Legislation & Politics

Statement of Charles M. Loveless, Director of Legislation, American Federation of State, County and Municipal Employees (AFSCME) Before the Ways and Means Subcommittee on Social Security, U.S. House of Representatives, June 9, 2005

Good morning, Mr. Chairman and members of the Subcommittee. I am Charles M. Loveless, Legislative Director of the American Federation of State, County and Municipal Employees (AFSCME). I appreciate the opportunity to be here today. We are also testifying on behalf of the Coalition to Assure Retirement Equity (CARE), which is a coalition of 50 national, state and local organizations established in 1991 to reform or repeal the Social Security Government Pension Offset and the Windfall Elimination Provision (WEP). The combined membership of these organizations represents millions of federal, state and local government workers and retirees affected by these two provisions.

AFSCME is a labor union that represents 1.4 million employees who work for federal, state, and local governments, health care institutions and non-profit agencies, as well as over 200,000 retiree members. AFSCME and its members are strong supporters of the Social Security system. As with most workers, the great majority of AFSCME members depend on Social Security to protect themselves and their families. One of our principal goals in the current debate over Social Security is to ensure that future generations of workers will be able to rely on the crucial protections that Social Security offers to workers at their retirement and to their families in the event of a breadwinner's death, disability or retirement.

Social Security is not in crisis although there will come a time - about four decades into the future according to the Social Security Trustees and the Congressional Budget Office (CBO) - when Social Security, if left unchanged, will only be able to pay between 70 and 80 percent of the currently guaranteed level of benefits. Therefore, the challenge facing Congress is to strengthen the Social Security program so that it can continue to pay 100 percent of guaranteed benefits for the next 75 years in a manner that will not deepen the projected shortfall and saddle our children and grandchildren with mountains of additional debt. At the same time, we should not reduce currently guaranteed benefit levels; raise the retirement age beyond that currently mandated; or destabilize the pension plans of those state and local government workers not covered by the Social Security system. In our view, a plan can be developed that would meet all these goals without altering the basic structure of the Social Security program.

Mandatory Coverage

We hope that the Subcommittee would agree that any solution to the very manageable shortfall in the Social Security Trust Fund should in no way jeopardize the retirement security of any worker. This should include the 25 percent of state and local government employees, and even higher percentages of teachers, police, fire and public safety officers, who do not participate in Social Security and would be adversely affected if their employers were forced to join the program.

When Social Security was established, states, cities, counties and other public entities were excluded from participation, and today, approximately 6.6 million state and local government employees do not participate in the Social Security system. These workers are presently covered under public pension plans that were designed to replace Social Security's basic retirement and disability protections as well as provide a basic pension benefit. The vast majority of these plans are well funded and actuarially sound. Furthermore, the Omnibus Budget Reconciliation Act (OBRA) of 1990 has already ensured that any temporary, part-time or seasonal employee not covered by one of these public plans be included in Social Security. As a result, basic pension protections are in place for all American workers — private and public sectors. And there is no need to mandate Social Security coverage in an effort to protect workers' interests.

On the contrary, mandated Social Security coverage would have serious negative implications for public employees, their employers, and their pension plans, and this is true even if the coverage applies only to future hires. Among the adverse consequences are the huge expenses that would be involved for workers and employers whose combined current pension plan contributions total, in many cases, 21-23 percent of payroll; the possible establishment of new tiers of pension benefits, with lower benefits for the newly hired; destabilizing pension plan finances for current participants; and raising taxes to fund additional payroll contributions. Raising taxes or cutting services would of course also negatively impact the general public in a major way. And while mandatory coverage creates much hardship, it still doesn't begin to address Social Security's long-term solvency issues. Mandated coverage adds only two years to the solvency of the trust fund, and in the long run, it could actually cost the system more, as new participants become eligible for Social Security benefits.

Any short-term financial gains for Social Security must be weighed against the effect it would have on the retirement security of others. AFSCME has studied this issue very carefully, and we recently commissioned a report by the actuarial consulting firm, the Segal Company, that outlines the costs and other problems associated with mandatory Social Security coverage for all public employees. According to a preliminary, updated analysis by the Segal Company, the five-year, employer-employee cost of mandatory Social Security coverage for newly hired employees is a staggering cumulative $44 billion over five years. This reflects a substantial increase from the previous estimate of $26 billion by Segal in large part due to the improved efforts of the Social Security Administration to report the number of uncovered employees. A copy of the firm's state-by-state breakdown of the costs is attached to my testimony.

Simply stated, mandatory coverage would negatively affect the financing of many state and local government pension plans and would adversely affect the retirement security of hundreds of thousands of public sector workers.

Government Pension Offset (GPO)

I also appreciate the opportunity to be here today to share our views and experiences with the Government Pension Offset (GPO), a federal law that's had a devastating effect on many Americans. The GPO applies to nearly everyone receiving a public pension from work not covered by Social Security. If the public pensioner is also eligible for a Social Security spousal or widow's benefit, this law requires that the benefit be offset by an amount equal to two-thirds of the public pension.

Approximately 335,000 retired federal, state and local government employees have already been affected by the GPO. For the great majority, the GPO totally eliminates the Social Security spousal/widow benefit. The remainder experience a dramatic benefit reduction. Thousands more will be affected in the future.

Currently, the average pension for many affected retirees is less than $500 a month. These relatively modest pensions are especially common for lower-paying occupational positions, such as school district employees. Our members in these positions include school cafeteria workers, crossing guards, bus drivers and custodians. Many of these employees retire after a full-length career, but may have worked only a 30-hour week. Others may have had less than a full career — say 15 or 20 years following divorce or child rearing. Most of those adversely affected are women who began their careers expecting to retire with both a public pension and a Social Security spousal benefit. It's a shock when they realize that they will not receive a much-needed portion of their expected retirement income.

