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<div id="hLogo"><a class="navLogo" href="/policy/index.html">Social Security</a><a class="navSearch" href="https://search.ssa.gov/search?affiliate=ssa">SEARCH</a></div>
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<h1 itemprop="headline"><span class="bannerNote">PERSPECTIVES:</span> The Social Security Windfall Elimination and Government Pension Offset Provisions for Public Employees in the Health and Retirement Study</h1>
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<div id="hByline">by <span itemprop="author">Alan L. Gustman, Thomas L. Steinmeier, and Nahid Tabatabai</span><br>Social Security Bulletin, <abbr title="Volume">Vol.</abbr> 74, <abbr title="Number">No.</abbr> 3, 2014 (released August 2014)</div>
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<div id="breadcrumbs" itemscope itemtype="http://schema.org/BreadcrumbList">You are here: <span itemprop="itemListElement" itemscope itemtype="http://schema.org/ListItem"><a href="/" itemprop="item"><span itemprop="name">Social Security Administration</span></a><meta itemprop="position" content="1" /></span> > <span itemprop="itemListElement" itemscope itemtype="http://schema.org/ListItem"><a href="/policy/index.html" itemprop="item"><span itemprop="name">Research, Statistics & Policy Analysis</span></a><meta itemprop="position" content="2" /></span> > <span itemprop="itemListElement" itemscope itemtype="http://schema.org/ListItem"><a href="/policy/docs/ssb/index.html" itemprop="item"><span itemprop="name">Social Security Bulletin</span></a><meta itemprop="position" content="3" /></span> > <span itemprop="itemListElement" itemscope itemtype="http://schema.org/ListItem"><a href="index.html" itemprop="item"><span itemprop="name"><abbr title="Volume">Vol.</abbr> 74, <abbr title="Number">No.</abbr> 3</span></a><meta itemprop="position" content="4" /></span></div>
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<p>The Social Security Fairness Act, <abbr class="spell">HR</abbr> 82, concerning the Windfall Elimination Program and Government Pension Offset, was signed into law on January 5, 2025. Upon implementation, the Social Security Fairness Act eliminates the reduction of Social Security benefits while entitled to public pensions from work not covered by Social Security. The Social Security Administration is evaluating how to implement the Act. Ongoing agency updates will be released at <a href="/benefits/retirement/social-security-fairness-act.html">https://www.ssa.gov/benefits/retirement/social-security-fairness-act.html</a>.</p><p>The following article is from the <b>historical</b> policy.</p>
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<div class="introBox">
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<p id="synopsis" itemprop="description">This article uses Health and Retirement Study data to investigate the effects of Social Security's Windfall Elimination Provision (<abbr>WEP</abbr>) and Government Pension Offset (<abbr class="spell">GPO</abbr>) 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 (“noncovered” employment). We find that about 3.5 percent of households are subject to either the <abbr>WEP</abbr> or the <abbr class="spell">GPO</abbr>, and that the provisions reduce the present value of their Social Security benefits by roughly <span class="nobr">one-fifth</span>. Households affected by both provisions experience benefit reductions of about <span class="nobr">one-third</span>. Under the <abbr>WEP</abbr>, the Social Security benefit reduction is capped at <span class="nobr">one-half</span> of the amount of the pension from noncovered employment, which substantially reduces the <abbr>WEP</abbr> penalty and prevents the <abbr>WEP</abbr> adjustment from falling disproportionately on households in the lowest earnings category.</p>
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<div class="eightypercent">
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<p>Alan L. Gustman is the Loren M. Berry Professor of Economics at Dartmouth College. Thomas L. Steinmeier is a professor of economics at Texas Tech University. Nahid Tabatabai is a research associate in economics at Dartmouth College.</p>
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<p><i>Acknowledgments:</i> We would like to thank Robert Clark, Irena Dushi, Howard Iams, and Erzo Luttmer for helpful comments; and Mike Nolte for advice on <abbr class="spell">HRS</abbr> data.</p>
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<p>This research was supported by a grant from the Social Security Administration through the Michigan Retirement Research Center (<abbr class="spell">MRRC</abbr> grant <abbr title="number">no.</abbr> <span class="nobr"><abbr class="spell">UM</abbr>13-07),</span> with subcontracts to Dartmouth College and to Texas Tech University. A more detailed version of this article is available as <abbr class="spell">NBER</abbr> Working Paper <abbr title="Number">No.</abbr> 19724 (December 2013).</p>
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<p>Contents of this publication are <a href="/policy/accessibility.html">not copyrighted</a>; any items may be reprinted, but citation of the <i>Social Security Bulletin</i> as the source is requested. The findings and conclusions presented in the <i>Bulletin</i> are those of the authors and do not necessarily represent the views of the Social Security Administration, the Michigan Retirement Research Center, the National Bureau of Economic Research, Dartmouth College, or Texas Tech University. </p>
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<h2>Introduction</h2>
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<div class="abbrtable">
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<table role="presentation">
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<caption>Selected Abbreviations</caption>
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<colgroup span="1"></colgroup>
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<tbody>
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<td><abbr class="spell">DB</abbr></td>
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<td>defined benefit</td>
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</tr>
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<td><abbr class="spell">DC</abbr></td>
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<td>defined contribution</td>
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<td><abbr>FICA</abbr></td>
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<td>Federal Insurance Contributions Act</td>
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<td><abbr class="spell">GPO</abbr></td>
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<td>Government Pension Offset</td>
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<td><abbr class="spell">HRS</abbr></td>
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<td>Health and Retirement Study</td>
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<td><abbr class="spell">PIA</abbr></td>
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<td>primary insurance amount</td>
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<td><abbr class="spell">SSA</abbr></td>
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<td>Social Security Administration</td>
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</tr>
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<tr>
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<td><abbr>WEP</abbr></td>
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<td>Windfall Elimination Provision</td>
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</tr>
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</tbody>
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</table>
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<p>The Windfall Elimination Provision (<abbr>WEP</abbr>), enacted in 1983, reduces Social Security benefit payments to beneficiaries whose work histories include both Social Security–covered and noncovered employment, with the noncovered employment also providing pension coverage. To be affected by the <abbr>WEP</abbr>, an individual must have worked in covered employment long enough to qualify for Social Security benefits; must have also worked in noncovered employment, meaning that Federal Insurance Contributions Act (<abbr>FICA</abbr>) Social Security payroll taxes were not paid; and, importantly, must have earned a pension in that noncovered job. The <abbr>WEP</abbr> reduces the share of preretirement earnings that Social Security benefits replace. For roughly the first $10,000 in average annual earnings, the <abbr>WEP</abbr> reduces the replacement rate from 90 percent to as low as 40 percent, depending on years of coverage under Social Security; however, the reduction cannot exceed 50 percent of the amount of the pension received from noncovered employment.</p>
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<p>A related provision, the Government Pension Offset (<abbr class="spell">GPO</abbr>), reduces Social Security benefits paid to spouses or survivors when the spouse or survivor earned a pension from a government job that was not covered by Social Security. The <abbr class="spell">GPO</abbr> reduction is equal to <span class="nobr">two-thirds</span> of the amount of the pension payment from noncovered government work (<abbr class="spell">SSA</abbr> 2012).</p>
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<p>Although the <abbr>WEP</abbr> and the <abbr class="spell">GPO</abbr> affect only about 3.5 percent of households, the provisions may have a substantial effect on benefits in those households. Our analysis suggests that the present value of lifetime Social Security benefits for affected households is reduced by roughly <span class="nobr">one-fifth</span>, which amounts to <span class="nobr">5–6</span> percent of their total wealth. For that reason, and because the provisions leave some inequities in place, considerable political pressure has been brought to reduce their impact, with some members of Congress pressing for modifying or eliminating current law. To inform that legislative interest, the Congressional Research Service prepares annual reports on the two provisions (Scott 2013a, 2013b).</p>
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<p>Analyzing the effects of the <abbr>WEP</abbr> and the <abbr class="spell">GPO</abbr> requires information on work history in covered employment, work history in noncovered government and nongovernment employment, and pensions from noncovered employment. It also requires household-level data to determine spouse and survivor benefits. Information on household wealth allows us to compare the Social Security and pension benefits of affected households with those of households that are not affected by the provisions, and it reveals where affected households stand in the wealth distribution.<sup><a href="#mn1" id="mt1">1</a></sup></p>
