I would like to thank you for having the hearing on July 20 and receiving written testimony on H.R. 4391, the proposed Public Servant Retirement Protection Act (PSRPA). PSRPA would affect thousands of state, school, and local workers who will receive or who already are receiving benefits from public employee retirement systems from their employment not covered by Social Security.

Colorado PERA has followed the Social Security Windfall Elimination Provision (WEP) since it was enacted over 20 years ago and revised in 1988. There have been a number of attempts to revise or repeal WEP since then. H.R. 4391 has many strong features, and Colorado PERA urges the Subcommittee to approve this bill and send it to the full Ways and Means Committee.

The original purpose of the WEP is to ensure that public employees who work a part of their career in Social Security-covered employment and the other part of their career in public employment outside Social Security, do not receive an unfair advantage from the weighting in Social Security's regular benefit formula. Social Security is a social insurance program in which benefits paid to low-income workers replace a higher percentage of pre-retirement earnings than for higher-income workers. For example, in 2004 Social Security replaces 90 percent of the first $612 of a worker's AIME (Average Indexed Monthly Earnings), and replaces 32 percent of the next $3,077 of AIME.

Because weighting occurs in all Social Security benefit calculations, it makes sense that public employees who have pensions from employment not covered by Social Security should be treated for Social Security benefits in some manner that takes into account their entire career earnings. Public employees who also have other employment in their careers that was covered by Social Security should not be accorded the advantage normally given only to low-income career workers in the calculation of their Social Security benefits.

PSRPA would accomplish this goal better than WEP. PSRPA would use a sounder concept for calculating the Social Security benefit. It compares the average indexed earnings covered by Social Security to the average indexed earnings during the worker's entire career, and bases the Social Security benefit on this ratio.

PSRPA would apply to public employees' Social Security benefits the same earnings-based weighting that is currently used in Social Security benefit calculations. According to examples prepared by the Subcommittee, the Social Security benefit under PSRPA to a low-wage career earner would replace a higher percentage of his average SS-covered indexed monthly wages than would be replaced for a medium-wage earner or a high-wage earner.

The WEP calculation, on the other hand, uses fairly arbitrary percentages in order to calculate the "windfall" reduction. Employees who meet other fairly arbitrary thresholds of income earned and years worked are exempt from WEP.

Colorado PERA prepared seven examples of employees with differing work patterns. In six of the examples, the Social Security benefit under PSRPA would be higher than the benefit under WEP. This occurred whether the employee first worked under Colorado PERA and then went to a Social Security-covered job, or started in Social Security and ended the career under PERA. A table showing results for all seven examples is attached.

For worker 7 in the table, WEP provides a larger benefit than PSRP, but only because the worker has 33 years of "substantial earnings" under Social Security and is exempt from WEP. However, PSRPA would grandfather active and retired public employees, including worker 7. Under H.R. 4391 an employee would receive the greater of the benefit under WEP or PSRPA if he or she is already retired or had public employment outside Social Security prior to 12 months following enactment of H.R. 4391.

The examples in the table are consistent with the findings of several other groups that show that most public employees would receive larger benefits under PSRPA than under WEP.

In addition to providing larger benefits under a fairer method than WEP, Colorado PERA believes that H.R. 4391 is attractive for other reasons.

Many Colorado PERA members make good use of portability provisions in PERA to purchase additional years of service credit based on prior, nonvested employment with another employer. In many cases, the prior employment was covered by Social Security. The maximum reduction under WEP is $306 per month in 2004, but in no case greater than one-half of the PERA retirement benefit. The PERA benefit, for purposes of the WEP, excludes the purchased service if the prior employment was covered by Social Security. Currently, PERA completes a special form to calculate the correct PERA benefit that is used by SSA for determining the WEP reduction in Social Security benefits. H.R. 4391 would eliminate this step because under PSRPA, the amount of the PERA retirement benefit would not affect the Social Security benefit.

The cost to the Social Security trust funds is far less for H.R. 4391 (PSRPA), at $7 billion over the next 10 years, than the cost of full repeal or the cost of H.R. 4234, which would eliminate WEP for public retirees with income below a certain figure.

H.R. 4391 addresses how best to provide benefits to public employees who have also worked in covered employment for enough years to qualify for Social Security benefits based on those earnings. It does so without mandating Social Security coverage.

Colorado PERA opposes mandatory Social Security because the current PERA retirement system has worked very well in the eyes of employees, retirees and employers. PERA provides very comprehensive benefits as a substitute for Social Security, and PERA is an attractive part of the benefits package for Colorado public employees. All seven examples from the attached table show that the worker received a significantly larger benefit if he was covered by PERA during his entire career than if he was covered by Social Security during his entire career.

The Colorado General Assembly has stated several times that it also believes that its employees are already well-served by existing retirement plans that do not include Social Security. Mandatory Social Security coverage would increase costs to taxpayers and employees, and challenge the soundness of the current plan. In the long run, mandatory coverage would not significantly benefit Social Security.

The Social Security Administration testified at the hearing on July 20 that it would be difficult to obtain data for employees' earnings prior to 1978, or to estimate it. The Internal Revenue Service has received wage and salary earnings reports from all employers for years, and if it was retained, it would seem the IRS could transmit this information to SSA. Colorado PERA would be willing to work with federal agencies and national public pension groups to try to find a workable solution to data problems.

Conclusion

Colorado PERA urges the Social Security Subcommittee to adopt H.R. 4391 and greatly appreciates the efforts of the sponsor and cosponsors to improve equity in the calculation of Social Security benefits for state and local workers who have earned those benefits.

Thank you for the opportunity to submit this testimony. I would be glad to provide further information or answer any questions the Subcommittee may have.