Issue Brief: Social Security Protection ActUpdated April 2009
Background
The Social Security Protection Act of 2004, (Public Law # 108-203), was signed into law by President Bush on March 2, 2004. The legislation focuses primarily on reducing fraud and abuse in Social Security and in the Supplemental Security Income (SSI) program but impacts State and local government employers and their employees in several ways. Specifically, the new law requires public employers to disclose to newly hired public employees starting January 1, 2005 that they are earning retirement benefits not covered by Social Security; closes the Government Pension Offset (GPO) loophole; and allows Louisiana and Kentucky the option to provide a divided retirement system.
| It is important to note that the legislation DOES NOT require all public employees to participate in Social Security. |
Impact On Government Employees And Government Pensions
New Disclosure Requirements – Form SSA-1945
The new law seeks to address complaints that the impact of the GPO as well as another provision called the Windfall Elimination Provision (WEP) often catches public retirees by surprise when they begin to receive their benefits. Like the GPO, the WEP reduces Social Security retirement benefits for many retirees who also collect pensions from jobs not covered by Social Security. In order to mitigate the potential surprise of reduced Social Security benefits for public retirees, the new legislation requires that public employers that do not provide Social Security notify individuals who start work on or after January 1, 2005 of the potential effects of the GPO and the WEP on any Social Security benefits they may be eligible to receive. Employers must have those new workers sign a new disclosure form SSA-1945 certifying that they have been told about the effects of the GPO and the WEP. The new law also requires employers to send copies of the signed forms to the retirement systems that will provide benefits to the employee upon retirement. Copies of the disclosure form are available at: http://www.socialsecurity.gov/form1945.
The new law also requires the Social Security Administration (SSA), beginning on January 1, 2007, to alter its annual benefit statements to incorporate the potential impact of the GPO and the WEP on the estimates for monthly Social Security retirement, survivor, and auxiliary benefits received by individuals who are thought to have extended periods of employment not covered by Social Security. Throughout consideration of the legislation, public employers praised this provision as a way of curtailing much of the current confusion surrounding anticipated Social Security benefits, which has resulted from a lack of information on annual benefit statements issued by the SSA. Hopefully, heightened attention to potential offsets of Social Security benefits from the GPO and the WEP will provide a new layer of clarity for potentially impacted beneficiaries. It is important to note, however, that the SSA annual benefits statement does not and will not include information regarding estimated benefits from plans outside of Social Security.
Government Pension Offset (GPO)
The GPO formula reduces spousal and survivor Social Security benefits paid to most retired public employees by two-thirds of their pension amount from employment not covered by Social Security. For example, if you receive a monthly pension benefit of $600, two-thirds of that, or $400 must be deducted from your spousal/survivor Social Security benefit. Thus, if you are eligible for a $500 spouse’s, widow’s or widower’s benefit from Social Security, you will instead receive $100 per month from Social Security ($500-$400 = $100). You will also receive your monthly pension benefit of $600, which will not be affected.
Closing the GPO “Last-Day Loophole”
Prior to the enactment of the new legislation, public employees in jobs not covered by Social Security could become exempt from the GPO discussed above if they spend just the last day of their careers in jobs covered by both Social Security and the retirement system that will pay their pension.
As an example, before the enactment of Public Law # 108-203, teachers who had worked for the majority of their careers in school districts that did not provide Social Security coverage could take positions in school districts providing Social Security for as little as one day and avoid any reduction in the amount of the Social Security spousal/survivor benefits they would receive.
Under the new law, which covers retirements that occur on or after July 1, 2004, public employees will be required to work in jobs covered by Social Security and the retirement system that will pay their pension for the last five years of their careers - rather than just the final day - in order to prevent the Social Security spousal/survivor benefits they receive from being reduced by two-thirds of the amount of their government pension.
This provision has implications for many public employees around the country, but particularly for teachers in Texas who have taken advantage of GPO loophole more than any other group in the country, according to a 2002 study by the U.S. General Accounting Office. Since Texas has some school districts in which non-teaching personnel are covered by Social Security, teachers have been able to transfer jobs for a day, pay a small sum into Social Security and save, potentially tens of thousands of dollars in retirement income. Beginning July 1, 2004, however, Texas teachers, as well as other public employees who would like to take advantage of the GPO loophole, will now need to spend the last five years of their employment in positions covered by Social Security in order to avoid the GPO.
Some estimates by the Congressional Budget Office (CBO) suggest that this provision is expected to save the federal treasury $80 million over the next ten years.
Kentucky and Louisiana Allowed to Operate Divided Retirement Systems
The new legislation also adds Kentucky and Louisiana to the list of states that are allowed to implement a divided retirement system. In divided systems, public employees vote on whether to participate in Social Security. If a majority want to join, those that voted yes will participate and those that voted no will stay out, but all new employees will be in the program. In states without a divided retirement system, referenda on Social Security coverage are decided by a majority of employees, with all employees subject to the results of a majority vote.
Related GFOA Public Policy Statements Additional Resources GFOA • Federal Liaison Center • (202) 393-8020 • (202) 393-0780 FAX • Email
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