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<p>The Health and Retirement Study (<abbr class="spell">HRS</abbr>) contains all the required information. We estimate the relative importance of two <abbr>WEP</abbr> features: (1) the lower replacement rate (from 90 percent to as low as 40 percent up to the first bend point in the benefit calculation formula, described below) and (2) the limit on that reduction to an amount equal to 50 percent of the pension received from noncovered employment. We believe that our analysis provides useful information to policymakers considering changes in the <abbr>WEP</abbr>'s current design. Similarly, we believe the findings regarding the wealth of households affected by the <abbr class="spell">GPO</abbr> are also of use to policymakers. Because both provisions affect only households that include a worker who has a pension from noncovered employment, those households typically have higher average combined pension and Social Security benefit income and higher total wealth than unaffected households.</p>
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<p>The remainder of this article is arranged in five sections. The first discusses the <abbr>WEP</abbr> and <abbr class="spell">GPO</abbr> provisions in detail. The second discusses the variables needed to estimate <abbr>WEP</abbr> and <abbr class="spell">GPO</abbr> adjustments with <abbr class="spell">HRS</abbr> data and the reasons we used a mix of respondent and administrative data. In the third section, we estimate <abbr>WEP</abbr> and <abbr class="spell">GPO</abbr> incidence and analyze the effects of the provisions on Social Security benefits. The fourth section disaggregates the effects of the <abbr>WEP</abbr> into the changes that result from its two key features: (1) the reduction in the generosity of the benefit calculation formula and (2) the mitigating effects of adjustments associated with pensions earned in noncovered employment. The fifth section concludes. An appendix summarizes our methods of imputing covered earnings histories and calculating Social Security benefits.</p>
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<h2>The <abbr>WEP</abbr> and <abbr class="spell">GPO</abbr> Provisions</h2>
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<p>To understand how the <abbr>WEP</abbr> works, one must have a basic understanding of how Social Security benefits are determined. Benefits are based on a person's highest 35 years of covered earnings. Amounts earned at younger ages are indexed to the year the individual turns age 60; those from subsequent years are not. Indexed covered earnings determine the basic benefit to which a worker is entitled at full retirement age, called the primary insurance amount (<abbr class="spell">PIA</abbr>). The Social Security benefit formula is designed to be progressive, replacing a decreasing share of earnings at higher earnings levels. In 2013, the <abbr class="spell">PIA</abbr> replaced 90 percent of the first $9,492 of average indexed annual earnings, plus 32 percent of average indexed annual earnings between $9,492 and $57,216, plus 15 percent of average indexed annual earnings above $57,216.<sup><a href="#mn2" id="mt2">2</a></sup> The indexed earnings levels at which the formula's replacement percentages change are called the “bend points.” Each year, the Social Security Administration (<abbr class="spell">SSA</abbr>) adjusts the bend points according to changes in the national average wage. The actual Social Security benefit payment does not necessarily equal the <abbr class="spell">PIA</abbr>; the payment amount also depends on when benefits are claimed. Benefits claimed before reaching full retirement age are reduced below the <abbr class="spell">PIA</abbr> level, and those claimed after the full retirement age are increased above the <abbr class="spell">PIA</abbr> level.</p>
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<p>Congress enacted the <abbr>WEP</abbr> to eliminate a perceived unintended windfall for certain beneficiaries (Government Accountability Office 2007, 6). Years worked in noncovered employment are treated as years of zero earnings for purposes of calculating Social Security benefits. Before the <abbr>WEP</abbr> was enacted, some individuals who received relatively high earnings throughout their lifetime—some from covered employment and some from noncovered employment—were treated in <abbr class="spell">SSA</abbr>'s earnings history calculations as if they were low earners, which entitled them to a higher replacement rate under the progressive Social Security benefit formula.<sup><a href="#mn3" id="mt3">3</a></sup></p>
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<p>Because an affected worker's own benefits are reduced by the <abbr>WEP</abbr>, Congress might have decided also to reduce the benefits paid to the worker's spouse or survivor. Legislators did reduce associated spouse benefits, but opted not to reduce survivor benefits.<sup><a href="#mn4" id="mt4">4</a></sup></p>
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<p>Although most noncovered employment consists of government jobs, most government employees are covered by Social Security.<sup><a href="#mn5" id="mt5">5</a></sup> “According to the [<abbr class="spell">SSA</abbr>], as of December 2012, about 1.5 million Social Security beneficiaries were affected by the <abbr>WEP</abbr>” (Scott 2013b, 3).</p>
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<p>Unlike the <abbr>WEP</abbr>, which can apply to any noncovered employment, the <abbr class="spell">GPO</abbr> applies specifically to government workers.<sup><a href="#mn6" id="mt6">6</a></sup> “In December 2011, about 568,000 Social Security beneficiaries (about 1% of all Social Security beneficiaries) had spousal benefits reduced by the <abbr class="spell">GPO</abbr>” (Scott 2013a, 3).</p>
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<p>In the absence of the <abbr class="spell">GPO</abbr>, the spouse or survivor of a covered worker would be treated more favorably if he or she had worked in noncovered government employment than if he or she had worked only in covered employment (Diamond and Orszag 2003). The differing treatment would stem from dual entitlement provisions that apply when a beneficiary receives benefits based on both one's own earnings record and that of his or her spouse. If an individual's own-earnings benefit is less than the full spouse benefit (which is roughly equal to <span class="nobr">one-half</span> of the primary earner's benefit), dual entitlement “tops up” that individual's own-earnings benefit to the level of the full spouse benefit. The <span class="nobr">top-up</span> provision also applies for dual-entitlement survivor benefits (which equal the primary earner's full benefit). Thus, if not for the <abbr class="spell">GPO</abbr>, a spouse who earned a government pension from a lifetime of noncovered (and non-<abbr>FICA</abbr> taxpaying) work would also be eligible for the full Social Security spouse or survivor benefit, rather than the smaller benefit calculated as a <span class="nobr">top-up</span> over own-earned benefits (<abbr class="spell">SSA</abbr> 2012).<sup><a href="#mn7" id="mt7">7</a></sup></p>
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<h3><abbr>WEP</abbr> and <abbr class="spell">GPO</abbr> Interactions at the Household Level</h3>
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<p>The effects of <abbr>WEP</abbr> and <abbr class="spell">GPO</abbr> adjustments depend on the employment history of each spouse, whether either spouse worked in both the public and private sectors, whether public-sector work was covered by Social Security, and whether noncovered jobs provided pensions. Either spouse, or both, may have worked long enough in a job covered by Social Security to be entitled to benefits, while also having worked in a noncovered job that provided a pension. Alternatively, either spouse may have worked only in one or more jobs covered by Social Security; or, he or she may not have worked long enough to be covered by Social Security, while never working in a noncovered job.</p>
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<p>There are eleven possible combinations of paired earnings histories. Each scenario involves a different adjustment to <span class="nobr">own-work,</span> spouse, or survivor benefits that may or may not be affected by the <abbr>WEP</abbr> or the <abbr class="spell">GPO</abbr>.<sup><a href="#mn8" id="mt8">8</a></sup></p>
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<p>For example, in one basic scenario, the husband worked in a noncovered job with a pension and gained entitlement to Social Security benefits from covered employment. The wife, with no substantial earnings in either covered or noncovered employment, is not entitled to Social Security benefits based on her own earnings record. In this case, the husband's own benefit is adjusted by the <abbr>WEP</abbr>, and the amount of the wife's dual-entitlement <span class="nobr">top-up</span> is equal to either the spouse benefit (after adjusting the husband's benefit for the <abbr>WEP</abbr>) or the survivor benefit (not adjusted for the <abbr>WEP</abbr>).</p>
|
|
<p>In a more complicated example, both the husband and wife worked in a noncovered job with a pension, and both also gained entitlement to Social Security benefits from covered employment. For each spouse, own-earnings benefits are first adjusted by the <abbr>WEP</abbr>. The wife's <span class="nobr">top-up</span> to the spouse benefit based on her husband's earnings in covered employment starts with <span class="nobr">one-half</span> of his <abbr>WEP</abbr>-adjusted benefit, from which her own benefits are subtracted; then, <span class="nobr">two-thirds</span> of the pension from her own noncovered work is subtracted from the remainder. If she is widowed, the <span class="nobr">top-up</span> to her survivor benefit starts with her husband's full benefit (not adjusted for the <abbr>WEP</abbr>), minus her <span class="nobr">own-work</span> benefits, with <span class="nobr">two-thirds</span> of the pension from her own noncovered work subtracted from the remainder. The same calculations determine any <span class="nobr">top-up</span> to a husband's spouse or survivor benefit based on his wife's covered earnings.</p>
|
|
<h3>Pensions from Noncovered Work Limit <abbr>WEP</abbr> and <abbr class="spell">GPO</abbr> Adjustments</h3>
|
|
<p>Congress did not go as far as it might have in setting the <abbr>WEP</abbr> and <abbr class="spell">GPO</abbr> adjustments on Social Security benefits. For the <abbr>WEP</abbr>, Congress recognized that the progressivity of the benefit formula enabled persons who spend part of their career in noncovered work to receive a proportionately better deal from Social Security. Nevertheless, Congress was unwilling to mechanically reduce basic Social Security benefits just because a person had also worked in noncovered employment.<sup><a href="#mn9" id="mt9">9</a></sup> That is, Social Security benefits are not reduced simply because a person who worked in noncovered employment consequently enjoys a higher ratio of Social Security benefits to Social Security taxes paid. Such an individual must also have earned a pension from noncovered work for benefits to be reduced under the <abbr>WEP</abbr>. In that instance, the benefit reduction is limited to <span class="nobr">one-half</span> of the value of the pension from noncovered work. We will show that limiting the <abbr>WEP</abbr> adjustment to <span class="nobr">one-half</span> of the value of a public pension reduces the <abbr>WEP</abbr> offset by more than half.</p>
|
|
