ``guarantee'' be reduced
from 50% to 20%. The ``guarantee'' is that the reduction in
benefits resulting from applying the WEP formula can be no more
than 50% of the government annuity. This only helps people with
extremely small government pensions. Social Security estimates
that 90,000 government retirees would see an increase in their
benefits under Dr. Meyers' proposal.
In summary, the GPO and WEP has had a devastating effect on
the retirement incomes of many federal, state and local
government retirees. It is hoped, Mr. Chairman, that your
Subcommittee will seriously consider changes to the GPO and WEP
provisions of the Social Security Act to provide a more
equitable solution.
Coalition to Assure Retirement Equity Members
American Federation of Government Employees
American Federation of State, County, and Municipal Employees
American Federation of Teachers
American Foreign Service Association
American Postal Workers Union
Employees For Full Offset Repeal Today (Denver, Co.)
Federally Employed Women
Federal Managers Association
Gray Panthers
Illinois Retired Teachers Association
International Association of Fire Fighters
International Federation of Professional and Technical Engineers
International Union of Electronic, Electrical, Salaried, Machine &
Furniture Workers
Louisiana Retired State Employee's Association
Mailhandlers Div. of Laborers' International Union of North America
Massachusetts Pension Not Posies Coalition
National Air Traffic Controllers Association
National Association of Air Traffic Specialists
National Association of Governmental Employees
National Association of Letter Carriers
National Association of Police Organizations
National Association of Postal Supervisors
National Association of Postmasters of the U.S.
National Association of Retired Federal Employees
National Committee to Preserve Social Security and Medicare
National Council of Senior Citizens
National Council on Teacher Retirement
National Education Association
National Federation of Federal Employees
National League of Postmasters
National Rural Letter Carriers Association
National Treasury Employees Union
Older Women's League
Patent Office Professional Association
Professional Managers Association
Public Employee Department--AFL-CIO
Retired State, County and Municipal Employees Association of
Massachusetts
School Employee Retirees of Ohio, Inc.
Senior Executives Association
Social Security Managers Association
Women's Institute For A Secure Retirement
Chairman Bunning. Thank you very much.
Ms. Jernigan.
STATEMENT OF BERNADINE A. JERNIGAN, CHAPTER MEMBER, NATIONAL
ASSOCIATION OF RETIRED FEDERAL EMPLOYEES
Ms. Jernigan. Mr. Chairman, Members of the Subcommittee, my
name is Bernadine Jernigan. I'm a member of the Vienna,
Virginia, Chapter of the National Association of Retired
Federal Employees. I'm 73 years old and have worked both for
the Federal Government and in the private sector. I am
currently----
Chairman Bunning. Pardon me, Ms. Jernigan, would you please
pull that right up to you, so we can all hear a little better?
Thank you.
Ms. Jernigan. I am currently employed 2 days a week as a
secretary/receptionist in a small business firm. I first
started working in the private sector in 1943. In 1946, at the
end of World War II, I married a marine. Military families
transfer every few years making it difficult for wives to
develop a long-term career. Also, my generation of women were
professional homemakers, not usually a high salaried position.
Despite these complications, while raising my family, I
earned the quarters needed to become eligible for Social
Security benefits at age 62. My husband served in Korea and
when that conflict ended he returned home and was hired by the
Central Intelligence Agency. We were stationed overseas several
times during the next 15 years, and when 3 of our 5 children
were in college at the same time I went to work to help pay the
college expenses. At that time, I was 49 years old and found it
difficult to find a good paying position in my previous
profession. I was hired by the CIA, but it was at a lower paid
GS position.
After working 13 years, I retired under the Civil Service
Retirement System. My husband had also retired, and he went to
work in the private sector. At age 65, he began receiving his
full Social Security benefits. At age 62, I filed for my own
Social Security benefits, but continued to work in my 2 day a
week job continuing to pay into the Social Security system. The
Social Security office told me that I would receive a check for
$152 a month, but my first check was for $32. I had been hit by
the windfall elimination provision and took an initial
deduction because of being age 62. All together, I lost almost
75 percent of my benefits.
My husband died in 1993, and the government pension offset
stepped in and reduced my already reduced benefits--I'm sorry.
Instead of receiving full widows benefits, I receive about one-
third of that amount because of my years as a government
employee. No one in the private sector has two-thirds of his
pension taken away.
Current government employees who retire under the new
Federal Employees Retirement System, FERS, are not affected by
the GPO. I could have also been exempt, but I was never
informed that if I had worked three more weeks I could have
transferred to FERS and been exempt from the GPO. I continue to
work at age 73 and have approximately $50 in Social Security
taxes withheld from my pay each and every month. I have been
told I will never see this money, but I must continue to pay
it.
GPO and government pension offset and windfall elimination
are laws that discriminate against some government employees.
Those of us affected by these unjust laws are not asking for
benefits we have not paid for or earned. We ask that the system
be made fair. Why are some, especially widows, less entitled
than others. We simply ask that these two laws be repealed.
Each time I receive a cost-of-living adjustment in my small
annuity, my Social Security benefits are reduced. It's not easy
to live on income below the national poverty level.
In 1997, I received a letter from the Social Security
Administration claiming that they had overpaid me $600. My
requests for clarification were ignored, and they just refused
to answer my questions. A visit to the local Social Security
office ended in a confrontation when the clerk accused me of
being responsible for the overpayment, and it was all my fault,
and she ushered me out the back door.
After nearly 30 years of working and paying into Social
Security, I receive $156. This is after the deductions of
$43.80 for Medicare, $16 for the overpayment, and a $280
offset. Without windfall and government pension offset, I
should be receiving close to $500 in widows benefits. It's
excruciatingly painful to suffer the loss of $280 of my
promised benefits each and every month of my life.
Why are government employees being punished? Where is the
fairness in these two pieces of legislation? Why must we
continue to fight for the benefits we were promised and have
already paid for? Are we going to our graves fighting these
discriminations? Thank you.
[The prepared statement follows:]
Statement of Bernadine A. Jernigan, Chapter Member, National
Association of Retired Federal Employees
My name is Bernadine A. Jernigan and I am a member of the
Vienna, Virginia chapter of the National Association of Retired
Federal Employees. I am 73 years old and have worked both for
the federal government and in the private sector. I am
currently employed two days a week as a secretary/receptionist
in a small business firm.
I first started working for the federal government in 1943.
In 1946, at the end of World War II, I married a marine.
Military families transfer every few years making it difficult
for wives to develop a long-term career. Also, my generation of
women were professional homemakers, not usually a high-salaried
position. Despite these complications, while raising my family,
I earned the quarters needed to become eligible for Social
Security benefits at age 62.
My husband served in Korea and when that conflict ended he
returned home and was hired by the Central Intelligence Agency
(CIA). We were stationed overseas several times during the next
fifteen years. When three of our five children were in college
at the same time I went to work to help pay the college
expenses. At that time I was 49 years old and found it
difficult to find a good paying job in my previous profession.
I was hired by the CIA but it was in a lower paid GS
position. After working thirteen years I retired under the
Civil Service Retirement System. My husband had also retired
and he went to work in the private sector. At age 65 he began
receiving his full Social Security benefits.
At age 62 I filed for my own Social Security benefits but
continued to work in my two day a week job, continuing to pay
into the Social Security system. The Social Security office
told me that I would receive $152 a month but my first check
was for only $39. I had been hit by the Windfall Elimination
Provision (WEP), and took an additional reduction because of
being age 62. Altogether I lost almost 75% of my benefits.
My husband died in 1993 and the Government Pension Offset
(GPO) stepped in and reduced my already reduced benefits.
Instead of receiving a full widow's benefit, I receive about
one-third of that amount because of my years as a government
employee. No one in the private sector has two-thirds of his
pension taken away. Current government employees who retire
under the new Federal Employees Retirement System (FERS) are
not affected by GPO. I could have been exempt also but I was
never informed that if I had worked three more weeks I could
have transferred to FERS and been exempt from the GPO.
I am continuing to work at age 73 and have approximately
$50 in Social Security taxes withheld from my pay each and
every month. I have been told I will never see this money again
but I must continue to pay it.
GPO and WEP are laws that discriminate against some
government employees. Those of us affected by these unjust laws
are not asking for benefits we have not paid for or earned. We
ask that the system be made fair. Why are some (especially
widows) less entitled than others? We simply ask that these two
laws be repealed. Each time I receive a cost-of-living
adjustment in my small annuity my Social Security benefits are
reduced. It is not easy to live on an income below the national
poverty level.
In 1997 I received a letter from the Social Security
Administration claiming that they had overpaid me $600. My
requests for clarification were ignored and they just refused
to answer my questions. A visit to the local Social Security
office ended in a confrontation when the clerk accused me of
being responsible for the overpayment, that it was all my
fault.
After nearly 30 years of working and paying into Social
Security I receive only $156. Without WEP and GPO I should be
receiving about $500 in widow's benefits. It is excrutiatingly
painful to suffer the loss of $350 of my promised benefits each
and every month of my life.
Why are government employees being punished? Where is the
fairness in this WEP and GPO legislation? Why must we continue
to fight for the benefits we were promised and have already
paid for? Are we going to our graves fighting this
discrimination?
Chairman Bunning. Thank you for your testimony.
Mr. Rugola.
STATEMENT OF JOSEPH RUGOLA, INTERNATIONAL VICE PRESIDENT,
AMERICAN FEDERATION OF STATE, COUNTY, AND MUNICIPAL EMPLOYEES
(AFSCME); AND EXECUTIVE DIRECTOR, LOCAL 4, OHIO ASSOCIATION OF
PUBLIC SCHOOL EMPLOYEES (OAPSE)
Mr. Rugola. Mr. Chairman and Members of the Subcommittee,
I'm Joseph Rugola, international vice president of the American
Federation of State, County, and Municipal Employees and
Executive Director of the Ohio Association of Public School
Employees, OAPSE, Local 4 of AFSCME.
I appreciate the opportunity to be here today to share our
experiences with the government pension offset, a Federal law
that's had a devastating affect on thousands of our members. I
would also like to express AFSCME's opposition to mandatory
Social Security coverage for public employees who do not
currently participate in the system. In the interest of time, I
will submit my written testimony which includes further
information in opposition to mandatory Social Security
coverage.
My local union known as OAPSE represents nearly 40,000
workers in school districts throughout Ohio. Ohio is a State
that does not participate in Social Security for its public
employees. Our OAPSE members are covered instead under SERS,
the Ohio School Employees Retirement System, which is a defined
benefit pension plan. While our members can't receive Social
Security benefits based on their earnings in public service,
they can receive benefits as the spouse or widow of a Social
Security covered worker. Unfortunately, the government pension
offset demands that they reduce these Social Security benefits
by two-thirds of the amount of the public pension.
Currently, the average SERS pension is less than $500 a
month. These relatively low pensions reflect the lower paying
job categories and work patterns of school district employees
who are predominantly women. Our members are school cafeteria
workers, crossing guards, bus drivers, custodians, classroom
aids, and secretaries. Many retire after a full-length career
as school district employees, but they may have worked only a
30-hour week, a pattern we call ``short hours.'' Others may
have had less than a full career, say 15 or 20 years in their
school district following divorce or child rearing. Most of
these women began their careers expecting to retire with both a
pubic pension and a Social Security spouse benefit. It's a
shock when they realize that they will not receive a much
needed portion of their expected retirement income.
We recognize that private sector workers cannot receive
full Social Security benefits from their own work plus full
benefits from a spouse. This rule for dually eligible Social
Security beneficiaries is supposed to be the basis for the GPO,
but the situations really are not comparable. To start with,
school district employers in Ohio contribute 13.5 percent of
payroll to SERS. The worker share is more than 8 percent. The
total of these contributions, 21.5 percent, is nearly double
the combined employer-employee contribution under Social
Security. These rates are typical for public pensions in non-
Social Security jurisdictions.
The GPO law assumes that the public plan contributions that
exceed Social Security rates are the equivalent of
contributions to a private pension plan. This reasoning
precipitated the 1983 offset revision which reduced the
original 100-percent offset to the current two-thirds, but even
the two-thirds calculation is very imprecise and not very fair.
Consider the fact that most private pension plans do not
require any contributions from any workers. They're financed
completely by the employer. Nevertheless, when the workers
retire, they get their full pension benefit plus their full
Social Security benefit with no offset of any kind. Meanwhile,
our members pay on both the front and the back end. To make
matters worse, their entire pension benefit is subject to
Federal income taxes while Social Security benefits are tax
free for most retirees.
To see how much the GPO can hurt, take a look at two of the
members of our retiree organization. Due to time limitations
they will have to represent the many, many calls and letters
that OAPSE regularly receives from GPO victims. Take Shirley
Milburn of Windsor, Ohio, for example. Her SERS pension check
is $405 a month. Her husband's monthly Social Security benefit
is $786 a month. Normally, she could expect to receive a
spousal benefit equal to half his benefit or $393 a month.
Instead, the GPO reduces it to only $121 a month giving her a
total retirement benefit, pension plus Social Security, of only
$526 a month, and from that amount she must still deduct her
Medicare part B premium of $43.
Another example is Donna Stevenson, an OAPSE member who
retired to Lake Park, Georgia. Her SERS pension is $534 a
month, and her husband receives $827 a month from Social
Security. Instead of getting a spousal benefit of $413, Donna's
benefit from Social Security is only $55 a month. When she
deducts her Medicare premium, she's left with a monthly check
of $12.
When the GPO was first enacted, it was meant to target
people receiving multiple government pensions, some of whom had
higher incomes in retirement than they had while working. Our
members just don't fit the image of these so-called double and
triple dippers. Congress could not have had them in mind when
the GPO was passed. That's why AFSCME strongly supports H.R.
2273, the GPO reform bill, sponsored by Congressman Jefferson.
The Jefferson bill would permit the public pensioners who
were not covered by Social Security to keep as much as $1,200 a
month in combined pensions and Social Security spousal widow's
benefits before the two-thirds offset is imposed. We believe
this will protect thousands of low-pension women who badly need
their Social Security benefits to keep them out of poverty.
It's a targeted approach to GPO reform, and it makes good
sense.
If H.R. 2273 were in effect today, Shirley Milburn would be
a lot better off. She could keep her SERS pension check of $405
a month plus her entire Social Security spouse benefit. This
would give her a combined monthly benefit of $798. Donna
Stevenson would be in much better shape too.
We urge the Members of the Subcommittee to give careful
consideration to H.R. 2273. Shirley and Donna and thousands
more like them are counting on your support. Thank you, Mr.
Chairman.
[The prepared statement follows:]
Statement of Joseph Rugola, International Vice President, American
Federation of State, County, and Municipal Employees (AFSCME); and
Executive Director, Local 4, Ohio Association of Public School
Employees (OAPSE)
Good morning, Mr. Chairman and Members of the Subcommittee.
I am Joseph Rugola, International Vice President of the
American Federation of State, County and Municipal Employees
(AFSCME) and Executive Director of AFSCME Local 4--the Ohio
Association of Public School Employees (OAPSE). I appreciate
the opportunity to be here today in order to express AFSCMEs
opposition to mandatory Social Security coverage for public
employees who do not currently participate in the system. We
would also like to share our experiences with the Government
Pension Offset (GPO), a federal law thats had a devastating
effect on so many of our members.
My local union, known as ``OAPSE,'' represents nearly
40,000 workers in school districts throughout Ohio. Ohio is a
state that does not participate in Social Security for its
public employees. Our OAPSE members are covered, instead, under
SERS--Ohios School Employees Retirement System--which is a
defined benefit pension plan.
While our members cant receive Social Security benefits
based on their earnings in public service, they can receive
benefits as the spouse or widow of a Social Security-covered
worker. Unfortunately, the Government Pension Offset demands
that they reduce these Social Security benefits by two-thirds
of the amount of their public pension.
Currently, the average SERS pension is less than $500 a
month. These relatively low pensions reflect the lower-paying
job categories and work patterns of school district employees,
who are predominantly women. Our members are school cafeteria
workers, crossing guards, bus drivers and custodians. Many
retire after a full-length career as school district employees,
but they may have worked only a 30-hour week--a pattern we call
``short-hours.'' Others may have had less than a full career--
say 15 or 20 years in their school district following divorce
or child rearing.
Most of these women began their careers expecting to retire
with both a public pension and a Social Security spouse
benefit. Its a shock when they realize that they will not
receive a much-needed portion of their expected retirement
income.
We recognize that private-sector workers cannot receive
full Social Security benefits from their own work plus full
benefits from a spouse. This rule for dually-eligible Social
Security beneficiaries is supposed to be the basis for the GPO.
But the situations really are not comparable. To start, school
district employers in Ohio contribute 13.5 percent of payroll
to SERS. The workers share is more than 8 percent. The total of
these contributions--21.5 percent--is nearly double the
combined employer-employee contribution under Social Security.
These rates are typical for public pensions in non-Social
Security jurisdictions.
The GPO law assumes that the public-plan contributions that
exceed Social Security rates are the equivalent of
contributions to a private pension plan. This reasoning
precipitated the 1983 offset revision, which reduced the
original 100 percent offset to the current two-thirds. But even
the two-thirds calculation is very imprecise and not very fair.
Consider the fact that most private pension plans do not
require any contributions from workers. Theyre financed
completely by the employer. Nevertheless, when the workers
retire they get their full pension benefit plus their full
Social Security benefit, with no offset of any kind. Meanwhile,
our members pay on both the front and back ends. To make
matters worse, their entire pension benefit is subject to
federal income taxes, while Social Security benefits are tax-
free for most retirees.
To see how much the GPO can hurt, take a look at two of the
members of our retiree organization. Due to time limitations,
they will have to represent the many, many calls and letters
that OAPSE regularly receives from GPO victims.
Take Shirley Milburn of Windsor, Ohio, for example. Her
SERS pension check is $405 a month. Her husbands monthly Social
Security benefit is $786.30. Normally, she could expect to
receive a spousal benefit equal to half his benefit, or
$393.15. Instead, the GPO reduces it to only $121.80, giving
her a total retirement benefit--pension plus Social Security--
of only $526.80 a month. And from that amount, she must still
deduct her Medicare Part B premium of $43.80.
Another example is Donna Stevenson, an OAPSE member who
retired to Lake Park, Georgia. Her SERS pension is $534.39 a
month and her husband receives $827.60 a month from Social
Security. Instead of getting a spousal benefit of $413.80,
Donnas benefit from Social Security is only $55.80. When she
deducts her Medicare premium, shes left with a monthly check of
only $12.
Its my understanding that when the GPO was first enacted,
it was meant to target people receiving multiple government
pensions, some of whom had higher incomes in retirement than
they had while working. Our members just dont fit the image of
these so-called ``double and triple dippers.'' Clearly,
Congress did not have them in mind when the GPO was passed.
Thats why AFSCME strongly supports H.R. 2273, the GPO
reform bill sponsored by Louisiana Congressman William
Jefferson. The Jefferson bill would permit public pensioners
who were not covered by Social Security to keep as much as
$1,200 a month in combined pension and Social Security spouse
or widows benefits before the two-thirds offset is imposed. We
believe this will protect thousands of low-pension women who
badly need their Social Security benefits to keep them out of
poverty. Its a targeted approach to GPO reform and it makes
good sense.
If H.R. 2273 were in effect today, Shirley Milburn would be
a lot better off. She could keep her SERS pension check of
$405.00 a month, plus her entire Social Security spouse benefit
of $393.15. This would give her a combined monthly benefit of
$798.15--well within the bills $1,200 limit.
Donna Stevenson would also be in much better shape. Shed
receive a total monthly benefit of $948.19 and could put a few
of her financial worries to rest.
We urge the Members of the Social Security Subcommittee to
give careful consideration to H.R. 2273. Shirley and Donna--and
thousands more like them--desperately need your support.
Just as we oppose the punishing effects of the Government
Pension Offset, AFSCME opposes any action to mandate Social
Security participation for state or local governments that do
not currently provide Social Security coverage to their public
employees. Nearly 25 percent of public employees are not
covered by Social Security. About the same percentage of AFSCME
members are in this category. But these individuals do not lack
pension protection. Nearly all are covered by state or local
defined benefit pension plans.
Furthermore, the Omnibus Budget Reconciliation Act (OBRA)
of 1990 has already ensured that any temporary, part-time or
seasonal employee not covered by one of these public plans be
covered under Social Security. So, already there is basic
pension protection for all American workers--private and
public-sector. There is no need to mandate Social Security
coverage in an effort to protect workers interests.
Public employees and their employers have been given ample
opportunity to come under Social Security. Most have
voluntarily done so. Those still outside the system clearly
prefer their own state or local pension plans. The vast
majority of these plans are healthy and actuarially sound. Most
of them have been in existence longer than Social Security and
were designed to function without it. They have excellent
records for providing disability protection and retirement
security to their participants.
