[Senate Hearing 108-279] [From the U.S. Government Publishing Office] S. Hrg. 108-279 PENALTY FOR PUBLIC SERVICE: DO THE SOCIAL SECURITY GOVERNMENT PENSION OFFSET AND WINDFALL ELIMINATION PROVISION UNFAIRLY DISCRIMINATE AGAINST EMPLOYEES AND RETIREES? ======================================================================= HEARING before the COMMITTEE ON GOVERNMENTAL AFFAIRS UNITED STATES SENATE ONE HUNDRED EIGHTH CONGRESS FIRST SESSION __________ SEPTEMBER 24, 2003 __________ Printed for the use of the Committee on Governmental Affairs 90-237 U.S. GOVERNMENT PRINTING OFFICE WASHINGTON : 2003 ____________________________________________________________________________ For Sale by the Superintendent of Documents, U.S. Government Printing Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; (202) 512�091800 Fax: (202) 512�092250 Mail: Stop SSOP, Washington, DC 20402�090001 COMMITTEE ON GOVERNMENTAL AFFAIRS SUSAN M. COLLINS, Maine, Chairman TED STEVENS, Alaska JOSEPH I. LIEBERMAN, Connecticut GEORGE V. VOINOVICH, Ohio CARL LEVIN, Michigan NORM COLEMAN, Minnesota DANIEL K. AKAKA, Hawaii ARLEN SPECTER, Pennsylvania RICHARD J. DURBIN, Illinois ROBERT F. BENNETT, Utah THOMAS R. CARPER, Delaware PETER G. FITZGERALD, Illinois MARK DAYTON, Minnesota JOHN E. SUNUNU, New Hampshire FRANK LAUTENBERG, New Jersey RICHARD C. SHELBY, Alabama MARK PRYOR, Arkansas Michael D. Bopp, Staff Director and Chief Counsel Jennifer A. Hemingway, Professional Staff Member Priscilla Hobson Hanley, Professional Staff Member Joyce A. Rechtschaffen, Minority Staff Director and Counsel Larry B. Novey, Minority Counsel Amy B. Newhouse, Chief Clerk C O N T E N T S ------ Opening statements: Page Senator Collins.............................................. 4 Senator Akaka................................................ 6 Prepared statement: Senator Lautenberg........................................... 31 WITNESSES Wednesday, September 24, 2003 Hon. Dianne Feinstein, a U.S. Senator from the State of California..................................................... 1 Jo Anne B. Barnhart, Commissioner, Social Security Administration 8 Julia Worcester, Columbia, Maine................................. 19 Charles L. Fallis, National President, National Association of Retired Federal Employees...................................... 21 Kenneth Rocks, National Vice President, Fraternal Order of Police 23 Alphabetical List of Witnesses Barnhart, Jo Anne B.: Testimony.................................................... 8 Prepared Statement........................................... 32 Fallis, Charles L.: Testimony.................................................... 21 Prepared Statement........................................... 46 Feinstein, Hon. Dianne: Testimony.................................................... 1 Rocks, Kenneth: Testimony.................................................... 23 Prepared Statement........................................... 52 Worcester, Julia: Testimony.................................................... 19 Prepared Statement........................................... 42 Appendix Hon. Barbara A. Mikulski, a U.S. Senator from the State of Maryland, prepared statement................................... 56 Maria M. Alamor and Leo R. Alamar, Social Security Administration Decision submitted by Mr. Fallis............................... 59 Additional prepared statements submitted for the Record: Ronald S. Dick, Silver Spring, Maryland...................... 70 Junita Drisko, Orrington, Maine.............................. 72 Carolyn T. Engers, Joliet, Illinois.......................... 73 Jane Nelson, Cleveland, Texas................................ 76 Sharon Richard, Sour Lake, Texas............................. 78 Suzanne Shaw, Penobscot, Maine............................... 81 Ralph White, President, Retired State, County and Municipal Employees Association of Massachusetts, and Shawn Duhamel, Legislative Liaison........................................ 87 Patricia Wolfe, President, Federally Employed Women (FEW).... 90 PENALTY FOR PUBLIC SERVICE: DO THE SOCIAL SECURITY GOVERNMENT PENSION OFFSET AND WINDFALL ELIMINATION PROVISION UNFAIRLY DISCRIMINATE AGAINST EMPLOYEES AND RETIREES? ---------- WEDNESDAY, SEPTEMBER 24, 2003 U.S. Senate, Committee on Governmental Affairs, Washington, DC. The Committee met, pursuant to notice, at 9:33 a.m., in room SD-342, Dirksen Senate Office Building, Hon. Susan M. Collins, Chairman of the Committee, presiding. Present: Senators Collins and Akaka. Chairman Collins. The Committee will come to order. Good morning. Today, the Committee on Governmental Affairs is holding a hearing to examine the effect that the Social Security government pension offset and the windfall elimination provisions have on public employees and retirees. I am going to go immediately to the distinguished senior Senator from California, Senator Dianne Feinstein, for her opening statement because of scheduling considerations. I will then resume with my own opening statement and we will continue with the hearing. I want to welcome Senator Feinstein here this morning. She has been such a leader in the Senate in remedying this inequity that has affected so many of our constituents. I am very proud to be the lead Republican cosponsor of the legislation that Senator Feinstein has introduced. We work together on many issues and it is a great pleasure to welcome her to the Committee this morning. Senator Feinstein. TESTIMONY OF HON. DIANNE FEINSTEIN, A U.S. SENATOR FROM THE STATE OF CALIFORNIA Senator Feinstein. Thank you very much, Madam Chairman. I appreciate your holding this hearing, and even more than that I appreciate your cosponsorship of this legislation which we together have introduced, along with 21 others of our body. The reason we have introduced it is because under current law, public employees, whose salaries are often lower than those in the private sector, actually find that they are penalized and held to a different standard when it comes to retirement benefits. The arbitrary reduction in their benefits makes it more difficult to recruit teachers, police officers, and firefighters, and it does so at a time when we should be doing everything we can to recruit the very best and brightest to these careers. I am very delighted to have introduced you to Bill Lambert, of the United Teachers of Los Angeles. He represents some 48,000 teachers, the dominant majority of whom lose benefits under the present system that no one in the private sector does, and that is what our bill seeks to remedy. The current government pension offset provision reduces Social Security spousal benefits by an amount equal to two- thirds of the spouse's public employment civil service pension. This can have the effect of taking away entirely a spouse's benefits from Social Security, and as one might guess, this provision disproportionately affects women. So as Mr. Lambert just said to you, you had better hope if you are going to be a teacher that you live a long time because if you don't, your spouse is going to be disadvantaged because you chose a public career rather than a private one. The Social Security windfall elimination provision reduces Social Security benefits for retirees who pay into Social Security and also receive a government pension, such as from a teacher retirement fund. Private sector retirees receive monthly Social Security checks equal to 90 percent of the first $561 in average monthly earnings, plus 32 percent of monthly earnings up to $3,381, and 15 percent of earnings above $3,381. Government pensioners, however, are only allowed to receive 40 percent of the first $561 in career monthly earnings. Now, that is a penalty of $280.50. It is a big penalty for people who really need those funds. To my mind, it is simply unfair. Our legislation will allow government pensioners the chance to earn the 90 percent to which non-government pension recipients are entitled. I don't understand why we want to discourage people from pursuing careers in public service by essentially saying that if you do enter public service, your family is going to suffer by not being able to receive the full retirement benefits they would otherwise be entitled to. Record enrollments in public schools and the projected retirements of thousands of veteran teachers are driving this urgent need for teacher recruitment. Efforts to reduce class size also necessitate hiring additional teachers. It is estimated that schools will need to hire between 2.2 and 2.7 million new teachers nationwide by 2009. My State, California, currently has more than 285,000 teachers, but is going to need to hire an additional 300,000 teachers by 2010 to keep up with California's rate of student enrollment, which is three times the national average. All in all, California has to hire 26,000 new teachers. Now, to combat the growing teacher crisis, 45 States and the District of Columbia now offer alternative routes for certification to teach in the Nation's schools. It is a sad irony that policymakers are encouraging experienced people to change careers and enter the teaching profession at the same time that we clearly tell them we will reduce your Social Security benefits for making such a change, benefits they worked hard to earn. Almost 300,000 government retirees nationwide are affected by the government pension offset and windfall elimination provisions, but their impact is greatest in the 13 states that chose to keep their own public employee retirement systems, including yours and mine. According to the Congressional Budget Office, the government pension offset reduces benefits for some 200,000 individuals by more than $3,600 a year. That is the loss; it is tremendous. As I mentioned earlier, the windfall elimination provision causes already low-paid public employees outside the Social Security system, like teachers, firefighters and police officers, to lose up to 60 percent of the Social Security benefits to which they are entitled. Sadly, the loss of Social Security benefits may make these individuals eligible for more costly assistance, such as food stamps. So we deny these workers the benefits and that entitles them to food stamps. I am not sure this is the pride that we want to take in public employees. I am also very aware that we are facing extraordinary deficits and that fixing the problem that we are talking about here will be expensive. So I am open, and I know you are open to considering all options that move us toward our goal of allowing individuals to keep the Social Security benefits to which they are entitled. The reforms that led to the government pension offset provision and the windfall elimination provision are almost 20 years old now. At the time they were enacted, I am sure they seemed like a good idea. Now that we are witnessing the practical effects of those reforms, I think it is time that we pass legislation to address the unfair reduction of benefits that make it even more difficult to recruit and retain public employees. What I want you and Senator Akaka to know is that I look forward to working with this Committee as you work this issue out. It is an expensive issue, but there is no question, on the side of fairness, that fairness says we should remedy this problem. So because on our bill we have some 23 Senators, and I know Senator Mikulski has a bill that does half what we do and I believe she has some 25 cosponsors, it seems to me that between the two bills, we ought to be able to put something together to get a fair conclusion to this in this session of the Congress. Thank you very much. Chairman Collins. Thank you very much, Senator. I certainly share your hope in that regard. I am proud to be a cosponsor of Senator Mikulski's bill, as well. Like you, I am open to compromises on this issue, but my hope is that by holding this hearing today, the Committee can shine a spotlight on what is a very troubling problem particularly for lower-income women retirees, as your statement so eloquently has pointed out, and