<p>Congress also would not augment the <abbr class="spell">GPO</abbr> adjustment to reduce spouse or survivor benefits simply because the spouse of an entitled worker had spent significant time in a noncovered job. As with the <abbr>WEP</abbr>, the adjustment applies only if the individual also earned a pension from work in noncovered employment.</p>
|
|
<p>In sum, Congress enacted the provisions to prevent what was perceived as “double dipping.” If, in addition to working long enough on a covered job to become eligible for Social Security benefits, a person worked and was provided a pension in noncovered employment, that individual's Social Security benefits (and those due to the individual's spouse or survivor) were adjusted downward.<sup><a href="#mn10" id="mt10">10</a></sup> Similarly, spouse and survivor benefits were adjusted downward for those whose own work was in a job not covered by Social Security, if that individual also earned a pension from noncovered employment.</p>
|
|
<h3>Opposition to the <abbr>WEP</abbr> and the <abbr class="spell">GPO</abbr> Continues</h3>
|
|
<p>Many affected government workers resent <abbr>WEP</abbr> and <abbr class="spell">GPO</abbr> adjustments to their Social Security benefits. Government employee associations lobby Congress to eliminate the adjustments. The potential size of the <abbr>WEP</abbr> adjustment underlies this opposition. In 2013, the <abbr>WEP</abbr> reduced the share of the first $9,492 of indexed annual covered earnings that Social Security benefits replace, from 90 percent to as low as 40 percent. That adjustment reduced the associated benefit from $8,543 per year to as low as $3,797 per year, with the maximum reduction amounting to $4,746. (For the <abbr>WEP</abbr> to impose the maximum reduction, the annual pension payment from noncovered work would have to be twice as large as the reduction, or $9,492—equal the first bend point for indexed earning.)</p>
|
|
<p>Under the <abbr class="spell">GPO</abbr>, the reduction may equal up to <span class="nobr">two-thirds</span> of the value of the pension in noncovered work and may wipe out the spouse or survivor benefit entirely. For a surviving spouse who spent a lifetime in noncovered employment (for example, as a public school teacher), that may entail a benefit reduction in the tens of thousands of dollars.</p>
|
|
<h2>The Data</h2>
|
|
<p>Since 1992, the <abbr class="spell">HRS</abbr> has surveyed a representative sample of Americans aged 51 or older every 2 years. We use data from surveys of the original 1992 <abbr class="spell">HRS</abbr> cohort and of the Early Boomer cohort, whose members were first interviewed in 2004.<sup><a href="#mn11" id="mt11">11</a></sup> The <abbr class="spell">HRS</abbr> interview provides data on employment history, Social Security coverage, and pension coverage. During the baseline survey, respondents were asked about their current job (or last job if not currently employed), the most recent previous job that lasted 5 or more years, and two additional previous jobs that offered a pension and lasted at least 5 years. In this first interview, respondents were also asked whether they ever worked in government at the federal, state, or local level. In the third survey wave, administered to the original <abbr class="spell">HRS</abbr> cohort, respondents were asked about work on a job that was not covered by Social Security. In 2004, all respondents were asked additional questions about Social Security coverage, and in 2006, they were asked whether they worked for a federal, state, or local government. Information collected on the start date and end date of jobs allows us to match the period of employment with the type of employer, Social Security coverage, and pension coverage.</p>
|
|
<p>We matched <abbr class="spell">HRS</abbr> data to administrative records provided by <abbr class="spell">SSA</abbr> that report covered earnings in each year of work spanning the full employment period. Additional records from Form <span class="nobr">W-2</span> contain information on total earnings and provide detail for earnings covered by Social Security, from self-employment, and from employment not covered by Social Security (non-<abbr>FICA</abbr> earnings). With these data, together with the <abbr class="spell">HRS</abbr> self-reports, we identify the jobs that were not covered by Social Security.</p>
|
|
<p>We match the self-reported dates of government work with the respondent's employment history to confirm whether a particular job was government employment. Each respondent reports the dates for current, last, or previous jobs, as well as the dates worked in various levels of government. We allow an error of plus or minus 3 years on each end of the job report when declaring a job to be a match. A total of 2,168 original <abbr class="spell">HRS</abbr> cohort respondents and 681 Early Boomer respondents reported ever having government employment, respectively representing 20.3 percent of the 10,703 original <abbr class="spell">HRS</abbr> respondents and 23.4 percent of the 2,906 Early Boomer respondents who reported ever being employed.</p>
|
|
<p>We devoted considerable time to one particular problem. Some respondents apparently do not report that they are, or have been, state or local government employees even though they participate in state or local pension plans. Notable examples include employees of state universities, libraries, and other state or locally funded services, who receive a salary that is not directly paid by a state or local government agency.<sup><a href="#mn12" id="mt12">12</a></sup> The status of even some elementary or secondary school teachers may be ambiguous.</p>
|
|
<p>In the end, only <span class="nobr">one-half</span> of the respondents who reported having worked in a job not covered by Social Security also reported that they were government employees.<sup><a href="#mn13" id="mt13">13</a></sup> Our approach is to pool information on government and noncovered employment from a number of sources, including self-reports and <span class="nobr">W-2</span> records. The adjustments we make for failure to report work as government employment are described more fully in our working paper (Gustman, Steinmeier, and Tabatabai 2013b).</p>
|
|
<p>Using matched <abbr class="spell">HRS</abbr> data and Social Security administrative records, we find that among the 10,703 original <abbr class="spell">HRS</abbr> cohort respondents who reported ever being employed, 895 (or 8.4 percent) reported ever holding a job that was not covered by Social Security. Of the 2,906 members of the Early Boomer cohort who had ever been employed, 239 (8.2 percent) reported some noncovered employment.</p>
|
|
<p>Based on <abbr class="spell">HRS</abbr> respondents' reports about their employers, we determine whether any reported pension is from covered or from noncovered employment. We calculate pension values for defined benefit (<abbr class="spell">DB</abbr>) plans based on reported benefits at expected retirement dates, monthly payment amounts for plans in current-pay status, and individual retirement account lump sums or monthly annuities that originated with pensions and were rolled over at termination. <abbr class="spell">SSA</abbr> provides a formula for converting the values of defined contribution (<abbr class="spell">DC</abbr>) pensions and <span class="nobr">lump-sum</span> pension settlements into a flow. For pensions from current jobs in the baseline period, we used terminal pension values if those jobs were terminated after 1992 for the original <abbr class="spell">HRS</abbr> cohort and after 2004 for the Early Boomers.</p>
|
|
<p>Social Security benefits based on one's own earnings in a covered job are calculated by applying <abbr class="spell">SSA</abbr>'s Any<abbr class="spell">PIA</abbr> benefit estimation program to the respondent's covered earnings records. When records are not available from <abbr class="spell">SSA</abbr>, we impute the full record based on individual and job characteristics, including self-reported earnings and an indicator of government employment (see the <a href="#appendix">appendix</a> for further details on the imputation procedure).</p>
|
|
<p>Once the values of benefits based on own earnings are calculated, individual respondents are grouped into households. <span class="nobr">Own-work,</span> spouse, and survivor benefits are calculated at the household level. For households in which members have some work in both covered and noncovered employment, at least one party is entitled to Social Security benefits, and at least one party has a pension from noncovered work, we calculate the household's <abbr>WEP</abbr> and <abbr class="spell">GPO</abbr> adjustments.</p>
|
|
<h2><abbr>WEP</abbr> and <abbr class="spell">GPO</abbr> Effects on Household Social Security Benefits and Wealth</h2>
|
|
<p>We categorize households according to whether they are subject to the <abbr>WEP</abbr>, to the <abbr class="spell">GPO</abbr>, to both provisions, or to neither. As seen in Table 1, of the 7,623 households in the original <abbr class="spell">HRS</abbr> cohort, 292 (3.8 percent) were subject to either the <abbr>WEP</abbr> or the <abbr class="spell">GPO</abbr>. The comparable figure for the Early Boomer cohort is 3.5 percent (75 of 2,150). Among households subject to at least one of the provisions in the original <abbr class="spell">HRS</abbr> cohort, 48.3 percent (141 of 292) were subject to both. The figure is 36.0 percent (27 of 75) for the Early Boomer cohort.</p>
|
|
<div class="table" id="table1">
|
|
<table>
|
|
<caption><span class="tableNumber">Table 1. </span>Number of households subject to the <abbr>WEP</abbr> or the <abbr class="spell">GPO</abbr>, by cohort</caption>
|
|
<colgroup span="1" style="width:11em"></colgroup>
|
|
<colgroup span="3" style="width:8em"></colgroup>
|
|
<colgroup span="1" style="width:8em"></colgroup>
|
|
<colgroup span="1" style="width:8em"></colgroup>
|
|
<thead>
|
|
<tr>
|
|
<th rowspan="2" class="stubHeading" scope="colgroup">Cohort</th>
|
|
<th colspan="3" class="spanner" scope="colgroup">Households with at least one worker subject to—</th>
|
|
<th rowspan="2" scope="colgroup">Households subject to both provisions</th>
|
|
<th rowspan="2" scope="colgroup">Total households</th>
|
|
</tr>
|
|
<tr>
|
|
<th scope="col"><abbr>WEP</abbr></th>
|
|
<th scope="col"><abbr class="spell">GPO</abbr></th>
|
|
<th scope="col">Either provision</th>
|
|
</tr>
|
|
</thead>
|
|
<tbody>
|
|
<tr>
|
|
<th class="stub0" scope="row">Original <abbr class="spell">HRS</abbr> (1992)</th>
|
|
<td>282</td>
|
|
<td>151</td>
|
|
<td>292</td>
|
|
<td>141</td>
|
|
<td>7,623</td>
|
|
</tr>
|
|
<tr>
|
|
<th class="stub0" scope="row">Early Boomers (2004)</th>
|
|
<td>75</td>
|
|
<td>28</td>
|
|
<td>75</td>
|
|
<td>27</td>
|
|
<td>2,150</td>
|
|
</tr>
|
|
</tbody>
|
|
<tfoot>
|
|
<tr>
|
|
<td class="onlyNote" colspan="6">SOURCE: Authors' calculations based on the <abbr class="spell">HRS</abbr>.</td>
|
|
</tr>
|
|
</tfoot>
|
|
</table>
|
|
</div>
|
|
