Fake janitors skim $2.2 billion from trust fund?! Investigations by Joe Fried and the PPTO lead to Inspector General finding of $2.2 billion in unauthorized benefits!
Normally, a person can only collect the greater of his/her own Social Security benefits or the spousal/survivor benefits he or she would get on the basis of his/her spouse's employment. This prohibition on "double dipping" has always been in place for workers in the private sector. For governmental workers, the prohibition was created about 30 years ago by legislation known as the Government Pension Offset (GPO). The GPO mandated a $2 reduction in spousal benefits for every $3 dollars of governmental pension benefits received.
In 2002 and 2003, the Government Accountability Office (GAO) reported that thousands of retiring teachers in Texas were using a loophole (the so-called GPO "exemption") in order to bypass the GPO double dipping prohibition. (See “Congress Should Consider Revising the Government Pension Offset ‘Loophole’,” available at http://www.gao.gov/new.items/d03498t.pdf). Use of this exemption allowed the retiring teachers to collect their own governmental pensions (which tend to be relatively opulent), while also collecting Social Security spousal and survivor benefits. The GAO report concluded that the loophole would cost the Social Security trust fund hundreds of millions of dollars.
To qualify for the GPO loophole, a retiring teacher had to work his or her last day, prior to retirement, in a position simultaneously covered by Social Security and the state pension plan, which is the Texas Teacher Retirement System (TRS). Generally, a retiring teacher would do this by morphing into a janitor (or cafeteria worker or clerk) - one day prior to his or her retirement. A cooperating school district would then pay the 1-day janitor a nominal amount (usually minimum wage), and would withhold 2 or 3 dollars of FICA tax, plus TRS, from his paycheck. The dual withholding of FICA and TRS was what the retiring teacher needed to effect the GPO "exemption," and the pay stub was the only evidence he would need to present to the SSA upon his retirement. That pay stub would qualify the teacher-janitor for about $100,000 in benefits!*
In 2004 and 2005, Joe Fried and the PPTO conducted an extensive investigation of several school districts in Texas to determine whether all of the retiring teachers were, indeed, qualified to use the lucrative loophole. Were they really performing services? (Or, were the jobs "make-believe"?) Were they really paid wages? (Or, did the 1-day workers effectively reimburse the school districts for the wages?). Social Security coverage can not be given unless the employment is bona fide.
Also, it appeared that some school districts had no legal authority to withhold FICA tax from the pay of these workers because of special "Section 218 agreements" they had signed years earlier. In those agreements, the school districts stipulated (to the Social Security Administration) that they would not give Social Security coverage to anyone in a "part-time" position. This raised an important question: Were the school districts giving Social Security coverage to workers in part-time positions (in violation of their Section 218 agreements)?
The results of the investigation conducted by Fried and PPTO were given to the OIG. The Inspector General conducted his own independent investigation and has concluded that $2.2 billion or more could be lost by the trust fund as a result of 1-day hiring programs. Some results of the Inspector General audit are shown below. The rest can be found
at http://www.ssa.gov/oig/ADOBEPDF/A-09-06-26086.pdf.
*You are probably wondering why he would qualify for these large benefits, and you are right to wonder! We carefully reviewed the wording of the so-called "GPO exemption," and do not believe that such an exemption was intended by Congress. We think it was simply sloppy wording in the Code. The loophole was eliminated by legislation that became effective on July 1, 2004.
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Excerpts from the Office of Inspector General report on Texas schools
The Inspector General's audit found:
"...individuals employed as 1-day workers by the seven Texas school districts did not appear to meet the requirements to receive a GPO exemption. This occurred because of the questionable nature of these individuals' employment. We also found that five of the school districts [of 7 audited] did not have the authority to provide these individuals Social Security coverage" (emphasis added).
Why was the employment "questionable"? The OIG found that workers effectively paid their own wages via large, so-called "processing fees." The report noted that one district collected $1,335,205 in fees from 4,313 1-day workers. Yet, the district acknowledged that "if it had not collected application fees, the school district would only have hired three or four individuals." Imagine, just 3 to 4 workers out of 4,313 were actually worth their wages. The rest were hired because they paid large fees to the district. How much did that one district cost the Social Security trust fund? Nearly one-half billion dollars!
