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

Abstract

This paper uses data from the Health and Retirement Study to investigate the effects of Social Security's Windfall Elimination Provision (WEP) and Government Pension Offset (GPO) provision on Social Security benefits received by individuals and households. WEP reduces the benefits of individuals who worked in jobs covered by Social Security and also worked in uncovered jobs where a pension was earned. WEP also reduces spouse benefits. GPO reduces spouse and survivor benefits for persons who worked in uncovered government employment where they also earned a pension.Unlike previous studies, we take explicit account of pensions earned on jobs not covered by Social Security, a key determinant of the size of WEP and GPO adjustments. Also unlike previous studies, we focus on the household. This allows us to incorporate the full effects of WEP and GPO on spouse and survivor benefits, and to evaluate the effects of WEP and GPO on the assets accumulated by affected families.Among our findings: About 3.5 percent of households are subject to either WEP or to GPO. The present value of their Social Security benefits is reduced by roughly one fifth. This amounts to 5 to 6 percent of the total wealth they accumulate before retirement. Households affected by both WEP and GPO lose about one third of their benefit. Limiting the Social Security benefit to half the size of the pension from uncovered employment reduces the penalty from WEP for members of the original HRS cohort by about 60 percent. CitationGustman, Alan L

Retirement Choices by State and Local Public Sector Employees: The Role of Eligibility and Financial Incentives

“…Both provisions reduce Social Security benefits for those who receive noncovered pension benefits. See Gustman, Steinmeier and Tabatabai (2013) for analysis of these provisions using HRS data.…”

“…This is particularly relevant for teachers -an important category of public employment many of whom do not participate in Social Security. Gustman et al (2013) speculate that teachers are the most likely of non-Social Security covered respondents to indicate that they do not work for the government so by using the detailed industry data I can include them as public sector employees.…”

“…Gustman, Steinmeier, and Tabatabai (2013) indentify underrerporting of public employment in the HRS. They find that too many respondents report not working for the government compared to those who report employment not covered by Social Security.…”

Social Security and Retirement Timing: Evidence from a National Sample of Teachers

“…With the Social Security system facing potential future solvency issues, policymakers have considered mandating the coverage of all public sector workers to increase the Social Security tax base (GAO-HEHS-98-196, 1998;GAO-03-710T, 2003;GAO-05-786T, 2005;Munnell, 2000Munnell, , 2005Nuschler et al, 2011) and changing rules that determine the level of spousal and survivor benefits for those not covered by Social Security (Diamond and Orszag, 2003;Haltzel, 2004;Kilgour, 2009;Gustman et al, 2013). Because public sector pensions generally have full retirement ages that are much younger than those of Social Security and private sector pension plans, past research into the impact of Social Security on retirement timing may not be extendable to teachers.…”

“…4 Gustman et al (2014) estimate that about 3.5 percent of households in the HRS are affected by either the WEP or the GPO. These programs impact the joint retirement decisions of households and apply to a substantial proportion of teachers (Diamond and Orszag, 2003;Haltzel, 2004;Kilgour, 2009;Gustman et al, 2013). When considering the implications of extending Social Security coverage to public sector workers, it is important to not only consider the impacts on Social Security solvency, but also how structural changes in public sector workers' retirement incentives will change their own and their spouses' labor supply decisions.…”