The GPO predominantly penalizes women educators in California, while the WEP penalizes many individuals who switch careers into public service.

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1 Chair Pomeroy and Members, Social Security has met the social insurance promise to ensure workers will not have to live in old age poverty. This promise needs to be guaranteed for current and future workers. The (CalRTA) appreciates the opportunity to submit written testimony regarding the future of Social Security and protecting the promise. This testimony will be on two issues: Social Security Fairness and Social Security Solvency. Social Security Fairness CalRTA supports HR 235 (Berman) and the 331 House of Representative cosponsors who support Social Security fairness. The legislation will repeal the Windfall Elimination Provision (WEP) and the Government Pension Offset (GPO). Both of the penalties affect, or will affect, millions of public employees who live in every state. The GPO predominantly penalizes women educators in California, while the WEP penalizes many individuals who switch careers into public service. CalRTA believes that when the House Ways and Means Committee considers Social Security reform and solvency, the equity issues of penalizing millions of public employees through the WEP and GPO needs to be addressed and resolved. The WEP was intended to stop doubledipping within government employment, but instead it is also penalizing transfers from private to public employment. The GPO was intended to address the dual earner issue; however, the practical effect is that the entire survivor benefit can be lost by individuals with modest public pensions. The survivor benefit is a social insurance policy. When the GPO eliminates the survivor benefit, it is the same as if a Social Security member paid their entire working career to fund an insurance benefit for their survivor, but the day the member dies the insurance company cancels the benefit. This denied survivor benefit has multiple effects. California educators with $1,500 to $2,000 per month of California State Teachers Retirement System (CalSTRS) benefits can lose all of their survivor Social Security benefit especially as the annual Cost-of-Living Adjustment continues to reduce the survivor benefit. California is a high-cost state. Losing a survivor benefit because of a modest state benefit seems to fail a basic fairness test and drives retirees toward poverty. Another increased cost these GPO individuals can face is paying for beyond basic Medicare Part B premiums because they are not eligible for spousal Social Security. 1

2 We hope the Committee will include HR 235 when continuing Social Security for the next 75 years. CalRTA believes Social Security solvency should not be considered simply in monetary terms. It should also be considered for equity and fairness to those individuals who paid into Social Security in good faith. Various commissions and others have recommended that all public employees should be mandated into Social Security. A mandate is proposed as a means to eliminate the WEP and GPO penalties for current and future public employees because all employees would be in Social Security. This is a simple solution and to quote H.L. Menken, For every complex problem there is an answer that is clear, simple and wrong. The public employee mandate answer fits this description. Mandating all public employees into Social Security provides the federal government a shortterm cash flow, but long-term liabilities. Mandating all public employees into Social Security does not address the millions of current retirees who have been, and are being, penalized by the WEP and GPO. Mandating all public employees into Social Security requires major changes and costs to public employee retirement systems which will create fiscal liability to already financially challenged states and local governments. Mandating all public employees into Social Security is the wrong answer. Social Security Solvency Social Security solvency is an urgent issue, especially because the federal government will have to make significant reductions in domestic discretionary programs, as well as defense programs, if the federal government is to redeem the trust fund IOUs to make Social Security payments. The trust fund is owed more than a trillion dollars by the federal government. The federal government, however, has no surplus revenue to pay the trust fund. Unless there are significant tax increases or significant increases in non-trust fund debt, the federal budget will face huge pressure. Consequently, CalRTA believes that the future of Social Security needs to be developed in a manner that does not expand the current trust fund IOU process and in fact over time reduces the trust fund debt to zero. CalRTA believes this should be accomplished by increases in the contributions from increased covered compensation for at least the next 20 years, but no reduction in the benefit levels nor increases in contribution rates. 2

3 Social Security was established as a guaranteed benefit that would be supplemented by private savings and employer retirement benefits. Unfortunately the middle assumption - private savings - has not grown as anticipated and employer pensions are disappearing. CalRTA supports Social Security as a safety net for low-income seniors to protect them from poverty. Keeping seniors out of poverty is important for self-dignity, reward for work, reduction of public health care costs and maintaining economic growth through senior consumer spending. CalRTA supports investing and protecting Social Security excess revenues in investments that will not be used to subsidize non-social Security federal spending. CalRTA opposes increasing Social Security borrowing to generate revenues for other federal spending because this leads to increased national debt, higher interest rates, lower economic growth and an increased foreign payments deficit. CalRTA opposes diverting Social Security payroll taxes away from meeting Social Security solvency. CalRTA supports ensuring adequate funding to maintain current earned Social Security benefits. CalRTA believes that full funding can be achieved by increasing high earner contributions and employer contributions. CalRTA also supports changing the economic growth and immigration assumptions to reflect actual growth and immigration during the past 75 years. CalRTA supports the federal government adopting a real senior consumer price index that is based on senior expenditure needs. The pilot program Bureau of Labor Statistics senior consumer price index should be used to replace the wage change index used for Social Security benefit adjustments because it will better reflect senior cost increases. Thank you for the opportunity to submit written testimony on Social Security fairness and Social Security solvency to ensure that all seniors have appropriate and adequate protection with Social Security over the next 75 years. To accomplish the goals of fairness and solvency, CalRTA has adopted a number of proposals and recommendations. Attached are CalRTA s position papers regarding WEP/GPO repeal and alternatives to mandating public employees into Social Security. 3