Mandated Social Security coverage could have serious
implications for public employees, their employers, and their
pension plans, even if the coverage applies only to future
hires.
Employees (i.e., future hires) would be required to pay 6.2
percent of their paychecks in FICA tax, even though most are
already making substantial contributions to their public
employee pension plans. Unlike the private sector--where plans
are usually financed entirely by employers--contributions by
public workers in non-Social Security jurisdictions typically
range from 8 to 10 percent of pay. Adding the Social Security
payroll tax would create an unaffordable burden for millions of
these workers, most of whom have lower-to middle-incomes.
Employers would also be required to contribute 6.2 percent
of payroll to Social Security, on top of the contributions they
now make to fund their own pension plans (typically 13 to 15
percent of payroll). Many of the states most affected, such as
California and Massachusetts, have only recently pulled
themselves out of deep fiscal crises and simply cannot afford
to meet this new expenditure. If forced to do so, the result
could be a loss of jobs and public services.
Faced with a requirement to pay the Social Security payroll
tax on behalf of employees, governments would most likely try
to create new pension plan tiers for new hires that would
integrate Social Security with supplemental public pensions.
This could result in reduced benefits, increased employee
contributions and changes in retirement ages. Benefit
structures for future retirees could be drastically altered.
It could also destabilize public pension funds for todays
workers and retirees. Benefits in existing public pension plans
rely heavily on a funds investment earnings. If some of these
investments are cut off and the proceeds diverted to new plans,
it could spell serious trouble for AFSCME members and other
public employees.
The result could be the inability of pension plans to pay
promised benefits to current participants, unless taxes are
raised to fund much higher employer contributions. In addition
to reductions in basic benefits, plans would be forced to look
seriously at other types of cuts--in already small cost-of-
living adjustments or retiree health care coverage, for
example.
AFSCME believes that mandatory coverage would create havoc
for public retirees, while providing only limited relief for
Social Security. After all, an influx of new funds might help
with a quick fix, but eventually the new participants will be
eligible to collect benefits. At that point, they might create
new problems for Social Security.
In closing, we would like to emphasize AFSCMEs strong
support for strengthening Social Security--our nations great
system of income protection that touches the lives of most
American workers, including 75 percent of AFSCME members.
AFSCME opposition to mandatory coverage is not based on a
belief that Social Security doesnt work. We think it does a
remarkable job of providing basic security and shielding
participants from potential poverty. Rather, we oppose
mandatory coverage because it will cause serious problems for a
group of workers and retirees who have never been part of that
system.
For the majority who do participate in Social Security, we
advocate maintaining the systems current social insurance
structure, while making the moderate changes necessary to
ensure the systems long-term solvency.
Thank you.
Chairman Bunning. Thank you very much for your testimony.
Ms. Jernigan, thank you for being here and sharing your story
with us. I am very sorry to hear of your experience at the
Social Security office. I wish some representatives of Social
Security were here--I don't think they are--so they could--we
hear those stories quite frequently. In fact, I would say 75
percent of all calls to my office in my district are on Social
Security problems, and so it is not an unusual occurrence. To
be ushered out the back door might be an unusual occurrence. We
understand your frustration, and we want to do something about
it. I don't know if Mr. Jefferson's bill is the exact way to do
it, but it would be a start in the right direction.
Let me ask Mr. Normandie, you indicated that CARE has
supported Congressman Jefferson's proposal that would eliminate
the government pension offset and the $1,200 threshold would
be--anything less that, they could get to the $1,200 threshold.
You also mentioned Congressman Frank's bill on the windfall
elimination provision and a separate proposal by Dr. Robert
Myer. Does CARE support either the Frank bill or the Myer
proposal?
Mr. Normandie. CARE doesn't really have a position on the
Frank bill, because we were formed as a coalition for the
government pension offset, and we really haven't developed a
policy yet on that or on Dr. Myers' proposal.
Chairman Bunning. Joseph, you mentioned that you also
support 2273, because it would protect thousands of low-pension
women who need their benefits to keep them out of poverty. Are
you saying that the overall policy, it makes better sense to
target the government pension offset as opposed to rebuilding
it all together?
Mr. Rugola. Our goal, when we began the debate years ago,
Mr. Chairman, was to have the GPO reversed. It's our opinion--
--
Chairman Bunning. Completely eliminated.
Mr. Rugola. Completely eliminated. But the fact of the
matter is that in the 20 years I've been with OAPSE, for me,
this issue's become as much of a women's poverty question as it
is a retirement or pension question. We just have thousands of
people who are at or near the poverty line, and our objective
ought to be, we think, to take care of that problem first. I
think the GPO is unfair. I pay into Social Security. I'm
looking forward to drawing my benefit. I'm also going to be the
recipient of a private pension plan. I don't have an offset.
I think the GPO is unfair, and it ought to be repealed,
but the fact of the matter is that the real tragedy is for the
overwhelming number of women. Of our members, we calculate
about 70 percent of them at some point will be affected by the
GPO, and since our membership is almost 70 percent women, we're
talking about tens of thousands of women who really will be at
the edge of poverty or in poverty during retirement. The cap in
Congressman Jefferson's bill, we think, is a reasonable place
to begin work on this: It at least alleviates the poverty
aspect of the GPO.
Chairman Bunning. Mr. Portman.
Mr. Portman. Thank you, Mr. Chairman, and I appreciate the
testimony on both the issues. I have one general question that
I just thought of as you were responding to Mr. Bunning. One of
the unfairness aspects of this is the fact that with private
pension savings there's no offset. I don't know what you're
private pension is--are you in a 457 plan or 403 plan?
Mr. Rugola. We're in a defined benefit pension plan which
falls under neither one of those categories, actually, but
our----
Mr. Portman. It's a public sector----
Mr. Rugola. No, the plan under which I will draw a benefit
is a private pension plan.
Mr. Portman. OK.
Mr. Rugola. Our members are covered, of course, under the
School Employee Retirement System which is a defined benefit
public plan.
Mr. Portman. OK. I guess my question is you've made the
analogy, really, between the two and drawn the unfairness
argument out of that saying that if you are in a private plan
you don't have an offset. If you're in a government plan you do
have an offset. There also are, of course, options for
government employees to get into private plans like the 457
plan; not a private plan but a defined contribution plan or a
403(b) plan, and, as you know, I've got legislation to greatly
expand that and to be able to permit rollovers--and I'll make a
pitch for my legislation here. Actually, it will help this
situation.
Chairman Bunning. Rob, there's nobody here listening to----
Mr. Portman. OK, nobody's listening?
Chairman Bunning. You have to sell it to the rest of the
Subcommittee.
Mr. Portman. I got to get you and Mac on it, but it's
actually helps in this situation because it will give
government employees a lot more options in terms of providing
for their retirement savings without having to worry about all
this. Is that correct? In other words, the 457 plans, 403(b)
plans would not result in any kind of offset.
Mr. Rugola. Right, that portion of it. That's my
understanding of how it would work, but, you know, the point
you're making, Congressman, is an excellent one in terms of how
the income aspect of this, the poverty aspect of this plays
out. Our average salary in our union for active workers is just
over $15,000 a year. Even for our full-time workers who are
mostly women--secretaries and classroom aids in the schools--
the average salary is barely over $20,000 a year.
The question will be how much of their--particularly, those
who are trying to raise a family on their own--how much of
their income will be able to be devoted to a private pension
plan? They really suffer on both ends. They wouldn't be able to
take advantage of the kind of options that you're talking
about, because the disposable income question comes into play,
and then when they do retire, if they're affected by the
offset, they're penalized at that point during retirement.
Mr. Portman. I understand that it would be difficult for
some people, particularly young families, to put that money
aside. I also think it's in their interest, particularly if we
can get this legislation passed, because you have more options
in terms of rollover; more options in terms of buying service
credits with those assets out of those plans that you want to,
and, of course, we raise the contributions and allow the plans
just to be more of a backstop to the Social Security and the
State retirement plans. So, I understand what you're saying,
though, there still will be a group of people who are unlikely
to take advantage of that. I think more education is necessary
on both fronts.
Let me ask you another question with regard to the fairness
issue, and, again, understanding this is a $5 billion question,
I think, with regard to the repeal; $5.5 billion, I guess, with
regard to the windfall elimination. Is there more education
that could take place? You've all essentially said people are
shocked when they find out this is true. Are we doing a good
enough job, and are the State plans doing a good enough job to
explain to people the situations so that there is at least more
planning and less of that shock?
Mr. Rugola. The answer to that question, I think, is that
the State plans are doing everything that they can. I think
there's a limit to how much people can do to prepare themselves
for the effect of the GPO when they're already low-income
workers. The fact of the matter is as we've heard earlier today
from a couple of other witnesses, what our folks are asking for
here is not a benefit that hasn't been earned. Most of the
widows, most of the women affected by the GPO are the spouses
of men who worked, and under any circumstances would be
entitled to half of that Social Security benefit. So, I think
it's problematic in that regard. Our people know, believe me.
I'm not a pension expert, but I'm more of an expert than I want
to be on the misery that's been caused by the GPO, because I
have to face too many people everyday and explain to them what
the effect of this is going to be on their retirement security.
Mr. Portman. Has your group, the international group, spent
some time looking at how we could target something like H.R.
2273 to the situation that you talk about; not just to women
although you mentioned low-income, fixed-income widows is where
you see most of that misery you talk about, but is there a way
to come up with some income targets in a context like this more
general legislation, H.R. 2273, that you all have looked at?
Mr. Rugola. To my knowledge, the cap itself is really the
only rational and effective way to deal with it. It's a $1,200
limit which, I might add since you asked Congressman, it's kind
of interesting because I was here testifying a few years ago on
the offset. I had a side conversation with Congressman Kasich
and he suggested that there might be a lot more understanding
if there were a cap involved because Congress when it passed
the GPO, in the first place, it was aimed at these huge
pensioners who were double and triple dippers. His point to me
was folks would understand a lot more readily what you're
trying to get at which is the poverty question.
Mr. Portman. If we could target them more.
Mr. Rugola. If it was targeted at lower income.
Mr. Portman. And getting it done in the context of Social
Security reform.
Mr. Rugola. Yes. We don't know of any better way to do it
than the income cap that's in Congressman Jefferson's bill.
Mr. Portman. Thank you, Mr. Chairman.
Chairman Bunning. Thank you.
Mr. Collins.
Mr. Collins. Just one brief question, Mr. Chairman. Going
back to the question we asked Mr. Scott about portability. If a
person retires from a government job under the government
retirement program and is not entered into the Social Security
system, and then they go to work in the private sector and come
under the Social Security guidelines, would it be feasible for
the government retirement program to be portable whereby any
deduction that would be the same or equal to Social Security,
instead of being deposited to the Social Security account for
that individual, is then deposited directly to the same
retirement account but the worker would not be eligible until
he or she retired from the second job.
Mr. Rugola. Congressman Collins, now you're getting into
some technical areas of retirement that I'm just not well-
versed enough on to answer, and I'm reluctant to get into those
kind of discussions, because it takes a retirement system
person to answer that question, and I'm a union person, not a
retirement system person.
Mr. Collins. Well, the money follows the person, and it
goes into the same retirement account only they would not be
eligible for the increased benefit until such time as eligible
for retirement again.
Mr. Rugola. I understand the concept you're describing. In
your question, you use the word ``feasibility,'' and that part
of it is--the feasibility aspect is something that----
Mr. Collins. How would that affect the offset and such?
Mr. Rugola. I think the offset----
Mr. Collins. Do you think we'd have just one retirement
system? One retirement plan for that individual, no matter if
it was public or private, one retirement plan for all of us.
Mr. Rugola. Well, on the question of whether public
employees ought to be mandated into the system, we're opposed
to that for a number of reasons.
Mr. Collins. Yes, but once they retire from the public and
go into the private sector for employment, then they have to
come under the Social Security.
Mr. Rugola. They do if they qualify.
Mr. Collins. So, if Social Security deductions and matching
by the employer normally being directed to the Social Security
Trust Fund were directed instead to that same retirement
program they are already participating in and drawing benefits
from, and as long as the benefits wouldn't change until the
time they became eligible for retirement again they wouldn't be
double dipping or wouldn't have two retirement systems; they'd
still have just one.
Mr. Rugola. If I understand your question correctly, what's
problematic is the objective. First of all, many of our people
who are covered by SERS, by our public plan, have either come
late in their career to the public schools or they were
employed previously in the private sector and then have come to
public sector work. I'm not sure about the feasibility of post-
public sector careers in that----
Mr. Collins. You would be in a prospective basis. It would
not be retroactive to anyone; it would be prospective.
Mr. Rugola. Right, I understand that piece of it, as I
said. I'm just not----
Mr. Collins. I just thought I throw it out for discussion.
Thank you, Mr. Chairman.
Chairman Bunning. I want to thank the panel. Often, it's
impossible for us, on the Subcommittee, to cover every issue
that we are interested in during the hearing. Therefore, we may
submit additional questions in writing for you to answer for
the record. I would like to thank all of our witnesses for your
extensive and thoughtful testimony. I have learned and I think
the panel has learned a great deal today on things that we have
dealt with.
Chairman Bunning. The Subcommittee stands adjourned.
[Whereupon, at 12:35 p.m., the hearing was adjourned
subject to the call of the Chair.]
[Submissions for the record follow:]
Statement of Donald L. Novey, President, California Correctional Peace
Officers Association
Should Social Security be expanded to cover all newly hired state and
local employees?
My name is Don Novey. I am the president of the California
Correctional Peace Officers Association which represents 27,000
state employees who work the toughest beat in California. I
suppose you could characterize these dedicated men and women as
working class, but their work is in a class of its own.
Their noble function in our society is extraordinary; the
sacrifices they routinely make carrying out their duties--
sacrifices that are sometimes taken for granted--are a portrait
of their courage, commitment to service, and professionalism. I
am proud to be associated with these special Americans who put
their lives on the line every day they go to work.
Let me briefly describe the conditions correctional
officers commonly face at work. They are routinely ``gassed''
by inmates throwing urine and feces. They are exposed to life-
threatening diseases like tuberculosis, hepatitis, and AIDS.
They are often assaulted with deadly handmade weapons. In fact,
in California alone, correctional officers endure about 1,500
assaults each year. Sometimes these attacks are fatal.
Everyday--24 hours a day--they ``walk the line,'' armed only
with a side-handle baton, among some of the toughest, most
violent inmates in the world.
The stress behind prison walls is suffocating and
unrelenting. Only about one in five felony convictions in
California actually results in prison time which means that
only the worst of the worst are sent to state prison. Thus
unlike other law enforcement professionals, correctional peace
officers face the state's most violent criminals all day every
working day. A reporter who toured Folsom Prison wrote: ``There
is no denying a palpable tension suffuses the atmosphere. The
idea of spending a half-hour here seems unpleasant; the specter
of years seems unbearable.''
To magnify the ``palpable tension,'' prisons in California
are operating at an alarming 201% capacity, holding over twice
the number of inmates for which they were designed. At the same
time that our prison population is exploding, budget cuts and
staff shortages are reducing the ratio of officers to inmates
to dangerously low levels.
With this background, I would now like to turn to the issue
at hand. I am perplexed and disappointed by the proposal to
include all currently uncovered newly hired state and local
employees in Social Security. I also must question the findings
of the Report of the Advisory Council on Social Security, which
report has been given significant consideration by this
subcommittee.
The council's report, which is two volumes and 750 pages,
devotes roughly one-half page to this issue. Given my
perspective of the issue and the many questions that were
apparently not discussed, I can come to only one conclusion:
that the Advisory Council's recommendation to expand Social
Security to include newly hired state and local employees has
not been given sufficient thought.
Consequently, I want to commend and to thank Chairman
Bunning for devoting an entire hearing to focus on this
troubling proposal. I believe that after careful consideration,
level heads will prevail and most of us will agree that
burdening correctional officers, police, and other hard-
working, essential public servants would be enormously unfair.
In the report's brief half-page coverage of this issue,
three potential flaws are suggested. First, bringing state and
local employees into Social Security may raise Constitutional
issues. Secondly, while there may be a short-term influx of
revenue, it is questionable whether or not it would sustain
sufficient benefits to be paid out in the future. Finally, the
added financial burden on workers and taxpayer-funded, public
employers already contributing to public pension systems would
be unjust. We strongly concur with these concerns and I will
expound on them throughout the course of my remarks.
At this point, we would like to respond to what appears to
be the only argument offered in the council's report in favor
of expanding Social Security to state and local employees. The
report states that it is a question of fairness. We completely
agree that it is a question of fairness, but we emphatically
disagree with the report's apparent conclusion that the current
system is unfair to other working Americans who contribute to
Social Security. Let's examine the question of fairness.
Is it fair to raid the paychecks of devoted public servants
who already make tremendous personal sacrifices, whose
stressful occupations place extreme demands upon them while
they are notoriously underpaid? Is it fair to impose a double
tax on the families of public safety officers and other state
employees? Because states have limited and defined budgets, the
``employers'' portion of the Social Security tax would be paid
by the state from its payroll funding which means the
employees' tax as well as the matching employers' contribution
would be paid from a single source.
Is it fair to destroy well-established, highly effective
retirement systems that are designed, under an existing set of
rules, to accommodate the specific needs of state and local
employees? On the basis of this issue alone, three members of
the Advisory Council opposed the ``inclusion of currently
uncovered state and local employees because of the financial
burden that would be placed on workers and employers who are
already contributing to other public pension systems.'' The
fact is, the new tax would be more than a ``financial burden.''
It would result in an immediate deterioration of state
employees' existing retirement systems. Additionally, it would
remove an enormous infusion of contributions into private
investments which would be damaging to the economy in general.
Is it fair to punish the working class, many of whom can
least afford it, to pay for over forty-years of irresponsible
fiscal policies of the federal government? The state and local
governments and especially their dedicated employees did not
create the financial mess Social Security is now facing. We
should not have to pay for it.
Is it fair to impose a new payroll tax on states and
counties which would inevitably result in cuts to or the
elimination of important programs as well as a reduction in
already dangerously thin staffing levels for correctional
facilities? Is it fair or wise to add to the extreme danger
levels and unrelenting job-related stress of correctional
officers and our police by taking urgently needed funds for
training, safety equipment, technological advancements and
sending the money to Washington?
Is it fair or wise to place side by side two young
correctional officers, one a ``newly hired,'' who are required
to perform the same duties, face equal risks, make comparable
sacrifices, but who receive different benefits. It may not have
an impact at first, but as the years pass and resentment
builds, compounded by the daily tension and stress that comes
with the job, loyalty may weaken or professionalism may be
compromised. Worst case, in an instant these two officers could
be faced with a life and death decision. At best, this
situation would damage morale in an environment that can ill
afford such an atmosphere.
Can any of us honestly and sincerely answer any of these
questions ``yes?'' I seriously doubt it. So if, as the
council's report suggests, the proposal is simply a question of
fairness, let us answer it now. Clearly it is not fair to
mandatorily cover all newly hired state and local employees.
Still, we can take the question of fairness a step further. Let
us review it from the perspective of all other workers who are
paying into Social Security.
Who in our society have chosen to be correctional or police
officers? These are high-stress, dangerous, underpaid jobs that
most citizens will not do. Yet they want it done; they expect
it to be done; and they expect it to be done professionally by
qualified, well-trained, highly-skilled individuals. They want
emergency services readily available. They want their police to
be well equipped. At a time of need, they want their fire-
fighters at their door in an instant. They also want computers
in their children's classrooms, the best teachers, and a wide
range of educational and extracurricular activities and
programs.
Is it reasonable to believe that private sector employees
would begrudge a small percentage of underpaid, overworked
public servants having their own retirement system? Would these
same citizens answer ``yes'' to the fairness issue questions
cited above? I strongly believe that they would NOT on both
counts. Furthermore, I firmly suggest that Americans paying
into Social Security who are given the perspective of all sides
of the issue would gratefully acknowledge the sacrifices of the
devoted, conscientious, hard-working public servants who are
now being targeted for this onerous tax.
Perhaps, instead of an issue of ``fairness,'' the true
reason for proposing an expansion of Social Security to newly
hired state and local employees is because it seems an easy fix
to bolster the long-term projections for Social Security. The
intensity and political nature of the larger debate over Social
Security should not tempt us to make this particular change
without reviewing it on its own merits.
