Congress Should Mend, Not End, Social Security’s WEP and GPO

On November 13, the U.S. House of Representatives passed the misnamed Social Security Fairness Act by a 327-75 vote. Now it is up to the Senate to decide whether to enact this legislation during Congress’ lame duck session. If enacted, this measure would unfairly treat workers with state or local pensions far better than those who contributed to Social Security throughout their working careers. It would also further weaken Social Security’s already-collapsing finances.

The core of the bill eliminates Social Security’s Windfall Elimination Provision (WEP) and Government Pension Offset (GPO). These provisions were enacted to achieve parity among workers with similar lifetime earnings but different employment histories. While the WEP and GPO are both imperfect and need reform, such provisions are essential to Social Security’s fair functioning and should be—with apologies to former President Clinton for borrowing his phrasing—mended, not ended.

The WEP and GPO Are Necessary in Some Form

The need for some version of the WEP and GPO within Social Security is a consequence of certain features of the program:

1. Workers’ benefits under Social Security are a mathematical function of their earnings that are subject to the Social Security payroll tax.

2. The Social Security benefit formula does not take into account other earnings that are not subject to the Social Security payroll tax.

3. Social Security’s benefit formula is progressive, meaning that a lower-income worker’s taxable earnings accrue benefits at a faster rate than other workers’ greater earnings do.

4. Social Security provides ancillary benefits, such as nonworking spouse benefits and surviving spouse benefits.

The following examples may help to explain why these factors, existing together, create a need for some version of the WEP and GPO. Consider the following three couples and the effect of the GPO:

In Couple 1, Spouse A and Spouse B are each covered by Social Security, and each earns an average of $50,000 a year over his or her respective career. As a result, each accrues his or her own worker benefit within Social Security. Between them, they receive two benefits, each individually commensurate with $50,000 of average annual earnings.

In Couple 2, Spouse C earns an average of $50,000 a year over his or her career and is covered by Social Security, whereas Spouse D does not have employment earnings. Social Security pays this couple one worker benefit commensurate with earnings of $50,000 a year (reflecting the earnings of Spouse C) and one nonworking spouse benefit (reflecting the stay-at-home Spouse D). The nonworking spouse benefit is generally half the benefit earned by the primary household earner.

In Couple 3, Spouses E and F each earn $50,000 a year, just like Couple 1, but Spouse E is covered by Social Security while Spouse F is not: Instead, Spouse F is covered by a state retirement plan and doesn’t pay Social Security taxes. Spouse E earns a worker benefit from Social Security commensurate with $50,000 of annual earnings, while Spouse F earns the state retirement benefit of a $50,000 earner. Were it not for the GPO, however, Social Security would treat Spouse F as a nonworking spouse, because it doesn’t track that spouse’s noncovered earnings or state retirement plan benefits.

Without a GPO, Couple 3 would be treated much better than Couples 1 and 2: That is, Spouses E and F would each get full worker benefits, plus a nonworking spouse benefit from Social Security, even though neither half of the couple was a stay-at-home spouse. The following table summarizes the situation.

Without a GPO, Social Security’s finances would be weakened by paying Couple 3 a windfall relative to Couples 1 and 2. The GPO partially corrects for this situation by reducing the unintended Social Security nonworking spouse benefits, as well as surviving spouse benefits, for those with state pensions. It’s not a complete offset; the Social Security spousal or survivor benefit is reduced by two-thirds, not all, of the worker’s state pension benefit. Thus, as a general rule, households affected by the GPO still tend to come out ahead relative to a scenario in which all their earnings were covered by Social Security.

The WEP is a little more complicated, but it is necessitated by the same cause—the fact that Social Security doesn’t account for earnings outside the Social Security system when calculating benefits—coupled with the progressive nature of Social Security’s benefit formula. In testimony delivered before the Social Security Subcommittee of the House Ways and Means Committee this April, I provided an illustration of how the WEP works.

• A hypothetical worker who earns an annual average of $100,000 a year under Social Security for 35 years would accrue a Social Security full retirement benefit of $37,610.

• Now, imagine instead that this worker worked for 15 years under Social Security and 20 under a state retirement plan (still averaging $100,000 per year).

• If the worker’s state retirement plan were equal in generosity to Social Security, the state retirement benefit based on 20 years of state employment would be $37,610 x 20/35 = $21,491.

• Because the worker works for only 15 years under Social Security, however, Social Security perceives the worker’s average career earnings as only $100,000 x 15/35 = $42,857.

• In other words, Social Security would treat this worker as a much lower-income worker than he or she actually is. It would therefore provide a much higher return on this worker’s Social Security contributions, specifically paying a Social Security benefit of $21,885.