The employment was questionable for a second reason: So many 1-day workers were hired that they could not possibly be of any service to the school districts. For example, a tiny district, with just over 900 students in total, hired 502 part-time employees on a single day! Is it possible for a district with 900 students to need 502 extra workers on just one day (a single day that will cost the trust fund nearly $50 million)?
Why didn't the districts have "authority" to give Social Security coverage to the 1-day custodians"? In several cases, they had signed written agreements with the Social Security Administration, stipulating that Social Security coverage would not be given to workers in part-time positions. OIG determined that these were, indeed, part-time positions. Therefore, the districts had no authority to deduct FICA tax from the wages of the workers. (For more explanation, click here>>.)
In its report, OIG estimated that the 1-day worker programs of these 7 tiny Texas school districts will cost the trust fund billions.
"...we estimate that 19,212 individuals will receive $110 million in spousal benefits annually to which they may not be entitled. Over their lifetimes, they will potentially receive about $2.2 billion in spousal benefits" (emphasis added).
The table, below, gives a recap of the Inspector General's findings with regard to the 7 districts it tested. These 7 small Texas school districts created programs that may cause Social Security to distribute more than $2 billion to unqualified beneficiaries.
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School district |
May cause Trust Fund to lose: |
| West | $203 million |
| Hudson | $192 million |
| Lindale | $465 million |
| Premont | $235 million |
| Coleman | $409 million |
| Sweeny | $326 million |
| Kilgore | $354 million |
| Total | $2.18 BILLION |
The Inspector General identified an additional 8 districts that may have created similar, but smaller programs. Those programs may cost the Social Security trust fund an additional $353 million, for a grand total of over $2.5 billion in improper disbursements. The 8 districts are Hidalgo, Yoakum, Iraan-Sheffield, Hunt, Ft. Davis, Anahuac, Port Arthur, and Somerville ISDs.
For the full Inspector General report click here>>.
Media Headlines:
"Loophole could still cost us billions" Houston Chronicle
"Spousal Benefits Abuse" The American Spectator
"One-day jobs yield lifetime benefits" Tyler Morning Telegraph
"Loophole could cost Social Security billions ..." Ft. Worth Star Telegram
| Waco-Tribune-Herald: "Teacher retirement loophole under fire ... The loophole itself was legitimate, [the Inspector General] says in his report, but the way ... the school districts tried to take advantage of it was not." |
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"Texas teacher retirements tripled during the five years the loophole was irresponsibly promoted by predatory recruiters and a few school districts hoping to turn a quick profit." by Congressman Kevin Brady, 8th District of Texas (Houston Chronicle) |
**Are Texas teachers the real victims?
Commentary by Joe Fried, March 7, 2007
In the March 5, 2007 Houston Chronicle, Gayle Fallon, the President of the Houston Federation of Teachers, claimed: "Teachers are routinely defrauded out of billions of dollars annually that are rightfully owed them from the Social Security system." Specifically, she asserts, they are cheated out of spousal and survivor benefits that "almost all [married] Americans" get. However, that is simply false.
Since spousal benefits were introduced in 1939, no one except for state/local governmental workers has been allowed to “double dip” for Social Security benefits. The ordinary guy (i.e., 96% of workers) can only collect the greater of his own benefit or the spousal benefit - not both. Until 1977, state/local workers in Texas routinely “double dipped” (i.e., collected both spousal and primary benefits with no offset). We all thought the law was fixed in 1977, and it was for about 20 years. Then, some unscrupulous characters managed to muscle their way through a loophole in the law. (Was some of that “muscle” union political influence?) Fortunately, the scam has now been exposed.
The unions representing Texas teachers try to confuse us by citing the rules for private pension plans. They say, “If a Texas teacher were in the Acme Mfg. Pension Plan, or in a private IRA, the pension benefits he received would not affect the amount of his spousal benefit." But here is what they don’t say: Texas teachers do not pay FICA tax (unlike the other 96% of us). The reason? They assert (correctly) that they are in a state governmental plan that is an alternative to the federal Social Security system (and not merely another private plan). Being in an alternative governmental plan is the sole basis for their exemption from paying FICA tax. Suddenly, however, we are supposed to imagine that this state governmental plan - exempt from FICA tax - is really just another private plan or IRA.
