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

Abstract

Introduction The Windfall Elimination Provision (WEP), 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 WEP, 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 (FICA) Social Security payroll taxes were not paid; and, importantly, must have earned a pension in that noncovered job. The WEP reduces the share of preretirement earnings that Social Security benefits replace. For roughly the first $10,000 in average annual earnings, the WEP 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. A related provision, the Government Pension Offset (GPO), 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 GPO reduction is equal to two-thirds of the amount of the pension payment from noncovered government work (SSA 2012). Although the WEP and the GPO 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 one-fifth, which amounts to 5-6 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). Analyzing the effects of the WEP and the GPO 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. (1) The Health and Retirement Study (HRS) contains all the required information. We estimate the relative importance of two WEP 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 WEP's current design. Similarly, we believe the findings regarding the wealth of households affected by the GPO 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. The remainder of this article is arranged in five sections. The first discusses the WEP and GPO provisions in detail. The second discusses the variables needed to estimate WEP and GPO adjustments with HRS data and the reasons we used a mix of respondent and administrative data. In the third section, we estimate WEP and GPO incidence and analyze the effects of the provisions on Social Security benefits. …