Ironically, this quick fix may backfire. It is quite
possible that Social Security will lose money by forcing public
safety officers into the system. First of all, public safety
officers retire at a younger age--and for good reason. In
consequence of the intense nature of their employment as well
as the obvious occupational hazards, public safety officers
commonly retire between the ages of fifty and fifty-five. In
addition, public safety officers are not protected by age
discrimination. They can be forced into retirement at age
fifty-five. The state benefits operationally by having a
younger, healthier work force. Consequently, many public safety
officers would require 12-14 years of benefits beyond that of
their private sector counterparts. Public safety officers are
also more likely to end careers or retire prematurely as a
result of disabilities. They are more likely to suffer from a
wide range of physical and/or psychological problems. This
means they would be paying into Social Security for a shorter
period and receiving benefits for a much longer period.
In addition to the fairness question and the economics of
the issue, a legal question looms. The legislative history of
the Social Security Act indicates that public employees were
excluded because Congress was concerned about the
Constitutionality of imposing a federal tax on or to dictate
the affairs of state governments. This could seemingly present
numerous hurdles, and if the inevitable Constitutional
challenge determines that states would not be required to match
the Social Security tax as does private sector employers, the
economic feasibility argument eluded to above would render
itself a foregone conclusion.
The council's report states that: ``In light of several
Supreme Court decisions dealing with Federal/State
relationships in the area of labor law, it is now generally
thought that there is no Constitutional barrier to compulsory
coverage.'' However, it is not ``generally thought'' that the
Constitutional issue in this matter has been decided. It is
ambiguous and open for debate.
We urge you to carefully contemplate the full ramifications
of forcing state-employed public safety officers into Social
Security. Raiding the paychecks of devoted public servants is
morally wrong. Looting the budgets of already strapped states
and counties to bail out an inefficient, wasteful federal
government would be reprehensible. Destroying a retirement
system that should be emulated and replicated would be
indefensible. The Constitutional argument remains unanswered.
Inequitable benefits' packages would destroy morale. Perhaps
most disturbing, after creating undue hardships for thousands
of families for many years, Social Security could find its
coffers just as empty several generations into the future.
Thank you for this opportunity to express our opinion. We
hope you will seriously consider our concerns.
Statement of Jennifer DuCray-Morrill, Deputy Chief Executive Officer--
Government Affairs & Program Development, State Teachers' Retirement
System, State of California
My name is Jennifer DuCray-Morrill. I am Deputy Chief
Executive Officer--Government Affairs & Program Development of
the California State Teachers' Retirement System (CalSTRS).
CalSTRS has 518,000 active and retired teacher members and
currently pays retirement, disability, and survivors' benefits
to some 154,000 recipients. CalSTRS pays out $238 million each
month in retirement, disability, and survivors' benefits,
totaling $2.9 billion annually.
We very much appreciate the opportunity to present our
views to the Subcommittee on the issue of imposing mandatory
Social Security coverage on newly-hired State and local
government workers.
Before describing the specific impact that mandatory
coverage would have on CalSTRS, its active members, and its
retirees, I would like to respond to a number of points raised
at the hearing, particularly by the General Accounting Office
(GAO) in its testimony.
There can be no serious question that the true driving
force behind proposals to impose mandatory coverage of new
State and local government workers is a new source of revenue
for the Federal government. The Federal government would be
requiring State and local governments to bear a significant
additional cost burden in order to help bolster the solvency of
the Social Security trust fund.
However, as the GAO recognizes in its testimony, while new
Federal revenue may be the driving force behind mandatory State
and local coverage proposals, revenue is not itself an
appropriate justification for imposing mandatory coverage. As
the GAO notes: ``While Social Security's solvency problems have
triggered an analysis of the impact of mandatory coverage on
[Social Security] program revenues and expenditures, the
inclusion of such coverage in a comprehensive reform package
would need to be grounded in other considerations.'' (U.S.
General Accounting Office, ``Mandating Coverage for State and
Local Employees,'' Testimony before the Subcommittee on Social
Security, House Committee on Ways and Means (GAO/T-HEHS-98-127)
(May 21, 1998), at p. 4).
In searching for an appropriate policy justification, GAO
points to the 1994-96 Social Security Advisory Council
statement that mandatory coverage is ``basically `an issue of
fairness.' '' (Id., at pp. 4-5). GAO then quotes the Advisory
Council report to the effect that ``an effective Social
Security program helps to reduce public costs for relief and
assistance, which, in turn, means lower general taxes. There is
an element of unfairness in a situation where practically all
contribute to Social Security, while a few benefit both
directly and indirectly but are excused from contributing to
the program.'' (Id., at p. 5).
It is important to examine in detail just how this
``fairness'' consideration balances out.
As a threshold matter, the Advisory Council's asserted
rationale of equitably sharing the burden of Social Security as
a social welfare program does not ring true as applied to State
and local governments already struggling with the cost burdens
of Medicaid, welfare, and other social safety net
responsibilities which the Federal government has passed down
to the States. Mandatory coverage threatens a significant
payroll cost increase for State and local governments. It seems
quite difficult to justify this additional cost burden on the
ground that State and local governments--and State and local
taxpayers--are not now bearing their fair share of social
safety net responsibilities. Moreover, State and local
governments have only two responses available to such an
additional cost burden coming from the Federal government--
raising taxes or cutting spending on other essential government
services.
More fundamentally, by imposing mandatory coverage the
Federal government would be seeking to carry out its commitment
to the participants in the Social Security system by forcing
State and local governments to cast aside the commitment they
have made to their workforce and the participants in their
retirement systems. State and local governments would be asked
to largely dismantle for the future their successful retirement
systems that have served millions of participants for decades,
in order to solve a Federal problem that these State and local
governments had no hand in creating.
States like California--which has pre-funded the CalSTRS
teacher retirement program to pay out almost $3 billion in
benefits each year--would be asked to cast aside these decades
of successfully providing retirement benefits to generations of
workers, in order to force the future membership into a pay-as-
you-go Social Security system that will provide these State and
local government employees with reduced benefits at higher cost
to State and local governments. It is not without clear irony
that, at the same time mandatory coverage proposals are being
discussed that would force States to largely dismantle
successful pre-funded retirement systems in order to help pay
for the inadequacies of the pay-as-you-go Social Security
system, State and local government retirement systems are being
examined by GAO and others as a model for how a pre-funded
retirement plan can be achieved and managed in the government
context.
If mandatory coverage is imposed, State and local
governments would lose flexibility to tailor retirement
benefits to the unique work histories of the broad range of
occupations necessary for the diverse State and local services,
giving way to the ``one-size-fits-all'' approach of Social
Security. State and local governments would lose the
flexibility to manage retirement costs directly, with such
costs now largely being thrust upon them from the Federal
government.
On the employee side, while the GAO testimony notes that
mandatory coverage will ``increase participation in an
important national program,'' the testimony produces no
conclusive evidence that overall retirement benefits of new
State and local government workers will be sustained, let alone
improved, under any reasonable cost scenario for State and
local governments. Indeed, as described below, actuarial
studies undertaken for our system show that the current CalSTRS
plan produces a much greater benefit than a plan coordinated
with Social Security for the same level of contribution.
Certainly the 364,000 active members of CalSTRS have not been
clamoring to shift into Social Security.
This should not be surprising since the new State and local
government workers mandated into Social Security would be
expected to receive less in Social Security benefits than they
contribute. The solvency problem facing the Social Security
trust fund is a later-term problem when the Baby Boomers begin
to retire en masse. The retirements shortly afterward by the
new State and local workers mandated into Social Security will
only exacerbate the problem unless these State and local
workers forced into Social Security in fact will receive less
in benefits than they contributed. Somehow, the ``fairness''
rationale failed to surface vis-a-vis State and local
government workers in the past when the situation was reversed
and participants drew out more in benefits than they had
contributed.
Social Security has been in place for some 63 years as a
``pay-as-you-go'' system. Employers and employees in one
generation have paid employment taxes which are used to pay
current benefits and, in turn, a later generation of employers
and employees have paid employment taxes which are used to pay
that preceding generation's employees' benefits. Consequently,
there is a certain rough justice as to current employers and
employees participating in the Social Security system.
It is inequitable to mandate nonparticipating State and
local governments into Social Security at this late point. This
legislation is asking the entering generation of State and
local employees, and the State and local governments which
employ them, to contribute at a high rate of tax to pay
benefits for a prior generation of workers, none of whom worked
for the State and local governments which are being mandated
into Social Security. Compared to all of the current employers
in the Social Security system, the upshot of mandating the non-
participating State and local governments into Social Security
is to provide all current benefits to someone else while
imposing the current burdens on the mandated State and local
governments and their employees.
It might have been ``fair'' to mandate State and local
governments at the start--everyone would be treated equally,
but it is unfair to wait until late in the game and then
mandate coverage.
State and local governments have designed their retirement
plans in reliance upon their exclusion from mandatory Social
Security coverage. Benefits have been structured and trusts
funded on this basis. State and local tax rates have been
established which provide adequate sums to fund these
retirement benefits along with the other expenses of State and
local governments.
There is, understandably, a great deal of reluctance on the
part of voters to increase State and local taxes. All parties,
including those favoring mandating Social Security coverage for
State and local government employees, concede that if coverage
is mandated, benefit costs will increase substantially if State
and local governments maintain the current level of benefits,
even taking Social Security benefits into account. The
alternative, and more likely scenario, is that benefits will be
cut in order to maintain the current levels of taxation. That
is unfair to State and local government employees.
This burden will be particularly hard on teachers who are
disproportionately the group affected by mandatory Social
Security coverage. At a time when schools, particularly schools
in California, are straining to improve educational performance
in the face of stringent budgetary restrictions, to add the
cost of mandatory Social Security coverage would be a
devastating blow.
In summary, Mr. Chairman, once ``fairness'' is considered
in all of its aspects--and not just those that favor the
Federal side--it becomes quite clear that ``fairness'' provides
no true rationale for mandating new State and local government
workers into Social Security.
Let me briefly outline the specific impacts that mandatory
coverage would have on CalSTRS and its 518,000 active and
retired participants.
CalSTRS and Other Existing State and Local Retirement Systems in States
That Do Not Participate in Social Security Are Successful and Should
Not Be Disrupted
State and local governments do an excellent job
managing retirement plans and providing good benefits for their
employees.
--The California State Teachers' Retirement System
(CalSTRS) pays out $238 million each month in retirement,
disability, and survivors' benefits, for total benefits of $2.9
billion annually. An average CalSTRS retiree's annual benefit
at retirement is approximately $18,000.
State and local government plans are more soundly
funded than Social Security. State and local plans are sound
because the necessary employer and employee contributions have
been actuarially determined and put into trust funds and
invested in accordance with sound portfolio management
principles. State and local plans invest in a range of
securities providing a greater return than the government bonds
held by the Social Security ``trust fund.''
--CalSTRS has a strong funding level, with assets
representing 97% of accrued liabilities.
--CalSTRS retirees on average receive retirement benefits
for 26 years. Two years of that payout represent the employee
contributions, two years represent the employer contributions,
and 22 years of that payout are funded by investment earnings.
--CalSTRS's assets totaled more than 22 times benefits paid
in 1995-96. By contrast, Social Security's assets were less
than 2 times annual benefits paid, providing much less
opportunity for investment growth.
By operating their own retirement systems, State
and local governments are able to tailor benefits to the work
histories of the uniquely broad range of occupations of State
and local workers.
--Police and fire personnel retire earlier because of the
physical demands of the job. Judges enter late in their careers
and serve for a limited period. Teachers often have long,
steady careers. The ``one-size-fits-all'' approach of Social
Security determined in Washington provides no such flexibility.
--State and local government employers are able to manage
retirement benefits and costs directly--rather than having
costs thrust upon them by the Federal government--and employee
groups have input on benefits through the bargaining and State
legislative processes.
CalSTRS strongly believes that all of its teacher
participants should receive comparable benefits for the same
service and pay. Mandatory Social Security coverage would
disrupt that equity because new hires likely would receive less
in benefits under a plan coordinated with Social Security than
current CalSTRS members receive under the existing plan.
Mandatory Social Security Coverage for All State and Local New Hires
Will Have a Harsh Impact on New Employees, Current Participants, State
and Local Employers, and the States and Local Retirement Plans
Themselves
Harsh cost impact or benefit cuts in the case of
new hires
--If added to current pension costs, the 12.4% Social
Security payroll tax cost for new teachers would create a major
financial burden for California public schools. The average
additional annual cost for a new hire would be at least $1,600
each for the employer and the employee.
--The additional Social Security payroll tax burden
approaches the normal cost of the current CalSTRS retirement
plan (15.79%), leaving little room for the design of a
retirement benefit to supplement Social Security for the new
hires except in the unlikely event that new State and local
funding can be found.
--State and local retirement plans produce substantially
higher investment returns than Social Security. If Social
Security is substituted for a large portion of the State and
local retirement plan benefit, contributions to the State and
local plan will have to increase to fund the same level of
benefits. In California actuarial studies indicate that it
would cost an additional 3% to 6% of payroll to fund a
supplemental retirement tier that when combined with Social
Security equates to the retirement benefits currently provided
by CalSTRS.
--Actuarial studies show that the current CalSTRS plan
produces a much greater benefit than a plan coordinated with
Social Security for the same level of contribution, for
essentially all combinations of age and service.
--Mandatory Social Security coverage would substitute an
unfunded benefit under the pay-as-you-go Social Security system
for the funded retirement benefit that the new State or local
worker would have received under the State or local government
retirement system.
--Given the fiscal and political difficulties of increasing
State and local government retirement costs, it seems likely
that State and local employers would respond to mandatory
coverage for new hires by cutting benefits under the State and
local retirement plan rather than increasing contribution
costs.
Adverse impact on current participants and
existing State and local government plans
--As the GAO testimony notes, ``Mandatory coverage and the
resulting changes to benefit levels for newly hired employees
are likely to result in reduced contributions to the current
pension plan. The impact of reduced contributions on plan
finances would depend on the actuarial method and assumptions
used by each plan, the adequacy of current plan funding, and
other factors.'' (p. 10). Even though CalSTRS is currently
well-funded, in the future the liabilities for the closed group
of current participants could exceed assets, creating an
unfunded liability. A substantial reduction in the
contributions from new hires would have an adverse impact on
the pay-down of any unfunded liability of the plan.
Dubious Benefit for the Social Security Trust Fund Unless State and
Local Workers Will Receive Less in Social Security Benefits Than They
Contribute
Mandating Social Security coverage for State and
local new hires would provide a short-term cash flow into the
Social Security trust fund. But the Social Security trust fund
has no short-term funding or liquidity problem.
The solvency problem facing the Social Security
fund is a later-term problem when the Baby Boomers begin to
retire en masse. The retirements shortly afterward by the new
State and local workers mandated into Social Security will only
exacerbate the problem unless these State and local workers
forced into Social Security in fact will receive less in
benefits than they contributed.
The payroll tax contributions of the State and
local workers mandated into Social Security will merely be
invested in Federal debt, not growing investments, and hence
there will be even greater dependence on the future taxing
resolve of the Federal government when that debt must be cashed
in to pay benefits.
Conclusion
Mr. Chairman, we would strongly urge you and the other
Members of the Committee, in examining proposals for mandatory
coverage of State and local government workers, to look beyond
the siren call of short-term revenue and to consider the severe
cost and dislocation that would be imposed on State and local
governments and their retirement systems that have successfully
funded retirement benefits for generations of workers in public
service.
Thank you for the opportunity to present our views.
Statement of Charles G. Hardin, President, Council for Government
Reform
Mr. Chairman, thank you for allowing me to testify for the
record regarding the addition of state and local government
workers to the Social Security system. I greatly appreciate
this opportunity to share the views of our 350,000 members with
the Subcommittee.
As we are all aware, Social Security is facing its greatest
crisis. Soon, demographic trends will push our nation's
retirement income security system into virtual bankruptcy.
One of the proposed solutions to this problem is to corral
all newly hired state and local government workers into the
current Social Security structure.
I firmly believe that this is the wrong approach. We should
be looking to build a structure that can withstand the
demographic storm brewing on the horizon, not adding more
ballast to a sinking ship.
In the short run, adding newly hired state and local
government workers will make Social Security's balance sheet
look better. But this is only a short-term fix. Soon-to-be-
hired state and local employees have no one to speak for them
and Congress must take care not to use them for its own
purposes.
What will happen when we add these workers to our already
overburdened retirement income structure? With Social
Security's current rate of return, our problems will only get
that much bigger in the long run.
Right now, state and local government workers who are
excluded from Social Security are enjoying high returns on
their retirement investment. The mammoth California Public
Employees Retirement System (CALPERS) reported a 20.1% rate of
return during the 12 months ending on June 30, 1997. And the
Virginia Retirement System returned 20.6% for their pensioners
during the calendar year of 1997.
While CGR would much prefer to see individually directed
retirement investments, these rates of return are very solid
compared with Social Security's near-negative return rate.
Privately-run mutual funds hold the same advantages of state or
local run funds, but they could not be held hostage to
political considerations as has happened in the past.
State and local government workers are not workers who are
in need of rescue by Social Security. In fact, the millions of
workers in Social Security can only wish they received such
good return on their investments.
We should be moving in the opposite direction. We should be
looking at how these state pension systems protect the
retirement income security of their members and we should be
designing a plan to apply these principals to the millions of
workers who face Social Security shortfalls in their future.
In addition, by carving out new hires in state and local
governments, we will essentially be creating a new ``notch.''
Newly-hired state and local government employees will look with
anger and envy at their predecessors' fat retirement savings
and wonder why Congress consigned them to the miniscule Social
Security benefit.
And the simple answer will be: Congress wanted to spend
their money.
Fixing Social Security should start with a fundamental
rethinking of how the program is structured. The old nostrums
of tax hikes, benefit cuts, and corralling more workers into
the system have been played out. They don't work and only make
things worse for future generations.
I urge the subcommittee to reject any proposal to include
newly hired state and local government workers in the current
Social Security plan and to push instead for wider reform that
will secure the retirement income of current retirees, current
workers and future workers.
Eleanor Deutsch
Brooklyn, N.Y. 11218-1442
May 28, 1998
A.L. Singleton
Chief of Staff
Committee on Ways and Means
U.S. House of Representatives
1102 Longworth House Office Building
Washington, D.C. 20515
Dear Chairperson:
I would like to take this opportunity to thank the Subcommittee on
Social Security for giving consideration to individuals like myself to
take part in these legislative proceedings.
Those immediately affected by the Government Pension Offset fully
understand the impact of these proceedings and are very grateful that
they have finally come to fruition.
I have suffered for several years financially and because of this
offset I am being forced to exhaust my lifetime savings. My husband and
I worked all of our lives and contributed to Social Security and my
government pension fund for which may I add is a very small amount.
Anything you can do to change or revise the law will be a personal
gratification not only to me but to thousands of government workers.
The Government Pension Offset is a very unfair law and I am sure
after great deliberation it can be revised to make it right to all
concern.
I have two main points to make:
1) The 1977 Amendments to the Social Security Act was written to
bring equity to the program and yet the legislation was amended in
January 1983 by Public Law 97-455 and again in April, 1983 by Public
Law 98-617, again in November, 1984 by Public Law 98-21 and finally in
December, 1987 by Public Law 100-203.
I count four amendments to the original law in 1977 which indicates
to me that these changes were necessary to correct legislation that was
either poorly written or unpopular with those individuals later
exempted and
2) As an applicant in 1995, I feel that there was no choice given
to me where I could meet one of the exemptions. My years of dedicated
service were behind me, I did not belong to an exempted group, there
was no offer for me to change my pension plan for FERS and my single
voice could not be heard in Congress.
For the past several years I could not understand why my benefits
were decreased by a twothirds formula. As my resources are steadily
being exhausted I become more and more dependant on my benefits which
places me in a unfair position of being more reliant on the government
instead of being self-reliant for myself.
Can you imagine the thousands and maybe millions of constituents
depending more on government benefit programs?
The time is now appropriate for Congress to right a wrong for those
beneficiaries who have struggled to meet their every day living
expenses.
In closing, it is my only wish that we are given and are
compensated in the future so that life will be much easier in our
golden years.
I thank you and your staff for finally giving this the proper
attention it deserves.
Sincerely yours,
Eleanor Deutsch
Statement of Patrick L. Doyle, Director, Division of Social Security,
Commonwealth of Kentucky
These are the comments of the Kentucky Division of Social
Security on the Subcommittee Social Security's hearing on
mandatory social security coverage for newly hired employees of
state and local governments. Brief comments concerning GPO and
WEP are also included.
The exception from social security coverage for state and
local government employees was included in the original version
of the Social Security Act passed in 1935. This exception is
the federal government's recognition of its constitutional
limitation to mandate a social security employer tax on the
states and their political subdivisions.