<p>For affected households, we calculate the lifetime value of Social Security benefits with and without <abbr>WEP</abbr> and <abbr class="spell">GPO</abbr> adjustments. Social Security benefits from covered employment are calculated by entering the beneficiary's covered earnings history and the expected benefit claiming date into <abbr class="spell">SSA</abbr>'s Any<abbr class="spell">PIA</abbr> software. For individuals who also worked in noncovered employment, Any<abbr class="spell">PIA</abbr> requires the value of any pension earned. If no pension was earned on the noncovered job, there is no <abbr>WEP</abbr> adjustment. If a pension was earned, the Any<abbr class="spell">PIA</abbr> program calculates the <abbr>WEP</abbr> adjustment, which is limited to <span class="nobr">one-half</span> of the value of the noncovered pension. The benefits paid to the spouse of a person who is subject to the <abbr>WEP</abbr> are reduced to <span class="nobr">one-half</span> of the <abbr>WEP</abbr>-adjusted benefit of the primary earner, with further adjustment possible depending on age at retirement. Survivor benefits are not adjusted for the <abbr>WEP</abbr>. The <abbr class="spell">GPO</abbr> adjustment is calculated by subtracting <span class="nobr">two-thirds</span> of the value of the noncovered-work pension from the pensioner's spouse or survivor benefit.</p>
|
|
<p>Pension plans are central to the <abbr>WEP</abbr> and <abbr class="spell">GPO</abbr> calculations. We determine plan values using respondent reports of expected benefits for <abbr class="spell">DB</abbr> plans, or of <abbr class="spell">DC</abbr> plan balances. We then determine whether former public-sector employees who also earned Social Security benefits should have a <abbr>WEP</abbr> or <abbr class="spell">GPO</abbr> adjustment. For purposes of determining <abbr>WEP</abbr> and <abbr class="spell">GPO</abbr> adjustment amounts, pensions are valued on a monthly basis. <abbr class="spell">DB</abbr> plan values are derived from respondent reports of either current or expected monthly pension benefits, along with monthly annuity payments, individual retirement account balances from rolled-over plans, and <span class="nobr">lump-sum</span> payouts. <abbr class="spell">DC</abbr> plan values are based on respondent reports of account values, including rollovers and lump sums. A monthly benefit is computed for <abbr class="spell">DC</abbr> plans and other balances using a table of actuarial values provided by <abbr class="spell">SSA</abbr> (2013). These computations also account for the date that Social Security benefits begin.</p>
|
|
<p>Our computations require three different key dates: the year in which earnings cease, the year in which Social Security benefits begin, and the year in which pension payments begin. For earnings cessation, we use either the actual date an individual left the labor force or the self-reported date when a respondent expects to stop working. If the expected date of separation is unavailable in the records, we substitute the year of attainment of age 62 or, if the respondent expected to work past age 69, the year of attaining age 70. For Social Security benefits, we assume that respondents who were current beneficiaries when first interviewed began receiving benefits in the year they attained age 62. For noncurrent beneficiaries, we use the respondent's self-reported expected date of first benefit receipt, again substituting the date of attaining age 62 if the expected date is missing and the date of attaining age 70 for those planning to defer claiming until reaching age 70 or later. For pension payments, we assume that the year of first receipt corresponds with the first year of Social Security benefits receipt. By using those assumptions, we may be unable to capture some instances in which sophisticated claimants “game” the claim process.<sup><a href="#mn14" id="mt14">14</a></sup> However, we do not count any pension payments received against the <abbr>WEP</abbr> if they are observed before the expected Social Security claiming age, so our data account for instances of gaming in which someone claimed a pension early and did not expect to claim Social Security until later.</p>
|
|
<h3>Value of Adjustments</h3>
|
|
<p>The present values of Social Security and pension benefits for members of both the original <abbr class="spell">HRS</abbr> cohort and the Early Boomer cohort are reported in 1992 dollars. We define <abbr>WEP</abbr> adjustments as the reduction in benefits that are due to the <abbr>WEP</abbr> adjustment alone. The <abbr class="spell">GPO</abbr> adjustment is calculated as the total effect of reducing benefits to account for both the <abbr>WEP</abbr> and the <abbr class="spell">GPO</abbr>, less the value of the <abbr>WEP</abbr> adjustment. Once we disaggregate the results, care is required in making comparisons between the original <abbr class="spell">HRS</abbr> sample, with 141 observations in even the smallest cell, and the Early Boomer cohort, where the number of observations falls to 27 for those subject to both the <abbr>WEP</abbr> and the <abbr class="spell">GPO</abbr>. Nevertheless, we do not pool the results for both samples.</p>
|
|
<p>Table 2 shows the lifetime average present values of Social Security benefits and <abbr>WEP</abbr> and <abbr class="spell">GPO</abbr> adjustments at the household level for members of both the original <abbr class="spell">HRS</abbr> cohort and the Early Boomer cohort, in 1992 dollars. In original <abbr class="spell">HRS</abbr> cohort households affected by either the <abbr>WEP</abbr> or the <abbr class="spell">GPO</abbr>, the average <abbr>WEP</abbr> adjustment amounts to $17,050 in present value. The <abbr>WEP</abbr> adjustment for the 141 original <abbr class="spell">HRS</abbr> cohort households affected by both provisions is $17,812. Households in the Early Boomer cohort experience considerably larger <abbr>WEP</abbr> adjustments, where benefits are reduced by $22,402 for those affected by either the <abbr>WEP</abbr> or the <abbr class="spell">GPO</abbr>. For the 27 Early Boomer households affected by both provisions, the <abbr>WEP</abbr> adjustment reduces benefits by $34,375.</p>
|
|
<div class="table" id="table2">
|
|
<table>
|
|
<caption><span class="tableNumber">Table 2. </span>Average lifetime present value of Social Security benefits and <abbr>WEP</abbr> and <abbr class="spell">GPO</abbr> adjustments among affected households, by cohort (in 1992 dollars)</caption>
|
|
<colgroup span="1" style="width:27em"></colgroup>
|
|
<colgroup span="2" style="width:9em"></colgroup>
|
|
<colgroup span="2" style="width:8em"></colgroup>
|
|
<thead>
|
|
<tr>
|
|
<th rowspan="2" class="stubHeading" scope="colgroup">Benefit and adjustment</th>
|
|
<th colspan="2" class="spanner" scope="colgroup">Households affected by either the <abbr>WEP</abbr>, the <abbr class="spell">GPO</abbr>, or both</th>
|
|
<th colspan="2" class="spanner" scope="colgroup">All households with—</th>
|
|
</tr>
|
|
<tr>
|
|
<th scope="col">Total</th>
|
|
<th scope="col">Households subject to both provisions</th>
|
|
<th scope="col">Any government or noncovered employment</th>
|
|
<th scope="col">Any employment history</th>
|
|
</tr>
|
|
</thead>
|
|
<tbody>
|
|
<tr>
|
|
<td> </td>
|
|
<th colspan="4" class="panel" scope="rowgroup">Original <abbr class="spell">HRS</abbr> (1992)</th>
|
|
</tr>
|
|
<tr>
|
|
<th class="stub0" scope="row">Social Security benefits (unadjusted)</th>
|
|
<td>129,386</td>
|
|
<td>120,143</td>
|
|
<td>146,740</td>
|
|
<td>137,130</td>
|
|
</tr>
|
|
<tr>
|
|
<th class="stub0" scope="row"><abbr>WEP</abbr> adjustment</th>
|
|
<td>-17,050</td>
|
|
<td>-17,812</td>
|
|
<td>-2,109</td>
|
|
<td>-704</td>
|
|
</tr>
|
|
<tr>
|
|
<th class="stub0" scope="row">Social Security benefits after <abbr>WEP</abbr> adjustment</th>
|
|
<td>112,337</td>
|
|
<td>102,331</td>
|
|
<td>144,631</td>
|
|
<td>136,427</td>
|
|
</tr>
|
|
<tr>
|
|
<th class="stub0" scope="row"><abbr class="spell">GPO</abbr> adjustment</th>
|
|
<td>-14,101</td>
|
|
<td>-28,805</td>
|
|
<td>-1,600</td>
|
|
<td>-569</td>
|
|
</tr>
|
|
<tr>
|
|
<th class="stub0" scope="row">Social Security benefits after <abbr>WEP</abbr> and <abbr class="spell">GPO</abbr> adjustments</th>
|
|
<td>98,235</td>
|
|
<td>73,526</td>
|
|
<td>143,032</td>
|
|
<td>135,858</td>
|
|
</tr>
|
|
<tr class="shaded">
|
|
<th class="stub0" scope="row">Number of households</th>
|
|
<td>292</td>
|
|
<td>141</td>
|
|
<td>2,337</td>
|
|
<td>7,051</td>
|
|
</tr>
|
|
<tr>
|
|
<td> </td>
|
|
<th colspan="4" class="panel" scope="rowgroup">Early Boomers (2004)</th>
|
|
</tr>
|
|
<tr>
|
|
<th class="stub0" scope="row">Social Security benefits (unadjusted)</th>
|
|
<td>145,654</td>
|
|
<td>163,653</td>
|
|
<td>172,182</td>
|
|
<td>161,305</td>
|
|
</tr>
|
|
<tr>
|
|
<th class="stub0" scope="row"><abbr>WEP</abbr> adjustment</th>
|
|
<td>-22,402</td>
|
|
<td>-34,375</td>
|
|
<td>-2,579</td>
|
|
<td>-851</td>
|
|
</tr>
|
|
<tr>
|
|
<th class="stub0" scope="row">Social Security benefits after <abbr>WEP</abbr> adjustment</th>
|
|
<td>123,252</td>
|
|
<td>129,277</td>
|
|
<td>169,602</td>
|
|
<td>160,454</td>
|
|
</tr>
|
|
<tr>
|
|
<th class="stub0" scope="row"><abbr class="spell">GPO</abbr> adjustment</th>
|
|
<td>-4,495</td>
|
|
<td>-12,589</td>
|
|
<td>-518</td>
|
|
<td>-171</td>
|
|
</tr>
|
|
<tr>
|
|
<th class="stub0" scope="row">Social Security benefits after <abbr>WEP</abbr> and <abbr class="spell">GPO</abbr> adjustments</th>
|
|
<td>118,757</td>
|
|
<td>116,689</td>
|
|
<td>169,085</td>
|
|
<td>160,283</td>
|
|
</tr>
|
|
<tr class="shaded">
|
|
<th class="stub0" scope="row">Number of households</th>
|
|
<td>76</td>
|
|
<td>27</td>
|
|
<td>660</td>
|
|
<td>2,001</td>
|
|
</tr>
|
|
</tbody>
|
|
<tfoot>
|
|
<tr>
|
|
<td class="firstNote" colspan="5">SOURCE: Authors' calculations based on the <abbr class="spell">HRS</abbr>.</td>
|
|
</tr>
|
|
<tr>
|
|
<td class="lastNote" colspan="5">NOTE: Values do not necessarily equal the sums of or differences between rounded components.</td>
|
|
</tr>
|
|
</tfoot>
|
|
</table>
|
|
</div>
|
|
<p>For the original <abbr class="spell">HRS</abbr> cohort, among the 292 households affected by either of the provisions, the average <abbr class="spell">GPO</abbr> adjustment amounts to $14,101 (beyond the $17,050 reduction that was due to the <abbr>WEP</abbr>). Combining the two adjustments for those households reduces the present value of Social Security benefits by 24.1 percent, from $129,386 to $98,235. For the Early Boomer cohort, among the 76 <abbr class="spell">HRS</abbr> households affected by either the <abbr>WEP</abbr> or the <abbr class="spell">GPO</abbr>, the <abbr class="spell">GPO</abbr> adjustment adds $4,495 to the $22,402 <abbr>WEP</abbr> adjustment, reducing the present value of Social Security benefits by 18.5 percent, from $145,654 to $118,757. Among households with at least one government or noncovered employee in the original <abbr class="spell">HRS</abbr> cohort, the <abbr>WEP</abbr> and the <abbr class="spell">GPO</abbr> together reduce benefits by 2.5 percent (from $146,740 to $143,032), and among all households with at least one member having any earnings history, the provisions reduce benefits by 0.9 percent (from $137,130 to $135,858). Corresponding figures for the Early Boomer cohort are 1.8 percent (from $172,182 to $169,085) and 0.6 percent (from $161,305 to $160,283).</p>
|
|