4 1130 K Street, Suite 210 Sacramento, CA dwalrath@m-w-h.com Voice: United States House of Representatives Issue Papers The (CalRTA) has approximately 53,000 members and represents the almost 200,000 retirees and beneficiaries in the California State Teachers Retirement System (CalSTRS). Both current and future CalSTRS retirees are penalized by the current Social Security benefit reductions through the Government Pension Offset (GPO) and the Windfall Elimination Provision (WEP). The (CalRTA) submits the following issue papers for your consideration: Social Security Penalties on California Educators California Teacher Data Why CalRTA Opposes Mandatory Inclusion in Social Security for California Educators WEP/GPO Effect on Medicare Part B Premiums Social Security Funding Supplemental Employer Contributions Investing Surplus Social Security Contributions 4

5 Social Security Penalties on California Educators California has a significant teacher shortage. The Social Security reduction provisions discourage and penalize individuals who change careers to enter teaching. Government Pension Offset The Government Pension Offset discourages both the individuals and spouses who have earned Social Security from entering into CalSTRS because of the double penalty of the Windfall Elimination Provision and the Government Pension Offset. It also discourages individuals from entering into CalSTRS if they have taken a break in service to raise a family and then attempt to return to teaching. The effect is to reduce the spousal retirement earnings for the family. This is the situation for women at age 45 who may go back to teaching for a 15-year period and then retire. Their retirement allowance is not adequate for an individual retirement. As part of a family, their retirement plus their spouse s retirement from Social Security would be adequate retirement if there were not a Government Pension Offset to the Social Security earning. CalRTA and teachers in California do not understand why public service should be treated differently than private employment with regard to the calculation of Social Security and the spousal Social Security benefits. Windfall Elimination Provision Approximately 39 percent (120,000) of California s teachers enter CalSTRS on or after age 35. These individuals could lose retirement benefits because of the Windfall Elimination Provision. The Windfall Elimination Provision hurts California s ability to recruit teachers from out-of-state. These teachers, who may have been part of Social Security in the state in which they formerly resided, will lose retirement benefits if they transfer to California. California s retirement system is structured on the basis of years of service. Consequently, those teachers who come in and have 15 to 20 years of service within California will have a double effect of having a combined lower retirement allowance because: 1) their California service is not a full teaching career; and, 2) they have a reduction to their earned Social Security. The Windfall Elimination Provision has the effect of significantly reducing California s ability to attract teachers from out-of-state. 5

6 The Windfall Elimination Provision also significantly reduces the ability to encourage individuals who are in private industry to leave and bring their skills and knowledge to California s classrooms. This transfer of knowledge is particularly important in some of the high technology areas for California high schools and community colleges. The Windfall Elimination Provision also hurts those individuals who have been in the armed services and are recruited to enter into teaching as a second profession. In California, the Windfall Elimination Provision would have the effect of discriminating against those service retirees. CalRTA believes that the Windfall Elimination Provision is discriminatory and hurts California s ability to attract qualified teachers. These new teachers are needed both for the state s significant enrollment growth and the class size reduction programs of the federal government and those instituted in California during the past four years. For these reasons, CalRTA urges the repeal of the Government Pension Offset and the Windfall Elimination Provision penalties to earned Social Security benefits. 6

7 California State Teachers Retirement System Data What is the number and percentage of CalSTRS members who join CalSTRS at 40 years of age or greater? For brand new members FY # of new member # of new member age 40 or older % of new member age 40 or older % % % For new entry members (who were inactive, non-member, new member, etc. and became active during the target FY) FY # of new entry member # of member age 40 or older % of member age 40 or older % % % 70% of the female retirees (FY 05/06) were single. 7