that we will be able to prompt the Finance Committee to move these bills. So I thank you very much for taking the time out of your busy schedule to be here with us today. I know this is of enormous importance to you and I thank you for your leadership. Senator Feinstein. Thanks, Madam Chairman. I appreciate it. Chairman Collins. Senator Akaka, we began the hearing by hearing from Senator Feinstein because she has an Appropriations meeting that she needs to go to. I am now going to go to my opening statement and then I will call on you shortly. OPENING STATEMENT OF CHAIRMAN COLLINS Chairman Collins. Senator Feinstein has given an excellent overview of the issue that we are looking at today. Individuals affected by both the government pension offset and the windfall elimination provisions are those who are eligible for Federal, State, or local pensions from work that was not covered by Social Security, but who also qualify for Social Security benefits based on their own work in covered employment or that of their spouses. While the two provisions were intended to equalize Social Security's treatment of workers, many of us are concerned that they unfairly penalize individuals for holding jobs in public service when the time comes for them to retire. These two provisions have enormous financial implications not just for Federal retirees and employees, but also for our teachers, police officers, firefighters, and other public employees as well. Despite their challenging, difficult, and sometimes dangerous jobs, these invaluable public servants often receive far lower salaries than private sector employees. It is therefore doubly unfair to penalize them when it comes to their Social Security retirement benefits. These public servants or their spouses have all paid taxes into the Social Security system. So have their employers, and I think that is a very important point. Each of the people that we are talking about has paid Social Security into the system, paid payroll taxes; the employer has, too. So they earned these benefits. They have worked the necessary quarters under covered retirement. Yet, because of the way these two provisions work, they are unable to collect all of the Social Security benefits to which they otherwise would be entitled. While the GPO and the WEP affect public employees and retirees in virtually every State, their impact is most acute in 15 States, including Maine, for the reasons that Senator Feinstein explained. Those States have retirement systems that do not have a Social Security component. Nationwide, more than one-third of teachers and education employees and more than one-fifth of other public employees are affected by the GPO and/or the WEP. Almost one million retired government workers across the country have already been adversely affected by these provisions. Millions more stand to be affected by them in the future. Moreover, at a time when we should be doing all that we can to attract qualified people to public service, this reduction in Social Security benefits makes it even more difficult for our Federal, State, and local governments to recruit and retain the teachers, police officers, firefighters, and other public servants who are so critical to the safety and well-being of our families. The Social Security windfall elimination provision reduces benefits for retirees who paid into Social Security and also receive a government pension from work not covered by Social Security, such as pensions from the Maine State Retirement Fund. While private sector retirees receive monthly Social Security checks equal to 90 percent of their first $606 in average monthly career earnings, government pensioners are only allowed to receive 40 percent--a harsh penalty of more than $300 per month. The government pension offset reduces an individual's survivor benefit under Social Security by two-thirds of the amount of his or her public pension. It is estimated that 9 out of 10 public employees affected by the pension offset lose their entire spousal benefit, even though their spouses paid Social Security taxes year after year. What is most troubling is that this offset is most harsh for those who can afford it the least, and that is lower-income women. In fact, of those affected by the pension offset, 73 percent are women. According to the Congressional Budget Office, as Senator Feinstein noted, the GPO reduces benefits for more than 200,000 of these individuals by more than $3,600 a year. That is the difference between poverty and a comfortable retirement for a lot of low-income retirees. Our teachers and other public employees face difficult enough challenges in their day-to-day work. Individuals who have devoted their lives to public service should not have the added burden of worrying about their retirement. This issue is extraordinarily important in my home State of Maine and it is one of the issues that I hear the most about. People stop me when I am in the grocery store, at church, wherever I am, even at my 30th high school class reunion a couple of years ago. I guess all of us as we are getting older are starting to finally think about what we are going to do when we retire. Many of my high school friends entered the teaching profession. They are committed to living and working in Maine. They love their jobs and the children they teach, but they worry about their future and their financial security in retirement. I hear a lot about this in my constituent mail and I want to share a couple of letters that I have received. One was from Patricia DuPont, from Orland, Maine. She wrote that because she had taught for 15 years under Social Security in New Hampshire, she is living on a retirement income of less than $13,000, after 45 years in education. Since she also lost survivor benefits from her husband's Social Security, she calculates that if we were to completely repeal the two provisions we are discussing today, it would double her current retirement income. And think how much better off she would be with $26,000 a year, still not exactly a fortune, versus $13,000. Moreover, these provisions penalize private sector employees who leave their jobs to become public school teachers. At a time when we are trying to get more people to come into teaching, I think this is another unfortunate effect of these provisions. Ruth Wilson, a teacher from Otisfield, Maine, wrote to me as follows: ``I entered the teaching profession 2 years ago, partly in response to the nationwide plea for educators. As the current pool of educators near retirement in the next few years, our schools face a crisis. Low wages and long, hard hours are not great selling points to young students when selecting a career. I love teaching and only regretted my decision when I found out about the penalties I will unfairly suffer. In my former life as a well-paid systems manager at State Street Bank in Boston, I contributed the maximum to Social Security every year. When I decided to become an educator, I figured that because of my many years of maximum Social Security contributions, I would still have livable retirement wage. I was unaware that I would be penalized as an educator.'' That is a perfect example of someone who thought that she had planned well for her retirement years, had worked in the private sector, then made the sacrifice to take a lower salary and teach. And yet she finds out that she is going to lose the benefit of those years in the private sector when it comes to retirement. Maine, like many States, is currently facing a shortage of teachers. I just don't think that we can afford to discourage people from pursuing important careers like teaching in the public sector in this way, and that is why I have joined Senator Feinstein in introducing her bill and have cosponsored Senator Mikulski's bill as well. Today's hearing will examine how these two provisions work, why they were enacted, and what their effect has been on public employees and retirees. We will also look at options for their modification and repeal. We have heard from Senator Dianne Feinstein. We will hear next from the Social Security Commissioner, Jo Anne Barnhart, who will help us better understand the history and reasons underlying the pension offset and windfall elimination provisions, as well as the impact that proposals to modify or repeal these two provisions would have on the Social Security retirement and disability funds. Finally, we will hear from a panel representing public employees and retirees, including Julia Worcester, who has traveled all the way from Columbia, Maine, to tell us about her work both in Social Security-covered retirement and as a Maine teacher. We will also be hearing from other public employee representatives, as well. I look forward to hearing all the testimony today. My hope is that this oversight hearing, which one of our witnesses tells me is the first Senate hearing to delve into this issue, will lay the ground work for action to resolve what is a very troubling problem for far too many of our retirees. I am very pleased to call on my colleague and friend, Senator Akaka, for any comments that he might have. OPENING STATEMENT OF SENATOR AKAKA Senator Akaka. Thank you very much, Madam Chairman, for holding this hearing. I commend you for highlighting this troubling issue not only for women, but for people of our country. I want to say good morning, also, to all of those who are with us today. I am pleased that Senator Feinstein was able to join us and give her remarks. Senator Mikulski unfortunately could not be with us. They are leaders in addressing problems associated with the government pension offset, and also the windfall elimination provision, both of which impact our Federal employees and retirees. As the Chairman noted, the general pension offset was established to create a level playing field between government and private sector workers who receive Social Security spousal benefits when the individual also receives a pension for work not covered by Social Security. Under the GPO, those individuals are subject to a reduction in their Social Security spousal benefits equal to two-thirds of the amount of the government pension. Unfortunately, the reduction has proved to be imprecise and has uneven results. As of last December, there were 376,000 government annuitants whose Social Security spousal benefits were affected by the GPO. Approximately 73 percent of them were women. The impact of the GPO is especially hard on women. The 2001 data shows that the average monthly offset for women was nearly one- third greater than that for men. In addition, women are harmed because many may have taken time off work to raise a family, resulting in a reduced pension. The reduction in one's pension, combined with reduced Social Security spousal benefits, put at risk many female retirees who have dedicated their lives to public service. This Committee has acted before to protect women and their retirement benefits. Last year, we passed legislation I introduced, the thrift savings plan catch-up bill, which allows Federal employees age 50 and over to contribute additional amounts to the thrift savings plan. Just like the GPO proposal before us today, the TSP change will help those women who return to the workforce after raising families and have not been able to prepare adequately for retirement. Due to the problems with the GPO and its aggravated impact on women, I am pleased to again cosponsor Senator Mikulski's legislation, S. 363. This bill would eliminate the application of the GPO for those individuals whose monthly combination of Social Security, spousal benefits, and non-Social Security pensions is $1,200 or less. Senator Mikulski's legislation will go a long way to minimize the harsh impact the GPO has on those government retirees, particularly women, who depend heavily on Social Security. Today, we are also discussing the windfall elimination provision. Although the WEP, like the GPO, was created to even the playing field between public and private workers, it