The unions want to eat their cake and have it too. When it comes to paying the FICA tax, they claim exemption because the Texas Teacher Retirement System (TRS) is governmental, but when it comes to the spousal benefit rules they want us to pretend that TRS is merely another private plan. Some of these union leaders need to go back to school.
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PRAs would help, but they're not enough!
The PPTO agrees that Social Security reform is needed, and believes that a properly-designed
system of Personal Retirement Accounts (PRAs) could be a valuable part of such reform.
However, the PPTO believes that PRAs are not enough: Other reforms are also needed (see below).
A cure for Social Security
[
As printed in the Chicago Sun Times on February 6, 2005]Congress should give serious consideration to the president's proposal to create an optional system of personal retirement accounts. A modest system of personal accounts could increase retirement wealth and could help bridge the gap between rich and poor (by giving low-income workers a chance to bequeath assets to their children).
However, we also need to eliminate some of the ''sacred cows'' of the Social Security system.
We need to stop shifting extra benefits to affluent workers with stay-at-home spouses. Spousal and survivor benefits are "extra" benefits because they are acquired through marriage -- not by the payment of Social Security tax. ''Means testing'' those extra benefits (to eliminate them for the wealthiest 30 percent of workers) could eliminate up to 60 percent of the actuarial deficit.
About 5 million state and local government workers are exempt from Social Security tax. By simply requiring the newly hired government workers to join Social Security, we could eliminate about 11 percent of Social Security's pending actuarial deficit.
The current method of taxing benefits is illogical, inequitable and confusing. If we start taxing Social Security benefits in the same way we tax other pension benefits, as much as 24 percent of the actuarial deficit could be eliminated.
We no longer require disabled beneficiaries (below retirement age) to get vocational rehabilitation. This is one reason Social Security disability costs are soaring.
Joe Fried, Director
Public Program Testing Organization
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A Conversation on Strengthening Social Security with - President George W. Bush - - Cedar Rapids, Iowa, March 30, 2005 -
PPTO Director Joe Fried participated in an informative "Conversation on Strengthening Social Security," held on March 30, 2005 in Cedar Rapids, Iowa. The program, which was hosted by Des Moines' Newsradio1040 radio host, Jan Mickelson, included many topics related to Social Security, and involved the following participants: President Bush, Senator Charles Grassley, former Congressman J.C. Watts, and American Spectator contributor David Hogberg. Audio clips of each speaker are available at this link>>.
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CATO reports success in Chile's PRA program (9/9/05)
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Is there really a Social Security trust fund? Why would PRAs help?
Hear Joe Fried discuss these issues with radio show host Mike Rosen
(December 22, 2003). Courtesy of 850KOA radio. The clip is about 1.3
MB (Click radio). |
"The Superintendent of the AFP System in Chile (the equivalent of PRAs) announced recently that rates of return remain high for the 7 million workers who have opted in to the personal accounts system. Over the last 36 months, the five available investment funds have averaged a real rate of return of 30.8 percent. However, only 10 percent of the participants are invested in the lowest performing option (which at 12.7 percent is still enjoying rapid growth)—overall, 90 percent of participants in the AFP system have seen returns between 27 and 55 percent over the last three years." Read more.
Why don't liberals support Social Security reform? (7/5/05)
A recently-issued Cato study suggests that liberals should welcome Personal Retirement Accounts because they would advance liberal ideals. In the study, Noble Lies, Liberal Purposes, and Personal Retirement Accounts, a Cato policy analyst claims that "Social Security has a barely progressive overall structure, if it is progressive at all." And, he suggests that "a system of personal retirement accounts plus a means-tested safety net would serve the 'social insurance' function better than the Social Security status quo according to liberal standards." To read the study, click here>>
The Social Security Wealth Transfer Machine
The Social Security system uses very crude and obsolete mechanisms (built into the benefit formulas) to transfer billions of dollars of wealth each year. The system presumes that single workers and 2-worker couples are relatively wealthy. Therefore, benefits for these workers (who comprise a majority of workers) are particularly meager. On the other hand, the worker with a stay-at-home spouse is presumed to be relatively poor. His or her benefits are good - relatively speaking. Of course, we all know that the worker with the stay-at-home spouse is often far wealthier than average. Conversely, the single mom with several kids is often the poorest among us.
