The Social Security Windfall Elimination and Government Pension Offset Provisions for Public Employees in the Health and Retirement Study

“This article uses Health and Retirement Study data to investigate the effects of Social Security's Windfall Elimination Provision (WEP) and Government Pension Offset (GPO) on Social Security benefits received by households. The provisions reduce benefits for individuals or the dependents of individuals whose work histories include jobs for which they were entitled to a pension and were not subject to Social Security payroll taxes (‘non-covered’ employment). 

“We find that about 3.5 percent of households are subject to either the WEP or the GPO, and that the provisions reduce the present value of their Social Security benefits by roughly one-fifth. Households affected by both provisions experience benefit reductions of about one-third. Under the WEP, the Social Security benefit reduction is capped at one-half of the amount of the pension from non-covered employment, which substantially reduces the WEP penalty and prevents the WEP adjustment from falling disproportionately on households in the lowest earnings category…

“Innovations in this study are central to fully understanding the nature of WEP and GPO adjustments. Unlike previous studies, we take explicit account of pensions earned on jobs not covered by Social Security, a key determinant of the size of WEP and GPO adjustments. Also unlike previous studies, we focus on the household, allowing us to incorporate the full effects of the WEP and the GPO on spouse and survivor benefits and to evaluate their effects on the preretirement assets accumulated by affected families.

“Among our specific findings are the following:

• Of 7,623 households in the original HRS cohort, 3.8 percent are subject to either the WEP or the GPO. The comparable figure for the Early Boomer cohort is 3.5 percent.
• Among original HRS cohort households affected by either provision, the WEP adjustment is $17,050 and the GPO adjustment is $14,101, which combine to reduce the present value of Social Security benefits by 24.1 percent among the affected households. For the Early Boomer cohort, the WEP and the GPO combine to reduce the present value of Social Security benefits by 18.5 percent among affected households.
• For members of the original HRS cohort affected by the WEP or the GPO, benefit reductions amount to 10.0 percent of the value of the pension plus Social Security benefits they in fact receive, and to 6.1 percent of their total wealth. Comparable reductions for members of the Early Boomer cohort amount to 8.7 percent of total Social Security plus pension wealth and to 5.3 percent of total wealth.
• By far the largest impact is on households affected by both provisions. Those from the original HRS cohort face a $45,786 reduction in present-value benefits, or 38.9 percent of their total Social Security benefit. Those subject to the WEP and the GPO from the Early Boomer cohort see their benefit reduced by 28.7 percent.

“We also decompose the effects of the WEP adjustment into two components: (1) the reduction that is due to the use of a lower replacement rate up to the first bend point in the PIA formula and (2) the mitigation of that adjustment by the pension. Limiting the reduction in the Social Security benefit to one-half of the size of the pension from non-covered employment reduces the WEP penalty for members of the original HRS cohort by $5,924 (58.5 percent). For the Early Boomers, the uncapped reduction in the replacement rate would lower benefits by $12,476, so limiting the adjustment to one-half of the value of the pension from non-covered work reduces the WEP penalty by $7,676 (61.5 percent).

“We also discuss the rationale for the WEP and GPO adjustments to Social Security benefits under current law. The law is designed to address a number of perceived inequities when workers in jobs not covered by Social Security also become eligible for Social Security own-earnings benefits or spouse or survivor benefits.

“The law does meet a number of its purposes. However, the limitation of the WEP offset to one-half of the value of the pension mitigates the effects of this adjustment. This system is most advantageous for individuals who benefit from the progressive Social Security benefit formula, have worked in both covered and non-covered employment, and have become entitled to a Social Security benefit—but who have little or no pension from non-covered work. Those individuals experience only modest WEP and GPO adjustments. Consequently, they enjoy a higher rate of return on the Social Security taxes they paid than do those who worked continuously in covered jobs because the years worked in non-covered employment count as zero-earnings years.

“It has been argued that the WEP adjustment disproportionately affects low-wage workers because it is applied only up to the first bend point of average indexed earnings. However, that argument ignores the effect of limiting the WEP adjustment to one-half of the value of the pension earned on the non-covered job. Social Security benefits will be affected only if the individual has earnings high enough to generate a large pension from government or other non-covered employment. Consequently, those who criticize the design of the WEP and the GPO on distributional grounds exaggerate their case. This is not to say, however, that there is no case for redesign.

“In addition, the law does not address all potential inequities. The GPO adjustment seems fair when comparing two two-earner households with identical earnings histories. In one, both spouses always worked in covered employment and paid payroll taxes. In the other, the lower-paid spouse worked in non-covered employment and thus did not pay FICA taxes. In the absence of the GPO, that latter household would not have the spouse benefit's top-up reduced by the primary earner's own Social Security benefits, as is standard for dually entitled beneficiaries. That household would therefore receive higher spouse and survivor benefits than the household with covered employment only. 

“On the other hand, the GPO seems to be quite unfair to that latter two-earner household when compared with a one-earner household in which the non-earner receives the full spouse or survivor benefit. In both of these households, the primary earner paid Social Security taxes while the spouse did not. Yet the spouse in the one-earner household will receive full spouse and survivor benefits, and the other will have spouse and survivor benefits reduced or eliminated. At the heart of this problem is the disparate treatment that favors one-earner over two-earner households, regardless of whether the lesser earner in the two-earner household worked in non-covered or only in covered employment.

“We close with a number of caveats affecting our estimates of the WEP and GPO adjustments. First, respondents underreport the extent to which they work for a government employer. To partially deal with that underreporting, we count a respondent as working for the government if there is a self-report of having worked for a federal, state, or local government employer, or if the respondent reported working in a non-covered job. But not all jobs that are not covered by Social Security are government jobs. Second, as we explain in our more detailed working paper, we find small inconsistencies in the Social Security records that we use to identify covered and non-covered employment. 

“Third, throughout the analysis, we calculate the WEP and GPO adjustments using respondent self-reports about expected pension values, which we link to non-covered employment. The Government Accountability Office (2007) indicates that affected workers do not always accurately report government pension income to SSA. To the extent that government pensions are underreported to SSA, we overstate the size of the WEP and GPO adjustments. Fourth, we do not account for behavioral responses to the WEP and GPO, as affected respondents and members of their households react to the incentives created by these policies. It is, of course, unclear how many respondents understand these incentives and make their employment and benefit election choices with these incentives in mind…”

 

For the complete analysis, Click Here.

For more information about the Social Security Windfall Elimination and Government Pension Offset Provisions for Public Employees, click the GPO/WEP link under the masthead of this blog.