8 Why CalRTA Opposes Mandatory Inclusion in Social Security for California Educators CalRTA opposes the mandatory inclusion of California educators into the Social Security system. CalRTA has adopted this position for the following reasons: 1. The Social Security benefit is not a vested benefit. Unlike the CalSTRS benefits, almost all of which are vested, Social Security benefits can be changed at any time by Congress if they pass a bill and have that bill signed by the President. There is no guarantee that any particular benefit will not be modified at a later date. The Windfall Elimination Provision (WEP) and Government Pension Offset (GPO) are examples of the effect of having non-vested benefits. Many individuals earned a full Social Security benefit with 40 quarters, then Congress changed the rules and those benefits are no longer provided at the same level. 2. CalSTRS has estimated that mandatory inclusion in Social Security will reduce long-term investment returns for CalSTRS, as well as requiring increased contribution rates to maintain the current benefits provided by CalSTRS. In the case of investment returns, CalSTRS would have less money available for investment because more money would be going to the federal government for Social Security rather than to CalSTRS. Even though teachers are not highly compensated, compared to the average Social Security recipient they are compensated at a higher level. Consequently, teachers will receive proportionally less in their Social Security benefits than they receive from an equal dollar contribution to CalSTRS. The result is that CalSTRS would need to increase contribution rates in order to maintain current benefits. 3. The mandatory inclusion of Social Security would increase the cost to new educators to participate in CalSTRS. Because newly hired teachers have lower compensation, they would have even less discretionary funds to meet their housing, medical and other costs. This would make teaching a less attractive profession for individuals either looking at career changes or individuals recently graduating from post-secondary education. 8

9 Privatization CalRTA is concerned that Social Security could be privatized or moved toward a privatized system. There has been an ongoing effort to shift away from the not fully guaranteed benefits of Social Security to even less guaranteed benefits by creating a defined contribution component in Social Security. For educators, such a shift would create even greater risk to their retirement, particularly compared to the vested benefits of CalSTRS. Finally, the Social Security normal retirement age is now 66 and is moving toward 67 years of age. Any new restructuring of Social Security probably could result in an increase to age 68 or 69 along with increasing the age necessary to receive the minimum Social Security benefit from age 62 upward to age 65. If CalSTRS were mandatorily included within Social Security, there would be greater pressure to change the normal retirement age of CalSTRS into the same normal retirement age as Social Security. Why CalRTA Supports a Voluntary Option to Participate In Social Security CalRTA supports requiring all public employee retirement systems to develop a Social Security option. An option would allow mid-career individuals who want to remain in Social Security the opportunity to remain. It would also allow individuals who are newly going into teaching the opportunity to contribute into Social Security. If they decide they no longer want to continue as educators (approximately 50% of new teachers leave before five years), they would have the ability to leave and still have Social Security earnings for their future retirement. CalRTA has supported this as a voluntary option for individuals. The assumption is that all individuals would join the current CalSTRS Defined Benefit Program, but would be allowed to choose a Social Security option alternative. 9

10 Will Lack of Social Security COLA Increase Some Public Sector Medicare Part B Premiums? Recent declines in consumer prices and low expected inflation during the next few years is expected to translate into no COLAs in Social Security benefits until Because of the way the Medicare Part B premium is funded, it is expected that approximately one quarter of all Medicare beneficiaries will have to pay a higher Medicare Part B premium than they would otherwise. Furthermore, as a percentage of the current premium, the increases will be significant. The reason for the increase is because most Medicare enrollees have their Part B premium withheld from their monthly Social Security benefit, and for those individuals, a holdharmless provision guarantees that a benefit check will not decrease as a result of an increase in the Part B premium. That is, the dollar increase in the Part B premium for a year is compared to the dollar increase in the Social Security monthly benefit, and if the dollar increase in the premium is larger than the dollar increase in the Social Security benefit, then the increase in the Part B premium paid by the beneficiary is limited to the dollar increase in the Social Security benefit. Thus, when there is no increase in the Social Security benefit to offset the Medicare Part B premium increase, then the hold-harmless means that these Social Security recipients are not required to pay the Medicare Part B increase. But this is not true for everyone. For example, new enrollees in Part B (because they did not have the premium withheld from their Social Security benefit in the prior year), will not be covered by the hold-harmless. Higher-income enrollees who are subject to an income-related premium, as well as individuals who do not have the Part B premium withheld from their Social Security benefit (nearly all of whom have their premiums paid by Medicaid), will also not receive the protection. And what about public employees who are not covered by Social Security? It would appear that they are also going to fall into this group who will not receive the protection from the hold-harmless provision. According to the Director s Blog of Douglas W. Elmendorf, the Director of the Congressional Budget Office (CBO), because almost three-quarters of Part B enrollees will be subject to the hold-harmless provision, the increase in Medicare Part B premium revenue needed to draw matching contributions sufficient to cover the growth in annual spending and maintain the contingency reserve will have to be collected from the one-quarter of enrollees who are not eligible for the protection of the hold-harmless provision. As a 10