The system also favors workers with low average wages (married or single), because they are presumed to be poor. However, many workers with low wages have other sources of income. In fact, their wages may be low simply because they have no need to work. For example, if Mrs. Bill Gates were paid wages of a few thousand dollars per year for serving as an advisor to a nonprofit organization, the Social Security system would presume her to be poor. She would get a higher rate of benefits than the average worker - say a truck driver or salesman - notwithstanding the fact that she has millions of dollars of dividend income (from Microsoft).
Social Security benefit formulas should be altered to eliminate the payment of these extra benefits. This would result in savings that could be used to increase the benefits of other workers and/or reduce the pending insolvency crisis. How significant are these wasteful transfers? If we stopped transferring extra benefits to people in the upper 30% of income ranges, most of Social Security's pending insolvency could be eliminated.
Wealth transfers are discussed in great detail in How Social Security Picks Your Pocket, by Joseph Fried. In addition, the book provides dollar estimates of the cost of the waste. To read a very brief excerpt, click here>>:
DeMint tried to put Dems in tight spot (6/27/05)
Sen. Jim DeMint, South Carolina Republican, put forth a proposal that may be appealing - even for some Democrats. His plan would rebate Social Security surpluses to workers in the form of contributions to personal accounts. Read an Op-Ed about the DeMint plan by Michael Tanner, of the Cato Institute. Click here>>.
Bush plan has already won approval - in several countries around the world! (6/15/05)
Thirty countries have reformed their pay-as-you-go Social Security systems with personal retirement accounts (PRAs). As a result of these changes, Britain, Chile and many others have virtually no unfunded liability. To read more about this study by the National Center for Policy Analysis, click here>>
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What do you think?
A visitor to our Web site has strong feelings about the out-of-control growth of entitlement spending in America - including the growth of Social Security spending. Jon N. Hall proposes that the special treasury bonds held in the Social Security trust fund be redeemed only with surpluses in the treasury's general fund (if any). And, under his plan, this limitation would be imposed, whether or not personal retirement accounts are adopted. It's pretty tough medicine. Does he make the case? To read his proposal, click here>>. |
Hispanic group says consider all Social Security options (6/15/05)
The National Council of La Raza, a large Hispanic civil rights and advocacy organization, released a report urging Congress and the President to improve the solvency of Social Security, and consider various options such as add-on private retirement accounts, automatic 401(k)s, and making the saver's tax credit permanent and refundable. Read more>>
Case studies from Heritage show PRA advantage (4/20/05)
In a "WebMemo," Rea Hederman, Jr. summarizes 3 case studies showing how the Bush PRA proposals can add retirement wealth to typical workers. Read here>>
Is it possible for someone to pay more in taxes than his income? Yes - if that person is a senior citizen. (3/15/05)
S
ome senior citizens are subject to two special taxes which, in combination, produce marginal tax rates that can EXCEED income. On the other hand, many Social Security recipients pay very little tax on their benefits. If we were to tax Social Security benefits in the same simple manner used for most pension income, greater equity would be achieved AND SOCIAL SECURITY INSOLVENCY COULD BE CUT BY AS MUCH AS 24%. To read more, click here. (And if you don't believe the calculation, show it to your CPA!)|
SS Disability rates continue to soar (3/10/05)
Not for the verifiable illnesses, mind you. Rates for verifiable illnesses have gone up moderately. It's the easy-to-fake disorders that are skyrocketing. Consider, for example, claimed mental illness, which now accounts for 1/3 of all worker disability awards. In the 6 years between 1997 and 2003, the number of mental impairment disability awards increased (in the worker program) by a compounding yearly rate of nearly 8%. And, among juveniles (in the SSI program) the problem is worse. In the 6 years between 1997 and 2003, the number of mental impairment awards increased by a compounding yearly rate of over 11%. To read more about the disability crisis, click here>>.