• Thus, without the WEP, a worker whose time is split between Social Security and a state pension would get a much higher combined benefit ($21,885 + $21,491 = $43,376) than the worker would have received if his or her entire career had been spent under Social Security ($37,610). In this particular illustration, the worker would receive a windfall increase of over 15% relative to other workers with similar incomes.

The WEP attempts to correct for this situation by adjusting the Social Security benefit formula for workers with noncovered (e.g., state or local retirement) pensions. It was enacted in 1983 pursuant to a recommendation from the bipartisan Greenspan Commission on Social Security Reform. The commission laid out two alternatives for designing the WEP, only one of which the Social Security Administration (SSA) had the information to implement at the time. The current WEP design uses a slightly different formula from that suggested by the commission, and it more greatly restricts the effect of the WEP. However, the basic design of the current adjustment is as the bipartisan commission suggested.

So, What’s the Problem?

Although the WEP and GPO each serve a clear need, there are multiple problems with both provisions.

The WEP and GPO exist in the forms they do today, not because they are accurate adjustments that perfectly equalize the treatment of different workers with the same earnings histories, but because they were the best that could be done when they were first enacted, given the data limitations of the time. At that time, the SSA did not have access to workers’ earnings histories in noncovered employment, and so couldn’t accurately adjust to ensure parity between individual cases. Today, however, SSA can track noncovered earnings after age 15 for all future claimants.

The inaccuracies in the current formula have real effects that cause real hardship. An especially important problem is that the WEP generally overadjusts (downward) the benefits of lower-income workers, undermining the intended progressivity of the Social Security benefit formula, and depriving some lower-income workers of retirement income they would have received if they’d been covered only by Social Security. On the other hand, the GPO tends to favor lower-income workers.

The WEP and GPO are also poorly understood by affected workers. As I noted in my April testimony:

[This] can result in inadequate retirement preparedness and thus income insecurity. Descriptions in government publications may also have the effect of fostering unwarranted resentment. For example, the Social Security Administration’s online WEP explainer begins with the statement, “Your Social Security retirement or disability benefits might be reduced,” and provides a column and a half of details of how the reduction works, before proceeding to the explanation that the purpose of the adjustment is to address unintended advantages that would otherwise favor those with non-covered pensions. Public understanding might be improved if the information sheet explained up front that the purpose is to achieve parity between participants with identical earnings rather than to reduce benefits outright. State and local governments are also required to disclose that the WEP and GPO will reduce their employees’ benefits, but the standard form used for that purpose does little to explain the reasons for the adjustments. Even worse, as the Bipartisan Policy Center notes, although SSA’s benefit statements alert participants to the existence of the WEP/GPO, the estimates they provide “fail to take the adjustments into account,” leading participants to overestimate their eventual retirement income and to misperceive the WEP and GPO as taking away benefits they were promised and had earned.

What Should Be Done?

There are three possible courses lawmakers can take: the ideal, the reasonable and the wrong.

The wrong thing to do is simply to repeal the WEP and GPO outright, as the Social Security Fairness Act would do. This would undermine parity between households with comparable earnings, pay unintended windfalls and further weaken already-imperiled program finances.

In an ideal policy world, lawmakers would enact comprehensive Social Security reform that fundamentally redesigned the program’s basic benefit formula. If Social Security benefits simply accrued with each year of earnings like many private pensions do, rather than as an average of lifetime earnings, there would be no need for a WEP because the program would never mistake a high-wage partial career for a low-wage full career. The GPO would still need to exist in some form, but the WEP would be rendered unnecessary. Such a formula would not only be fairer, it would be much more transparent to workers in state and local plans, lacking the unpleasant surprises under current law.

But as long as fundamental Social Security reform remains a distant vision rather than a near-term likelihood, the program needs some version of the WEP and GPO, and our task is to make them as fair as possible. Fortunately, the information is now available to do much better. Such reform efforts have been supported not only by me, but by experts at the Bipartisan Policy Center, Center on Budget and Policy Priorities and EPIC for America. Such reform could achieve parity by prorating Social Security benefits for the fraction of a worker’s total lifetime earnings covered by Social Security. In addition to agreeing on the basic direction of desirable reform, these experts are similarly unanimous that repealing rather than reforming the WEP and GPO would be misguided.

We live in an era where experts on the left and right don’t appear to be able to agree on much of anything—not only on subjective value judgments but on underlying facts. But on this issue, experts widely agree: Social Security’s WEP and GPO should be mended, not ended. Let’s hope for Social Security’s sake that federal lawmakers agree.