has had the effect of penalizing those who had lower earnings in their non-Social Security employment. The problem has become so severe that last winter the CBS Evening News ran a special feature on the WEP, depicting the hardships faced by hundreds of thousands of Americans who receive less than their full Social Security benefits because of this provision. Congress must act now to mitigate the financial strains placed upon our retired workers because of the GPO and WEP. Madam Chairman, I hope we can work together to find a solution to the problems facing retired government employees and their spouses, and help those who have dedicated their lives to public service. You have been a great leader, Madam Chairman, in this respect, too, and I thank you again for holding this hearing. Chairman Collins. Thank you very much, Senator. Senator Akaka. Madam Chairman, I am sorry that I have another hearing to go to and I won't be able to stay for the remainder of the hearing. Chairman Collins. I understand. I have that hearing also, so represent me well there. Senator Akaka. Thank you. Chairman Collins. This is a day with a lot of hearing conflicts, but thank you very much for coming by. The Committee would now like to welcome and call forward the Hon. Jo Anne Barnhart, the Commissioner of the Social Security Administration. I know that the Commissioner rearranged her very busy schedule in order to be with us today, and I want to express my appreciation for her efforts. I also want to say that the Commissioner has done an excellent job running the Social Security Administration. It is an enormous task. My case workers in Maine tell me that you have made real progress in cutting down on the backlogs and processing claims and disputes, and I want to recognize that good work. Commissioner Barnhart's experience with Social Security dates back to her service in 1981 as Deputy Associate Commissioner of the Office of Family Assistance. I would note that she also served as the Republican staff director for this very Committee and that we had the pleasure of working together decades ago. We look forward to hearing your testimony this morning. You may proceed. TESTIMONY OF JO ANNE B. BARNHART,\1\ COMMISSIONER, SOCIAL SECURITY ADMINISTRATION Ms. Barnhart. Thank you, Madam Chairman. I appreciate those kind comments about Social Security. Also, I must say that it was something of a nostalgic trip for me to walk in here this morning, because I don't think I have been in this hearing room for 15 years since I did serve as Republican staff director. --------------------------------------------------------------------------- \1\ The prepared statement of Ms. Barnhart appears in the Appendix on page 32. --------------------------------------------------------------------------- I want to thank you for inviting me to discuss the government pension offset provision, or GPO, and the windfall elimination provision, which is also known as WEP. These provisions are extremely complex and they are not well understood, so I appreciate this opportunity to briefly describe their purpose, how they work, and issues that should be evaluated when you are considering legislative changes. I would like to begin with GPO which, as you have indicated, affects government retirees who are eligible for two benefits, a pension based on their own work in a Federal, State, or local government job that was not covered by Social Security and a Social Security spouse's or surviving spouse's benefit based on their husband's or wife's work in Social Security-covered employment. If the GPO applies, the person's spouse or surviving benefit is reduced by an amount equal to two-thirds of the person's government pension based on work not covered by Social Security. As of December 2002, about 367,000 beneficiaries had their benefits fully or partially offset due to the GPO. Of those, 73 percent were women. In enacting the GPO, Congress intended to assure that individuals working in non-covered employment would be treated in the same manner as those working in covered employment. Prior to GPO, a person who worked in a government job not covered under Social Security could receive, in addition to the government pension based on his or her own earnings, a full Social Security spouse's or surviving spouse's benefit. However, a person who works in a job covered under Social Security is subject to the dual entitlement provision. This provision, which has been applied since 1940, requires that Social Security benefits payable to a spouse or a surviving spouse be offset by that person's own Social Security benefit amount. Therefore, GPO really acts as a surrogate for the dual entitlement offset, ensuring that spouses and surviving spouses are treated similarly regardless of whether their jobs are covered under Social Security or not. The impetus for enacting the GPO provision was a March 1977 Supreme Court ruling in Califano v. Goldfarb. That ruling eliminated the dependency test that then applied to men but not women in order to qualify for Social Security spousal benefits. Essentially, it eliminated gender bias in the Social Security programs. Because of the dual entitlement provision, men who worked in covered employment still did not typically receive spouse or widow benefits, but those who worked in non-covered employment could. Therefore, Congress enacted the GPO in December 1977. While the GPO provision is intended to accomplish the same purpose as the offset under the dual entitlement provision, the amount of the reduction under the GPO is different. Under the dual entitlement provision, dollar-for-dollar is reduced. Under the GPO, there is a two-thirds reduction, and I would like to give just a brief example to clarify the difference. If we take Ms. Jones, who is receiving a Social Security retirement benefit of $900 a month based on her own work, her own employment, she is also potentially eligible for $900 as a widow's benefit. So that would be a total of $1,800 if she were allowed to receive both. Her Social Security retirement benefit is subtracted from her widow's benefit, resulting in her widow's benefit being fully offset. So her Social Security benefit is subtracted from the $1,800 total and she receives only $900 in Social Security benefits. A second widow, Ms. Brown, is in a comparable situation. She worked for the government and her pension is $900. Potentially, she too could be eligible for a Social Security widow's benefit of $900. However, the GPO provision reduces the $900 widow's benefit by two-thirds of her pension, or $600. So she receives a $300 Social Security benefit, in addition to her $900 government pension. Therefore, she receives $1,200, while the individual who worked in covered employment receives $900. That is just a brief example to explain what, looking back over legislative history, it appears was Congress' intent in enacting the GPO--to create a situation comparable to the dual entitlement provision. I would now like to briefly address the WEP provision. In 1983, the Social Security Act was amended and included WEP as a means to eliminate what were called and have been called windfall Social Security benefits for retired and disabled workers who were receiving pensions from employment that isn't covered by Social Security. Generally while the WEP applies to any pension based on non-covered employment, it primarily affects government workers. The WEP, I want to point out, though, does not affect Social Security benefits that are payable to survivors of workers. The WEP removes an unintended advantage that the weighting in the regular Social Security benefit formula would otherwise provide for persons who have substantial pensions from non- covered employment. This weighting is intended to help workers who spent their whole lives in low-paying jobs. It provides them with a relatively higher benefit in relation to their prior earnings than the benefit that is provided for higher- paid workers. However, because Social Security benefits are based on average earnings over a working lifetime, a worker who has spent part of his or her career in employment not covered by Social Security actually appears to have a lower lifetime earning than he or she actually had. Without the WEP, such a worker would be treated as a low-income worker for Social Security benefit purposes and therefore receive the advantage of the weighted benefit formula that was designed to help lower-wage earners. I would like to explain how the WEP is computed. The primary insurance amount formula for determining Social Security benefits for workers who reach age 62 in 2003 is, as Senator Feinstein described in her testimony, 90 percent for the first $606 in average monthly earnings, plus 32 percent of the next $3,047, and 15 percent of average monthly earnings above $3,653. Under the WEP computation, the 90 percent factor is reduced, so that the 90 percent of the first $606 becomes 40 percent of the first $606. Under the regular Social Security benefit formula, a worker would get $545 of that $606. Under WEP, the individual would receive $242 of the first $606. Under both scenarios, the 32-percent and the 15-percent factors remain the same. So the effect of WEP occurs at that first level of calculation. For a worker first eligible in 2003, the maximum WEP reduction is $303 a month, because when you take 40 percent of $606, that is the largest reduction that you have, the 50 percent, the difference between the 40 and the 90 percent. Unlike the GPO, the WEP can never eliminate a person's Social Security benefit. For workers who have 30 or more years of substantial covered earnings, the WEP does not apply at all. Substantial earnings for 2003 are defined as $16,125 a year. The WEP is phased out gradually for workers who have substantial earnings for 21 to 29 years. There is a phase-out of the WEP from the 21st year down to the 30th year, where the total exemption from WEP begins. As of December 2002, WEP reduced the Social Security benefits of approximately 635,000 retired and disabled workers, and of those affected workers, 66 percent are men. The President's fiscal year 2004 budget includes a proposal that would improve the administration of both WEP and GPO. It is a change that would allow SSA to independently verify whether beneficiaries have pension income from employment not covered by Social Security. Right now, we rely largely on the applicants who come into the office. We do have an ongoing computer matching program with OPM that helps us as far as Federal employees go. But with State employees, it is a much more difficult situation. A number of proposals have also been advanced to change the WEP and GPO provisions, and Senator Feinstein's bill is one of those. Senator Mikulski's, which you and Senator Akaka referenced, is another, and there are several others. Some would eliminate those provisions entirely. Others, like Senator Mikulski's bill, have set a limit for the offset. These provisions would be costly and would restore the more favorable treatment afforded to many workers in non-covered employment prior to the enactment of the GPO and WEP. I raise that issue because I think it was Congress' intent to establish equity in enacting these previsions. Since you are looking at issues that would need to be addressed as you move ahead in looking at the GPO and WEP, certainly that is one that would warrant consideration. Further, if both WEP and GPO were eliminated, the Social Security trust fund exhaustion date would advance by 1 year, from 2042 to 2041, as would the year of cash flow deficit advance from 2018 to 2017. Most other proposals to modify the effects of WEP or GPO provide higher Social Security benefits for government workers whose pensions from non-covered employment, in combination with Social Security benefits, are below certain levels. That would be Senator Mikulski's bill. However, those bills do not address the dual entitlement offset that applies to millions of comparable beneficiaries who worked only in covered