March 17, 2003

March 17, 2003 | WebMemo on Social Security

Social Security: Texas Teachers Learn to Cheat

Why would Texas teachers use a questionable loophole in the law to get Social Security benefits that they are not qualified for? That loophole might allow them to pay as little as $3 in Social Security taxes and receive Social Security benefits worth about $5,200 a year for the rest of their lives. Even worse, why would they block needed legislation that would keep fugitives from receiving Social Security benefits and help to prevent sharp lawyers and others from taking advantage of senior citizens? 

Needed reforms that were blocked

The legislation the incensed the Texas teachers was H.R. 743, the Social Security Protection Act, which is mainly concerned with making sure that senior citizens and disabled workers who are unable to manage their own affairs are not defrauded by the attorney or other person who is handling their payments. It also would prohibit escaped prisoners, parole violators and people deported because they smuggled aliens into the United States from receiving Social Security benefits. 

A similar bill was approved in the last Congress by a vote of 425-0. However, on March 5, after strenuous lobbying by Texas teachers and national teachers unions, H.R. 743 failed to get the necessary two-thirds vote necessary to pass the House of Representatives under a special procedure designed for non-controversial bills. The final vote was 249-180, with 166 Democrats and 13 Republicans voting "no" even though the Ranking Democrat on the Social Security Subcommittee, Rep. Bob Matsui (CA) both co-sponsored the bill and voted for it. 

A costly loophole

What made the bill suddenly controversial was Section 418, which would close a minor loophole that allows some teachers to receive more Social Security benefits than they should. The loophole allows workers whose pension plans are not part of Social Security to receive a share of their spouse's Social Security benefits. The law decides this eligibility based on the last day of employment before retirement. If a worker is employed in a position that pays Social Security taxes on that last day, then the worker is eligible for some of his or her spouse's Social Security benefits even if he or she has never paid Social Security taxes before. 

In 2002, according to the US government's General Accounting Office (GAO), 3,521 Texas teachers spent their last day before retirement employed as a janitor instead of as a teacher. In Texas, most teachers are in a retirement system that is not part of Social Security, while most janitors do pay Social Security taxes. By paying just a couple of dollars in Social Security taxes, they qualify for both their own non-Social Security pensions and a Social Security payment equal to half of their spouse's benefits. GAO estimates that these teachers and others who have used this loophole will receive a total of $450 million over their lifetimes.

How the loophole worked

Normal workers in jobs covered by Social Security qualify for retirement benefits based on their own work record. If both husband and wife worked, then both would receive retirement benefits based on their individual work histories. Thus, the husband might qualify for $1000 a month from his work record and his wife might qualify for $800 a month from hers.

However, if one spouse has no work record because he or she remained home to raise children of for other reasons, then that spouse also qualifies for a retirement benefits equal to half of that of the spouse who worked. In this case, if the husband got $1000 a month from his employment history, then his wife would also receive $500 a month. 

If both spouses have an earnings record, the lower paid spouse gets the higher of either her own benefit or a spousal benefit from the other spouse. Thus, if the lower paid spouse qualified for $800 from his or her own employment and a $500 spousal benefit, then he or she would receive only the $800 from her own employment.

In the Texas case, the teachers are part of a state retirement system that is not part of Social Security. Before 1983, any state or local government could decide if their retirement system would be part of Social Security or not. Texas chose not to have their teachers retirement system be part of Social Security.

Because the teacher is not part of Social Security, his or her Social Security earning record looks the same as if he or she was not working. Thus, even though that teacher is receiving a Texas pension, he or she might qualify for Social Security benefits from a spouse's work record. In this case, the teacher might get $1500 a month from the Texas system, his or her spouse might get $800 a month from Social Security, and the teacher might also qualify for Social Security spouses benefits of $400 a month.

Government Pension Offset prevents double dipping

To treat people whose retirement systems is not part of Social Security the same as those who were part of Social Security, Congress created a mechanism in 1977 called Government Pension Offset (GPO). This provision counts two-thirds of the non-Social Security pension as though it came from Social Security. Then the Social Security spousal benefit is reduced by that amount.

In this case, if the teacher was to get $1500 monthly from the Texas system, and the spouse $800 a month from Social Security, Social Security would treat $1000 (two-thirds) of the teachers pension as though it came from Social Security. Since that $1000 is more than the $400 spousal benefit, then GPO would keep the teacher from receiving any spousal benefit. However, the law says that if the teacher is employed in a position that pays Social Security taxes on the last day before retirement, then GPO does not apply. This is the loophole that HR 743 would close.

Teachers and other government workers whose retirement systems are not part of Social Security claim that GPO is unfair, but it really treats them the same as other workers. 

Teachers who cheat

It is one thing to want to repeal or to change Government Pension Offset. There are several bills in Congress that would do just that. However, blocking necessary reforms in order to preserve a loophole is just cheating. How can teachers expect their students to behave honorably if they intend to cheat the Social Security system to get more benefits than they deserve?

About the Author

David C. John Senior Research Fellow in Retirement Security and Financial Institutions
Thomas A. Roe Institute for Economic Policy Studies