According to current law, retirees cannot receive a Social Security benefit based on their own work record and a full spouse/widow benefit. They receive the larger of the two. This is known as the "dual entitlement" rule. For the purpose of the GPO provision, Congress made a determination in 1983 to equate two-thirds of a public pension (from work not covered by Social Security) with a Social Security earned benefit. The GPO essentially applies the dual entitlement rule to this portion of the pension and assumes that the remaining 1/3 portion of the public pension is equivalent to a private pension benefit. However, we believe the reasoning behind this assumption is faulty because it ignores the generally large contributions made to public pensions by workers and employers. In non-covered jurisdictions, the average total contribution can amount to 21% of pay or more, compared to a much lower total of only 12.4% under Social Security. Furthermore, private sector pensions have no such offset. Retirees can receive a full pension and a full spousal benefit under Social Security. In addition, a retiree's entire public pension is subject to federal income tax — including the part that's deemed equivalent to Social Security. However most Social Security benefits are tax-free. So, the public retiree is in effect hit twice — once with taxes and again with the GPO. It's simply not fair.

To show how the GPO can adversely affect average Americans, let's take a look at two of our Union's own members. One example is Shirley Milburn of Windsor, Ohio, who worked for 26 years as a teacher's aide and library technician. Her Ohio School Employees Retirement System pension check is $405 per month. Her husband's monthly Social Security benefit is $786.30. Normally, she could expect to receive a spousal benefit equal to half his benefit, or $393.15. Instead, the GPO reduces it to only $121.80, giving her a total retirement benefit — pension plus Social Security — of only $526.80 a month.

Another example is Annette Williams from Los Angeles, California. She retired in 2003 at the age of 58 from her job as a clerical worker employed by the City of Los Angeles. She never knew about the GPO, and while she thought she would be able to collect a widow's benefit when she reached the age of eligibility, she found out that two-thirds of her $1,300 pension would completely eliminate her widow's benefit of $812 a month. She simply cannot understand why this is the case, since as a city employee she contributed the same amount into her pension as a private sector worker contributes to Social Security, and her employer's contribution was substantial — as high as 16 and half percent of payroll.

When the GPO was first enacted, it was meant to target retirees receiving multiple government pensions, some of whom had higher incomes in retirement than they had while working. I don't think Annette Williams and Shirley Milburn fit the image of these so-called "double and triple dippers." Clearly, Congress did not have them in mind when the GPO was passed.

It is for these reasons that AFSCME strongly supports efforts to repeal or to significantly modify the impact of this unfair law.

Windfall Elimination Provision (WEP)

The Windfall Elimination Provision (WEP) is another federal statutory provision that applies to individuals who receive a pension from a public-service job that is not covered by Social Security. If the public pensioner also worked in a Social Security-covered job for at least a decade, the WEP creates a public pension offset that can greatly reduce that person's earned Social Security benefit. The maximum reduction in 2005 was $313.50 a month. Approximately 635,000 retired federal, state and local government employees are currently affected by the WEP. That number grows by about 60,000 retirees each year.

Under the WEP, part of a retiree's public pension (from non-covered employment) is considered equivalent to a Social Security benefit. And, Social Security won't let retirees collect two full benefits. So, instead of Social Security's normal benefit formula, which is weighted in favor of lower-wage workers, WEP retirees' benefits are calculated using a modified benefit formula for higher-wage earners.

The WEP was created in 1983 by Congress to distinguish between two types of retirees — those who receive good pensions from primary jobs in non-covered employment, but whose low-wages or short work records from secondary jobs make them appear to have had low-wage careers; and others who actually spent their entire work lives in low-wage jobs. Congressional supporters of WEP believed that those with secondary jobs were getting an unfair advantage from a Social Security benefit formula designed to give low-wage workers a decent income upon retirement. However, the Social Security Administration does not determine what a public employee has earned in total wages but treats him/her as a high wage earner under WEP. This is especially unfair when you consider that these workers pay the same percentage in payroll contributions on their Social Security-covered earnings as all others, yet they are being penalized by this unfair statutory provision.

For the foregoing reasons, AFSCME strongly supports legislation to repeal or reform the WEP. Recognizing the unfairness of both the GPO and WEP, Representatives McKeon and Berman, along with 260 cosponsors, introduced H.R. 147 which would repeal these unfair statutory provisions.

Conclusion

In conclusion, we again want to emphasize AFSCME's strong support for strengthening Social Security — our nation's great system of income protection that touches the lives of most American workers, including 75% of AFSCME members.

AFSCME opposition to mandatory coverage is not based on a belief that Social Security doesn't work. We think it does a remarkable job of providing basic security and shielding participants from potential poverty. Rather, we oppose mandatory coverage because it will cause serious problems for a discrete group of workers and retirees who have been precluded through no fault of their own from being a part of that system. For the majority who do participate in Social Security, we advocate maintaining the system's current social insurance structure, while making the moderate changes necessary to ensure the system's long-term solvency.

At the same time, we think it is imperative that Congress take swift action to eliminate the serious inequities and unintended consequences of the application of the GPO and WEP laws. Their original purposes have been subverted under their current application, and the widespread bipartisan support that exists in Congress for making changes in these laws is due to the gross injustices that have been created by their misapplication. Congress should act immediately to correct both these unfair laws.

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