employment. If you look at addressing the dual entitlement provision that has been in effect since 1940, you find that the cost increases substantially to over $500 billion. As indicated, the GPO and WEP are two highly technical provisions of law that are not well understood by the public, and we have therefore greatly increased our public information efforts on these provisions. We have revised the annual Social Security statement to attempt to make it clearer to people who receive the statement that they could be affected by the government pension offset or by the windfall elimination provision. We have individuals who conduct pre-retirement seminars. We have a website with a calculator so workers can actually see the individual effect of these reductions--actually put in their figures. And we are obviously happy to walk them through it if they come into our offices for an appointment because it is complicated and difficult for people to understand. We are in the process right now of putting up a special website related specifically to WEP and GPO, in large measure because of the increased emphasis and interest that this issue has received; many people have expressed concern and a lack of understanding about how these provisions operate. We felt it was very important to make information accessible in every possible form. At this time, I would be happy to answer any questions that you might have, Madam Chairman. Chairman Collins. Thank you very much, Commissioner. Your explanation of how the law works, which was very good, demonstrates a problem, however, and that is its complexity. What I have found is that many of the people who have come to me about this issue were surprised to learn of the impact of the pension offset and the windfall elimination provision on their future Social Security benefits. Ms. Worcester, who will be testifying on our next panel, is one of those who found out about it only when she happened to go to a retirement seminar. It is very common in my State that people are surprised to learn of the impact. One teacher friend of mine told me that he had worked every summer purposefully during his teaching career in order to earn his Social Security benefits, having no idea that they would be offset. I am glad to hear about your efforts because I really think there is a lack of understanding that compounds the problem for a lot of retirees. You mentioned the Social Security statements that we get after a certain age on an annual basis. The last time I got mine I specifically looked for mention of these provisions because I am one of those who has employment under both the public and private sector. I knew the amount that was listed was not going to be the amount that I would be eligible for, but I didn't see any warning or any caution to me. Has that been changed recently? Ms. Barnhart. Actually, it was, Senator. Thank you for asking that question, Madam Chairman, because I did make changes in the Social Security statement this past spring. So I hope that you are not going to tell me you received your statement since May of this year. Chairman Collins. I did not. What does it say now? Ms. Barnhart. We actually put in a highlighted area. It is in bold print and it actually says, under your estimated benefits, ``The law governing benefit amounts may change. Your benefit amount may be affected by military service, railroad employment, or pensions earned through work on which you did not pay Social Security. Visit''--then we give the website-- ``to see whether your Social Security benefit amount will be affected.'' In addition, in the ``Some Facts About Social Security'' section, we list five publications that we have available and one of those is ``The Windfall Elimination Provision: How It Affects Your Retirement of Disability Benefits,'' and ``Government Pension Offset: Explanation of a Law that Affects Spouse's or Widow(er)'s Benefits.'' This information had not been included prior to the changes that were made last spring. I felt it was important because of the increased concern that I was hearing that we include this warning and advisory, basically, to individuals who might not realize that their benefits could be affected. When we put this statement out--and we do it for everyone 25 years of age and older--we estimate future earnings, and we estimate your benefit; we have the posted earnings--but we don't have a way to tell you at this point what the offset would be because we don't know whether you will receive a noncovered pension or the amount of your pension. We are looking at ways to see if we could set some sort of parameter for individuals who, on their statement, have many years of covered work, but then they have years of noncovered work, or they have years of noncovered work and then they are working in covered employment. The feasibility of setting up some sort of a computer alert, an automated alert, so we could then put a special advisory in those statements--is something we are investigating now to see if it is possible. We still wouldn't be able to tell the individual the dollar effect, but if we are able to accomplish this, we could give a more direct advisory to the person that it appears, because of ``x'' years of non-covered employment, you may be affected by this. Chairman Collins. I think that would be extremely helpful. I still believe the provisions themselves need to be modified and, in practice, have become unfair. But the least we can do is make sure that people realize the impact. And I think because the law was changed, a lot of people are surprised. In the case of Ms. Worcester, for example, her mother's retirement was not affected. So I think it is incumbent upon the Social Security Administration to do everything possible to wave a red flag so that at least people can make appropriate plans for their retirement until we can get this modified or fixed. Ms. Barnhart. I certainly appreciate that and if you or other Members of the Committee have recommendations or the panelists that are following me have other recommendations of other activities we could undertake, I would certainly be willing to take those under consideration. Chairman Collins. Thank you. Some have criticized, including myself, the windfall elimination provision for the way that it actually works in practice; that it sounded fine, perhaps, when it was passed--I wasn't a Member of the Senate at the time and I want to make sure everybody in the room knows that--but that, in practice, it creates inequities and hardships. For example, many would contend that the arbitrary 40- percent factor in the formula does not reflect the actual ``windfall'' when it is applied in individual cases. The current formula seems to over-penalize lower-paid workers with shorter careers or with full careers that are fairly evenly split between Social Security-covered and non-covered employment. The current formula, in my judgment, also is regressive because the reduction causes a relatively large reduction in benefits for lower-wage workers. Would it be appropriate to modify the formula, for example, by perhaps including a means test--Senator Mikulski's bill does that to some extent--to ensure that low-wage workers receive a greater portion of the earned benefits? Ms. Barnhart. One of the basic tenets of the Social Security program has been the ``earned right'' nature of the program, and that is that you pay into the system for the benefits that you obtain. I do think that if Congress considers the inclusion of a means test, it would be important to recognize that could be viewed as a significant departure from that ``earned right'' nature of the Social Security program. Also, it may be helpful for you if I could provide some information to you about the relative poverty status of individuals who are affected by the WEP. Chairman Collins. It would be helpful. Ms. Barnhart. I would be happy to do that. The information follows: INFORMATION PROVIDED BY MS. BARNHART Poverty Status of Beneficiaries Affected by the Windfall Elimination Provision Based on the most recent data available, approximately 3 percent of beneficiaries affected by the windfall elimination provision have incomes below the poverty level ($8,628 for aged individual in 2002 and $10,874 for aged couple). In contrast, 8.4 percent of all aged (age 65 or older) Social Security beneficiaries have incomes below the povery level. Chairman Collins. Thank you. You mentioned the ``earned right'' feature of Social Security, but I think that is what is so frustrating to teachers and firefighters and police officers who have paid in personally into the system, worked for 10 years in the private sector, earned their benefits and can't get the benefit--don't get them. Ms. Barnhart. I certainly understand that. I think the thing that is a very difficult aspect of the WEP to explain, again, looking back at the comparability between individuals working in covered and non-covered employment, part-time in each of those or entirely covered employment--the Social Security program benefit, structure provides a different replacement rate depending on the lifetime amount of covered wages of the individual. For the low-income earner, the replacement rate is approximately 56 percent of pre-retirement income. For the average earner, it is around 42 percent and for the high-wage earner it is somewhere around 27 to 30 percent. So the issue here is if you have an individual who worked for 10 years in covered employment at, say, $60,000 a year, when we calculate the Social Security benefit, we do it over a 35-year work history. So we take that $60,000 for 10 years and for the remainder of the years, we put zeroes in for all those years. So it presents in the benefit calculation a situation where that individual has a much lower lifetime earning. In other words, the $60,000 a year over 10 years gets averaged out over that 35-year time period and it appears that the individual worked for many years as a low-wage earner. If we had a person who worked in Social Security and had the equivalent lifetime earnings as the case that I just described, they would, in fact, be a low-wage earner, and therefore entitled to the progressivity of the replacement rate. I think this is really the dilemma, Madam Chairman, when we look at this in terms of how the Social Security benefit is structured and the effect that changing the WEP would have on the concern that low-wage workers receive a higher replacement rate than higher-wage workers do. Chairman Collins. But if you look at the CBO study about the impact of these two provisions, it seems that they disproportionately affect lower-income workers because of the way the formula works. Since, as you mentioned, Social Security is designed to replace more of the income for lower-income workers than higher-income workers, in a sense it already has a means test built in, in that it isn't an equal benefit as far as the replacement of wages. That is why it seems that, at the very least, a first step ought to be to try to help those lower-income workers who are particularly hard hit by these provisions, because I really don't think that Congress intended that. It was an attempt, as you said, to have equity in the system, to make sure the dual eligibles were not treated differently or more harshly than those with other pensions. But, in practice, it has created a lot of problems. Ms. Barnhart. I certainly understand, and I have read the testimony of the panelists who are going to follow me. Chairman Collins. I was going to ask you that. Good. I am glad you did. Ms. Barnhart. Yes, I absolutely did, last night. Let me just take this opportunity to say, if I may, in the situation that related to the overpayment, I read about that last night and met with my staff this morning and have asked them to look into that situation and find out the circumstances that created it. I will contact your office to let you know if that situation can be resolved in any way. Chairman Collins. I appreciate that. That was an issue that I