To hear Joe Fried and Jan Mickelson discuss the
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What transition costs? (2/26/05)
Cato's "Social Security this Week" (see link below) cites reporting by Jeff Johnson of Cybercast News Service, who notes that a "growing number of economists" see the so-called "transition cost" of moving to a prefunded Social Security system as political fiction. One of the cited economists is Arizona State University professor Edward Prescott, 2004 winner of the Bank of Sweden Nobel Prize in Economics. Said Prescott, "I’m going to use some economic jargon, not ‘political accounting’ jargon. There are no transition costs...Re-labeling debt is not a cost." Read the full story by clicking here>>.
Greenspan endorses PRAs - but you'd hardly know it from the news media!
(2/19/05)Under intense questioning before the Senate Banking Committee, Fed Chief Alan Greenspan endorsed the concept of Personal Retirement Accounts. But, many in the media tried to duck this major story. E.g., Reuters simply reported that Greenspan would not say the program was in "crisis." That's it. They completely left out his endorsement. Here's a fairly objective report from AP, courtesy the Seattle Times. Click here>>
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How to report fraud If you wish to report possible waste or fraud in the Social Security system, contact the Office of Inspector General. There, you will find an online form for reporting this information. |
We need a wide-ranging debate, says Social Security Expert
(2/10/05)Eugene Steuerle, a senior fellow at the Urban Institute and former deputy assistant Treasury Secretary, says that the Social Security debate should not be limited to Personal Retirement Accounts. In an op-ed in USA Today (2/10/05) Dr. Steuerle describes a system that is outdated and in need of comprehensive reform:
"Yes, we should debate these [PRA] accounts and their funding. But the real problem is that Social Security was designed decades ago for the needs of a different age."
Steuerle notes that single workers and 2-earner couples get short shrift from the system, compared to 1-earner married couples. Other problem areas include the failure of Social Security to adequately deal with changing life expectancies, poverty, and rising disability costs. Read this excellent article by clicking here>>.
Proposal No. Two from the President's Commission - a disaster!
(1/10/05)In the report of the President's Commission to Strengthen Social Security, issued in December 2001, there were three proposals - each of which involved Personal Retirement Accounts (PRAs). The first plan was simple, straight forward, and beneficial to people at all levels of income. An analysis of plan one can be found on this Web site. Click here for example of promising plan.
Unfortunately, however, the proposal that gained the most attention and support was plan two - and it was a disaster. It would be better to have no reform than to adopt plan two. Click here for example of a poor plan.
Is Social Security Insurance? Get real!
(1/18/05)Defenders of the Social Security status quo like to say that we should not compare the program to private pensions. Instead, they say, Social Security is "insurance" to cover the misfortunes of life. If you are middle class or affluent, you shouldn't expect too much from Social Security - after all, you don't need it. But is the insurance analogy logical? Jon Hall, a guest columnist for the Kansas City Star, has prepared an excellent analysis of this issue. Click here>>.
Have SS actuary's underestimated life-span increases?
(12/31/04)The New York Times reports that a leading demographer, Prof. Samuel Preston of the University of Pennsylvania, believes that the Social Security Administration has greatly underestimated likely increases in longevity rates. If he is right, the fiscal problems of Social Security will be far worse than now predicted. Read more by clicking here>>.
Would Chile's Social Security program work in U.S.?
(12/6/04)Jose Pinera, former secretary of labor and social security in Chile, discusses Chile's successful reform program with Colin McNickle, editor with the Tribune-Review. To read article, click here>>.
Bush to overhaul team - for SS reform
(11/29/04)The Washington Post reports that President Bush plans to extensively change his economic team, to help plan and sell Social Security reform. Click here>>.
U.S. may borrow to pay for SS changes
(11/28/04)The New York Times reports that the White House and Congressional Republicans are likely to propose large-scale borrowing to help finance Social Security personal retirement accounts (PRAs). The amount of borrowing would depend upon the details of the PRA plan adopted.