<p>Table 3 shows how the <abbr>WEP</abbr> and <abbr class="spell">GPO</abbr> adjustments relate to the present values of lifetime Social Security and pension benefits.<sup><a href="#mn15" id="mt15">15</a></sup> The combined effect of the two provisions for all households from the original <abbr class="spell">HRS</abbr> cohort subject to either the <abbr>WEP</abbr> or the <abbr class="spell">GPO</abbr> totals $30,596 and reduces their benefits by 23.8 percent (from $128,348 to $97,752). The comparable group of Early Boomers absorbs a reduction of $26,907, or 18.5 percent of their benefits (from $145,805 to $118,898). Original <abbr class="spell">HRS</abbr> cohort households affected by both the <abbr>WEP</abbr> and the <abbr class="spell">GPO</abbr> have a $45,786 reduction in the present value of benefits, or 38.9 percent of their total Social Security benefits of $117,764. Those subject to both the <abbr>WEP</abbr> and the <abbr class="spell">GPO</abbr> from the Early Boomer cohort have a 28.7 percent reduction in their benefits ($46,964 from $163,653).</p>
|
|
<div class="table" id="table3">
|
|
<table>
|
|
<caption><span class="tableNumber">Table 3. </span>Average lifetime present value of Social Security and public pension benefits and <abbr>WEP</abbr> and <abbr class="spell">GPO</abbr> adjustments among affected households, by cohort (in 1992 dollars)</caption>
|
|
<colgroup span="1" style="width:30em"></colgroup>
|
|
<colgroup span="2" style="width:9em"></colgroup>
|
|
<colgroup span="2" style="width:8em"></colgroup>
|
|
<thead>
|
|
<tr>
|
|
<th rowspan="2" class="stubHeading" scope="colgroup">Benefit and adjustment</th>
|
|
<th colspan="2" class="spanner" scope="colgroup">Households affected by either the <abbr>WEP</abbr>, the <abbr class="spell">GPO</abbr>, or both</th>
|
|
<th colspan="2" class="spanner" scope="colgroup">All households with—</th>
|
|
</tr>
|
|
<tr>
|
|
<th scope="col">Total</th>
|
|
<th scope="col">Households subject to both provisions</th>
|
|
<th scope="col">Any government or noncovered employment</th>
|
|
<th scope="col">Any employment history</th>
|
|
</tr>
|
|
</thead>
|
|
<tbody>
|
|
<tr>
|
|
<td> </td>
|
|
<th colspan="4" class="panel" scope="rowgroup">Original <abbr class="spell">HRS</abbr> (1992)</th>
|
|
</tr>
|
|
<tr>
|
|
<th class="stub0" scope="row">Social Security benefits (unadjusted)</th>
|
|
<td>128,348</td>
|
|
<td>117,764</td>
|
|
<td>146,451</td>
|
|
<td>137,461</td>
|
|
</tr>
|
|
<tr>
|
|
<th class="stub0" scope="row"><abbr>WEP</abbr> adjustment</th>
|
|
<td>-17,105</td>
|
|
<td>-17,941</td>
|
|
<td>-2,115</td>
|
|
<td>-711</td>
|
|
</tr>
|
|
<tr>
|
|
<th class="stub0" scope="row">Social Security benefits after <abbr>WEP</abbr> adjustment</th>
|
|
<td>111,243</td>
|
|
<td>99,823</td>
|
|
<td>144,336</td>
|
|
<td>136,750</td>
|
|
</tr>
|
|
<tr>
|
|
<th class="stub0" scope="row">Combined <abbr>WEP</abbr> and <abbr class="spell">GPO</abbr> adjustment</th>
|
|
<td>-30,596</td>
|
|
<td>-45,786</td>
|
|
<td>-3,654</td>
|
|
<td>-1,257</td>
|
|
</tr>
|
|
<tr>
|
|
<th class="stub0" scope="row">Social Security benefits after <abbr>WEP</abbr> and <abbr class="spell">GPO</abbr> adjustments</th>
|
|
<td>97,752</td>
|
|
<td>71,978</td>
|
|
<td>142,797</td>
|
|
<td>136,204</td>
|
|
</tr>
|
|
<tr>
|
|
<th class="stub0" scope="row">Public pension benefits</th>
|
|
<td>155,401</td>
|
|
<td>167,149</td>
|
|
<td>39,939</td>
|
|
<td>13,568</td>
|
|
</tr>
|
|
<tr>
|
|
<th class="stub0" scope="row">Social Security benefits after <abbr>WEP</abbr> and <abbr class="spell">GPO</abbr> adjustments plus public pension benefits</th>
|
|
<td>253,154</td>
|
|
<td>239,127</td>
|
|
<td>182,736</td>
|
|
<td>149,773</td>
|
|
</tr>
|
|
<tr>
|
|
<th class="stub0" scope="row">All other pension benefits</th>
|
|
<td>52,324</td>
|
|
<td>39,543</td>
|
|
<td>105,425</td>
|
|
<td>83,351</td>
|
|
</tr>
|
|
<tr>
|
|
<th class="stub0" scope="row">Social Security benefits after <abbr>WEP</abbr> and <abbr class="spell">GPO</abbr> adjustments plus all pension benefits</th>
|
|
<td>305,478</td>
|
|
<td>278,670</td>
|
|
<td>288,161</td>
|
|
<td>233,124</td>
|
|
</tr>
|
|
<tr>
|
|
<th class="stub0" scope="row">All other assets</th>
|
|
<td>192,157</td>
|
|
<td>196,604</td>
|
|
<td>184,616</td>
|
|
<td>169,835</td>
|
|
</tr>
|
|
<tr>
|
|
<th class="stub1" scope="row">Total wealth</th>
|
|
<td>497,635</td>
|
|
<td>475,274</td>
|
|
<td>472,777</td>
|
|
<td>402,959</td>
|
|
</tr>
|
|
<tr class="shaded">
|
|
<th class="stub0" scope="row">Number of households</th>
|
|
<td>289</td>
|
|
<td>138</td>
|
|
<td>2,313</td>
|
|
<td>6,938</td>
|
|
</tr>
|
|
<tr>
|
|
<td> </td>
|
|
<th colspan="4" class="panel" scope="rowgroup">Early Boomers (2004)</th>
|
|
</tr>
|
|
<tr>
|
|
<th class="stub0" scope="row">Social Security benefits (unadjusted)</th>
|
|
<td>145,805</td>
|
|
<td>163,653</td>
|
|
<td>171,695</td>
|
|
<td>161,617</td>
|
|
</tr>
|
|
<tr>
|
|
<th class="stub0" scope="row"><abbr>WEP</abbr> adjustment</th>
|
|
<td>-22,352</td>
|
|
<td>-34,376</td>
|
|
<td>-2,575</td>
|
|
<td>-854</td>
|
|
</tr>
|
|
<tr>
|
|
<th class="stub0" scope="row">Social Security benefits after <abbr>WEP</abbr> adjustment</th>
|
|
<td>123,453</td>
|
|
<td>129,277</td>
|
|
<td>169,120</td>
|
|
<td>160,763</td>
|
|
</tr>
|
|
<tr>
|
|
<th class="stub0" scope="row">Combined <abbr>WEP</abbr> and <abbr class="spell">GPO</abbr> adjustment</th>
|
|
<td>-26,907</td>
|
|
<td>-46,964</td>
|
|
<td>-3,100</td>
|
|
<td>-1,027</td>
|
|
</tr>
|
|
<tr>
|
|
<th class="stub0" scope="row">Social Security benefits after <abbr>WEP</abbr> and <abbr class="spell">GPO</abbr> adjustments</th>
|
|
<td>118,898</td>
|
|
<td>116,689</td>
|
|
<td>168,595</td>
|
|
<td>160,589</td>
|
|
</tr>
|
|
<tr>
|
|
<th class="stub0" scope="row">Public pension benefits</th>
|
|
<td>138,809</td>
|
|
<td>149,622</td>
|
|
<td>33,257</td>
|
|
<td>11,018</td>
|
|
</tr>
|
|
<tr>
|
|
<th class="stub0" scope="row">Social Security benefits after <abbr>WEP</abbr> and <abbr class="spell">GPO</abbr> adjustments plus public pension benefits</th>
|
|
<td>257,707</td>
|
|
<td>266,310</td>
|
|
<td>201,853</td>
|
|
<td>171,608</td>
|
|
</tr>
|
|
<tr>
|
|
<th class="stub0" scope="row">All other pension benefits</th>
|
|
<td>52,379</td>
|
|
<td>28,126</td>
|
|
<td>93,286</td>
|
|
<td>72,761</td>
|
|
</tr>
|
|
<tr>
|
|
<th class="stub0" scope="row">Social Security benefits after <abbr>WEP</abbr> and <abbr class="spell">GPO</abbr> adjustments plus all pension benefits</th>
|
|
<td>310,086</td>
|
|
<td>294,436</td>
|
|
<td>295,139</td>
|
|
<td>244,369</td>
|
|
</tr>
|
|
<tr>
|
|
<th class="stub0" scope="row">All other assets</th>
|
|
<td>197,027</td>
|
|
<td>170,688</td>
|
|
<td>205,531</td>
|
|
<td>183,062</td>
|
|
</tr>
|
|
<tr>
|
|
<th class="stub1" scope="row">Total wealth</th>
|
|
<td>507,113</td>
|
|
<td>465,124</td>
|
|
<td>500,670</td>
|
|
<td>427,431</td>
|
|
</tr>
|
|
<tr class="shaded">
|
|
<th class="stub0" scope="row">Number of households</th>
|
|
<td>75</td>
|
|
<td>27</td>
|
|
<td>651</td>
|
|
<td>1,965</td>
|
|
</tr>
|
|
</tbody>
|
|
<tfoot>
|
|
<tr>
|
|
<td class="firstNote" colspan="5">SOURCE: Authors' calculations based on the <abbr class="spell">HRS</abbr>.</td>
|
|
</tr>
|
|
<tr>
|
|
<td class="note" colspan="5">NOTES: Values do not necessarily equal the sums of or differences between rounded components.</td>
|
|
</tr>
|
|
<tr>
|
|
<td class="lastNote" colspan="5">Households in the top 1 percent and bottom 1 percent of the wealth distribution are omitted.</td>
|
|
</tr>
|
|
</tfoot>
|
|
</table>
|
|
</div>
|
|
<p>These benefit reductions are small compared with the average lifetime public pension benefits of $155,401 for members of the original <abbr class="spell">HRS</abbr> cohort affected by either of the two provisions and of $138,809 for the comparable group of Early Boomers. For members of the original <abbr class="spell">HRS</abbr> cohort affected by either provision, the adjustment ($30,596) amounts to 10.0 percent of the combined value of all pension benefits and adjusted Social Security benefits ($305,478) and to 6.1 percent of their total wealth ($497,635). Comparable reductions for members of the Early Boomer cohort amount to 8.7 percent of adjusted Social Security benefits plus total pension wealth ($26,907 of $310,086) and to 5.3 percent of total wealth ($26,907 of $507,113).</p>
|
|
<p>Among households in the original <abbr class="spell">HRS</abbr> cohort with any government or noncovered employment, or with an employment history of any kind, those reductions represent much smaller fractions of total wealth, respectively amounting to 0.8 percent ($3,654 of $472,777) and 0.3 percent ($1,257 of $402,959). Comparable reductions for members of the Early Boomer cohort are 0.6 percent ($3,100 of $500,670) and 0.2 percent ($1,027 of $427,431), respectively.</p>
|
|
<p>Table 4 compares total wealth and its components between households subject to the <abbr>WEP</abbr> or the <abbr class="spell">GPO</abbr> and all households. Original <abbr class="spell">HRS</abbr> cohort households subject to the <abbr>WEP</abbr> or the <abbr class="spell">GPO</abbr> average $102,454 more in total wealth than do all households, and the comparable difference for Early Boomer households is $90,374. The value of pension benefits plus Social Security benefits among households affected by the <abbr>WEP</abbr> or the <abbr class="spell">GPO</abbr> far exceeds that for all households. These findings indicate that, contrary to previous claims, the adjustments do not fall disproportionately on poor households.</p>
|
|
<div class="table" id="table4">
|
|
<table>
|
|
<caption><span class="tableNumber">Table 4. </span>Average household wealth by component for all households and those affected by the <abbr>WEP</abbr> or the <abbr class="spell">GPO</abbr>, by cohort (in 1992 dollars)</caption>
|
|
<colgroup span="1" style="width:20em"></colgroup>
|
|
<colgroup span="2" style="width:8em"></colgroup>
|
|
<colgroup span="2" style="width:8em"></colgroup>
|
|
<thead>
|
|
<tr>
|
|
<th rowspan="2" class="stubHeading" scope="colgroup">Component</th>
|
|
<th colspan="2" class="spanner" scope="colgroup">Original <abbr class="spell">HRS</abbr> (1992)</th>
|
|
<th colspan="2" class="spanner" scope="colgroup">Early Boomers (2004)</th>
|
|
</tr>
|
|
<tr>
|
|
<th scope="col">Affected households</th>
|
|
<th scope="col">All households</th>
|
|
<th scope="col">Affected households</th>
|
|
<th scope="col">All households</th>
|
|
</tr>
|
|
</thead>
|
|
<tbody>
|
|
<tr>
|
|
<th class="stub0" scope="rowgroup">Social Security benefits (unadjusted)</th>
|
|
<td>128,348</td>
|
|
<td>131,956</td>
|
|
<td>145,805</td>
|
|
<td>156,096</td>
|
|
</tr>
|
|
<tr>
|
|
<th class="stub0" scope="rowgroup">Combined <abbr>WEP</abbr> and <abbr class="spell">GPO</abbr> adjustment</th>
|
|
<td>-30,596</td>
|
|
<td>-1,183</td>
|
|
<td>-26,906</td>
|
|
<td>-958</td>
|
|
</tr>
|
|
<tr>
|
|
<th class="stub0" scope="rowgroup">Social Security benefits after <abbr>WEP</abbr> and <abbr class="spell">GPO</abbr> adjustments</th>
|
|
<td>97,752</td>
|
|
<td>130,773</td>
|
|
<td>118,899</td>
|
|
<td>155,138</td>
|
|
</tr>
|
|
<tr>
|
|
<th class="stub0" scope="rowgroup">Pension benefits</th>
|
|
<td colspan="4"></td>
|
|
</tr>
|
|
<tr>
|
|
<th class="stub1" scope="row">Noncovered employment</th>
|
|
<td>155,401</td>
|
|
<td>12,602</td>
|
|
<td>138,808</td>
|
|
<td>10,276</td>
|
|
</tr>
|
|
<tr>
|
|
<th class="stub1" scope="row">Covered employment</th>
|
|
<td>52,595</td>
|
|
<td>78,483</td>
|
|
<td>52,379</td>
|
|
<td>68,801</td>
|
|
</tr>
|
|
<tr>
|
|
<th class="stub0" scope="rowgroup">Adjusted Social Security benefits plus all pension benefits</th>