The 1950 amendments to the act, effective January 1, 1951,
allow a state to enter into a voluntary agreement with the
federal government permitting the state and its political
subdivisions to provide social security coverage for their
employees. This voluntary coverage concept was included in
Section 218 of the Social Security Act. The Omnibus Budget
Reconciliation Act of 1990--which requires social security
coverage for all state and local employees not covered under a
Section 218 agreement, or state and local employees not
belonging to a qualified, public retirement system--avoided the
constitutionality question by retaining the states' and their
political subdivisions' right to determine if employees will be
covered under social security or a qualified, public retirement
system. The new-hire proposal for universal social security
does not provide for any options to state and local
governments.
The Tenth Amendment to the Constitution expressly provides
that ``the powers not delegated to the United States by the
Constitution, nor prohibited by it to the States, are reserved
to the States respectively, or the people.'' After decades of
erosion, the Tenth Amendment's revival was initiated by the
United States Supreme Court in 1991 in Gregory v. Ashcroft and
further strengthened in the landmark New York v. United States
decision in 1992. The High Court's 1992 ruling included the
following statement: ``Congress may not simply `commandeer' the
legislative processes of the States by directly compelling them
to enact and enforce a federal regulatory program.''
Aside from the obvious question of constitutionality, the
imposition of universal social security coverage would cause
havoc on the organization of many state retirement systems.
Some Kentucky retirement systems were created prior to 1951
specifically for certain career employees, such as teachers,
police and firefighters, when social security coverage was not
available to public employees. These non-social security
retirement systems were designed to provide these employees
with a complete benefit structure of retirement, disability and
health insurance coverage that was based on the unavailability
of social security coverage.
The imposition of the ``new hire'' rule places Kentucky's
retirement systems in the position of having to review all the
pension plans for the affected employees. Sound pension policy
dictates that Kentucky must consider the issue of equity to its
employees, as well as the reasonableness of the income
replacement at retirement. If new-hires retain the benefits of
current pension plans, then they would be entitled to a
significantly higher level of income replacement at the time of
retirement (current pension benefits plus social security), at
a significantly higher cost to the taxpayers. Kentucky cannot
justify paying higher benefits simply because of the hire date
of an employee. Kentucky would be forced to either increase the
benefits of current ``old hires'' in the interest of equity or
to establish new retirement systems or new tiers for the new
hires with equivalent total income replacement values. This
process of creating an entirely new retirement system for a new
class of employees requires legislative and policy
considerations that cannot be accomplished with a stroke of a
pen.
The economics of establishing a separate system for the new
hires could undermine the actuarial soundness of the old system
due to the loss of new members contributing to the system. A
two-tiered system, while actuarially more sound, would likely
lead to further legislative pressures to increase benefits or
to expensive lawsuits brought by either of the employee groups.
If, and when, the above problems are legally overcome, the
implementation of the new-hire concept of social security must
be implemented at significant cost and effort to state and
local employers. Kentucky's state government and its 216 city
governments, county governments, boards of education and
smaller political subdivisions effected by the change would
incur first year employer contribution costs of an estimated $5
million. This, of course, must be matched equally by employee
contributions. (The cost to retirement systems in Kentucky to
implement the ``new hire'' proposal could possibly exceed the
amount of ``new-hire'' social security contributions collected
from Kentucky in the first year.)
Over and above the financial drain of the social security
contributions on already very limited resources, all government
employers would be required to modify their payroll systems to
accommodate another class of employee. This would be very
expensive for those governmental employers who have
computerized payrolls system. One must also factor in the cost
of training payroll personnel about the modified payroll
system, maintaining the records of a new employee group and the
additional withholding and reporting requirements the ``new-
hire'' proposal would mandate.
It has been said that the ``new-hire'' proposal would ease
the administrative burden of the social security program for
the Internal Revenue Service and the Social Security
Administration. One only has to examine current medicare
coverage with its new-hire provisions to realize that it is
very complicated and requires additional and constant
administration by both the state and local employers and the
federal agencies.
In the event this proposal becomes law, Section 218 must
remain in place to ensure the details of social security
coverage for the employees continue under all existing Section
218 Agreements. Each of Kentucky's 1,500 agreements is unique
to the applicable governmental employer. State and local
governmental employers also need the avenues Section 218
provides to allow for social security coverage of veteran
(``old-hire'') employees, if they so desire, as in current
medicare-only coverage.
Congress recognized a basic inequity in the application of
social security benefits to certain groups of public employees
without social security coverage when the Government Pension
Offset and the Windfall Elimination Provision were enacted. The
GPO and WEP benefit reductions addressed these inequalities.
Congress may wish to consider simply fine tuning the GPO and
WEP provisions as this would be far more appropriate and
efficient than enacting mandatory social security legislation
that would create a new class of public employees.
Statement of Edith U. Fierst, Member, 1994-96 Advisory Council on
Social Security
Introduction
I very much appreciate this opportunity to present my views
in writing since unhappily I was not able to accept the
invitation of your Staff Director, Kim Hildred, to testify in
person. The views expressed are mine alone; I do not appear on
behalf of any clients, persons or organizations.
Reasons for Bringing New Hires Under Social Security
The members of the 1994-96 Social Security Advisory
Council, whatever their views on the contentious issue of
privatization, were unanimous in recommending that all new
hires by State and local governments be brought under mandatory
coverage of Social Security. Doing so would cut the long-run
estimated deficit in the trust fund by 0.25 percent of payroll
because contributions would start to flow into the trust fund
promptly after mandatory coverage were enacted, but the
benefits payable to State and local employees would not become
due for some years. The trust fund would profit from the time
lapse between collecting the tax and paying benefits.
In making this recommendation the members of the Advisory
Council were mindful of several major advantages that would
flow to covered employees from being brought under coverage of
the national retirement system. These include:
1. Portability. Bringing newly hired State and local
employees under coverage of Social Security would enable them
to move from one job to another without sacrificing retirement
benefits. This missing portability is often very important to
employees, although little publicized. Traditionally employers
have thought of the lack of portability of pension plans as a
way of locking in their labor force, and the attention of
employee leaders has been focused primarily on those who stay,
not on those who leave.
I experienced the pressures created by lack of portability
when I worked for the Federal Government under the Civil
Service Retirement System (CSRS). The time came when I wanted
to leave for other employment, but realized doing so would
cause me to incur a major financial loss. CSRS offers
retirement without reduction for early retirement at a younger
age than does Social Security--at age 55 after 30 years of
service, at age 62 after 5 years of service--and CSRS indexes
benefits to the cost of living only for those who have retired
under the system. Those who leave before retiring must wait to
age 62 before starting to receive the benefits they have
earned; they also sacrifice the COLAs that would be payable to
retirees in the years between leaving government service and
reaching age 62 Moreover, they lack the protection of survivor
annuities for their widow(er)s if they die in those interim
years.
As a consequence of these and perhaps other disincentives,
many workers covered by CSRS feel locked in. They become time-
servers, watching the calendar until their earliest possible
date for retirement. This is not good for either the workers or
their employers. Many press for abolition of their jobs so they
can retire at age 50 after 20 years of service, and for a
number of reasons, their supervisors are often glad to help
them out. This has entailed considerable cost to the taxpayers.
Fortunately this problem was solved for future Federal
employees in 1984 when a new retirement law became effective,
bringing new Federal hires under Social Security, but analogous
problems continue to plague employees of the State and local
governments and the governmental units that employ them. All
would be happier if retirement benefits were made portable by
bringing new hires under Social Security.
2. Cost of living increases. Not only does Social Security
compute initial benefits under a formula that takes into
consideration average wage increases before the employee
reaches retirement age or qualifies for disability or dependent
benefits, it also guarantees that the purchasing power of
benefits will be retained through annual cost of living
increases indexed to price increases. The plans of state and
local government for public employees rarely, if ever, provide
full COLAs. Today, we are in a period of relative price
stability, when cost of living increases may seem to matter
little, but this stable economy may not last. Without it, the
security of retirees is at risk, as we have seen so often in
parts of the world with runway inflation.
3. Security for dependents. Social Security provides
monthly benefits for spouses, surviving widows and widowers and
children at no additional cost to those whose dependents are
covered. Individual employees do not need to make an election
to be covered, nor do they pay extra for it. Rather, these
benefits are the insurance part of Social Security. They have
substantial value.
By contrast, under many State and local government plans,
coverage is optional with the employee, and those who elect
coverage pay for it through reductions in their own retirement
benefits.
I saw how this works when a client came to me while I was
in the private practice of law. The client was highly educated
and intelligent, a star at a local think tank. His father, who
had been a well-respected state government worker, was recently
deceased. Much to the family's surprise and consternation, the
father had opted against a survivor annuity for his wife
because paying for it would have reduced his retirement
benefits. Suddenly my client's mother was left without income
after a marriage of 50 years; fortunately in her case the
children were able and willing to take on the burden of
supporting their mother. But we all know that is not true for
everyone.
Social Security has made lack of protection for surviving
spouses a non-problem for covered families. For them, the
desperation that used to beset elderly widows and their
families is a thing of the past. While many have reason to
worry because the benefit is too low (something we can and
should remedy by increasing benefits for survivors of two-
earner couples), no one, not even a divorced spouse after a
marriage that lasted at least ten years, is excluded.
Some of those who favor privatization have been spreading a
myth that while some public plans based on individual accounts
make these accounts available to young widows, the only benefit
available to those covered by Social Security is $255 in
funeral expenses. The truth is that Social Security provides a
monthly benefit for eligible mothers until the youngest child
reaches age 16 and an additional benefit for surviving children
until they reach age 18, or if later, finish high school or
reach age 19. If the child is disabled before age 22, the
child's benefits last as long as the child is disabled and the
eligible caretaker's lasts as long as the child needs care. The
value of this insurance for the family of an average wage
worker with two children and a mother of 27 is estimated at
$307,000.
Public employees and their families, like everyone else,
need this coverage. They can get it only if they are covered by
Social Security.
4. The Public Pension and Windfall Offsets. Both the public
pension
and windfall offsets were designed to protect the Federal
Government from the obligation to make excessive payments to
retirees covered under both Social Security and pensions not
covered by Social Security. They work as follows:
A. The Public Pension Offset (PPO) reduces benefits payable
to spouses or survivors by Social Security by two-thirds of the
benefits earned by that spouse or survivor in a public job not
covered by Social Security. Thus a Social Security spouse or
survivor benefit of $300 is reduced to zero if the spouse has
earned a pension of $450 a month or more in non-covered public
employment.
Many retirees do not learn of the public pension offset
until they are about to retire. Then they are shocked and
believe they have been cheated by an unfair policy. I'm sure
you and other Members of Congress hear from them. However, the
protesters do not understand that the PPO is analogous to the
dual entitlement rule under which Social Security benefits
payable to spouses and survivors are reduced by the benefits
they themselves earned as workers. Indeed, the dual entitlement
rule demands a total offset, not one that reduces overlapping
benefits by only two-thirds. The PPO is a smaller offset
presumably because public pensions substitute for both Social
Security and private pensions payable to those in private
employment.
While the public pension offset might be improved at the
margins, in view of the dual entitlement rule which reduces
benefits for those covered under Social Security both as
workers and spouses (or survivors), it is hard to make the case
for eliminating it altogether except by bringing public
employees under coverage of Social Security.
B. The Windfall Offset reduces the replacement rate of
Social Security payable to retirees with only short-term
coverage under Social Security if they also had non-covered
employment. Its purpose is to restrict the number of employees
entitled to payment of the highest replacement rate under
Social Security's progressive formula. Under that formula, a 90
percent replacement rate is paid for the initial roughly $5500
a year in earnings (indexed); this high return is designed to
assure minimum adequacy for persons who worked many years at
low wages. The high replacement rate was never intended to give
a windfall to short-term employees with high pay whose lifetime
covered earnings are low because most of their work was done
under non-covered plans.
Before the windfall offset was enacted, persons who had
worked for many years in exempt public employment sometimes
received benefits from Social Security as high as those whose
low-paid lifetime careers were under Social Security. This was
unfair and unintended. Its cost to Social Security was
substantial.
Nevertheless those who are adversely affected by the
windfall offset are often surprised at retirement age to learn
about it; they, like those covered by the PPO, may feel cheated
and outraged.
Perhaps the windfall offset could be moderated at the
margins, but I have heard no good arguments for eliminating it
for employees whose major career was in non-covered public
employment. The best solution is to bring these employees under
coverage of Social Security during their years of public
employment.
Attitude of public employees
Many public employees say they prefer plans offered by
their State or local government employers to Social Security.
Frequently they lack understanding of the very real advantages
of coverage under Social Security outlined above.
In addition, typically these employees do not understand
that their large benefit amounts derive from generous
contributions by their employers rather than from their exempt
status. They may not realize that private pensions provide
similar benefits to those also covered by Social Security or
that they could have the equivalent. Public employers could
fund separate plans with the amount they now contribute in
excess of the 6.2 percent of earned income employers are
required to contribute to Social Security or the 12.4 percent
employees and employees are required to contribute. If they did
so, many public employers would provide excellent pension
plans, making their employees much better off than they are now
because they would have both Social Security and pensions.
The recent extraordinary performance of the stock market
has given ammunition to those who prefer separate coverage
dependent upon private investment. Investment advisers and
managers who earn their living by working for the funds of
these plans are particularly articulate in their defense. Their
self-interest in these plans should be taken as a caution
against too much reliance on their views.
I understand that it is difficult for Members of Congress
who represent large numbers of uncovered public employees to
vote to include them when their leaders oppose bringing them
under Social Security. Nevertheless I believe public employees
can be persuaded to accept Social Security coverage by a
combination of the advantages to public employees of Social
Security coverage listed above and the realization that Social
Security is not an either/or to special plans for public
employees.
Interest of Public Employers
Many state and local governments have been overpromising
future retirement benefits to placate employees who demanded
pay increases that could not be afforded immediately. These
governmental units could seize the opportunity of to
restructure their retirement packages at the time of changeover
to Social Security, thus solving a big financial crisis which
awaits them in the future. And they could do this while at the
same time providing their employees supplemental plans,
possibly of an individual accounts type that would make
everyone happy. Inasmuch as the coverage of State and local
government employees would apply to new hires only, there would
be time for the governmental units to phase in such coverage
and absorb any transitional expenses while at the same time,
initiating supplemental plans for covered public employees.
Conclusion:
I regret I could not be here to answer your questions, but
I would be pleased to do so if anyone wishes to contact me.
Statement of Alfred K. Whitehead, General President, International
Association of Fire Fighters
Mr. Chairman. My name is Alfred K. Whitehead, and I am the
General President of the International Association of Fire
Fighters. I greatly appreciate this opportunity to express the
views of the nation's more than 225,000 professional fire
fighters and emergency medical personnel on the vitally
important issue of mandatory Social Security coverage of public
sector employees.
The IAFF strongly supports efforts to ensure the future
solvency of the Social Security system. Thousands of our
members are counting on Social Security as an important part of
their retirement security, and we are committed to preserving
the system for them and their families. We are also committed
to protecting the retirement security of those fire fighters
who are currently outside the Social Security system.
On behalf of both of these groups, the IAFF is adamantly
opposed to the mandatory coverage of those public employees who
are not currently part of the Social Security system. Mandatory
coverage would wreak havoc with the economic security of fire
fighters who are currently not covered by Social Security, and
would only produce a short term cosmetic benefit to the Social
Security system. In the long run, both groups of fire fighters
would be harmed by mandatory coverage.
Background
When the Social Security system was created in 1935,
government employees were expressly excluded. It wasn't until
the 1950s that state and local government agencies were given
the option to join the system. Even then, fire departments in
24 states were prohibited from voluntarily joining the Social
Security. It wasn't until 1994 that all fire fighters had the
right to vote on whether or not to enroll in Social Security.
In response to this long-standing arrangement, state and
local governments that were outside the scope of Social
Security developed their own retirement systems that took into
account the unique needs of their employees. These plans have
been extremely successful in meeting the retirement security
needs of their members. On the whole, these plans offer higher
benefits at lower cost than Social Security.
The ability to tailor retirement plans has been especially
important to the nation's fire fighters and emergency medical
personnel. Fire fighters retire at much earlier ages than the
general population--well before eligibility for Social Security
benefits. In many cases, fire fighters are legally required to
retire at a given age, and therefore do not even have the
option of working until age 62. In addition, fire fighters are
far more likely than the general population to leave work due
to a disability.
This ability to tailor the retirement benefits is the
primary reason that so many public safety agencies have opted
to remain outside the Social Security system. While only 30% of
all public employees are not covered by Social Security, fully
76% of fire fighters and police officers are not covered. It is
important to note that the creation of specially tailored
retirement plans did not come cheaply. In many cases fire
fighters gave up increased wages and other benefits in exchange
for better pensions, including disability benefits and survivor
benefits.
Problems with Mandatory Coverage
There are four distinct problems that the members of my
organization have with proposals to extend Social Security
coverage to all public sector employees. First and foremost, it
would wreak havoc with the specially tailored fire fighter
pension plans. Even if mandatory coverage is required only for
new hires, the pension systems that fire fighters helped
design, and in many cases gave up wage increases to get, could
not be sustained. The system would collapse, leaving the
retirement security for thousands of fire fighters in shambles.
Second, mandatory Social Security coverage would amount to
a 6.2% income tax on public sector employees. The vast majority
of these workers are middle-income Americans who are struggling
to make ends meet. This is precisely the wrong group that our
nation should be looking to to shoulder more of the current tax
burden. Consider a fire fighter who is supporting a family of
four on $32,500 a year. Mandatory Social Security coverage
would cost that family over $2,000 in increased taxes. Imposing
a significant new tax on middle-income wage earners is
counterintuitive and would be counterproductive.
Third, mandatory Social Security coverage would impose an
enormous financial burden on the public safety agencies that
employ our members. This increased cost will necessarily result
in either reduced services or increased local taxes, or both.
Many fire department budgets are already stretched to their
maximum, and it simply will not be possible to sustain further
budget cuts without jeopardizing public safety.
Finally, mandatory coverage of public employees will harm
the Social Security system. While mandatory coverage will bring
a short term infusion of cash into the system, Congress needs
to show the courage to resist the quick fix and look at the
protecting the system in the long run. The millions of workers
who are brought into the system under mandatory coverage will
one day begin receiving benefits. Since the amount of
contributions made by an individual does not equal the benefits
paid by the system, bringing a sizable new group of employees
into Social Security is a guaranteed money loser and a
significant threat to the long-range solvency of the system.
Arguments Made in Favor of Mandatory Coverage
Although the true reason for extending Social Security
coverage to all public employees is undoubtedly the short term
cash infusion into the system, advocates of the proposal argue
that the change is justified for two reasons--both of which are
highly suspect.
First, they argue that employees need Social Security.
Because not all employers can be counted on to provide a
pension, it is the responsibility of the federal government to
ensure that all workers have some minimal level of retirement
income. While valid on its face, this argument ignores a
significant change in the law made in 1990. In that year,
Congress voted to extend Social Security coverage to any public
employee who is not covered by a pension plan that is at least
comparable to Social Security.
Second, they argue that many public employees who are not
covered by Social Security nevertheless qualify for benefits
either because their spouse is covered or because they
contribute to Social Security in a second job. To the extent
that either of these situations is inequitable, Congress has
already addressed the problem with the Spousal Offset and the
Windfall Offset which reduce Social Security benefits paid to
any individual who is receiving a pension from employment that
is not covered by Social Security.
Conclusion
Mr. Chairman, just last week a member of our organization
testified before another subcommittee of this distinguished
body. That hearing was called to explore ways that the United
States government can adequately honor the nation's public
safety officers for their extraordinary valor. Members of the
Subcommittee appeared deeply moved as they listened to the
tales of heroism displayed by fire fighters and law enforcement
officers who selflessly risked their lives to save the lives of
others.
A mere seven days later my organization is appearing before
you to ask--to plead--that you not recklessly jeopardize the
retirement income of these same heroes. If Congress truly wants
to honor its nation's domestic defenders, let it begin by
preserving their economic security.
Thank you.
Hon. Barbara A. Mikulski, a U.S. Senator from the State of Maryland
Mr. Chairman, I want to thank you for having this hearing
and for permitting me to provide testimony on a very important
issue, the Government Pension Offset.
The Pension Offset is an issue that is very important to
me, very important to my constituents in Maryland and very
important to government workers and retirees across the nation.
First, I want to thank Representative Jefferson for his
leadership in the House of Representatives on Government
Pension Offset reform. He has introduced important legislation
which I hope this committee and the House will soon approve.
I have introduced a similar bill in the Senate, S. 1365 The
Government Pension Offset Reform Act, to modify this heartless
rule of government that prevents current workers from enjoying
the benefits of their hard work in their retirement. I want the
middle class of this Nation to know that if you worked hard to
become middle class you should stay middle class when you
retire.