11 result, the current-law increase in the monthly Part B premium for those individuals will be nearly four times the increase that would be required if no enrollees were subject to the holdharmless provision, Mr. Elmendorf estimates. CBO estimates that the hold-harmless provision, in conjunction with the zero COLAs projected for Social Security benefits, will result in the monthly Part B premium for beneficiaries not subject to the hold-harmless provision increasing to $119 in 2010, $123 in 2011, and $128 in Without the hold-harmless provision, CBO estimates that the monthly premium would be $103 in 2010 and would grow to about $109 in 2012, so the interaction of the hold-harmless provision and projected zero COLAs for Social Security will add significantly to the increases called for under current law, Mr. Elmendorf says. There is no effect on Part D premiums because there is no hold-harmless provision in Part D.ʺ Ed Derman, Deputy Chief Executive Officer California State Teachers Retirement System ederman@calstrs.com Mailing address: P. O. Box 15275, Sacramento, CA Physical address: 100 Waterfront Place, West Sacramento, CA

12 Social Security Funding Social Security was established as a guaranteed benefit that would be supplemented by private savings and employer retirement benefits. Unfortunately, the middle assumption - private savings - has not grown as anticipated, and the employer pensions are under pressure. CalRTA supports the Social Security Fairness Act (HR 235 and S 484) that repeals the Social Security penalties applied to many public employees and widows with public pensions. CalRTA supports Social Security as a safety net for low-income seniors to protect them from poverty. Keeping seniors out of poverty is important for self-dignity, reward for work, reduction of public health care costs and maintaining economic growth through senior consumer spending. CalRTA opposes diverting Social Security payroll taxes away from meeting Social Security solvency. CalRTA supports ensuring adequate funding to maintain current earned Social Security benefits. CalRTA believes that full funding can be achieved by: 1. Adjusting benefits for new workers by increasing the early retirement age for partial benefits to reflect longer life expectancy; 2. Increasing the salary cap for employee and employer contributions; 3. Adopting a supplemental payroll tax for employer contributions greater than the salary cap; 4. Changing the economic growth and immigration assumptions to reflect actual growth and immigration during the past 75 years; and 5. Including stock options and other compensation in the supplemental employer contribution. 12

13 CalRTA Recommended Contribution Changes Employee and Employer Contribution Cap Increase the current contribution cap annually by the prior year percentage increase in W-2 salaries and wages plus three (3) percentage points per year for the next 20 years. Employer Supplemental Contribution CalRTA proposes that after any limit on compensation for employee contribution there would be a continuation of the employer contribution on the following schedule: Require a supplemental employer contribution on all compensation above the employee cap dollar amount: 6.2% up to the employee salary cap (match employee) 1% amount above the employee salary cap for compensation above the cap up to a total of $500 K in total compensation 2% for $500 K to $1 M 3% for $1 M to $1.25 M 4% for $1.25 M to $1.50 M 5% for $1.5 M to $1.75 M 6% for $1.75 M to $2 M 6.2% for everything above $2 million with no inflation adjustment Compensation would include salary and wages, stock options, deferred compensation and all other compensation including bonuses. 13

14 Avoiding the If They Have It They Will Spend It Trap With Social Security Excess Revenues The California Retired Teachers Association (CalRTA) and others have advocated Social Security solvency recommendations that will result in Social Security surpluses (payroll tax annual revenues greater than annual payouts) for a significant amount of time. From a deficit reduction viewpoint, how do increased revenues assure a deficit reduction rather than just more spending? If the excess revenues are used to balance the current federal spending level - then 40 to 50 years from now when the excess funds decline - the federal budget will not have the reserves to pay the then earned Social Security benefits. The current process is to invest in Treasuries which just means that there is a debt that the federal budget and revenues will have a problem paying at some point in the future. Investing in either domestic or foreign equities or corporate paper raises significant issues with the federal government having too much of a control over domestic private business or under pressure to adjust foreign policy to protect governmental investments. CalRTA proposes that any Social Security excess revenue be invested in state and local bonds. The investments would help create jobs, provide additional revenue from interest payments, increase federal tax revenue because of fewer deductions and would allow private capital to be used for economic expansion. This proposal will be incorrectly attacked based on the flawed belief that it will result in displacing private capital and investments. That attack assumes that the private capital would not be shifted to other investments. I believe that investment capital will be invested, if not in state and municipal bonds then in other investments. Capital will be spent not on consumer goods, but on equipment, labor productivity, research and expansion. CalRTA believes this proposal: Increases investment and savings Avoids government intrusion in private businesses Increases employment Increases federal revenue Ensures that Social Security surpluses will be available for future costs without pressure on the federal budget Does not allow spending which can result in future deficits. Thank you for your consideration of this proposal. 14