|
|
<td>305,748</td>
|
|
<td>221,858</td>
|
|
<td>257,707</td>
|
|
<td>234,215</td>
|
|
</tr>
|
|
<tr>
|
|
<th class="stub0" scope="rowgroup">Net home value</th>
|
|
<td>85,008</td>
|
|
<td>65,362</td>
|
|
<td>105,091</td>
|
|
<td>79,771</td>
|
|
</tr>
|
|
<tr>
|
|
<th class="stub0" scope="rowgroup">Other real estate</th>
|
|
<td>29,777</td>
|
|
<td>24,468</td>
|
|
<td>11,659</td>
|
|
<td>17,737</td>
|
|
</tr>
|
|
<tr>
|
|
<th class="stub0" scope="rowgroup">Business assets</th>
|
|
<td>5,579</td>
|
|
<td>19,007</td>
|
|
<td>13,066</td>
|
|
<td>14,892</td>
|
|
</tr>
|
|
<tr>
|
|
<th class="stub0" scope="rowgroup">Net value of vehicles</th>
|
|
<td>13,342</td>
|
|
<td>12,224</td>
|
|
<td>12,757</td>
|
|
<td>10,171</td>
|
|
</tr>
|
|
<tr>
|
|
<th class="stub0" scope="rowgroup">Individual retirement account assets</th>
|
|
<td>17,148</td>
|
|
<td>15,329</td>
|
|
<td>15,024</td>
|
|
<td>21,021</td>
|
|
</tr>
|
|
<tr>
|
|
<th class="stub0" scope="rowgroup">Other financial assets</th>
|
|
<td>41,032</td>
|
|
<td>36,934</td>
|
|
<td>39,428</td>
|
|
<td>38,931</td>
|
|
</tr>
|
|
<tr>
|
|
<th class="stub2" scope="row">Total</th>
|
|
<td>497,636</td>
|
|
<td>395,182</td>
|
|
<td>507,113</td>
|
|
<td>416,739</td>
|
|
</tr>
|
|
<tr class="shaded">
|
|
<th class="stub0" scope="rowgroup">Number of households</th>
|
|
<td>289</td>
|
|
<td>7,470</td>
|
|
<td>75</td>
|
|
<td>2,107</td>
|
|
</tr>
|
|
</tbody>
|
|
<tfoot>
|
|
<tr>
|
|
<td class="firstNote" colspan="5">SOURCE: Authors' calculations based on the <abbr class="spell">HRS</abbr>.</td>
|
|
</tr>
|
|
<tr>
|
|
<td class="note" colspan="5">NOTES: Values do not necessarily equal the sums of or differences between rounded components.</td>
|
|
</tr>
|
|
<tr>
|
|
<td class="lastNote" colspan="5">Households in the top 1 percent and bottom 1 percent of the wealth distribution are omitted.</td>
|
|
</tr>
|
|
</tfoot>
|
|
</table>
|
|
</div>
|
|
<p>Although the <abbr>WEP</abbr> and the <abbr class="spell">GPO</abbr> reduce the benefits of those who worked in noncovered employment, and those who worked in noncovered employment have lower pension income from work in covered jobs than the average household, the pension from noncovered work dwarfs those differences. The lifetime values of pensions from noncovered jobs are $155,401 and $138,808 for original <abbr class="spell">HRS</abbr> and Early Boomer cohort households, respectively, accounting for most of the difference in total wealth between affected households and all households.</p>
|
|
<p>After adjusting for the <abbr>WEP</abbr> and <abbr class="spell">GPO</abbr> provisions, the average lifetime value of Social Security benefits for affected households in the original <abbr class="spell">HRS</abbr> cohort is 25.3 percent lower than that of all households ($97,752 versus $130,773). The entire difference, however, is the result of the offsets alone. For the Early Boomer cohort, average Social Security benefits of affected households are 23.4 percent lower than those of all households ($118,899 versus $155,138), but for that cohort, part of the difference is due to lower Social Security earnings. Still, in the absence of the <abbr>WEP</abbr> and the <abbr class="spell">GPO</abbr>, those who worked in noncovered employment would have Social Security benefits relatively similar to those of the entire population.</p>
|
|
<h2>Disaggregating the <abbr>WEP</abbr> Adjustment into Two Component Effects</h2>
|
|
<p>Previous studies sought to measure the aggregate value of <abbr>WEP</abbr> benefit reductions by analyzing the way the <abbr>WEP</abbr> alters the Social Security benefit formula for affected individuals. Those calculations overlooked the <abbr>WEP</abbr> adjustment's limitation to <span class="nobr">one-half</span> of the value of pensions from noncovered work. Ignoring that limit causes the <abbr>WEP</abbr> adjustment to be overstated by roughly 150 percent. Moreover, as we have seen, ignoring the role of pensions from noncovered work leads to a misleading picture of where households affected by the <abbr>WEP</abbr> or the <abbr class="spell">GPO</abbr> stand financially. They are not, as some have claimed, among the poorer households.</p>
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<p>Table 5 shows how the requirement that pensions must be received from noncovered work before the <abbr>WEP</abbr> or <abbr class="spell">GPO</abbr> is instituted affects the values of the offsets. First, the table presents the unadjusted Social Security benefit value. For the original <abbr class="spell">HRS</abbr> cohort, the present value of Social Security benefits without a <abbr>WEP</abbr> adjustment averages $76,828. With the <abbr>WEP</abbr> adjustment capped at <span class="nobr">one-half</span> of the value of the pension from noncovered work, the present value of Social Security benefits is $72,619. So the average <abbr>WEP</abbr> adjustment for this cohort amounts to $4,209. Unadjusted and <abbr>WEP</abbr>-adjusted benefit numbers for the Early Boomer cohort are $81,692 and $76,892, respectively, so their average <abbr>WEP</abbr> adjustment amounts to $4,800.</p>
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<div class="table" id="table5">
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<table>
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|
<caption><span class="tableNumber">Table 5. </span>Cost of the <abbr>WEP</abbr> adjustment to Social Security benefits for affected households under the actual formula and a counterfactual formula in which the adjustment is not limited to <span class="nobr">one-half</span> the value of the pension from noncovered employment (average lifetime values in 1992 dollars)</caption>
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<colgroup span="1" style="width:12em"></colgroup>
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|
<colgroup span="2" style="width:7em"></colgroup>
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|
<colgroup span="1" style="width:8em"></colgroup>
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|
<colgroup span="3" style="width:7em"></colgroup>
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|
<colgroup span="1" class="shaded" style="width:6em"></colgroup>
|
|
<thead>
|
|
<tr>
|
|
<th rowspan="2" class="stubHeading" scope="colgroup">Cohort</th>
|
|
<th colspan="3" class="spanner" scope="colgroup">Actual</th>
|
|
<th colspan="3" class="spanner" scope="colgroup">If the <abbr>WEP</abbr> adjustment were not capped at <span class="nobr">one-half</span> of the pension value</th>
|
|
<th rowspan="2" scope="colgroup">Number of households</th>
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|
</tr>
|
|
<tr>
|
|
<th scope="col">Unadjusted lifetime Social Security benefits</th>
|
|
<th scope="col"><abbr>WEP</abbr> adjustment</th>
|
|
<th scope="col"><abbr>WEP</abbr>-adjusted Social Security benefits</th>
|
|
<th scope="col">Maximum additional reduction of benefits</th>
|
|
<th scope="col">Maximum total reduction of benefits</th>
|
|
<th scope="col">Social Security benefits</th>
|
|
</tr>
|
|
</thead>
|
|
<tbody>
|
|
<tr>
|
|
<th class="stub0" scope="row">Original <abbr class="spell">HRS</abbr> (1992)</th>
|
|
<td>76,828</td>
|
|
<td>-4,209</td>
|
|
<td>72,619</td>
|
|
<td>-5,924</td>
|
|
<td>-10,133</td>
|
|
<td>66,695</td>
|
|
<td>1,105</td>
|
|
</tr>
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|
<tr>
|
|
<th class="stub0" scope="row">Early Boomers (2004)</th>
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|
<td>81,692</td>
|
|
<td>-4,800</td>
|
|
<td>76,892</td>
|
|
<td>-7,676</td>
|
|
<td>-12,476</td>
|
|
<td>69,216</td>
|
|
<td>266</td>
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|
</tr>
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|
</tbody>
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|
<tfoot>
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<tr>
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|
<td class="onlyNote" colspan="8">SOURCE: Authors' calculations based on the <abbr class="spell">HRS</abbr>.</td>
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</tr>
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|
</tfoot>
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|
</table>
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</div>
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<p>By assuming an artificially large pension, we can isolate the size of the <abbr>WEP</abbr> adjustment produced by the reduction in the Social Security benefit formula's replacement rate from 90 percent to as low as 40 percent for indexed earnings up to the first bend point. This hypothetical scenario allows us to determine the full effect of the formula change without any mitigation from the pension from the noncovered job. If the <abbr>WEP</abbr> adjustment were not limited to <span class="nobr">one-half</span> of the size of the pension, the Social Security benefit for members of the original <abbr class="spell">HRS</abbr> cohort would drop to $66,695, a total reduction of $10,133 from the unadjusted benefit.</p>
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<p>Thus, the limitation of the Social Security benefit reduction to <span class="nobr">one-half</span> of the size of the pension from noncovered employment saves members of the original <abbr class="spell">HRS</abbr> cohort as much as $5,924 in <abbr>WEP</abbr> penalties, or 58.5 percent of what the penalty would be if not for the treatment of noncovered pensions. For the Early Boomers, the change in the <abbr class="spell">PIA</abbr> benefit formula alone would reduce benefits by $12,476, so consideration of the pension from noncovered work reduces their <abbr>WEP</abbr> penalty by $7,676, or by 61.5 percent.</p>
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<p>Although pensions mitigate the effect of the <abbr>WEP</abbr> adjustment to Social Security benefits, pensions from noncovered employment trigger the <abbr class="spell">GPO</abbr> adjustment, which mechanically reduces the spouse and survivor benefits of those with a public pension by <span class="nobr">two-thirds</span> of the value of that pension. Thus, on one hand, consideration of public pensions significantly reduces the <abbr>WEP</abbr>'s downward adjustment to Social Security benefits for those who worked in noncovered employment; on the other hand, consideration of pensions from noncovered employment is the sole determinant of the <abbr class="spell">GPO</abbr> downward adjustment in spouse and survivor benefits.</p>
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<h2>Conclusions</h2>
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<p>This article investigates the effects of the <abbr>WEP</abbr> and the <abbr class="spell">GPO</abbr> on Social Security benefits received by households. Innovations in this study are central to fully understanding the nature of <abbr>WEP</abbr> and <abbr class="spell">GPO</abbr> 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 <abbr>WEP</abbr> and <abbr class="spell">GPO</abbr> adjustments. Also unlike previous studies, we focus on the household, allowing us to incorporate the full effects of the <abbr>WEP</abbr> and the <abbr class="spell">GPO</abbr> on spouse and survivor benefits and to evaluate their effects on the preretirement assets accumulated by affected families.</p>