As many in this room know, under current law, there is
something called the Government Pension Offset law. This is a
harsh and unfair policy. Let me tell you why. If you are a
retired government worker, and you qualify for a spousal Social
Security benefit based on your spouse's employment record, you
may not receive the full amount for which you qualify because
the Pension Offset law reduces or entirely eliminates a Social
Security spousal benefit when the surviving spouse is eligible
for a pension from a local, state or federal government job
that was not covered by Social Security. This policy only
applies to government workers not private sector workers.
Let me give you a hypothetical example of two women I call
Helen and her sister Phyllis. Helen is a retired Social
Security benefits counselor who lives in Woodlawn, Maryland.
Helen currently earns $600 a month from her federal government
pension. She's also entitled to a $645 a month spousal benefit
from Social Security based on her deceased husband's hard work
as an auto mechanic. That's a combined monthly benefit of
$1,245.
Phyllis is a retired bank employee also in Woodlawn,
Maryland. She currently earns a pension of $600 a month from
the bank. Like Helen, Phyllis is also entitled to a $645 a
month spousal benefit from Social Security based on her
husband's employment. He was an auto-mechanic too. In fact, he
worked at the same shop as Helen's husband.
So, Phyllis is entitled to a total of $1,245 a month, the
same as Helen. But, because of the Pension Offset law, Helen's
spousal benefit is reduced by \2/3\ of her government pension,
or $400. So instead of $1,245 per month, she will only receive
$845 per month. This reduction in benefits only happens to
Helen because she worked for the government. Phyllis will
receive her full benefits because her pension is a private
sector pension. I don't think that's right and that's why I
have introduced my legislation.
The crucial thing about Government Pension Offset Reform
Act that I have proposed is that it guarantees a minimum
benefit of $1,200. So, with this reform to the Pension Offset,
Helen is guaranteed at least $1,200 per month. Let me tell you
how it would work.
Helen's spousal benefit will be reduced only by \2/3\ of
the amount her combined monthly benefit exceeds $1,200. In her
case, the amount of the offset would be \2/3\ of $45, or $30.
That's a big difference from $400 and I think people like our
federal workers, teachers and our firefighters deserve that big
difference.
Why should earning a government pension penalize the
surviving spouse? If a deceased spouse had a job covered by
Social Security and paid into the Social Security system, that
spouse expected his earned Social Security benefits would be
there for the surviving spouse. Most working men believe this
and many working women are counting on their spousal benefits.
But because of this harsh and heartless policy, the spousal
benefits will not be there, your spouse will not benefit from
your hard work, and chances are, you won't find out about it
until your loved one is gone and you really need the money.
The Government Pension Reform Act guarantees that the
spouse will at least receive $1,200 in combined benefits. It
guarantees that Helen will receive the same amount as Phyllis.
I have introduced this legislation, because these survivors
deserve better than the reduced monthly benefits that the
Pension Offset currently allows.
They deserve to be rewarded for their hard work, not
penalized for it. Many workers affected by this Offset policy
are women or clerical workers and bus drivers who are currently
working and looking forward to a deserved retirement. These are
people who worked hard as federal employees, school teachers,
or firefighters.
Frankly, I would repeal this policy all together. But, I
realize that budget considerations make that unlikely. As a
compromise, I hope we can agree that retirees who work hard
should not have this offset applied until their combined
monthly benefit exceeds $1,200.
In the few cases where retirees might have their benefits
reduced by this policy change, my legislation contains a ``hold
harmless'' provision that will calculate their pension offset
by the current method. My legislation would also index the
minimum amount of $1,200 to inflation so retirees will see
their minimum benefits increase as the cost of living
increases.
Mr. Chairman, I believe that people who work hard and play
by the rules should not be penalized by arcane, legislative
technicalities. If the federal government is going to force
government workers and retirees in Maryland and across the
country to give up a portion of their spousal benefits, the
retirees should at least be allowed a livable level of
benefits.
Thank you again, Mr. Chairman, for having this hearing on
this important issue. I hope that as the debate on the future
of Social Security continues, this issue, and other issues that
penalize people for hard work will be addressed and will be
remedied.
Statement of Robert T. Scully, Executive Director, National Association
of Police Organizations, Inc.
I. Introduction: Background and Overview
I am Robert Scully, the Executive Director of the National
Association of Police Organizations, otherwise known as NAPO. I
am a retired police officer who served for 25 years with the
Detroit Police Department. I also served as a full-time elected
officer of the Detroit Police Officers Association and was a
collective bargaining team member from 1973-92. In addition, I
was NAPO's elected president from 1983 to 1993.
NAPO is a national non-profit organization representing
State and local law enforcement officers. NAPO is a coalition
of police associations and unions serving to advance the
interests of law enforcement officers through legislative and
legal advocacy and educational programs. NAPO represents more
than 4,000 law enforcement unions and organizations, with over
220,000 sworn law enforcement officers, 3,000 retired officers,
and more than 100,000 citizens dedicated to crime control and
law enforcement.\1\
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\1\ Many of our statewide `umbrella' groups are composed of
hundreds of State and local member organizations, whose members are
also NAPO members.
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Mandating Social Security taxes on the vast majority of
public safety officers, primarily law enforcement officers,
firefighters, and rescue squad workers,\2\ would have serious
implications and unintended consequences. It would have a
dramatic and negative impact on the recruitment and retention
of well-qualified public safety officers and their current
pension funds. Even mandating that only new hires be included
in the system would still have serious unintended and possibly
devastating consequences. Such a Federal mandate would strain
State and local government budgets and would probably reduce
current salaries, freeze future pay raises, and curtail or
eliminate other benefits, such as retiree health insurance,
retirement pensions, death benefits, and line-of-duty
disability pay for public safety officers.
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\2\ For purposes of this statement, I am using the definition ``law
enforcement officer'' contained in 42 U.S.C. Sec. 3796b(5). That
provision states: `` `Law enforcement officer' means an individual
involved in crime and juvenile delinquency control or reduction, or
enforcement of the laws, including, but not limited to, police,
corrections, probation, parole, and judicial officers.''
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II. Brief History of the Applicability of Social Security to State and
Local Public Employees
When established in 1935, the Social Security program
covered all private sector workers in commerce and industry and
excluded State and local government employees from Social
Security coverage. The legislative history of the Social
Security Act indicates that these employees were excluded
because most had their own retirement systems and because
Congress was concerned about the constitutionality of imposing
a Federal tax on State governments, an issue which has never
been litigated.
In 1950, Congress added Section 218 of the Act which
allowed for voluntary participation in the system by State and
local employees not covered by public retirement systems. Then,
in 1954 this provision was amended to permit voluntary
participation by those State and local employees who were
covered in a public retirement system, if a State or local
government agency entered into an agreement with the Federal
government.
In 1983, Congress once again amended the 1935 Act, making
several relevant changes. First, State and local government
agencies participating in the Social Security system (whose
employees were voluntarily covered) could no longer exit from
the system; for these employees, it was no longer voluntary.
Second, all private sector and government employees hired after
March 31, 1986, were covered by Medicare health insurance, with
matching contributions from employer and employees. Third, by
1991, all State and local government employees not covered by a
public retirement system were required to be in the Social
Security system, which is in effect today.
The Social Security Administration estimates that 4.9
million State and local government employees are not covered by
the system (although there may be more than that). Seven
states, California, Ohio, Texas, Massachusetts, Illinois,
Colorado, and Louisiana account for a large percentage of the
non-covered public employee payroll.
The 1980 ``Report of the Universal Social Security Coverage
Study Group,'' which lead to the 1983 amendments, stated:
Unfortunately, in contrast to the case with the Federal
workforce, the likely costs of requiring Social Security
coverage for all State and local government workers are
considerable. Because most existing State and local pension
plans lack many of the features of Social Security, the new
coordinated systems would cost many State and local governments
more than they are paying to operate their noncoordinated
plans. We should not forget that these increased costs usually
translate into superior retirement, disability, and survivors
protection for State and local government employees.
Nonetheless, in these times of fiscal constraint at all levels
of government, the Federal legislature should move cautiously
in imposing new costs on State and local governments. In
addition, many current State and local government plans are
pay-as-you-go; hence, imposing the Social Security payroll tax
. . ``crowds out'' revenue that governments were anticipating
for paying future benefits based on their existing pension
plans.\3\ [Emphasis added.]
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\3\ Joint Committee Print, Committee on Ways and Means and
Committee on Post Office and Civil Service, U.S. House of
Representatives, 9th Cong. 2d Session, March 27, 1980, WMCP: 96-54,
reprinting ``Report of the Universal Social Security Coverage Study
Group,'' transmitted by the U.S. Secretary of Health, Education, and
Welfare on March 24, 1980, pp. xiii-xiv.
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III. Special Pension Needs of State and Local Public Safety Employees
and the Unintended Consequences of Imposing Social Security Taxes on
Them
Best estimates by the Public Pension Coordinating Council
for 1996 (the most recently available data) indicate that 76
percent of State and local public safety personnel do not pay
Social Security taxes and are not covered by the system.\4\
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\4\ This data is from the 1997 Survey of State and Local Government
Employee Retirement Systems, Government Finance Officers Association,
Chicago, Illinois. This survey is done for members of the Council,
which is composed of the National Association of State Retirement
Administrators, National Conference on Public Employee Retirement
Systems, National Council on Teacher Retirement, as well as the
Government Finance Officers Association.
A. Special needs of public safety officers and inadequacy of
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Social Security:
Let me describe the dilemma faced by public safety officers
when Social Security's very limited disability, death, and
early retirement benefits are factored in, compared with
current pension systems. Simply stated, the Social Security
system was not designed for police officers and firefighters.
First, being an active police officer is a younger person's
job. This is due to the special dangers and physical stresses
of police work, often resulting in a disability or forcing
police officers into an earlier retirement, as these stresses
mount. During the last century and especially the last 50
years, State and local governments have developed pension
systems which acknowledge that police and firefighter jobs are
very different than normal careers, with a set of dangers and
stresses not faced by most other professionals. These systems
take into account that law enforcement officers and
firefighters usually must undergo a career change in middle
age, usually in their late 40s to mid 50s. In many police
departments, a large percentage of police officers will be
sufficiently disabled at all ages for varying lengths of time
and thus be unable to perform their duties as officers.
Therefore, most governments have recognized that public safety
officers need certain protections and benefits in recognition
of the nature of their jobs. I will describe a typical system,
the City of Detroit Policemen and Firemen Retirement System,
shortly.
Social Security provides no comparable disability benefits
for police officers and firefighters. Social Security requires
that an employee be unable to perform any substantial and
gainful employment. This means that an individual unable to
perform regular and continuous duties as a public safety
officer, who would now receive some disability benefit to
supplement a subsequent career at usually a lower salary, would
receive nothing under Social Security.
In addition, there are other officers who will not be able
to continue to keep performing the duties after reaching middle
age, because of the physical and psychological stresses and
demands of police work. And therefore they must retire from
police work and begin another career. Unfortunately, for these
public safety employees, no Social Security benefits will be
available, as they start a new career at much less pay.
Social Security death benefits are much lower than current
retirement death benefits which often pay anywhere from 50
percent to 75 percent of an officer's salary.
B. Unintended likely consequences of mandatory Social Security
taxes and coverage:
I would like to discuss the impact of imposing Social
Security taxes on these essential workers. Mandating that
government agencies and public safety officers each pay 6.2
percent of pay would have a negative repercussion on the
retention and recruitment of the highly trained and competent
law enforcement officers and firefighters--the most qualified
job candidates possible.
Let me explain what is likely to happen to the majority of
police and pension systems and to government expenditures if
Social Security taxes and coverage are universally mandated.
There seems to be a presumption that governmental bodies
can reduce benefits received from current pension plans by the
same amount that would be received as benefits by public safety
officers under Social Security. First, let us put aside the
great disparity between what one receives from a pension plan
as compared with Social Security.
As a general proposition, participants in State and local
government pension systems have a right to receive retirement
benefits at a defined point in the future. These rights are
vested by explicit constitutional provisions, statutory
provisions, common law contractual rights, or a combination of
the above, in all 50 states.\5\ In many States, public safety
officer retirement benefit levels cannot be reduced without the
agreement of both the employer and the employee through
collective bargaining or a vote of the citizenry. Therefore, a
vested public pension in the majority of states is a
contractual or statutory right that can be modified only with
some difficulty.
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\5\ A survey of the 50 States, conducted by the National Council on
Teacher Retirement, disclosed that 6 States have explicit
constitutional provisions guaranteeing pension rights, 15 States have
express guarantees in their statutes, 18 States have common law
contractual rights, and 11 States approach the issue in other ways
(often through a combination of contractual rights and statutory or
constitutional provisions). Moore, Cynthia L., Public Pension Plans:
The State Regulatory Framework, 3rd ed., National Council on Teacher
Retirement (to be published in 1998).
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There would be tremendous pressure by government agencies
to change these pension systems, pitting public safety officers
against elected officials--something none of us wants. But let
us assume that most of these current pension systems, which
cannot be easily changed, are maintained. A Social Security tax
on employees and their government employers would negatively
impact public safety operations and could result in layoffs,
reduced pay or other benefits, or no cost-of living increases,
and could reduce purchases of necessary equipment and
technology, or a combination of these consequences. At the
outset, this new unfunded Federal mandate would probably
inflict on State and local governments reduced staffing or,
worse yet, layoffs, or would cause a several percentage point
reduction in pay for public safety employees, all based on a
6.2 percent increase in employee personnel costs for local
governments.
Let us focus on a somewhat different scenario. There are
states, fewer in number, where State governments can change
their public pension systems without collective bargaining or
votes of the citizens. Facing public pressure against tax
increases, the legislatures in these states would likely change
the current systems to make them much less beneficial to public
safety workers. State and local government pension
contributions to these systems are likely to be reduced,
probably dollar-for-dollar for allocation to Social Security
taxes.
Those current police and fire pension systems so affected
would be severely curtailed. Public safety officers in these
plans would therefore have much less protection than they do
now, causing police and firefighting work to become much less
desirable.
For all of these scenarios, both Congress and the
Administration need to ask the following questions: Would we
retain the best public safety officers we now have if their
take-home pay is automatically cut by 6.2 percent, which is the
additional amount that they would have to pay out? Or if Social
Security taxes are applied only to new hires, would we recruit
the best public safety officers if their take-home pay is
automatically reduced by 6.2 percent in taxes? Would we retain
or recruit the best officers if current pension systems are
severely curtailed--reducing substantially or eliminating
excellent early retirement, line-of duty-disability, and early
death benefits--so that the total percentage of both employing
agency and employee contributions remain about the same, once
Social Security taxes are factored in? Would we get the best
officers if the employing agency also reduces future pay raises
or freezes cost-of-living or other increases, in order to pay
its portion of Social Security? I am afraid that the answer to
all of these questions would be `No!,' given the tight labor
markets and a variety of career choices.
In addition, imposing this tax would negatively affect
government expenditures on the best technology and equipment
available for law enforcement to fight crime.
In short, mandatory Social Security taxes on law
enforcement would hurt efforts to recruit the best qualified
and competent law enforcement personnel. It would result in a
pool of less qualified candidates for law enforcement
positions, with negative implications for public safety.
C. Additional implications if Social Security taxes and
coverage are imposed on only new hires:
Even expanding the Social Security system to just new hires
would cause serious morale problems. It would create a
different class of public safety officers and could very well
endanger the trust essential among police officers and
firefighters depending upon each other in life-threatening
situations. If Social Security taxes are imposed on just new
hires, it is likely that State and local governments would
respond to this added tax burden over time in the same ways and
with the same negative consequences for public safety officers
and the public safety.
Over time, mandatory coverage on new hires would destroy
the early retirement and disability benefits for public safety
officers. One might as well abandon many of these individuals
and their families if Congress mandates Social Security
coverage and thereby causes the States to replace the current
pension systems. On the other hand, trying to blend the special
needs of actuarially funded pension systems with the structure
of Social Security will create substantial complications and
costs for benefit design and administration, as well as
collective bargaining.\6\
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\6\ In many States, any government effort to modify current pension
systems, either to reduce the contributions or benefits, cannot be
unilaterally undertaken without input from workers, but must be the
subject of collective bargaining.
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There are other financial implications, as well, if Social
Security is applied to new hires. If State and local
governments reduce their contributions dollar-for-dollar in new
Social Security taxes, current pension systems for
grandfathered employees will eventually be severely impacted,
as current employees retire with no contributions coming in
from government agencies and new workers enter the police and
firefighting forces of this country. In effect, Social Security
would eventually and inevitably destroy these fire and police
pension fund systems. I will describe these potential
consequences shortly while discussing the impact on the Detroit
police and firefighter pension system.
D. State tax implications of mandatory coverage:
For these public safety officer pension systems, there are
tax implications which have not been considered. Current
retirees receive a benefit which is fully taxed, bringing in
revenue to governments at all levels, unlike Social Security
payments which are untaxed below a certain income level. Also,
closely related, the after-tax income of current public safety
officers will be reduced by any shift from pre-tax pension
contributions to after-tax Social Security contributions.
E. Examples of several systems' benefits and probable impact of
mandatory coverage:
To illustrate all of these concerns, I have set forth
several examples of the retirement benefits and line-of-duty
death and disability benefits available to police officers or
their families which Social Security cannot even come close to
matching. (My staff surveyed several police and firefighter
pension funds in Michigan, Ohio, Florida, and California, and
the comments by their officials have been integrated into this
statement.)
Example One: City of Detroit Policemen and Firemen
Retirement System.--This Detroit retirement system has
approximately 5,400 active employee members and 7,800 retirees
and beneficiaries and over $3 billion in investments from which
to pay benefits. Line-of-duty disability benefits can amount to
66.6 percent of final salary for full disabilities. And
employees can retire after 25 years of service, with a
retirement set at 62.5 percent of salary, increasing by 2.1
percent for each year after 25 years until 35 years is reached.
A line-of-duty death before retirement results in 45.5 percent
of the average patrolmen's salary.
Public safety employees are required to contribute 5
percent of salary until eligible for retirement, and in the
1995-96 fiscal year, the City of Detroit had a computed
employer contribution of 25.9 percent.
In addition, with an annual average salary of $40,000 for
police officers and firefighters and a total annual payroll
(before overtime) of approximately $220 million, the City of
Detroit and public safety officers would have to pay a combined
total of at least $27.2 million in Social Security taxes, if it
were made mandatory.
Even if Social Security applies only to new hires, it would
be very difficult for the City of Detroit to maintain this
system of benefits and salaries for its current public safety
employees, as it is required to do under Michigan's
constitution (one of 6 state constitutions guaranteeing pension
rights). One of two events would likely occur:
First, as other cities have done, Detroit might be tempted
to create a second tier system for the new hires, to reduce its
contribution by at least the same amount that it would pay into
Social Security, 6.2 percent, (if not more). (Presumably this
would be done through collective bargaining.) As the number of
new hires increases and there are fewer pre-Social Security
coverage employees to fund the current system, the system could
very well develop unfunded liabilities for those employees
already vested in the current system, eventually reducing the
amount of funds which can be paid out. There is no way that
reducing the City's and employees' contributions to the current
system--dollar-for-dollar of Social Security taxes paid--would
come close to matching these benefits. Nationally, covering
only new hires will eventually hurt hundreds of thousands of
current public safety employees, reducing their death,
disability, and early retirement benefits, making public safety
careers much riskier and less desirable financially.
Or, alternatively, the City may retain the current system
for new hires. In that case, as in most large American cities,
Detroit will likely pay the 6.2 percent increase for new hires
(with the numbers of covered employees increasing every year)
by taking it from somewhere else, whether from beginning
salaries, new equipment, salary increases for all employees, or
retirement health benefits--a particularly vulnerable target,
or a combination of these. The most immediate consequences of a
6.2 percent tax would likely be a significant decrease in a
new-hire's salary and reductions in health insurance for
retirees or other benefits. Do not have any doubts; this is
what would happen!
An official for the Detroit fire and police pension system
told us during an informal NAPO survey, ``We have 50 years or
more of success and a history of serving our police officers
and firemen. Why would the Federal government want to disrupt
this healthy and fine-tuned system?'' That sentiment was
mirrored by others.
Example Two: Ohio Police and Fire Disability and Pension
Fund.--The Ohio Police and Fire Disability and Pension Fund
serves 25,000 members and 15,000 retirees or surviving
beneficiaries.