was going to bring up to you. For those in the audience who haven't read the testimony of the next panel, the President of the National Association of Retired Federal Employees brought to our attention the case of a 79-year-old widow who worked for the Veterans Administration, retired in 1994. No one ever told her about the impact of these two provisions. As a consequence, she received both Social Security and her pension without an offset and has now been told that she owes more than $20,000. I want to tell you, Commissioner, that this is not uncommon, that my case workers in my six State offices deal with exactly this kind of overpayment case all the time. As you can imagine, it imposes a tremendous hardship on elderly people when they all of a sudden are presented with this huge bill because of an overpayment. I did want to ask you what the Social Security Administration's general policy is in dealing with overpayments and whether there is any procedure for waiving or lessening them when it is clear it would impose a considerable financial hardship, and it is also clear that the individuals involved had no idea and were not at fault. Ms. Barnhart. Yes, let me say we do have procedures. First of all, the law would allow us technically to withhold the entire benefit check. We most times do not do that, particularly in cases where it is evident that the individual was not at fault and it certainly was an unintended situation. Generally what we do, first of all, is offer to sit down and negotiate and look at the person's financial status and withhold a much smaller amount over time, so that we do not expect to be paid back immediately. We actually try to work with the individual to do something that will not financially penalize them even further. We are allowed to grant waivers, and there are special circumstances. I would be happy to provide a description of that waiver process for you for the record, if you would like. Chairman Collins. That would be helpful. The information follows: INFORMATION PROVIDED BY MS. BARNHART The following outlines the Social Security Administration's process for determining if an overpayment can be waived:The Social Security Act (Section 204(b)) provides that recovery of an overpayment can be waived if the person from whom we are seeking recovery is without fault in causing the overpayment and recovery would either defeat the purpose of title II of the Act or be against equity and good conscience. To make a fault/without fault finding, we consider all of the circumstances surrounding the overpayment in each case. We take into account any physical, mental, educational or linguistic limitations the person has. If the person caused or helped to cause the overpayment, he is found at fault. If he is blameless in the creation of the overpayment, he is without fault. To determine if recovery would defeat the purpose, we look at the person's current financial condition, that is, his situation at the time the waiver decision is being made. Current financial information is defined as no more than 1 year old when the waiver decision is made. Financial information must be provided to make a defeat the purpose determination. If a person does not wish to pursue the defeat the purpose criteria by providing current financial information, he may still pursue waiver by showing that recovery is against equity and good conscience. As defined by Social Security regulations, this means that the person changed his position for the worse or relinquished a valuable right because of reliance on a notice that a payment would be made or because of the overpayment itself. Financial circumstances are not material to a finding of against equity and good conscience. A decision by SSA regarding a request for waiver of an overpayment is an initial determination and a decision that is unfavorable to the beneficiary may be appealed through all levels of administrative appeals within SSA (i.e., reconsideration, hearing before an Administrative Law Judge, and review by the Appeals Council.) When all administrative appeals have been exhausted, the beneficiary may file a civil action with the appropriate United States District Court. Ms. Barnhart. That is precisely what I have my staff looking into to see if this would be one of those cases where such a waiver might be appropriate. I would point out to you this is one of the reasons--the fact that this situation occurs is one of the reasons that the President's budget includes the proposal I described in my testimony. Because we have situations where we don't know whether a claimant is receiving a pension from non-covered work, even though our workers are trained to ask. I am sure that doesn't happen a hundred percent of the time. Although we have very dedicated workers, there are a lot of things they must attend to when someone comes in to apply for retirement. By the same token, I am sure in some cases individuals don't necessarily understand what that means, even if an attempt is made to describe it, or they may not be receiving a pension at that time and the situation may change later. In fact, they may be eligible fully for Social Security at one point, but not for the other pension because of different rules, and so forth. That is one of the reasons that we wanted to have the ability to do independent verification so that we wouldn't have people in these situations where they receive Social Security and then get this overpayment notice. It really is an administrative issue for us. Chairman Collins. One of the challenges in tackling this problem is the cost. You mentioned in your statement that if we enacted the various legislative proposals, the Social Security trust fund would be depleted a year earlier. I have two questions in that regard. One is, either today or for the record, could you give us an estimate of the Feinstein-Collins bill and the Mikulski- Collins bill so that we do have a sense of what we are dealing with? Second, is the administration open to working on this issue to try to come up with some sort of approach that would lessen the burden particularly for lower-income retirees? I realize that, much as I would like to see outright repeal, that may not be feasible this year or next year, but surely we can start down the path of remedying some of the problems that are described by our next panel of witnesses. Ms. Barnhart. I do have some estimates that were developed by our independent chief actuary's office. First of all, to eliminate the GPO and the WEP, as the Feinstein-Collins legislation provides, it would cost $22.5 billion over 5 years and $61.9 billion over 10 years. In the Mikulski-Collins legislation, which modifies the GPO, as has been described earlier, the cost is estimated at $10.1 billion over 10 years. So we are talking, if we look at it from a 10-year perspective, for either the Mikulski or Feinstein bills, about a range of $10 to $60 billion-plus in cost. Chairman Collins. Thank you. And not to press you, but will the administration continue to work with us to try to see if there is a way that we can start to remedy this? Ms. Barnhart. I wrote that down because I knew I would forget the second part of that question. I have my 35th high school reunion coming up. Certainly, we at the Social Security Administration would be very happy to work with you and the Committee and any other Members in terms of providing any analysis that we can on the effect that various provisions would have. I would say this, that due to the cost, and certainly if we look at the $10 to $60 billion-plus, and then looking at the dual entitlement--the cost of eliminating the dual entitlement should be somewhere around $500 billion, not that you suggested that, but if we get into those kinds of equity issues, I would say that I do think that one could make a real case for waiting until the entire Social Security program has been strengthened and protected to entertain these kinds of costly changes. As you know, and as we have discussed and alluded to in the hearing earlier, it is projected by our actuaries that the Social Security trust fund will move into a negative cash flow basis in 2017 and that the trust funds will be entirely exhausted by 2042, which, absent any action, would necessitate that only 73 percent of benefits would be able to be paid. So it would be my hope that as we undertake changes to benefits-- and clearly this would affect the benefit program into the future--that it could be done in that context. Chairman Collins. I want to thank you very much for your testimony today which has been very helpful to the Committee as we consider this important issue. Your testimony was very helpful in giving us a better understanding of how it works, and I salute you for your efforts on the education front to make sure that people understand the impact. I still feel very strongly that we do need to act, that we can't wait on this issue, because every day it creates a hardship for people who are struggling to live on their retirement income. Every day, it discourages another would-be teacher, firefighter, Federal employee, or police officer from going into public sector employment. So I hope we can come up with a creative approach and work together to see if we can remedy this problem, and I very much appreciate your being here today. Ms. Barnhart. Thank you, Madam Chairman, and in that spirit of cooperation that you have just expressed, let me say that we stand ready, as I say, to provide any information and analysis, and to answer any questions for the record you or your colleagues may have, and certainly any questions that arise as a result of the panel that is going to follow me. Chairman Collins. Thank you very much. Ms. Barnhart. Thank you. Chairman Collins. We now will call forward our next panel. I would like to extend a special welcome to Julia Worcester, of Columbia, Maine. Ms. Worcester worked for 20 years in Social Security-covered employment before deciding at the age of 49 to go back to school to pursue her dream of becoming a teacher. I think it is a wonderful story, Ms. Worcester, and I admire you so much for doing that. After teaching full-time for 15 years, Ms. Worcester retired and now her monthly income is substantially reduced because of the government pension offset and the windfall elimination provisions. As a result, she is still substitute- teaching to make ends meet. Again, Ms. Worcester, we very much appreciate your willingness to share your story with the Committee today. I want to mention that you were brought to our attention by Sue Shaw, who has been a very strong advocate in the State of Maine on this issue, and she will be submitting some testimony which, without objection, we will enter into the record as well. The Committee is also delighted to welcome Charles Fallis, who will testify on behalf of the 400,000 members of the National Association of Retired Federal Employees. Since 1921, the association has focused on improving the retirement benefits of Federal retirees, employees, and their families. I know that elimination of both the GPO and the WEP provisions are top legislative priorities for the National Association of Retired Federal Employees, and the Committee thanks you for your work on this issue and for being here today. Finally, I would like to welcome to the Committee Kenneth Rocks, the National Vice President of the Fraternal Order of Police. Due to the physical demands of their jobs and the number of law enforcement officers who augment their income with second and third jobs, law enforcement officers are particularly affected by the provisions we are discussing today. In fact, Mr. Rocks, my most recent constituent to contact me on this issue stopped me at a convenience store in Bangor, Maine. He was a Bangor police lieutenant who told me that he had been working two jobs for years to try to ensure that he would have sufficient retirement income and had only just learned of what the impact of these provisions would be on his retirement as well. So we very much