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|
<p>Among our specific findings are the following:</p>
|
|
<ul>
|
|
<li>Of 7,623 households in the original <abbr class="spell">HRS</abbr> cohort, 3.8 percent are subject to either the <abbr>WEP</abbr> or the <abbr class="spell">GPO</abbr>. The comparable figure for the Early Boomer cohort is 3.5 percent.</li>
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|
<li>Among original <abbr class="spell">HRS</abbr> cohort households affected by either provision, the <abbr>WEP</abbr> adjustment is $17,050 and the <abbr class="spell">GPO</abbr> 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 <abbr>WEP</abbr> and the <abbr class="spell">GPO</abbr> combine to reduce the present value of Social Security benefits by 18.5 percent among affected households.</li>
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|
<li>For members of the original <abbr class="spell">HRS</abbr> cohort affected by the <abbr>WEP</abbr> or the <abbr class="spell">GPO</abbr>, 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.</li>
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|
<li>By far the largest impact is on households affected by both provisions. Those from the original <abbr class="spell">HRS</abbr> cohort face a $45,786 reduction in present-value benefits, or 38.9 percent of their total Social Security benefit. Those subject to the <abbr>WEP</abbr> and the <abbr class="spell">GPO</abbr> from the Early Boomer cohort see their benefit reduced by 28.7 percent.</li>
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|
</ul>
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<p>We also decompose the effects of the <abbr>WEP</abbr> 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 <abbr class="spell">PIA</abbr> formula and (2) the mitigation of that adjustment by the pension. Limiting the reduction in the Social Security benefit to <span class="nobr">one-half</span> of the size of the pension from noncovered employment reduces the <abbr>WEP</abbr> penalty for members of the original <abbr class="spell">HRS</abbr> 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 <span class="nobr">one-half</span> of the value of the pension from noncovered work reduces the <abbr>WEP</abbr> penalty by $7,676 (61.5 percent).</p>
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|
<p>We also discuss the rationale for the <abbr>WEP</abbr> and <abbr class="spell">GPO</abbr> 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.</p>
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<p>The law does meet a number of its purposes. However, the limitation of the <abbr>WEP</abbr> offset to <span class="nobr">one-half</span> 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 noncovered employment, and have become entitled to a Social Security benefit—but who have little or no pension from noncovered work. Those individuals experience only modest <abbr>WEP</abbr> and <abbr class="spell">GPO</abbr> 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 noncovered employment count as zero-earnings years.</p>
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|
<p>It has been argued that the <abbr>WEP</abbr> adjustment disproportionately affects <span class="nobr">low-wage</span> 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 <abbr>WEP</abbr> adjustment to <span class="nobr">one-half</span> of the value of the pension earned on the noncovered job. Social Security benefits will be affected only if the individual has earnings high enough to generate a large pension from government or other noncovered employment. Consequently, those who criticize the design of the <abbr>WEP</abbr> and the <abbr class="spell">GPO</abbr> on distributional grounds exaggerate their case. This is not to say, however, that there is no case for redesign.</p>
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|
<p>In addition, the law does not address all potential inequities. The <abbr class="spell">GPO</abbr> 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 noncovered employment and thus did not pay <abbr>FICA</abbr> taxes. In the absence of the <abbr class="spell">GPO</abbr>, that latter household would not have the spouse benefit's <span class="nobr">top-up</span> 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 <abbr class="spell">GPO</abbr> seems to be quite unfair to that latter two-earner household when compared with a one-earner household in which the nonearner 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 noncovered or only in covered employment.<sup><a href="#mn16" id="mt16">16</a></sup></p>
|
|
<p>We close with a number of caveats affecting our estimates of the <abbr>WEP</abbr> and <abbr class="spell">GPO</abbr> 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 noncovered 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 noncovered employment. Third, throughout the analysis, we calculate the <abbr>WEP</abbr> and <abbr class="spell">GPO</abbr> adjustments using respondent self-reports about expected pension values, which we link to noncovered employment. The Government Accountability Office (2007) indicates that affected workers do not always accurately report government pension income to <abbr class="spell">SSA</abbr>. To the extent that government pensions are underreported to <abbr class="spell">SSA</abbr>, we overstate the size of the <abbr>WEP</abbr> and <abbr class="spell">GPO</abbr> adjustments. Fourth, we do not account for behavioral responses to the <abbr>WEP</abbr> and <abbr class="spell">GPO</abbr>, 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.</p>
|
|
<h2 id="appendix">Appendix: Imputations of Covered Earnings Histories and Calculation of Present-Value Social Security Benefits</h2>
|
|
<p>Our analysis uses records for <abbr class="spell">HRS</abbr> respondents who gave explicit permission to allow their Social Security earnings records to be matched to the basic survey instrument. We impute benefit amounts for those without a matched earnings record. We calculate Social Security benefits from data on yearly covered earnings for individuals in the 2004 survey year using <abbr class="spell">SSA</abbr>'s Any<abbr class="spell">PIA</abbr> program.</p>
|
|
<p>To impute the earnings for a respondent without a matched Social Security earnings history,<sup><a href="#mn17" id="mt17">17</a></sup> we use a “nearest-neighbor” approach. We run a regression for individuals who have a matched earnings record, with total earnings from the earnings record as the dependent variable. Independent variables are taken from the respondents' reports to the <abbr class="spell">HRS</abbr>.<sup><a href="#mn18" id="mt18">18</a></sup> The nearest neighbor is then selected based on predicted total earnings from a sample that includes individuals both with and without matched earnings records. We then replace the missing record with the nearest neighbor's entire Social Security record.</p>
|
|
<p>We also impute characteristics of the spouses who were absent in the survey by constructing an index based on the spouse's sex, respondent's age, and household earnings and assets. We use that index to sort the data. We then replace the absent spouse's missing record with the nearest neighbor's entire Social Security record, along with other information such as retirement date, entitlement date, values of an index that identifies noncovered employees, and donor spouse's monthly pension amount. We treat the observation for which a value was imputed as if the earnings record and other information had never been missing.</p>
|
|
<p>The Any<abbr class="spell">PIA</abbr> software requires monthly pension amounts to be entered for respondents with both covered and noncovered jobs. We calculate pension amounts from those jobs and impute the missing values. We convert the defined contribution account balances and the defined benefit plan lump sums to a monthly amount based on the age at which the respondent starts to receive the benefit and the award year (<abbr class="spell">SSA</abbr> 2013).</p>
|
|
<p>We use the estimated <abbr class="spell">PIA</abbr> to calculate the present value of Social Security benefits and discount that value back to the survey year based on the individual's own earnings record and on his or her spouse and survivor benefits. In calculating and discounting the benefit values, we use a life table and consumer price index and nominal interest rate tables from the <i>2010 Annual Report of Board of Trustees of the Federal <span class="nobr">Old-Age</span> and Survivors Insurance and Federal Disability Insurance Trust Funds</i> (Tables <abbr title="five">V</abbr>.B1 and <abbr title="five">V</abbr>.B2).</p>
|
|
<div id="notes">
|
|
<h2>Notes</h2>
|
|
<p> <a href="#mt1" id="mn1">1</a> The Social Security Administration, Government Accountability Office, and Congressional Research Service have used administrative data to report the number of individuals affected by the <abbr>WEP</abbr> and the <abbr class="spell">GPO</abbr> and the dollar values of those offsets. However, administrative data have not been used to analyze the impact of the provisions at the household level. Without household-level data, it is not possible to analyze how the <abbr>WEP</abbr> and <abbr class="spell">GPO</abbr> interact and how the associated benefit adjustments relate to household pensions and total wealth accumulated by retirement age.</p>
|
|
<p> <a href="#mt2" id="mn2">2</a> Social Security benefits and the earnings levels used to calculate them are typically expressed as monthly amounts, but to facilitate the discussion of our analysis later in the article, we use annual values.</p>
|
|
<p> <a href="#mt3" id="mn3">3</a> A similar problem involving immigrants has not yet been addressed by a policy change. Gustman and Steinmeier (2000) show that certain immigrants who spend fewer years working in the United States (and thus fewer years in covered employment) enjoy a higher rate of return on the payroll taxes they pay than do <abbr>U.S.</abbr>-born retirees with comparable earnings histories. For example, comparing households with similar earnings and wealth profiles, the authors find the ratio of Social Security benefits to taxes is 0.855 for <abbr>U.S.</abbr>-born households, 0.935 for immigrant households overall, and 1.480 for more recently arrived immigrant households. Indeed, immigrants with high average annual earnings, but only a decade or so of covered employment, enjoy a replacement rate of up to 90 percent on the <abbr>FICA</abbr> taxes they pay, despite having similar annual earnings and wealth as <abbr>U.S.</abbr>-born beneficiaries. The authors also discuss a simple policy fix for this problem.</p>
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|
<p> <a href="#mt4" id="mn4">4</a> For further discussion of the <abbr>WEP</abbr>, see <abbr class="spell">SSA</abbr> (2014). Brown and Weisbenner (2013) thoroughly analyze the incentives created by the <abbr>WEP</abbr>'s adjustment to the <abbr class="spell">PIA</abbr>. They do not, however, examine the implications of the limit on the <abbr>WEP</abbr> adjustment to <span class="nobr">one-half</span> of the value of the pension from noncovered employment.</p>
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|