Approximately 25 percent of all police and fire retirements
are due to full or partial disability occurring in the line-of-
duty, which is not an unusual number. Full disability results
in payments to the officer at 75 percent of active duty salary
in this statewide system, and partial disabilities (79 percent
of police and fire disability retirements overall) results in
disability awards ranging from 5 percent to 60 percent of
salary. As compared with this system, Social Security would
provide no benefits to these individuals, unless they were
totally unemployable in any line of work. And, even if they
were so unemployable, the benefit would be a fraction of what
these officers currently receive in disability pay. In
addition, line-of-duty death benefits replace all of an
officer's income and are available for the public safety
officer's survivors; the Social Security benefit is
significantly lower.
Employees contribute 10 percent of their pay, and State
agencies pay 19.5 percent of pay for police officers and 24
percent of pay for firemen. To retain the same benefits and to
impose Social Security would result in employees paying 16.2
percent of pay and municipalities paying 25.7 percent for
police and 30.2 percent for firefighters, a heavy burden.
Also, if Social Security taxes were imposed on all active
police and fire personnel, then Ohio municipalities would have
to pay an additional $68.2 million (based on a payroll in FY
1996 of $1.1 billion) for public safety officers alone.
As the head of this Ohio pension fund has said, ``Our
workers will be giving up the certainty of an actuarially
funded pension for the uncertainty of a pay-as-you go plan with
an unreachable age for retirement and a very-hard-to-reach
requirement for eligibility for disability benefits.''
Example Three: City of Tampa Pension Fund for Firefighters
and Police Officers.--The Tampa City Pension Fund for
Firefighters and Police Officers has 1,411 active contributing
public safety officers and 1,205 retired members and
beneficiaries, as of October 1997. Officers can receive up to
65 percent of salary for line-of-duty disabilities, regardless
of age. They can retire after 20 years at age 46 with a pension
at 50 percent of salary (increasing for later retirement). For
a death benefit, a surviving spouse receives 65 percent of the
member's earned benefit, plus cost-of-living increases.
The City contributes 7.7 percent of salary, and employees
contribute 5.75 percent of salary into this retirement system.
The system is very healthy financially, and its investments,
mostly in equities, have returned an average annualized return
to 15 percent, making these benefits possible.
A pension fund official told us that if Social Security
taxes were imposed on new police officers and firefighters in
this system, it would be necessary to continue the current
system to maintain the same level of benefits, to fill in the
gaps prior to age 62 or 65. If coverage were made mandatory for
all public safety officers, based on 1996 payroll figures of
$66.5 million, the city would pay $4.1 million, and employees
would pay the same amount, resulting in a significant reduction
in pay. Yet, even if coverage applied to just new hires, the
likely consequence of superimposing a 6.2 percent tax on
employee and employer would be to reduce the number of
firefighters and police officers serving Tampa's citizens or
significantly reduced benefits for these employees, or a
combination of both.
By contrast, there is the statewide Florida Retirement
Systems, which includes a system for `special risk' members,
including all Florida county firefighters and deputy sheriffs.
Members of this system are also covered by Social Security.
Employing agency contributions equal a whopping 32.6 percent--
26.4 percent for the pension system and 6.2 percent for Social
Security. Interestingly, the benefits are not nearly as
beneficial as Tampa's system. To recover disability, public
safety officers must be unable to hold any substantial gainful
employment and officers cannot retire under age 55. Therefore,
even with a greater outlay of funds, the Florida State system
cannot provide nearly the same security and benefits essential
to attract and keep police officers, as does the Tampa system.
Example Four: City of Los Angeles, The Safety Members'
Pension Plan.--In the City of Los Angeles, there are over
12,000 active public safety officers contributing to the Safety
Member's Pension Plan or an earlier pension plan for those
hired prior to 1980 (the vast majority of firefighters and
police officers are in the Safety Members Pension Plan). In
addition, there are 11,049 individuals receiving a service,
disability, or survivor pension.
Public safety officers hired between 1980 and June 30,
1997, belong to Plan I. Those hired since June 30th are members
of Plan II. Plan I members can retire at age 50, with a minimum
of 10 years of service. Plan II members can retire at any age
with at least 20 years of service. In all other aspects, the
plans are the same. The amount of the pension will vary from 20
percent of final average salary after 10 years, to 55 percent
of salary after 25 years, to 70 percent of salary after 30
years. Service-connected disabled members receive 30 to 90
percent of average salary, depending on the degree of
disability. A service-connected death qualifies a survivor for
a benefit at 75% of the member's final average salary.
The active members contribute 8 percent of their salary,
and the City contributes approximately 15 percent of salary
(which varies from year to year), for an approximate total of
23 percent. At the end of FY 1996, the Pension Plan's
investments were valued at $6 billion, and the rate of return
for that year was 14.6% percent.\7\
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\7\ Section 535 of the City's Charter provides that, should Social
Security be mandatory, the City will integrate the Social Security
benefits with the Safety Members Pension Plan, so that benefits are
``at least equal to the benefit offered by the Safety Members Pension
Plan prior to such integration.'' (p.678, Charter of the City of Los
Angeles, Rev. 12-13-90)
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IV. Conclusion: Impact of Mandatory Social Security on Public Safety
Officers
In conclusion, keep in mind these essential points: Social
Security does not address the special needs of police officers
and firefighters. First, they and their families need the
security of service-connected disability and death benefits.
Social Security benefits do not provide anywhere near the same
level of benefits, and, in fact, provide no disability benefits
unless one is totally unable to perform any work, not just
public safety work.
Second, Social Security is not appropriate for public
safety officers who normally retire prior to or around 55 years
of age, as usually they must, due to the stresses and dangers
faced every day. Social Security will pay these individuals
nothing, until they reach 65 (unless they take a reduced
benefit at age 62).
Even mandating Social Security taxes on just new police
officers and firefighters will seriously disrupt compensation
and benefits for all of them. From our perspective, it makes no
sense whatsoever to harm a system of pension funds that is
working well and paying needed benefits to those who protect
the public safety through public service. Forcing State and
local governments and employees to pay a combined 12.4 percent
tax will have major consequences.
Scaling back and reducing the benefits in the current
plans, even if done only for new hires, would reduce and could
potentially eliminate these crucial benefits paid to these
officers in recognition that they repeatedly put their lives on
the line and are often disabled at some point in their careers.
This would be the consequence of reducing employer and employee
contributions to current pension plans in order to pay Social
Security taxes.
For those remaining State and local governments which will
both pay the 6.2 percent tax and retain their current pension
systems for everyone, there will still be serious consequences
to both pay and working conditions. This is because the money
to pay the tax has to come from somewhere, and raising taxes or
pay to make up the difference is not politically feasible. As a
result, first, officers will automatically suffer a minimum de
facto pay decrease through the newly imposed 6.2 percent tax,
in order for them to keep their current pension benefits.
Second, either local governments will reduce the number of
public safety officers to retain current pay levels and
benefits, or they will reduce the pay of law enforcement
officers or freeze future cost-of-living increases. Also, to
minimize the impact on pay, it is probable that government
bodies will not provide public safety officers with the
essential equipment (such as bulletproof vests) and technology
needed to effectively perform their work.
Under a mandatory Social Security system, police officers
and firefighters will pay more taxes for inadequate benefits.
Their ability, through collective bargaining and the political
process, to obtain what they need to compensate them for their
service to us, the public, will be severely weakened. Even if
limited to new hires, the consequences of mandatory Social
Security taxes--lowering benefits or salaries and freezing
cost-of-living increases--will make police and fire safety work
less financially desirable. If we tamper with the current
system, we will most assuredly lose some of our better
candidates and current officers to other professions, in view
of the fierce competition among police departments and the
private sector.
Mandatory Social Security taxes and coverage will hurt, not
help, 75 percent of the public safety officers not included, in
addition to millions of other public employees. It will hurt us
all.
V. Need for Proposed Legislation to WEP AND GPO
I would also like to briefly touch on two Social Security
provisions that the Subcommittee on Social Security will be
addressing in this hearing. These two provisions, the
Government Pension Offset (GPO) and Windfall Elimination
Provision (WEP), affect the way benefits are calculated for
retirees of Federal, State and local governments, who do not
pay into Social Security. The GPO was instituted in 1977 and
later amended in 1983, to set a two-thirds offset for Social
Security benefits of spouses or surviving spouses earning
government pensions. The WEP was adopted as part of the Social
Security Amendments of 1983, which affect an individual's
Social Security if that person becomes eligible for a Federal,
State or local government pension after 1985, based on work not
covered by Social Security.
In present form, the GPO and WEP unfairly over-penalize
employees who participate in government pension plans in lieu
of Social Security. NAPO believes that there must be some
equity when lawmakers distinguish between pensions earned in
the private sector and those in the public sector. Currently,
there is legislation pending in the 105th Congress correcting
these inequities, which we strongly support.
As part of the CARE coalition (Coalition to Assure
Retirement Equity), NAPO has been actively lobbying to ensure
that the concerns of public employees are met. This legislation
would not repeal the GPO or WEP but would appropriately amend
the provisions. I recognize the fiscal and budget
considerations which would arise from such a repeal. However, I
also recognize that law enforcement and other government
employees who do not pay into Social Security should not be
used as tools to facilitate the solvency of the Social Security
program. The modified legislative proposals addressing these
issues are, as follows.
On July 25, 1997, Congressman William Jefferson (D-LA)
introduced H.R. 2273 to amend the Government Pension Offset.
Congressman Jefferson's bill would remove the offset for anyone
whose combined monthly benefit from a government pension and a
spouse's Social Security benefit is $1,200 or less. On November
4, 1997, Senator Barbara Mikulski introduced S.1365, a
companion bill, with some modifications. Her bill would provide
for an index adjustment for the $1,200 threshold, due to the
cost of living. Also, Senator Mikulski's bill would initiate
the two-thirds offset for anything over $1,200, compared to a
dollar-for-dollar offset in Congressman Jefferson's bill.
On September 25, 1997, Congressman Barney Frank (D-MA)
introduced H.R. 2549 to amend the Windfall Elimination
Provision. This bill would amend Title II of the Social
Security Act. Under this bill, individuals whose combined
monthly government pension and Social Security benefits are
$2,000 or less would be exempt from the WEP. The WEP would then
be phased in for amounts between $2,000 and $3,000, and, if
over $3,000, the full WEP would apply.
It is estimated that 500,000 government retirees have
already been affected by the GPO (210,000) and WEP (290,000).
These provisions will financially impact many more low- to
middle-income government employees in the future. As stated
before, many law enforcement employees retire early due to the
nature of their jobs. Subsequently, many will enter the private
sector and earn enough credits to qualify for Social Security.
These individuals will become greatly impacted by the WEP
formula because of their short, or fairly evenly split careers,
compared to workers with long-covered Social Security jobs.
The GPO has a profound effect on the economic security of a
widow (or widower), who receives a government pension and
relies on the full payment of their widow's benefit of Social
Security. The law unfairly offsets a recipient whose pension
was not covered by Social Security and exempts individuals who
earned their pension in the private sector. Furthermore, public
pensions are taxed, while Social Security is not if income
falls below a certain amount, which adds to the host of
inequities facing many public sector workers. It should be
noted again that an estimated 75 percent of law enforcement
employees do not pay into Social Security.
Thank you for the opportunity to submit a statement for the
record.
Statement of National Committee to Preserve Social Security and
Medicare
Chairman Bunning, Members of the Subcommittee on Social
Security, we appreciate your holding this hearing to review
anti-windfall provisions of Social Security law. We welcome
this opportunity to submit testimony regarding proposed reforms
to Social Security to lessen any inappropriate adverse impact
on Government employees who are covered under retirement
systems which are outside of the Social Security system. On
behalf of the 5.5 million Members and supporters of the
National Committee to Preserve Social Security and Medicare we
appreciate the importance of this series of hearings, and its
contribution to the unfolding national dialogue.
We especially appreciate your willingness to include
testimony in this particular hearing about how the Government
Pension Offset (GPO) and Windfall Elimination Provisions (WEP)
of Social Security can unfairly impact low earners. Our
testimony will focus on these issues, as well as issues related
to disability coverage of Government annuitants. We will also
comment on proposals to bring currently non-covered government
employees into the Social Security System.
Mr. Chairman, as you know, federal, state, and local
workers receiving retirement or disability benefits for
government employment which was not covered by Social Security,
also may be eligible for Social Security based on their own or
a spouse's employment. In recent years, Congress has reduced
Social Security benefits to such individuals, arguing that
government annuitants frequently received higher Social
Security benefits in relation to contributions than individuals
who worked solely under Social Security. Some of these
reductions are excessive and inequitable.
For example, 64 year old Mrs. Ruth Shoup of Florida, is a
victim of a double offset. She is affected by both the GPO and
WEP. Her late husband, a retired policeman, paid into Social
Security all of his life. Mrs. Shoup also worked all of her
life, for about 20 years in the private sector and about 21
years with the Postal Service. After her husband's death, Mrs.
Shoup was forced into early retirement due to rheumatoid
arthritis. When she applied for Social Security widow benefits
she was told that the offset essentially eliminated any
benefits to which she might be otherwise entitled. Despite her
husband's life-long contributions to Social Security and her
own for about 20 years, she has been told that when she turns
65 she'll probably only see an extra $50 per month from Social
Security. She lives on $950 per month after taxes and her
health insurance premium. When Mrs. Shoup becomes eligible for
Medicare her $50 per month health coverage, including her
coverage for prescription drugs, will terminate. After two
operations on her hands, Mrs. Shoup's medical bills are
mounting. Ironically, because of the offset and windfall
elimination, Mrs. Shoup may be eligible for Medicare premium
assistance when she turns 65.
Mr. Cornelius Faass, also of Florida, is 67 years old. He
worked until almost 3 years ago, mostly part time since he
started his Social Security at age 62. In December of 1995, Mr.
Faass began receiving a pension from Holland where he worked as
a Merchant Marine before acquiring U.S. citizenship in 1962.
The Dutch pension is about $175 to $200 per month depending
upon the current exchange rate. Since January, because of the
GPO, SSA has been taking $123 per month from his Social
Security due to the pension. Mr. Faass was receiving Medicaid
food stamp assistance of $90 per month until the pension came.
Then his food stamps were dropped to $77 per month and
eventually revoked entirely last July. In November, his food
stamp assistance was reinstated to $32 per month.
Government Pension Offset
Under the Government Pension Offset, a government annuitant
may receive only that portion of a Social Security spouse or
widow benefit which exceeds two-thirds of the government
pension. No one but a government annuitant suffers a loss of
Social Security due to receipt of a pension. Spouse and
survivor benefits are not denied to persons receiving other,
comparable non-Social Security annuities.
Frequently, the offset totally eliminates a Social Security
benefit a spouse or widow relied upon receiving. The National
Committee, a long standing member of the Coalition to Assure
Retirement Equity (CARE), supports modification of the offset
to lessen its severity. We commend your colleagues Congressman
William Jefferson and Senator Barbara Mikulski for introducing
legislation, H.R. 2273 and S.1365, to alleviate the problem.
This legislation would protect many low-income women, in
particular from excessive reductions. We urge you to enact such
legislation this year and to include the Mikulski language
which ensures that the proposed $1,200 threshold for the offset
will be regularly adjusted for inflation, and that also ensure
no one receives an inadvertent reduction in benefits as a
result of any change enacted.
Windfall Elimination
Under Windfall Elimination, Social Security Benefits are
reduced for a worker who personally earns both a government
pension and a Social Security benefit from separate employment
unless the worker has 30 or more years of Social Security
employment. The maximum reduction applies to a worker with 20
or fewer years of Social Security employment and can be as much
as half the government pension. Hardest hit by this provision
are workers with careers roughly evenly divided between covered
and non-covered employment. Phasing the reduction over more
years, for example by using a 2.5 percent reduction in the
first bend point for each year less than 30, would provide a
more equitable benefit to workers with significant years of
Social Security employment.
Because government pension plans provide proportionately
smaller pensions to short service workers, a worker with a
divided career has the worst of both worlds. The government
pension is proportionately less than it would be for a full
government career and Social Security can be reduced by as much
as 55.5 percent.
The 90 percent replacement rate in the first bend point of
the Social Security benefit determination method was
deliberately designed to weigh benefits so as to give added
protection to low and average earners. The Windfall Elimination
Provision, by its across-the-board reduction to 40 percent of
the first bend point, regardless of the wage earner's level of
earnings, frustrates that purpose. The low earner is deprived
of the protection intended by the law in order to make certain
no high earner is overcompensated. This unintended penalty on
low earners and those with lifetime modest wages could be
minimized by limiting the Social Security windfall reduction to
a smaller proportion of the pension received from non-Social
Security covered employment as has been suggested by former
Social Security Actuary Robert J. Myers.
Disability Benefit Gap
A requirement for Social Security Disability insurance
benefits is earnings in at least five of the ten years before
becoming disabled. The purpose of this ``recency of work'' test
is to limit benefits to persons who are out of the work force
because of disability. However, only Social Security earnings
count. Government employment is treated as if the individual
was unemployed. Workers who move between Social Security
covered employment and non-Social Security covered employment
thus can be deprived of disability benefit protection without
ever having missed a day of work. The recency of work test
should recognize all employment. Windfall elimination and the
Social Security disability benefit formula are adequate
safeguards against excessive benefits.
Disability Benefit Cap
A separate provision of law effectively denies Social
Security disability benefits to anyone working two jobs, one in
Social Security covered employment and the second in non-Social
Security employment. Combined disability benefits are capped at
80 percent of pre-disability Social Security earnings alone.
Government earnings are ignored in setting the 80 percent cap,
but government benefits count against the cap. Total earnings
should be the basis for the 80 percent cap.
There is historic precedent for recognizing and protecting
the worker's total earnings from loss of earnings due to
disability. When an 80 percent disability benefit cap was
initially placed on Social Security earnings in the early
1970s, only earnings on which Social Security FICA taxes had
been paid were considered. Workers with earnings over the
taxable wage base had no protection for their higher income
above the wage base. Within four years, Congress recognized
this inequity and revised the law. The disability benefit cap
was re-established as 80 percent of earnings in covered
employment, thereby protecting the worker's entire income.
Individuals working two jobs deserve this same recognition of
total earnings in capping combined disability benefits.
Moving Non-covered Workers into Social Security
All of the problems and inequities discussed in this
testimony would become a thing of the past if Social Security
were universal as has been consistently advocated by the
National Committee. Until that goal is achieved, we are
appreciative of the efforts of this Committee to ensure that
Social Security reductions imposed on persons with non-covered
pensions do not go beyond Congress' intent to eliminate only
inappropriate excess benefits.
National Conference on Public
Employee Retirement Systems (NCPERS)
May 26, 1998
The Honorable Jim Bunning, Chairman
Subcommittee on Social Security
Committee on Ways and Means
U.S. House of Representatives
Dear Chairman Bunning:
I am writing to you on behalf of The National Conference on Public
Employee Retirement Systems (NCPERS) to urge you not to support
legislation that would reform Social Security by mandating coverage for
public employees. Currently there are several bills that have been
introduced in the House that are designed to keep Social Security
solvent. All of these bills have one thing in common, mandatory
coverage of public employees by the Social Security System. We strongly
oppose such a provision because it would have a profoundly negative
affect on our members and their beneficiaries.
NCPERS is a powerful pension advocacy partnership with 450 fund
members from all 50 states, representing more than $750 billion in
assets and more than 5 million public employees and retirees.
While 80 percent of our members are already covered by the Social
Security program, we are still opposed to mandatory coverage because we
believe that it is unfair to those funds who are not currently in the
system. Many of our members were not allowed to participate in the
program when Social Security was first introduced. They were then
forced to start their own retirement plans. Additionally, many of our
members have retirement funds that pre-date the creation of Social
Security. Forcing them to join the Social Security program at this
point would be very costly both for public employees and state and
local governments for the following reasons:
It would be costly to retirement programs. Making Social
Security mandatory would have little impact on the projected funding
shortfalls of Social Security, however, such a move would greatly
affect public employees. Public employees currently not covered would
be required to pay an additional 6.2% in payroll taxes.
It would be costly to states and localities. As employers,
states and localities would also be required to pay an additional 6.2%
in payroll taxes. This would cost California over $2.3 billion
annually, Ohio $1 billion annually, and hundreds of millions to Texas,
Illinois, Colorado, Massachusetts and Louisiana.
It would be disruptive to existing retirement programs.
Many public employers would be unable to absorb the higher costs. They
would be required, in addition to the Social Security payroll tax, to
continue the funding of their respective retirement plans. Many of
these plans are established constitutionally and to make such a change
would require legislative action and/or a constitutional amendment.
It would require the creation of a second tier. A second
tier of retirement benefits would have to be created for prospective
employees required to be covered by Social Security.