appreciate your being here today on behalf of your members. Ms. Worcester, because you are from Maine, we are going to start with you on this panel today. Ms. Worcester. Thank you, ma'am. It is nice to know influential people. Chairman Collins. Thank you. TESTIMONY OF JULIA WORCESTER,\1\ COLUMBIA, MAINE Ms. Worcester. Good morning, Senators. Thank you for the chance to tell you how the changes in the way Social Security retirement benefits are calculated for public service employees has affected me. --------------------------------------------------------------------------- \1\ The prepared statement of Ms. Worcester appears in the Appendix on page 42. --------------------------------------------------------------------------- I am 73 years old and my husband of 54 years, Oswald, will be 88 in December. I am one of seven children, all born in Downeast Maine. I was not raised to expect something for nothing. I live a modest life, I work hard, and I do not spend time fretting about things I cannot change, but this law has had a tremendous effect on me. I was fortunate to be raised in a family that respected education. My father insisted on good grammar and corrected our speech when we strayed. My mother's family was college-educated and my mother went to what was then Machias Normal School in the 1920's and received a lifetime teaching certificate, which she updated toward the end of her career by taking courses by television. She taught school for many years and retired in the mid-1960's. She was able to collect both Social Security retirement, earned from work she did during summers and after she retired, and her State of Maine pension from her teaching. She was not bad off. I have worked 20 years outside of my teaching career. As a young woman, I worked in a herring cannery factory and in a string bean factory. While Oswald and I had two young children, a son and a daughter, I persuaded him that we should move to Connecticut, since the school system in our town at that time was very small. There was a two-teacher grade school and a two- teacher high school. We lived in Branford, Connecticut, for 13 years, and Oswald worked in a stone quarry. At first, I waitressed full-time so that I could work nights when Oswald could be home with the children. When the children were teenagers, I found a day job in a factory, as I discovered that teenagers needed their mother paying close attention to where they were in the evening and their father was not very good at saying no. In 1968, when I was 37, we had another child. We decided to come home to Maine when she was 6 years old. The other children were out of school and on their own, and even though we had another young child, the school system had improved greatly. My parents were getting older and my husband's brothers and sisters were also reaching elder years, and it was time for us to come home. When we got back to Columbia, I worked part-time for a while. Oswald was approaching retirement age, as he is 15 years older than I, and I thought seriously about our future. I decided to become a teacher, like my mother. It was something I always wanted to do. So at the age of 49, with the help of Pell grants and federally-subsidized loans, I started at the University of Maine, in Machias. I went to school year-round and completed my degree in 3 years, completing the degree in December 1982. I did some long-term substitute teaching right away and was hired full-time in the fall of 1983, which turned out to be an ominous year for my retirement benefits, but I loved it. This is where the problem comes in: Four or 5 years after I started teaching, I went to a seminar put on by Horace Mann and learned of the new law that meant all those years of working in factories and waitressing were not going to count for much in my retirement years, and that I was not even going to be able to collect much on Oswald's work record if that should be the case. That was when I learned that the life I had carefully planned wasn't going to work out quite the way I thought it was going to. I was nearly 60 years old, much too late to start over with a new plan. With my working, we are all right. Last year, I subbed 125 days out of the 175-day school year. The year before that, I substitute-taught 140 days out of the 175 days. It certainly makes a big difference in our income. We are not big spenders. Oswald is a bear about debts. We have long since paid off our mortgage and we don't charge things on credit cards. But I have to face facts. I will not be able to teach forever and Oswald is getting on in years. I should have what I rightfully earned. My family is a family that has accepted life as it has been handed. You do what you can with what you have. I am not bitter about the situation. I just believe I have earned this benefit through years of honest work and I should be able to receive it. I also have an addendum of my monthly income, if you would like me to continue with that. Chairman Collins. Certainly. Ms. Worcester. My monthly retirement is $814. I pay $418 a month for companion plan insurance for my husband and I out of my retirement, which is a necessity in this day and age. I receive from Social Security $107 a month, which is the 40- percent area, and my husband receives $716 a month, and both of those Social Security benefits are calculated after the Part B Medicare is taken out. I thank you. Chairman Collins. Thank you very much for your testimony. You so embody the Maine values of independence, hard work, thrift, and integrity, and I really appreciate your being here today to help us put a human face on what is a serious problem not only for you, but for so many others. So I appreciate your speaking out and your willingness to be here. For all of those years that you worked so hard waitressing and in other jobs, to receive only $107 a month in Social Security after paying into the system for so long seems just so unfair to me. Ms. Worcester. Well, it is kind of like an insurance policy that the company is not paying off on. Chairman Collins. That is a good way to put it, and yet you paid the premiums--i.e. payroll taxes--year after year, as did your employer, too. So thank you for that testimony. Mr. Fallis, can you beat that? [Laughter.] TESTIMONY OF CHARLES L. FALLIS,\1\ NATIONAL PRESIDENT, NATIONAL ASSOCIATION OF RETIRED FEDERAL EMPLOYEES Mr. Fallis. I can't beat that. --------------------------------------------------------------------------- \1\ The prepared statement of Mr. Fallis appears in the Appendix on page 46. --------------------------------------------------------------------------- Madam Chairwoman, I am Charles Fallis, President of NARFE, the National Association of Retired Federal Employees. I am testifying today on behalf of 400,000 retirees, employees, spouses, and survivors who are NARFE members. I would like to commend you, Senator Collins, for paving the way and holding the first ever Senate hearing on GPO and WEP. These atrocious laws have for many years destroyed the quality of life of a significant number of our members. We can't afford to wait any longer for corrective action to repeal or reform these onerous offsets--corrective action, by the way, that has a lot of support in the 108th Congress in the House and the Senate. NARFE has worked for repeal of GPO and WEP from the very beginning, well over 20 years. Throughout the course of those years, the pernicious provisions of these two offsets have denied many thousands of our older members, particularly women, of the economic dignity that they thought they would have in retirement. So I appreciate your invitation to come here today. I humbly ask for this Committee's assistance in the repeal of GPO and WEP, and I reiterate NARFE's continuing support for changes that would restore earned benefits to women and other deserving retirees. The GPO law targets government retirees who were first eligible to retire after December 1982, preventing them from collecting Social Security benefits based on their spouse's work record while at the same time they are collecting government annuities based on their own work. This law requires that two-thirds of a non-exempt public sector retiree's annuity must be used to offset whatever Social Security benefits are payable to him or her as a spouse, widow, widower, or survivor. By all accounts, this two-thirds offset against Social Security income is an arbitrary figure and, as such, we believe it should be reexamined. Of all the affected GPO beneficiaries, about 80 percent are fully offset, which translates into no benefits at all. I believe it is important to recognize, also, that almost 70 percent of those affected are low-income women, many of whom exist either in or on the fringes of poverty. Turning to WEP, current law greatly reduces the earned Social Security benefit of a retired or disabled worker who also receives a public sector annuity based on his or her own earnings. It applies to anyone who becomes 62 or disabled after 1985 and becomes eligible for a government annuity after 1985. This windfall reduction can reduce the worker's earned monthly Social Security income by up to $303. Madam Chairwoman and Members of this Committee, I have stated before that the harshness of GPO and WEP as they exist today causes both fears and tears among thousands of older retirees. They fear for their financial survival and their tears come from deep frustration that Congress, despite widespread congressional support to do so, has not acted to ameliorate their suffering. There are several bills pending before the Senate today that would offer relief to hundreds of thousands of former teachers, policemen, firefighters, cafeteria workers, postal workers, VA nurses, Social Security employees, and others who work long and hard for their benefits. There are 40 Senators of this 108th Congress, including you, Madam Chairwoman and several Members of this Committee, who have indicated their support for a change in GPO and WEP. They have cosponsored one or more of the pending bills introduced by Senator Feinstein and Senator Mikulski. We applaud you and we thank all of you for your continuing efforts to change or eliminate these Social Security offsets. I would like to share with you today a sad and compelling account of a situation concerning a NARFE member who contacted us early last week and described the details of her case. This NARFE member is 79 years old and is widowed. We have received documentation substantiating the facts in her case and, with that member's permission and upon your request, Madam Chairwoman, we would provide the documents to you. Chairman Collins. Without objection, those documents will be part of the record.