<p> <a href="#mt5" id="mn5">5</a> Quoting Brown and Weisbenner (2013), “approximately one fourth of all public employees in the <abbr>U.S.</abbr> do not pay Social Security taxes on the earnings from their government job ([Government Accountability Office] 2007). This includes approximately 5.25 million state and local workers, as well as approximately 1 million federal employees hired before 1984 ([General Accounting Office] 2003).”</p>
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|
<p> <a href="#mt6" id="mn6">6</a> We will show later that <abbr class="spell">HRS</abbr> respondents have difficulty in determining whether they work for the government. Therefore, we assume the <abbr class="spell">GPO</abbr> adjustment applies to any job reported as not covered by Social Security.</p>
|
|
<p> <a href="#mt7" id="mn7">7</a> Although the <abbr class="spell">GPO</abbr> addresses one type of inequity, it creates another. Consider two households. Household 1 reflects the traditional model of a family typical of the era when Social Security was established, in that all work is undertaken by a primary earner in covered private-sector employment. By design (with some minor adjustments), a spouse who never worked is entitled to a benefit equal to <span class="nobr">one-half</span> of the primary earner's benefit, or equal to the full benefit should the primary earner die. In household 2, one spouse works in noncovered employment and earns a pension, while the other works in covered employment. The worker with a pension from noncovered employment may lose spouse and survivor benefits because of the <abbr class="spell">GPO</abbr>. In both households, the spouse who was not the primary earner paid no <abbr>FICA</abbr> payroll taxes, but the spouse in household 2 who worked in noncovered government employment and earned a pension will receive a much smaller spouse or survivor benefit (if any) than the spouse in household 1, who did not work at all.</p>
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<p> <a href="#mt8" id="mn8">8</a> In the working paper from which this article is adapted, we detail each of the scenarios (Gustman, Steinmeier, and Tabatabai 2013b).</p>
|
|
<p> <a href="#mt9" id="mn9">9</a> This was partly because of the difficulties of measuring earnings from noncovered employment. Brown and Weisbenner (2013) point out that <abbr class="spell">SSA</abbr> did not collect data on earnings from noncovered employment before 1978 and therefore the agency could not adjust benefits for noncovered earnings in those years.</p>
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|
<p><a href="#mt10" id="mn10">10</a> Congress tempers the reduction in benefits for those who, despite having worked in noncovered employment, also worked for many years in covered employment. The <abbr>WEP</abbr> penalty is reduced if an individual worked in covered employment for more than 20 years and is eliminated if an individual was covered by Social Security for at least 30 years. For persons with between 20 and 30 years in covered employment, the <abbr>WEP</abbr> penalty is reduced on a prorated basis.</p>
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|
<p><a href="#mt11" id="mn11">11</a> The original <abbr class="spell">HRS</abbr> cohort comprises respondents who were born during <span class="nobr">1931–1941.</span> Members of the Early Boomer cohort were born during <span class="nobr">1948–1953.</span></p>
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|
<p><a href="#mt12" id="mn12">12</a> It is easy to see why some respondents who work in a publicly supported institution that is part of the state retirement system may correctly note that the job is not covered by Social Security and yet consider the job nongovernment employment. Consider a person who works for a state university and thus does not work directly for the state. Tuition may be at least as important a source of revenue for the university as direct support from the state. In such a case, it is not immediately clear whether researchers should classify the job as government employment, or even whether the respondents themselves should.</p>
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|
<p><a href="#mt13" id="mn13">13</a> Agricultural workers and railroad employees are also not covered by Social Security; however, our sample includes only a few of these individuals.</p>
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|
<p><a href="#mt14" id="mn14">14</a> Depending on the work history, marital status and history, and other circumstances in a household, some claimants can optimize their benefits by adjusting the timing of their retirement, when they claim their pensions, and when they claim their Social Security benefits.</p>
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|
<p><a href="#mt15" id="mn15">15</a> The number of observations in <a href="#table3">Table 3</a>, unlike those in <a href="#table2">Table 2</a>, exclude households in the top and bottom 1 percent of wealth holding. As a result, the values in <a href="#table3">Table 3</a> differ slightly from the corresponding cells in <a href="#table2">Table 2</a>.</p>
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|
<p><a href="#mt16" id="mn16">16</a> For studies of the effects of spouse and survivor benefits on redistribution fostered by the Social Security benefit formula, see Gustman and Steinmeier (2001) and Gustman, Steinmeier, and Tabatabai (2013a). Conventional wisdom greatly overstates the redistribution fostered by the progressive benefit formula.</p>
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|
<p><a href="#mt17" id="mn17">17</a> We made separate imputations for married individuals if both were interviewed and for individuals who were divorced, widowed, or never married. We also imputed the earnings of spouses of divorced respondents for whom we had no information and for widowed individuals.</p>
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|
<p><a href="#mt18" id="mn18">18</a> The covariates we use in imputing earnings include work and earnings characteristics and demographic characteristics. Work and earnings characteristics include annual earnings from current job, tenure on longest and current jobs, total years worked, number of jobs (total and lasting 5 or more years), industry and occupation of current job, union membership, whether a public employee, whether insured for benefits at the normal retirement age, labor force and disability status, and self-employment status in 2004. Demographic characteristics include age; whether <abbr>U.S.</abbr>-born; home ownership; and indicators of marital status, including number of marriages and divorces, widowhood, length of longest marriage, and number of children.</p>
|
|
</div>
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|
<div id="references">
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|
<h2>References</h2>
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|
<p>Brown, Jeffrey R., and Scott J. Weisbenner. 2013. “The Distributional Effects of the Social Security Windfall Elimination Provision.” <i>Journal of Pension Economics and Finance</i> 12(4): <span class="nobr">415–434.</span></p>
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|
<p>Diamond, Peter A., and Peter R. Orszag. 2003. “Reforming the <abbr class="spell">GPO</abbr> and <abbr>WEP</abbr> In Social Security.” <i>Tax Notes</i> November 3: <span class="nobr">647–649.</span></p>
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|
<p>General Accounting Office. 2003. “Social Security: Issues Relating to Noncoverage of Public Employees. Testimony Before the Subcommittee on Social Security, Committee on Ways and Means, House of Representatives. Statement of Barbara D. Bovbjerg.” <span class="nobr"><abbr class="spell">GAO</abbr>-03-710T.</span></p>
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|
<p>Government Accountability Office. 2007. “Social Security: Issues Regarding the Coverage of Public Employees. Testimony Before the Subcommittee on Social Security, Pensions, and Family Policy, Committee on Finance, <abbr>U.S.</abbr> Senate. Statement of Barbara D. Bovbjerg.” <span class="nobr"><abbr class="spell">GAO</abbr>-08-248T.</span></p>
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|
<p>Gustman, Alan L., and Thomas L. Steinmeier. 2000. “Social Security Benefits of Immigrants and <abbr>U.S.</abbr> Born.” In <i>Issues in the Economics of Immigration,</i> edited by George Borjas, <span class="nobr">309–350.</span> Chicago, <abbr title="Illinois">IL</abbr>: University of Chicago Press.</p>
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<p>———. 2001. “How Effective Is Redistribution Under The Social Security Benefit Formula?” <i>Journal of Public Economics</i> 82(1): <span class="nobr">1–28.</span></p>
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<p>Gustman, Alan L., Thomas L. Steinmeier, and Nahid Tabatabai. 2013a. “Redistribution Under the Social Security Benefit Formula at the Individual and Household Levels, 1992 and 2004.” <i>Journal of Pension Economics and Finance</i> 12(1): <span class="nobr">1–27.</span></p>
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<p>———. 2013b. “The Social Security Windfall Elimination and Government Pension Offset Provisions for Public Employees in the Health and Retirement Study.” <abbr class="spell">NBER</abbr> Working Paper <abbr title="Number">No.</abbr> 19724. Cambridge, <abbr title="Massachusetts">MA</abbr>: National Bureau of Economic Research. <a href="https://www.nber.org/papers/w19724">http://www.nber.org/papers/w19724</a>.</p>
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<p>Scott, Christine. 2013a. <i>Social Security: The Government Pension Offset (<abbr class="spell">GPO</abbr>).</i> <abbr class="spell">CRS</abbr> Report <abbr title="Number">No.</abbr> <span class="nobr"><abbr class="spell">RL</abbr>-32453.</span> Washington, <abbr class="spell">DC</abbr>: Congressional Research Service.</p>
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<p>———. 2013b. <i>Social Security: The Windfall Elimination Provision (<abbr>WEP</abbr>).</i> <abbr class="spell">CRS</abbr> Report <abbr title="Number">No.</abbr> <span class="nobr">98-35.</span> Washington, <abbr class="spell">DC</abbr>: Congressional Research Service.</p>
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<p>Social Security Administration. 2012. “Government Pension Offset.” <abbr class="spell">SSA</abbr> Publication <abbr title="Number">No.</abbr> <span class="nobr">05-10007.</span> <a href="/pubs/EN-05-10007.pdf">http://www.socialsecurity.gov/pubs/<span class="nobr"><abbr class="spell">EN</abbr>-05-10007.</span>pdf</a>.</p>
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<p>———. 2013. “Program Operations Manual System (<abbr>POMS</abbr>) Section <abbr class="spell">RS</abbr> 00605.364: Determining Pension Applicability, Eligibility Date, and Monthly Amount.” <a href="https://secure.ssa.gov/apps10/poms.nsf/lnx/0300605364">https://secure.ssa.gov/apps10/poms.nsf/lnx/0300605364</a>.</p>
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<p>———. 2014. “Windfall Elimination Provision.” <abbr class="spell">SSA</abbr> Publication <abbr title="Number">No.</abbr> <span class="nobr">05-10045.</span> <a href="/pubs/EN-05-10045.pdf">http://www.socialsecurity.gov/pubs/<span class="nobr"><abbr class="spell">EN</abbr>-05-10045.</span>pdf</a>.</p>
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