NCPERS acknowledges the arguments of proponents of mandatory Social
Security coverage, that everyone should be covered by Social Security
to reduce public assistance costs. However, these proponents fail to
note the existence of properly funded state and local government
retirement plans also reduce the cost of public relief. They also argue
that public employees who are not covered by Social Security often get
benefits from a spouse or through other employment covered by Social
Security. This issue was already addressed by Congress in the 1983
``anti-windfall'' legislation that was passed to reduce the Social
Security benefit of such employees.
Although we are aware that specific action on this issue will not
take place for the remainder of this session, a number of hearings are
already scheduled, as well as the SAVER Summit and other forums for you
and Congress to begin the process of debate. We feel it is important
for us to communicate with you our position for what is anticipated to
be a legislatively charged issue in the next Congress.
I urge you to oppose any provision to extend mandatory Social
Security coverage of public employees. Such a law would be detrimental
to the millions of uncovered public employees and their employers.
Sincerely,
Jay W. Bixby
President
National Conference of State Legislatures
Washington, DC 20001
May 20, 1998
The Honorable Jim Bunning, Chairman
Subcommittee on Social Security
Committee on Ways and Means
U.S. House of Representatives
Dear Chairman Bunning:
On behalf of the National Conference of State Legislatures I urge
you to oppose efforts to extend Mandatory Social Security Coverage to
all newly hired State and local employees.
The subcommittee's hearing on May 21, 1998, ``The Future of Social
Security for this Generation and the Next,'' is expected to highlight
the devastating effects such a change would have on state finances.
While the number of covered State and local workers has remained
consistent at 70%, future efforts by the federal government to expand
mandatory coverage would have severe consequences for states with large
numbers of uncovered employees and would constitute a tremendous cost
shift to states. NCSL firmly opposes all efforts by the federal
government to extend mandatory coverage to additional categories of
state and local employees.
In 1991, NCSL opposed final OBRA 1990 regulations and revenue
procedures mandating full Social Security coverage, including Medicare,
for public sector employees who are not members of a retirement system.
The final rule required public employee retirement systems to meet
minimum contribution and benefit level standards, and also required
that part-time, seasonal and temporary (PST) employees be immediately
and fully vested (100 percent) in any employer-sponsored retirement
arrangement in order to satisfy the rules. The mandate
disproportionately affected approximately 3.8 million State and local
employees who were part-time, seasonal and temporary employees--the
very employees least able to pay the tax increase on their income
resulting from mandatory coverage.
NCSL maintains that the U.S. Department of Treasury and the IRS
went well beyond the intent of OBRA 1990 in their interpretation of the
law. At the time of the final rule, NCSL feared that the action would
make it easier for the federal government to become further involved in
the administration of state and local public plans and to expand
mandatory Social Security coverage to all state and local public
employees. Presently, it appears that the Congress intends to consider
these proposals as possible revenue generators.
State and local retirement plans do an excellent job of providing
for the retirement of public employees. Rather than extending the
unfunded mandate, NCSL urges the Congress and the administration to
grandfather preexisting state and local retirement plans. In other
words, public plans in existence prior to the adoption of OBRA 1990
(November 5, 1990) would be deemed in compliance with the law and
benefits received from a state or local retirement system would qualify
as being equivalent to a benefit received under Social Security.
NCSL opposes any additional involvement of the federal government
in public pension plans and the expansion of mandatory Social Security
coverage for public employees of state and local governments who are
not already covered. NCSL believes that state and local governments
should be allowed to affiliate their plans with Social Security on a
voluntary basis.
We look forward to working with you further on this issue. If our
staff can be of any assistance to you, please do not hesitate to
contact Chris Zimmerman, our Federal Budget and Tax Committee Director
at (202) 624-8668 or Gerri Madrid, our Fiscal Policy Associate at (202)
624-8670.
Sincerely,
Tom Johnson, Chair
Federal Budget and Taxation Committee
Ohio House of Representatives
Statement of Russell Graves, President 1997-98, National Conference of
State Social Security Administrators
The National Conference of State Social Security
Administrators (NCSSSA) represents more than 70,000 state and
local government employers nationwide. These comments concern a
major issue that has arisen in recent proposals regarding
mandated social security coverage for all newly-hired state and
local government employees.
It may seem somewhat ironic that the NCSSSA, which has been
given the statutory authority in all 50 states, including
several U. S. territories, to serve as the liaison between the
federal Social Security Administration and the state and local
units of government, would come out and oppose a proposal for
universal Social Security coverage. An in depth explanation of
the respective roles of the State Social Security
Administrator, the NCSSSA as an organization, and the Social
Security Administration would be in order, and, as such,
follows:
The exception from social security coverage for state and
local government employees was included in the original version
of the Social Security Act (HR 7260), approved in 1935. The
committee reports on the act contain no discussion of the
exception provision. In the January 22, 1935, hearings of the
Committee of Ways and Means, however, Dr. E. E. Witte,
Executive Director of the Committee on Economic Security, was
quoted as saying:
``Government employees are excluded from the tax for
obvious reasons. The federal government cannot impose a tax on
the states or the political subdivisions of the states. This is
a tax measure...''
The 1950 amendments to the act, effective January 1, 1951,
allow a state to enter into a voluntary agreement with the
Social Security Administration and permit the state and its
political subdivisions to provide social security coverage for
their employees. Section 218 of the Social Security Act
includes this voluntary coverage concept.
The Omnibus Budget Reconciliation Act of 1990 (OBRA 90)
requires social security coverage for every state and local
government employee who does not belong to a qualified, public
retirement plan or not covered by social security under a
Section 218 agreement. OBRA 90 retains the states' and their
political subdivisions' right to determine whether employees
are covered by social security or a public retirement plan that
provides comparable, but in most cases greater, benefits.
Although public employers have managed to comply with the
coverage requirements of OBRA 90, it has only been with
significant expense and great administrative effort. And though
the cost is great, every state and local governmental employee
has some form of retirement protection.
Aside from the obvious question of constitutionality, the
imposition of universal social security coverage would cause
havoc on the organization of many state retirement systems. The
cost of universal social security to state and local government
employers would be devastating. States in which there is
limited Social Security, such as California, Colorado,
Illinois, Louisiana, Massachusetts, Ohio and Texas, would face
overwhelming burdens on already strained budgets. Even states
that already have general social security coverage for their
public employees (Connecticut, Florida, Kentucky and Michigan
to name a few) would have thousands of employees impacted and
millions of tax dollars in costs as universal coverage is
phased in. Some public retirement systems were created prior to
1951 specifically for certain career employees, such as
teachers, police and firefighters, when social security
coverage was not available to public employees. These non-
social security retirement systems were designed to provide
their members with a complete benefit structure of retirement,
disability and survivors coverage that was based on the
unavailability of social security coverage.
The imposition of the ``new hire'' rule places public
retirement systems in the position of having to review all the
pension plans for their affected employees. Sound pension
policy dictates that states must consider the issue of equity
to its employees, as well as the reasonableness of the income
replacement at retirement. If new-hires retain the benefits of
current pension plans, then they would be entitled to a
significantly higher level of income replacement at the time of
retirement (current pension benefits plus social security), at
a significantly higher cost to the taxpayers. States cannot
justify paying higher benefits simply because of the hire date
of an employee. These states would be forced to either increase
the benefits of current ``old hires'' in the interest of equity
or to establish new retirement systems or new tiers for the new
hires with equivalent total income replacement values. This
process of creating an entirely new retirement system for a new
class of employees requires legislative and policy
considerations that cannot simply be accomplished with a stroke
of a pen.
The economics of establishing a separate system for the new
hires could undermine the actuarial soundness of the old system
due to the loss of new members contributions to the system. A
two-tier system would likely lead to further legislative
pressures to increase benefits or to expensive lawsuits brought
by either of the employee groups.
It has been said that the ``new-hire'' proposal would ease
the administrative burden of the social security program for
the Internal Revenue Service and the Social Security
Administration. One only has to examine current medicare
coverage with its new-hire provisions to realize that it is
very complicated and requires additional and constant
administration by both the state and local employers and the
federal agencies.
It is somewhat surprising and, perhaps even more alarming,
that Chairman Bunning was quoted as saying ``...To many,
covering those State and local government workers not covered
under Social Security is an issue of simple fairness...''.
``Simple fairness'' seems like a very frivolous reason to
change a well established public pension policy for nearly 5.0
million government workers. In fact, based upon the original
language in the Social Security Act, which excluded state and
local government employees from participating in the program,
quite the opposite would seem to fit under the general category
of ``simple fairness.''
Requiring all newly hired state and local government
employees to participate in the federal program will cause
financial hardships to the various affected employers.
Actuarial costs such as the employer's share of retirement
contributions to the existing plans will be significantly
increased. This will occur because newly hired employees will,
in all likelihood, be contributing at an employee contribution
typically one-half of the non-covered employees. For the next
fifteen to twenty years, at a minimum, the public plans will
continue to have to pay retirement benefits to ``old hires'' at
the rates in effect when they established service credit,
however, the amount of revenues available to the pension fund
has now been reduced because of lower ``new-hire'' employee
contributions.
This income gap between benefit payout and employee
contributions paid in could have potentially three disastrous
effects. First, it may force the pension fund to seek higher
rates of returns by investing in more volatile and highly
speculative types of investments. One needs only to recall the
financial horror stories such as those in one county in a
western state and others like it to see the results of an
overly aggressive investment policy. Second, the required
employer contribution could become so high that, when faced
with tax caps in some localities and states, the employing
entity will be forced to choose which types of service will be
reduced or simply deleted altogether in order to pay the higher
employer contribution rate, as well as the required matching
share of the Social Security contributions. Third, situations
will arise when a ``newly-hired'' employee working side-by-side
with an ``old-hire,'' faces the unfortunate truth of having to
work perhaps as many as five or seven more years to enjoy the
full complement of retirement benefits from both the federal
and state (or local) governments to which they are entitled.
This is based upon many non-covered public retirement plans
which have a ``normal'' retirement age of 60, as compared to an
ever-escalating age for unreduced Social Security benefits
(presently up to nearly age 70).
In the event this proposal becomes law, Section 218 must
remain in place to ensure that details of social security for
the employees continue under the existing Section 218
Agreements. State and local governmental employers also need
the avenues Section 218 provides to allow for social security
coverage of veteran (``old-hire'') employees, if they so
desire, as in current medicare-only coverage.
Imposition of universal coverage would impair, and in some
cases severely lessen, retirement security for millions of
state and local government employees. Government pension plans
work well for employees because returns on investments allow
the employees to receive substantially greater benefits than
would be possible under an incremental approach. Public pension
funds are invested directly in the economy, thereby creating
jobs and earning dividends that help fund future retirement
benefits.
The NCSSSA requests that serious consideration be given to
all of the ramifications of universal social security coverage.
We propose that perhaps an alternative be given to expanding
certain existing voluntary coverage provisions, such as
extending the option to divide retirement systems on the basis
of desire for coverage, to all states (Social Security Act
Section 218 (d)).
We believe the human and monetary costs to state and local
governments of universal social security, at this time, far
outweigh the benefit of any revenue to be gained by the federal
government.
The NCSSSA appreciates the opportunity to express our
position on this matter of national interest. If you have any
questions or would require additional information from the
NCSSSA, please contact me (405) 521-3555.
Statement of the National Education Association
Mr. Chairman and Members of the Subcommittee:
On behalf of the 2.3 million teachers and other education
employees who are members of the National Education Association
(NEA), we would like to thank you for the opportunity to
address the subcommittee about Social Security reform.
We would like to address two issues: the government pension
offset provision and mandatory Social Security coverage. NEA
strongly supports scaling back the pension offset provision,
which requires the reduction of Social Security benefits to
thousands of retirees whose public employer does not
participate in Social Security, but who are otherwise entitled
to Social Security benefits based on their spouses' private
sector employment. The provision's current two-thirds reduction
in spousal benefits severely limits the retirement benefits of
retired public employees.
On the issue of mandatory participation in the Social
Security program, NEA opposes such a requirement because it
would weaken current pension plan benefits for public sector
retirees. It would also impose unfunded mandates on fiscally
overburdened state and local governments.
Government Pension Offset
When the Social Security system was established in 1935,
state and local government employees were excluded from
coverage. In the 1960s, these employees were given the
opportunity to elect to participate in the Social Security
system. As a result, public sector employees in 36 states opted
to enroll in Social Security in the 1960s and 1970s. The
remaining 13 states and a number of local governments in two
others chose instead to maintain and enhance their existing
retirement systems.
The government pension offset affects government employees
and retirees in virtually every state, but its impact is most
acute in 15 states. They are Alaska, California, Colorado,
Connecticut, Georgia (certain local governments), Illinois,
Louisiana, Kentucky (certain local governments), Maine,
Massachusetts, Missouri, Nevada, Ohio, Rhode Island, and Texas.
Nationwide, more than one-third of teachers and education
employees and more than one-fifth of other public employees are
not covered by Social Security.
In 1977, federal legislation was enacted that required a
dollar-for-dollar reduction of Social Security spousal benefits
to public employees and retired public employees who received
earned benefits from a federal, state, or local retirement
system. Following a major campaign to repeal the provisions,
Congress and the President agreed in 1983 to limit the spousal
benefits reduction to two-thirds of a public employee's
retirement system benefits. But this remedial step falls well
short of addressing the inequity of Social Security benefits
between public and private employees.
The harshest affects of the offset provision are borne by
lower-income women. It is estimated that the spousal benefit is
eliminated entirely in 9 of 10 cases, even though the covered
spouse paid Social Security taxes for many years, thereby
earning the right to these benefits. Moreover, these estimates
do not capture those public employees or retirees who never
applied for spousal benefits because they were informed they
were ineligible.
According to the Congressional Budget Office, the
government pension offset reduces benefits for some 200,000
individuals by more than $3,600 a year. Ironically, the loss of
these benefits may cause these women and men to become eligible
for more costly assistance, such as food stamps.
The present system creates a tremendous inequity in the
distribution of Social Security benefits. The standard for this
narrow class of individuals--retired public employees who are
surviving spouses of retirees covered by Social Security--is
inconsistent with the overall provisions of the Social Security
Act and does not apply to persons receiving private pension
benefits. This imbalance exists even though Congress, through
ERISA standards and tax code provisions, has more direct
influence over private employers than public employers.
Three Personal Illustrations of How the Offset Provision Harms
People
A retired widow who worked as a custodian in the
Parma, Ohio, public schools receives just $215 a month from the
Ohio School Employees Retirement System. Her Social Security
spousal benefit is reduced to $215 a month after applying the
government pension offset provision.
A disabled former school employee and widow who
retired in 1986 receives $403 a month from her school pension.
That income totally offsets a $216 per month Social Security
survivor's benefit. Her total income is about 70 percent of the
federal poverty level.
A retired widow who worked as a school cook
receives $233 a month from her school pension. Her Social
Security widow's benefit is reduced by $155 because of the
automatic offset. Her combined total income is about 76 percent
of the federal poverty level.
NEA supports H.R. 2273, legislation sponsored by
Representatives William Jefferson (D-LA) and J.D. Hayworth (R-
AZ), that would amend Title II of the Social Security Act to
protect low-and middle-income public retirees by limiting the
government pension offset. H.R. 2273 and companion bill S.
1365, sponsored by Senator Barbara Mikulski (D-MD), would also
move to restore equity between public and private employees in
the distribution of Social Security benefits.
Mandatory Social Security Participation
NEA believes that requiring state and local employees to
participate in the Social Security system is unnecessary and
financially burdensome. A federal mandate for participation
will not solve the systems' financial difficulties and would
weaken state and local plans whose benefits are superior to
those provided by Social Security.
The 15 states that have opted not to participate in the
Social Security system have strong plans that provide ancillary
benefits such as health care, disability and survivor coverage
and secure portability. These ancillary benefits would have to
be lowered or eliminated if non-participating pension systems
are required to pay Social Security.
Mandatory participation would also create unnecessary and
burdensome financial burdens for the state and city governments
involved, as well as hurt active and retired employees. If
these governments are required to pay the full cost of the FICA
tax, this could result in diluted benefits to retirees and
fewer funds available for investment, a large source of income
for the affected pension plans.
We urge you to support H.R. 2273, which moves to restore
eligibility for mostly lower-income survivors of spouses who
paid into the Social Security system, and to reject mandatory
Social Security participation. Teachers and other public
employees who have devoted their working lives to children and
public service should not have to worry about the security of
their retirement plans.
Statement of Robert M. Tobias, National President, National Treasury
Employees Union
Chairman Bunning, Members of the Subcommittee:
I am Robert M. Tobias, National President of the National
Treasury Employees Union (NTEU). Thank you very much for
holding this timely hearing today and for giving us an
opportunity to present our members' views on the effects of the
Government Pension Offset (GPO).
NTEU represents over l60,000 federal employees and
retirees. Many of our members have already felt the effects of
the Government Pension Offset. Others are not yet aware of the
impact this offset could have on their retirement income.
Federal retirees often first become aware of the existence of
this offset at the time they first apply for Social Security
benefits.
As you know, the Government Pension Offset reduces or
eliminates the Social Security benefit many federal retirees
are otherwise eligible for on their spouse's earnings record.
Under current law, Social Security benefits normally due an
individual as a spouse or widow of a Social Security recipient,
are reduced by two-thirds of the amount of the government
pension.
For example, if an elderly widow is eligible for a monthly
pension of $600 as a result of her federal government service,
two-thirds of that amount, or $400, must be used to offset the
Social Security spouse's or widow's benefit for which she might
also be eligible. If she is eligible for a monthly spousal
Social Security benefit of $500 based on her husband's earnings
record, the GPO results in her receiving only $l00 per month.
This is not an isolated example.
More often than not, this offset disproportionately affects
those who can least afford to forego this retirement income.
The effects are particularly devastating to female federal
employees who are often eligible for only meager federal
pensions resulting from either interruptions in their careers
while raising their families or working in lower graded
positions for most of their careers. Had these individuals
toiled in the private sector earning private pension benefits
instead of dedicating their careers to public service, they
would remain fully eligible to collect their spousal Social
Security benefits.
NTEU strongly supports legislation introduced by
Congressman William Jefferson (D-LA), H.R. 2273. While this
legislation would not entirely eliminate the GPO, it represents
a humane step in the right direction by applying the GPO only
to combined annuity and Social Security spousal benefits that
exceed $l200 per month. One hundred and sixty two of
Congressman Jefferson's colleagues apparently agree with him
and have added their names as cosponsors of his legislation.
While we urge this Congress to address this important issue and
pass H.R. 2273, we continue to believe that the GPO unfairly
penalizes individuals who spend their careers in public service
and should be repealed.
I want to share with this Committee the circumstances of
two particular long-term federal employees who are negatively
impacted by the Government Pension Offset.
Mrs. Joan Lonnemann has been a seasonal Internal Revenue
Service employee at the Cincinnati, Ohio Service Center for 33
years. Although Mrs. Lonnemann is fully eligible to retire, she
simply cannot afford to take that chance right now. Her
husband, who is six years her senior, has already retired and
currently receives Social Security. She currently receives her
spousal Social Security benefit, based on her husband's
earnings record, of $5l2 per month. And, she is entitled to
continue to receive her spousal Social Security benefit just as
long as she continues working! If and when Mrs. Lonnemann is
forced to retire, all but $26 of that benefit will end.
As absurd as this sounds, these are the facts. If, as
expected, she receives a monthly annuity for her 33 years of
public service of approximately $730 per month, her Social
Security spousal benefit will be reduced by \2/3\ of that
amount, or $486, leaving her a Social Security spousal benefit
of $26. She is not entitled to Social Security benefits in her
own right.
Surely, the Government Pension Offset was never intended to
wreak this kind of havoc. Should Mrs. Lonnemann retire and her
husband predecease her, she would be left to live on $756 per
month ($730 plus $26 in Social Security spousal benefits).
Blindly applying a law such as the Government Pension Offset
without regard to the economic hardship it causes is difficult
to justify. This is precisely the situation Congressman
Jefferson looks to rectify by passage of his legislation, H.R.
2273.
Another case that has been brought to my attention is that
of Mr. Oliver Hall of Havertown, Pennsylvania. Mr. Hall worked
for the federal government as a customs inspector for 35 years
and was forced to retire after a severe stroke. His retirement
annuity, based on his long career in public service, is a
little over $l400 per month. When Mr. Hall's wife retired in
late l997, he was told he would be eligible for spousal Social
Security benefits based on her earnings record of $452 per
month.
Of course, Mr. Hall is not eligible for this spousal Social
Security benefit because of the Government Pension Offset. The
first he learned of this offset, however, was in a letter dated
December 28, l997 from the Social Security Administration. With
very little in the way of explanation, Social Security states,
``We are writing to let you know that you are entitled to
monthly husband's benefits on claim number....we reduce Social
Security benefits paid to husbands or wives if they also
receive a government pension based on their own work...for this
reason, we cannot pay you.