\1\ --------------------------------------------------------------------------- \1\ The information referred to appears in the Appendix on page 59. --------------------------------------------------------------------------- Mr. Fallis. This unfortunate lady originally filed for divorced spousal benefits in 1989 while still working for the Veterans Administration. Her divorced spouse died in 1991, thus converting her claim to an application for surviving divorced spousal benefits. She became sick in 1993 and subsequently retired in early 1994 and began receiving her government annuity soon thereafter. She asserts that no one ever explained GPO or WEP to her, or the effect these offsets would have on her annuity and finally on her total income. Upon her retirement, and with no thought that retribution would follow, she began receiving both her government pension and Social Security survivor benefits. Then, in July 1997, this very unlucky lady received a letter from Social Security requesting repayment of $20,737 because of an erroneous overpayment. It had been determined belatedly, they said, that she was not exempt from GPO. She began an immediate appeals process that has been denied at every stage, culminating in a very recent final denial from an administrative law judge in Chicago. Madam Chairwoman, it is clear that this elderly lady with a meager pension from the VA of only $752 a month has no financial means of repaying this tremendous amount of money, money that she had no idea that she was not entitled to. Hers is not the only case such as this. There have been many, but this is a recent one and it is one of the worst that we have seen. But there are thousands of others in this same situation. Senator Collins, over the past two decades we have received thousands of letters from NARFE members, from Maine and elsewhere, describing in detail the anguish and economic hardships they experience every day because of GPO and WEP. For hundreds of thousands of Federal, State, and local government retirees, repeal of both of these offsets would ease or eliminate the devastating financial burdens they endure because of the effects of these onerous laws. Social Security Administration actuaries have determined that repeal of GPO and WEP would increase the size of the OASDI actuarial deficit by an amount estimated at .11 percent of taxable payroll. Now, the amount is not negligible, of course, but returning this income to long-suffering and deserving retirees would help restore their financial independence, provide them with increased purchasing power, and return to them a measure of self-esteem and economic dignity that was taken from them over 20 years ago with the enactment of this pair of insidious laws. Senator Collins, your hearing advisory today says, ``The individuals affected by GPO and WEP are individuals who are eligible for Federal, State, or local pensions from work that was not covered by Social Security.'' Yes, these affected individuals' work was not covered by Social Security, but they and/or their spouses worked in other jobs outside of the government that were covered long enough to make them eligible for Social Security benefits. But they still are being denied unfairly the Social Security benefits to which they are entitled and they still are being punished for having worked another full-time or part-time job in a different venue. I want to thank and commend you, Madam Chairwoman and Members of this Committee, for recognizing the need for change in GPO and WEP, and for addressing that need in this hearing today. I ask that you convey the urgency of this need to your colleagues on the Senate Finance Committee. Please ask them to recognize the significance of these issues, as well, so that we can get a bill out of the Senate, passed in the House, and on to the President's desk for his signature, a bill that would at long last allow Federal, State, and local government retirees in this country some relief from these terrible offsets. Finally, on behalf of the 400,000 members of NARFE, I commit to you today that we stand ready to work with you and the Members of the Senate for the expeditious resolution of these issues. I thank you. Chairman Collins. Thank you very much for your excellent testimony. Mr. Rocks, we are pleased to welcome you here today as well. TESTIMONY OF KENNETH ROCKS,\1\ NATIONAL VICE PRESIDENT, FRATERNAL ORDER OF POLICE Mr. Rocks. Good morning, Madam Chairman. My name is Kenneth Rocks and I am a Philadelphia police officer and the Vice President of the National Fraternal Order of Police, the largest law enforcement labor organization in the United States, representing more than 310,000 rank-and-file officers in every region of the country. --------------------------------------------------------------------------- \1\ The prepared statement of Mr. Rocks appears in the Appendix on page 52. --------------------------------------------------------------------------- I am here this morning at the request of Chuck Canterbury, National President of the Fraternal Order of Police, to share with you the views of the members of the Fraternal Order of Police on the windfall elimination provision and the government pension offset provisions in current Social Security law. The Fraternal Order of Police has designated the repeal of the windfall elimination provision and the government pension offset as one of its top legislative priorities, and we strongly advocate the passage of S. 349, the Social Security Fairness Act. The Social Security Fairness Act, introduced by Senator Dianne Feinstein, would repeal both the windfall elimination provision and government pension offset. This bill already has 23 cosponsors, drawing strong support from both sides of the aisle. It is our hope that Congress will take a serious look at the manifest unfairness of the windfall elimination provision and the government pension offset, and act to correct them by passing this bill. Ultimately, this legislation is about fairness to the State and local employees who paid for and ought to receive their Social Security benefits. Let me begin by explaining the impact of the windfall elimination provision on retired police officers. Simply put, law enforcement officers who serve communities which are not included in the Social Security system may lose up to 60 percent of the Social Security benefits to which they are entitled by virtue of secondary or post-retirement employment which required them to pay into the Social Security system. This 60 percent is a lot of money, especially when you consider the officer and his family were likely counting on that benefit when they planned retirement. The FOP contends that this provision has a disparate impact on law enforcement officers for several reasons. First of all, law enforcement officers retire earlier than many other professions. Owing to the physical demands of the job, a law enforcement officer is likely to retire between the ages of 45 and 60. Second, after 20 or 25 years on the job, many law enforcement officers are likely to begin second careers and hold jobs that do pay into the Social Security system. Even more officers are likely to moonlight and to hold second or third jobs throughout their law enforcement careers in order to make ends meet. This creates an unjust situation that too many of our members find themselves in. They are entitled to a State and local retirement benefit because they worked 20 or more years keeping their streets and neighborhoods safe, and also worked a job or jobs in which they paid into Social Security, entitling them to a benefit as well. However, because of the windfall elimination provision, if their second career resulted in less than 20 years of substantial earnings, upon reaching the age they are eligible to collect Social Security they will discover that they lose 60 percent of the benefit for which they were taxed. Actuarily speaking, I doubt many officers will live long enough to break even--that is, to collect the money they paid into the system--let alone receive any windfall. These men and women earned their State or local retirement benefit as public employees and they paid Social Security taxes while employed in the private sector. How is this a windfall? I think it is clear that Congress did not intend to reduce the benefits of hard-working Americans who choose to serve their States and communities as public employees and then went on to have second careers or worked second jobs to make ends meet. When the windfall elimination provision was enacted in 1983, it was part of a large reform package designed to shore up the financing of the Social Security system. The ostensible purpose was to remove a windfall for persons who spent time in jobs not covered by Social Security, like public employees, and also worked other jobs where they paid Social Security taxes long enough to qualify for retirement benefits. However, we can now clearly see that the windfall elimination provision was a benefit cut designated to squeeze a few more dollars out of a system facing financial crisis. The fallout has had a profoundly negative impact on low-paid public employees outside the Social Security system, like law enforcement officers. This is a matter of fairness. The arbitrary formula in current law, when applied, does not eliminate windfalls because of its regressive nature. The reduction is only applied to the first bracket of the benefit formula and causes a relatively larger reduction in benefits to low-paid workers. It also over- penalizes low-paid workers with short careers or, like many law enforcement officers, those whose careers are split inside and outside the Social Security system. Simply put, this provision has not eliminated a windfall for any individuals who did not earn it. It has resulted in a windfall for the Federal Government at the expense of public employees. Let me now discuss the aspects of the bill which would repeal the government pension offset. Like the windfall elimination provision, the government pension offset was adopted in 1983 to shore up the finances of the Social Security trust fund. This provision reduces the surviving spouse's benefit from Social Security by two-thirds of the monthly amount received by the government pension. For example, the spouse of a retired law enforcement officer who at the time of his or her death was collecting a government pension of $1,200 would be eligible to collect a surviving spouse benefit of $600 from Social Security. Two- thirds of $1,200 is $800, which is greater than the spouse's benefit of $600. Thus, under the law, the spouse is unable to collect a single dime of it. If the spouse's benefit were $900, only $100 can be collected because $800 would be offset by the officer's government pension. In 9 out of 10 cases, this completely eliminates the spousal benefit, even though the covered spouse paid Social Security taxes for many years thereby earning the right to these benefits. It is estimated that approximately 349,000 surviving spouses of State and local employees have been unfairly affected by the government pension offset. 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. Clearly, this is an issue that Congress must address. Previous Congresses sought to save money for the Social Security system by cutting benefits earned by State and local employees. The windfall elimination provision and government offset pension provision do not eliminate a windfall for workers. Rather, they have provided a windfall for the Federal Government at the expense of public employees. This is not right and it is not fair. This Congress has a chance to set things right by passing S. 349. Madam Chairman, I want to thank you and the Members of this distinguished Committee for the chance to appear before you today. It is my hope that this hearing will bring greater attention to the issue and increase the chances that S. 349, the Social Security Fairness Act, will be considered in this Congress. Thank you for inviting me to testify before you this morning and I would be pleased to answer any questions that you may have. Chairman Collins. Thank you very much, Mr. Rocks. You have very ably represented your members and we appreciate your being here. I am going to start with a question for Mr. Fallis and Mr. Rocks and then go back to Ms. Worcester. You heard Ms. Worcester testify that she was not aware of the windfall elimination provisions or the government pension offset until she had been teaching for a number of years. At that point I think she testified she was about age 60 and it was a little hard to come up with a new plan, in her words. Do you think that her situation is unusual, or have you found with NARFE members that there is also a lack of information and that a lot of your members, retired Federal employees, are also shocked to learn of the impact? Mr. Fallis. Yes, too many of them are unaware. I think we probably have a better communications system than in other areas. I think school teachers have been especially hard hit. I have two sisters-in-law in Florida who, until they retired and were hit with GPO and WEP, had never heard of these two terrible laws. So, yes, there is a problem here. If I might say so, I think GPO and WEP were enacted in a stealthy kind of way. The GPO first passed in 1977 and was not implemented until January 