The borrowing would be necessary because of the transitional cost of PRAs. Since Social Security is a "pay-as-you-go" system, money paid by current workers is used to fund the benefits of current retirees. If this money went, instead, into PRAs, Social Security would need a different source of funds to pay current retirees.
It is important to realize that "transition costs" would replace much larger costs that would eventually be incurred - when the Social Security trust fund is depleted in a few decades.
To read the NY Times article, click here.
Kotlikoff proposes sales tax to replace Social Security PR tax
Economist Laurence J. Kotlikoff proposes to use a federal retail sales tax to replace the Social Security payroll tax. In addition, his plan would eliminate further Social Security benefit accruals. Only benefits owed to current retirees and current workers would be paid (using the retail sales tax receipts). In addition, he proposes that a personal retirement account system be established for those now entering the work force.
The new personal retirement accounts would be split 50-50 between spouses, and invested in a single, global, market-weighted indes fund. All workers would get the same fully diversified portfolio and rate of return. The government would guarantee against economic loss (so individuals could only gain on their invested funds).It's an interesting proposal.
Read more about it in the WashingtonPost.com.
Social Security is Now on Front Burner (11/05/04)
On Thursday, President Bush said that he would discuss with Congress the findings of his long-ignored Commission to Strengthen Social Security. The bi-partisan Commission, co-chaired by the late Daniel Patrick Moynihan, set forth 3 alternative reform proposals in late 2001. Until now, the proposals have received little public attention.
Although he stopped short of endorsing the Commission's proposals, President Bush said that the report of the Commission "is a good place for members of Congress to start. I will show them Senator Moynihan's thinking as a way to begin the process."
The PPTO enthusiastically endorses the Commission's Proposal number 1, but does NOT endorse proposals 2 or 3. We feel that proposals 2 and 3 would make a bad situation worse. For a brief analysis, click here. A more detailed analysis of all three Commission proposals can be found in How Social Security Picks Your Pocket, by PPTO Director Joe Fried.
Private Retirement Accounts:
Would administration costs outweigh benefits?The Kerry campaign is citing a study that claims that private retirement account administration costs would "eat 20% of the benefits" in an account held by an average worker. (Click here to see AP report.) Theoretically, this study by Austan Goolsbee, University of Chicago Business Professor, makes sense - but the assumptions are ridiculous. The professor assumes that all workers would opt for privately-managed accounts when their balances reach $5,000. No worker would have to do that, and many or most workers probably would not do that. Workers could be given the option of keeping their funds in something similar to the Thrift Savings Plan used by federal workers since 1986. In the Thrift Plan, annual overhead charges average just one tenth of one percent (0.1%). For a brief and balanced overview of this issue, refer to an excerpt from the book, How Social Security Picks Your Pocket, by Director Joe Fried. (Click here.)
Do we need a Constitutional Amendment to Fix Social Security?
What do you think?
An intriguing issue is raised by Donald N. Farmer, in a letter to the PPTO. Mr. Farmer advocates adoption of the following constitutional amendment:
Section I The Congress shall ensure the continuation of the Social Security program and its continued solvency, in a manner that provides qualified recipients with equal to or greater than the accepted minimum standard of living.
Section II The Congress shall have the power to enforce this article by appropriate legislation.
Does a constitutional amendment make sense? Is this the right one? Please read on - and send us your views. Click here>>
The impact of taxes on retirees ... it's disgraceful
The taxation of Social Security benefits is complex and inequitable. Many retirees pay a double tax on their benefits, and are subject to harsh penalties for working while collecting those benefits. This can result in effective marginal tax rates exceeding 100%! In How Social Security Picks Your Pocket, author Joe Fried (PPTO Director) illustrates and quantifies this outrageous problem. Read More>>
Ticket to Shirk?
The Ticket to Work program, designed to encourage the disabled to return to work, is off to a slow start. Maybe that’s a good thing. Read more>>
Is it time for Personal Retirement Accounts?
If properly designed, a system of optional Personal Retirement Accounts (PRAs) could give almost all retirees significantly better retirement benefits. Let's take a close look at one of the proposals included in the report of the bi-partisan President's Commission to Strengthen Social Security. Read more>>
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