As you can imagine, this came as quite a surprise to Mr.
Hall who has appealed this ruling to the Social Security
Administration. Mr. Hall is hardly alone in being caught
unaware of this offset. Many more federal employees will be
caught similarly unaware and many more--especially women--will
be forced into poverty as a result of the Government Pension
Offset.
Again, thank you for holding this important hearing today
and for shining some light on an issue that often catches
federal retirees completely by surprise. We look forward to
working with you to correct this inequity. Let's begin by
passing H.R. 2273. Thank you very much.
Statement of Sally D. O'Hare, Retired Illinois High School Teacher,
Palos Heights, Illinois
Prior to my retirement in June, 1994, at age 64, I had been
a high school mathematics teacher for 32 years. I taught in the
private schools for eight years and then taught in the public
schools for twenty-four years. I paid social security as a
private school teacher. I also paid social security for 24
years as a public school teacher on income earned outside of
the school year, and as a part-time counselor, and other part-
time curriculum assignments.
I receive a pension from my 24 years as a public school
teacher. My social security monthly check is reduced
dramatically by the off-set regulation. If my husband precedes
me in death, which actuarially is quite likely, I would receive
none of his social Security benefit as his widow. This is
identified as a widow's penalty.
I am currently an independent contractor and have a part-
time marketing job, in education. I must pay federal taxes,
State taxes, and Social Security taxes on this income. I must
pay the social security tax as an employer and as an
independent contractor employee. I pay all of my taxes and no
income is off the books, nor part of the underground economy. I
will receive not one dime of the additional Social Security
taxes I must pay from my current employment. This inequity
needs to be corrected for those persons, such as my self who
have fallen through the cracks. You are in a position to
rectified this injustice for senior citizens, who are retired
teachers and who elect to stay in the work force. I would
welcome an opportunity to testify before your committee. Thank
you for your spirited representation of this matter in our
behalf.
Statement of Hon. George V. Voinovich, Governor, State of Ohio
Thank you for the opportunity to provide written testimony
for members of the House Ways and Means Subcommittee on Social
Security.
As Governor of the State of Ohio, I strongly oppose the
imposition by the federal government of mandatory Social
Security coverage on state and local government employees.
Mandatory Social Security would be another example of the
federal government imposing an unfunded mandate on state and
local governments. If state and local governments raise tax
revenues to maintain the current benefit structure of existing
state retirement systems, the funding liability for Social
Security would shift from the federal government to state and
local governments.
Ohio Public Pension Systems
State and local government employees originally were
excluded from the Social Security system and were not permitted
to join the program voluntarily until 1954. The State of Ohio
took efforts to ensure that state and local public employees
also were protected. In fact, the State created the State
Teachers Retirement System in 1921 to provide financial
security in retirement for the teachers of Ohio. The Public
Employees Retirement System (PERS), Ohio's largest retirement
system, also was formed before the creation of the Social
Security system. PERS was established by Ohio's legislature in
1933 to provide needed benefits to qualified members and their
beneficiaries. These benefits include: survivor, disability,
lump sum death benefits, and supplemental health care coverage
for a retiree who is 65 and is eligible for Medicare, in
addition to retirement income.
There are now five public employee retirement systems in
the state of Ohio:
Public Employees Retirement System of Ohio (PERS)
State Teachers Retirement System of Ohio (STRS)
Police and Fireman's Disability and Pension Fund
School Employees Retirement System (SERS)
Ohio State Highway Patrol Retirement System
All of the State's systems were designed to meet the direct
needs of the occupations served.
There are over 1.1 million active and retired members in
Ohio's five retirement systems. Ninety-two percent of the
State's public employees are not covered by Social Security. As
the largest retirement systems, PERS is a multiple employer
plan covering 3,700 state and local government units. PERS
currently has 637,500 active and inactive members and benefit
recipients.
All Ohio retirement systems included a defined benefit plan
and are pre-funded through employee and employer contributions
and investments income. The largest source of income of the
systems is investment return. For example, Ohio law requires
pension benefits under Ohio's systems to be financed over a 30
year working career. Benefits under STRS are funded over 27
years. In PERS, over 70 percent of disbursements come from
investments. Earnings pay for 17 years of 26 years of expected
payments under STRS. The concept of financing an employee's
benefits over a working career provides intergenerational
equity. It avoids the problem of current pensions being paid
for by future generations. The systems have funded liabilities
so that as the ratio of active members to benefit recipients
decreases, contribution rates will not have to be increased to
fund the same level of benefits.
The investment of the state retirements funds provides a
tremendous amount of capital in the economy of Ohio and the
nation, unlike Social Security funds which simply support other
government programs.
The state and local pension plans were actuarially sound at
their conception and remain so today. These systems are
accepted, trusted, fiscally sound and provide excellent
benefits for their members. There is no need to restructure the
state and local retirement systems.
Impact of Mandatory Social Security
Mandatory Social Security would result in a drastic
restructuring or abandonment of many excellent state and local
retirement programs.
Financially strong, well-funded state and local retirement
systems will be reduced to unstable pension systems. Current
active members and retirees will suffer benefit reductions and
loss of help with health care costs causing the systems to
break the social contract we have with our members.
In Ohio, a response to mandated Social Security for State
of Ohio employees would rest with the General Assembly to enact
legislation to change public employee benefits. If the General
Assembly would choose to take no action to change Ohio statute,
the added burden of the cost of FICA contributions would rest
on public employees and employers at a rate of 6.2% for each
group. Adding the full cost of the FICA tax to the state
retirements system taxes would create an enormous unfunded
mandate for the state and localities.
If the General Assembly would choose to add no new costs to
employers and employees, future investment fund flows would be
reduced to make FICA payments. The remaining contributions
would be used to provide a level of benefits within those
contribution levels. This approach would necessitate a
reduction of benefits to public employees. Changes to the
program could include the elimination of health care for
participants, including retirees; elimination of death,
disability or survivor benefits; or reducing cost of living
adjustments.
The General Assembly also could take the position that the
current levels of benefits would be maintained by integrating
state retirement plan and Social Security benefits. If this
scenario were adopted, additional costs for the PERS, for
example, likely would be in the range of six percent to seven
percent of covered payroll, especially if there were a
continuation of some meaningful retiree health benefits.
Without post-retirement health care programs, an enormous
burden will be shifted to the Medicare and potentially the
Medicaid programs.
Under the second and third scenarios, reduced cash flow
into the systems will result in a lower amount of funds to
invest. Since investment earning are a vital part of pension
financing, the reduction will cause a longer funding period (up
to 40 years in the estimate of STRS).
In addition, public plan benefits are tailored to specific
subsets of all workers. Social Security does not address the
special needs of our uniformed employees. Disability, which
accounts for 25 percent of Police and Fire retirements, is not
provided by Social Security unless one is totally unemployable
for any job. Partial disabilities, which encompass 79 percent
of Police and Fire disability retirements with awards ranging
from five percent to 60 percent of salary, are not covered by
Social Security. Also, the nature of Police and Fire work
requires early retirement, when Social Security is not yet
available.
Increased contribution rates or reduced benefits also could
hurt the recruiting and retention of public employees. Many
public employees receive lower pay but better benefits than
their private sector counterparts. Removing the benefit
incentive will entice many employees to seek employment in the
private sector.
Practically speaking, mandatory Social Security would cause
employee rates to increase or employee benefits to decrease.
Public employees are fully and immediately vested in their own
contributions. This is not the case with Social Security. Ohio
public employees would be forced to participate in a poorly
funded system with future benefits at risk. Mandatory Social
Security taxes likely will cause states, especially Ohio, to
reduce or eliminate the funding of post retirement health care
programs--shifting an enormous burden to Medicare programs.
Any change to state programs would result in significant
administrative cost increases, as well. The state would need to
change publications, computer systems, benefit processing, and
member education efforts, just to name a few.
History has shown that Social Security calculation of
benefits and corresponding revenues is faulty. The small
transition funds received from mandating coverage will not fix
the basic problems with Social Security, and in the long-run
the new obligation may offset the added revenue. If the
benefits for current beneficiaries and current participants
cannot be fiscally met, then the infusion of more participants
simply exacerbates the problem. The result will be the
destruction of secure long-standing state pension funds for
very little gain and lesser benefits for public employees.
Conclusion
I believe that it would not be prudent to alter the funding
of Ohio's public employee retirement systems that are solvent,
stable systems. Mandating that public employees covered by the
public pension systems in Ohio and other states participate in
Social Security is flawed public policy. It would cause great
harm to systems which pre-date social security and cause the
systems to break promises made to their members for little or
no material help to Social Security.
I respectfully urge your opposition to any attempt to
require state and local employees to participate in Social
Security. Thank you for your consideration of my concerns.
Statement of Hon. Max Sandlin, a Representative in Congress from the
State of Texas
Thank you Mr. Chairman and Ranking Member Rangel, for the
opportunity to testify today on the impact of the Windfall
Elimination Provision on the Social Security benefits of
retired government employees. I appreciate the committee
including both the Government Pension Offset and the Windfall
Elimination Provision in the debate on the future of Social
Security.
I would like to echo the testimony given by my colleagues,
Mr. Frank and Mr. Jefferson, regarding their respective bills.
Both bills are worthy of consideration by this committee. I
have cosponsored the bill by Mr. Jefferson and support full
Social Security widow's benefits for former government
employees. I also support the legislation introduced by Mr.
Frank, which addresses the Windfall Elimination Provision, on
which I am about to testify.
Mr. Chairman, just like many of my colleagues on this
committee, I spend time virtually every weekend traveling
through my district visiting with my constituents. From every
corner of the 19 counties in the First Congressional District
of Texas, I have heard from former local, state and federal
government employees who have been surprised by the paucity of
their Social Security benefits due to the Windfall Elimination
Provision, enacted in 1983.
One of these constituents happens to be my mother, whose
suggestions and advice I have learned over many years not to
ignore. My mother was happy to spend nearly 30 years serving
society as a public school teacher, a job which simultaneously
challenged and fulfilled her. However, she never expected that
her reward for these years of service would be a significant
reduction in her Social Security benefits. She, like many of
the 290,000 government retirees affected by this provision,
feels like the federal government has turned its back on her
when she needs its help the most--during her retirement years.
The Windfall Elimination Provision was enacted in 1983 to
help restore solvency to the program and correct a perceived
inequity in the treatment of people who had worked both in jobs
covered by Social Security and jobs exempted from Social
Security. Mr. Chairman, I understand the history of and the
rationale for the Windfall Elimination Provision. It may be
true that due to a flaw in the Social Security formula, prior
to 1983 some retirees eligible for both Social Security
benefits and a local, state, or federal government pension
received a larger-than-justified benefit. I don't think anyone
in this hearing room wants to be giving undeserved benefits to
retired government employees who also spent time in the private
sector. However, I also don't think anyone in this room
believes we should now punish these teachers, firemen, and
policemen with Social Security benefits that fail to meet their
expectations, fail to provide them with a basic standard of
living, and fail to fulfill the agreement they have made with
the federal government.
Some claim that this provision is not particularly onerous
to many of the affected retirees because the provision
generally affects only those who are well off and have a
generous government pension. I assure the members of this
committee that my mother, for one, is not one of the retirees
who feel this provision is not particularly onerous. She spent
much of her life in public service and planned her retirement
carefully. To have had her Social Security benefits arbitrarily
and unexpectedly reduced was more than just an insult--it was
also a lowering of her standard of living in her retirement
years.
According to a 1990 CRS report, the Windfall Elimination
Provision ``is appropriate for typical CSRS annuitants, but
over-penalizes lower-paid workers with short or fairly evenly
split careers, and under penalizes workers with long Social
Security-covered careers.'' I appreciate the work Mr. Frank has
done on addressing the impact of the Windfall Elimination
Provision on low income retirees. His bill partially repeals
the Windfall Elimination Provision for government employees
with small pensions. I think this may be one very effective way
of restoring benefits to those who most need them and who may
be disproportionately affected by this provision.
However, I have introduced a bill, H.R. 3077, the Social
Security Benefit Restoration Act, to repeal the Windfall
Elimination Provision and restore equity and fairness to the
Social Security benefits of our retired government employees. I
introduced this bill calling for the complete repeal of the
Windfall Elimination Provision because I believe the provision
is unfair to any retired government employee, regardless of his
or her financial status.
This bill would put our federal government back in the
business of providing our retired government employees with the
retirement security they deserve. I recognize that full repeal
of the Windfall Elimination Provision would be expensive, and
we need to debate a reasonable way to pay for this legislation.
However, this bill would not be creating a new benefit, only
restoring a benefit that retirees once had. I don't think this
means the bill should be exempt from pay-go rules, but it does
mean that it should be part of any debate on Social Security
reform. As Congress moves forward with reform of the Social
Security system, Mr. Chairman, I urge you and the members of
this committee to remember our retired federal, state, and
local government employees and seriously consider repeal of the
Windfall Elimination Provision.
I would like to close, Mr. Chairman, by reading you a
portion of a letter from a constituent. This constituent
writes:
``From day one of my employment, I was always told that
someday I would be glad the withholding from my check for
Social Security would be there for me at retirement. That was
always in my plan for retirement. Now a significant amount of
what I was promised is being withheld from my check. Just at a
time in my life when I am very likely to need extra funds for
health care and to maintain a fair standard of living it is
being taken away. This is unfair to us seniors.''
Thank you Mr. Chairman, Ranking Member Rangel, and members
of this committee.
State Teachers Retirement System of Ohio
May 13, 1998
Mr. A. L. Singleton, Chief of Staff
U. S. House of Representatives
Committee on Ways and Means
1102 Longworth House Office Bldg.
Washington, D. C. 20515
Dear Mr. Singleton:
These comments are being submitted on behalf of the State Teachers
Retirement System of Ohio Board of Trustees and the more than 300,000
active and retired members of our system for the printed record of the
Subcommittee on Social Security of the Committee on Ways and Means
hearing on ``The Future of Social Security for this Generation and the
Next.''
Ohio has a long history, predating Social Security, of providing
retirement and disability security and family income to state and local
public employees. When Social Security was initiated in the mid-1930s
by Congressional action, Ohio public employees were not permitted to
participate. Later, when states were given the option of joining Social
Security, Ohio voted to remain independent. Ohio public servants were
already well served. The Ohio public retirement systems were and are
stable and working well.
After carefully studying the January 6, 1997 Advisory Council on
Social Security report and analyzing the actuarial impact both in terms
of increasing costs and reducing benefits to the members of our system,
we stand strongly opposed to any proposal that would require mandatory
participation in Social Security. We respectfully urge your determined
opposition to any proposal that would mandate coverage for any non-
covered system.
The soundness of Social Security for the future is a very important
issue for the nation. However, mandating participation is not the
solution; it provides no long-term fiscal benefits to Social Security,
but causes permanent and serious damage to plans like STRS and those
like us throughout the nation.
Unlike Social Security which is a pay-as you-go system, STRS is 83%
reserve funded. Member and employer contributions, along with income
from investments, provide the reserves needed to finance retirement
benefits. Investment income provides 65% of the funds for benefit
payments.
It would be a serious mistake to believe that those public
employees who remained in public pension funds would not be adversely
affected by mandatory coverage for new hires. Faced with the added cost
of Social Security, it is certain that over time Ohio would be forced
to change existing public pension plans by adjusting benefits downward
as well as dropping retiree health care. The impact of reducing
contributions to public plans by more than half in most systems would
reduce the capital stream necessary for investment and could force such
plans to cut back on benefits for all members. There is no way that
states can deal with an unfunded mandate of such immense proportions.
In restructuring the Social Security system, we believe that
consideration should be given to what non-covered systems have done
well in providing for our members. The area of investments alone
provides great potential for restructuring Social Security. Simply
adding more members which has never worked in the past, and which will
not work now, is not the answer.
We appreciate the opportunity to comment on this important issue
and would be pleased to provide further information if that would be
helpful to you. Thank you for your consideration.
Respectfully,
Herbert L. Dyer
Executive Director
Teachers' Retirement System of Kentucky
June 3, 1998
Representative Jim Bunning
Chair, House Social Security Subcommittee
2437 Rayburn Building
Washington, D.C. 20515
Dear Congressman Bunning:
I wish to comment on the proposal to mandate Social Security
participation for all new public employees that is under consideration
in the House Social Security Subcommittee. As you know, the retirement
benefits of public school teachers and administrators in Kentucky are
provided exclusively by the Kentucky Teachers' Retirement System which
has more than 75,000 members.
The Kentucky General Assembly has acted over a period of years to
establish an excellent level of benefits for public school teachers.
While enhancing the recruitment and retention of qualified teachers,
the benefit program also recognizes that the current demands placed on
teachers make it beneficial to the State and the teachers to provide
meaningful benefits at ages several years prior to age 65 or the
extended ages planned by Social Security.
Unlike the Social Security program which operates on a pay-as-you-
go basis, the Commonwealth has acted responsibly by funding the cost of
the program on an actuarial reserve basis from contributions made by
active members and the State. The June 30, 1997 actuarial valuation by
an independent actuary reflects that the current total contribution
rate of 19.81 percent of active member payroll plus reserve funds and
investment income will be sufficient to pay all benefits earned by
retired and currently active members. Members contribute 9.855 percent,
and the State matches the member contribution plus an additional 3.25
percent to retire the System's unfunded obligations with the
contributions totaling 22.96 percent, 3.15 percent of which is
allocated for a comprehensive health insurance plan for retirees. The
current levels of funding allow the System to maintain reserve trust
funds that assure the actuarial and financial soundness of KTRS.
Buck Consultants, the System's Actuary, has stated that if the
current 22.96 percent contribution rate to KTRS is reduced by 12.4
percent due to mandated Social Security, the KTRS benefit accrual
formula per year of service by public school teachers would have to be
reduced from 2.5 percent to
less than 1.0 percent. The reallocation of 12.4 percent from the
KTRS is a distinct possibility since it would be improbable that
members or the State could contribute an additional 12.4 percent of
payroll, and the choice would be either large increases in
contributions or significant reductions in KTRS benefits now available
to all KTRS members. An illustration identifies the negative impact on
an average teacher. Under current KTRS laws, a new teacher would
receive 83 percent of their average salary at age 55 after teaching 33
years. If the KTRS funding is reduced by 12.4 percent to accommodate
Social Security coverage, the KTRS benefit for the same new teacher
would be less than 33 percent at age 55, and they would have to wait at
least ten years to be eligible to receive Social Security.
Most would agree with the GAO finding that mandatory coverage would
benefit the financially troubled Social Security program. The program
would receive an additional 12.4 percent of salaries of newly hired
public school teachers and other public employees for a period of 40
plus years before having to make any payments to most of the teachers
and other government employees. I understand that the Social Security
actuaries estimate that the savings resulting from mandatory coverage
would be hundreds of billions of dollars over the next 75 years, but
the saving for Social Security would represent funds lost by the newly
covered employees and their employers, such as the state of Kentucky.
It appears that the reason such a blatant and unwarranted transfer
of wealth could even be considered results from too much attention to
actuarial funding and not enough recognition of the fact that Social
Security is almost a pure pay-as-you-go system where today's active
workers support today's retirees. It also appears the reason for this
proposal is not to protect the retirement benefits of future state and
local employees, but to use their current contributions to help solve
the Social Security deficit problem.
I have read the statements made at the May 21, 1998 meeting of the
House Social Security Subcommittee by the Executive Directors of three
state pension plans, Colorado, Ohio and Nevada. The makeup of those
public pension plans is very similar to that of the Kentucky Teachers'
Retirement System, and rather than repeat their positions, I submit
that their findings and recommendations are typical of the public plans
that would be affected by mandatory Social Security coverage.
In conclusion, it is the position of the Kentucky Teachers'
Retirement System that mandatory Social Security coverage would impose
significant negative impact on Kentucky's teachers who would either
contribute an additional 6.2 percent for Social Security or have their
KTRS benefits reduced more than half of the current level. The choice
of the state of Kentucky would be increase taxes to pay the additional
6.2 percent employer payment required for Social Security or reduce the
KTRS benefits. With 12.4 percent of contributions allocated to Social
Security, the KTRS would lose multimillion of dollars each year due to
a loss of income from investments, a source of income that funds over
60 percent of the annuities paid to retirees.
Congressman Bunning, we ask that you consider the serious
consequences that mandatory coverage would place on Kentucky's future
teachers and the necessity of the State having to increase taxes or
dismantling of a retirement system that has provided meaningful
benefits to Kentucky's teachers since 1940. We need your help on this
very important issue.
Please advise if you would like additional information pertaining
to the Kentucky Teachers' Retirement System and its members.
Sincerely,
Pat N. Miller
Executive Secretary
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