1983, thus sort of low-keying the whole thing in my mind. The arbitrariness of these two bills is really striking. In my own situation, I was eligible first to retire in 1982, in September, and if you come right on up to WEP, if you were eligible to retire on December 31, 1985, you were OK. But if you were eligible to retire on January 1, 1986, 1 day later, the sky fell. That is arbitrary. You know, what happened to equal protection of the law here, while one is victimized and the other escapes harm? This sort of thing is terribly unfair. Chairman Collins. I think you are right that there was not a lot of discussion about what the impact would be, as we have gone back and studied this issue. I think these changes caught a lot of public employees by surprise, particularly because it was such a dramatic change without a lot of discussion and debate. Mr. Rocks, are some of your members surprised to learn about the impact of these provisions when they go to retire and file for Social Security benefits? Mr. Rocks. Yes. Much of it, Senator, is usually the lack of information at the local Social Security offices to be able to articulate to our members the adverse impact of the government pension offset and the windfall elimination provision. Many of the counselors in Social Security clearly don't understand the application of the law, because our members will go in there and represent that they worked for 20 years and when they retired from their police departments, they continued to work in other secondary jobs, performing security work in their communities. So they felt that because they worked a substantial amount of time, but unfortunately less than 30 years of substantial earnings, and therefore they were adversely impacted by the windfall elimination provision. It clearly is a shock when you have planned for something because in many cases, as a previous speaker said, you will work with another officer who is eligible to retire on December 31, 1985, and this officer next to him was eligible to retire on January 3, 1986. One was offset and affected by the windfall elimination and the other wasn't, and therein is the confusion. If you got it, then I must be able to get it, and therefore the confusion actually came into the local Social Security offices. And it is still present, with the information being requested not really being articulated in a manner which our members would understand it. Chairman Collins. Ms. Worcester, you decided to become a teacher relatively late in life, at age 49. I suspect, though I would be interested in your views on this, that you probably would have gone into teaching regardless because you enjoyed it so much. But do you think that had you known of the impact that it might have made a difference in your career choices? Ms. Worcester. Not in my case, I don't think, the circumstances being what they were and it being something I always wanted to do and something I could do at that age. It was definitely a boost financially to be able to go into the teaching profession where I was, and because of several other considerations concerning my family, it probably would have still happened. Chairman Collins. Do you think that these provisions discourage other people from changing professions later in life and deciding to become teachers at a time when we really need teachers? Ms. Worcester. I am sure it will. As a matter of fact, a young lady who graduated in my graduating class and ended up teaching in the same school I taught in worked 14 years under the teaching profession and then chose to leave and withdraw her State retirement, invest it privately, and seek other employment, mainly because of this law. She felt, as a young person, she had to make a decision whether to continue or to change professions and she chose to change professions. Chairman Collins. I hear that, as well, and I think that is one of the problems. In addition to creating hardship and inequities for the individuals who are affected, the provisions also discourage people from going into careers like teaching, like police work, like firefighters, like Federal employees, where we really need talented people to be willing to enter these careers. So I think that disincentive is an issue as well. Ms. Worcester. There is one other thing that I might add which has been brought up by these other gentlemen. My lifetime girlfriend retired last year, and because of all I had been through and all of the publicity, because of Sue Shaw's enthusiasm, she understood this a little better than anybody that might not have had that advantage. It required four telephone calls and dogged pursuit to convince the Social Security Administration that they were overpaying her. When her Social Security checks started coming, she put them in a separate account because she knew she was being grossly overpaid, and it took her almost 9 months to sort this out and to convince somebody to do the work that needed to be done to settle the issue and come up with the right sums. Because she had put her Social Security checks in a separate account, she ended up, of course, just writing a check and sending it back. But had she not known that this existed, she is one of those people that would have been eventually in this sort of a repayment situation. Chairman Collins. I am so glad that you mentioned that because I know the case workers in my State offices deal with overpayments all the time, and very few people would have the knowledge that your friend did to actually argue the case with Social Security and withhold the money. And then they get into terrible problems, just like the case that Mr. Fallis described to us. I am going to pass on all of your comments to the Social Security Administration about people still not being aware and the local workers not necessarily being fully aware of how these complex laws work. I think that is an excellent point. Mr. Fallis, I would like to ask you to respond to the argument that the commissioner made that if we correct this problem, we create other inequities. I disagree with her about that, but do you or Mr. Rocks have any comments about the argument regarding dual-eligibles and that if we correct the pension offset and the windfall elimination provisions that we will create an inequity for the dual-eligibles? Mr. Fallis. Well, I disagree with some of the things she said, as well. I think there were unintended consequences of both these laws when they were passed and, as I say, the chickens are coming home to roost now and have been for some time. I think the truly outrageous and bizarre twist in all of this is, with WEP, those people retire and find out that they have been penalized to the point that they have to go back to work and are working in a Social Security-covered job and are paying premiums into Social Security with no hope of ever getting any kind of return because WEP has eliminated it. Of course, the Social Security payments were designed to favor low-income people. But you take a person who takes a fairly low-income job with the Federal Government or any public sector job and it is totally objective; they get no consideration because of the low wage, and so forth, in that retirement. And then this thing in Social Security, which is designed to take care of them, comes back and hits them and takes it away, too. So this individual is penalized, even though we have in our system a provision to take care of those low-income people. They get no benefits from their government job or their public sector job and because of WEP, they get none from Social Security either. So it is a double whammy here and it is so atrocious that I think these other considerations pale in comparison. Chairman Collins. I want to clarify that I understand that the commissioner is correct in saying why the Act was passed in the first place, but I think the impact has not been what was anticipated. Mr. Rocks, do you have any comments on that? Mr. Rocks. I think from an actuarial standpoint, the commissioner's argument was very sound in that with the members I represent, they may retire early due to the rigors of the job, the rotation of shift work, working 24 hours, 7 days a week, which is the case in some of our departments, and the stressful nature of the law enforcement profession. But our members do not live based on the actuarial standards set down by the Social Security Administration. So in many cases, we will not, like I said in my testimony, reap the benefits of even the monies that we put in, to recoup them. So I don't think from looking at the actual dollar amounts from the actuarial standards that argument can carve out certain groups. You don't have any basis for an argument. It is easy to throw around billion-dollar figures, but when you get into reality the actuarial tables of the life expectancy of law enforcement officers, you will find it significantly reduces and would reduce that figure. Chairman Collins. Thank you. I want to thank all of you for testifying. This is the first Senate hearing to review the impact of these two provisions. It is my intention to share our hearing record with every single member of the Finance Committee, in the hope of giving them the information that they need. They deal with so many different issues, but I feel this is a very important issue. It is important to school teachers, it is important to public employees, it is important to our public safety officers, and I am going to continue my efforts to get this law changed. To me, this is a matter of simple fairness. If you are paying into the Social Security system, if your spouse had paid into the Social Security system, if you have earned those benefits, then as Ms. Worcester said, it is like an insurance policy. And if you are paying in the premiums, when the time comes to collect, you should be able to do so when you have met the other requirements and otherwise would be eligible. So I thank you for giving us a better understanding today. I want to thank all of our witnesses and I want to assure you of my personal commitment to keep working to rectify this inequity. I also want to thank my staff, which worked very hard on this hearing and all others who have contributed to it. The hearing record will remain open for the submission of additional materials and statements for 15 days, and a special thank you to my constituent, Ms. Worcester, who came from Maine today. Thank you. [Applause.] You do deserve that applause. We don't usually allow that, but this is well deserved. Thank you. This hearing is now adjourned. [Whereupon, at 11:22 a.m., the Committee was adjourned.] A P P E N D I X ---------- PREPARED STATEMENT OF SENATOR LAUTENBERG Madam Chairman, I believe the Government Pension Offset (GPO) and the Windfall Elimination Provision (WEP) are good examples of the law of intended consequences. While these provisions were designed to shore up the financing of Social Security they have instead hurt close to one million public service employees. I have always supported strengthening Social Security and ensuring the programs fiscal solvency. However, I support the repeal of both the GPO and the WEP, and I have cosponsored Senator Feinstein's bill that will do just that. We have an Administration that has its priorities way off the mark. The President is giving away huge tax cuts to the wealthy and neglecting our teachers, our police, our firefighters, and our Federal employees--people who we rely upon more and more in the post-September 11 world. These are not individuals who are counting on stock options or extremely generous corporate retirement plans. They are public servants--individuals who dedicated their careers to making our communities better. The current policies penalize those employees least able to afford it. I believe we need to fix this inequity. I look forward to hearing the views of all our witnesses and making progress to identify ways to improve Social Security's fairness for all workers. Thanks you, Madam Chairman. 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