Which State and Local Government Workers Lack Coverage?
Most U.S. jobs are covered by Social Security. Over the years, Congress has expanded the system’s reach so that it is now nearly universal. The Social Security Administration estimates that about 182 million people or 94% of workers in paid employment or self-employment were covered by the program in 2022.
Social Security, also known as the Old-Age, Survivors, and Disability Insurance (OASDI) program, provides monthly benefits to qualified retired and disabled workers and their dependents and to the survivors of insured workers. Workers’ contributions to the program determine their eligibility and benefit amounts. For wages paid in 2022, the Social Security payroll tax rate for both employers and employees is set by statute at 6.2% apiece up to an annual earnings limit of $147,000. There is no means test to qualify for these benefits.
A sizeable segment of the state and local government workforce does not participate in Social Security. Instead, they participate in public sector retirement systems that must provide a minimum comparable level of benefits. Workers without Social Security coverage do not pay the associated payroll taxes based on their earnings and are therefore ineligible for Social Security benefits. Public pension benefits for these non-covered workers are generally higher than those of other public employees to compensate for the lack of Social Security coverage.
The historical roots of this complex system lie in depression-era Constitutional concerns about the authority of the federal government to impose payroll taxes on states and localities. Following modifications to the Social Security system in the 1950s, state and local government employees may now, as a group, elect coverage through a special agreement between a state and the Social Security Administration. These agreements, called Section 218 Agreements, are authorized under Section 218 of the Social Security Act (42 U.S.C. §418) and involve a referendum among eligible employees. The extent of the coverage under these agreements varies significantly from state to state.
In 2018, there were 23.2 million state and local government employees; 16.6 million (72%) had Social Security coverage. The other 6.6 million (28%) did not have Social Security coverage through their government employment. Eight states (California, Texas, Ohio, Massachusetts, Illinois, Colorado, Louisiana, and Georgia) accounted for almost three-fourths (73%) of noncovered state and local government employees.
While every state has groups of public employees that do not participate in Social Security, the largest share of noncovered employees work at the local level in teaching and public safety professions. (The membership of public safety plans varies from state to state but includes state and local government law enforcement officers and firefighters, and is likely to include corrections personnel, wildlife wardens and foresters, probation officers, some officers of courts, and members of various other protective occupations).
Mandatory Coverage Proposals
Debates over Social Security policy have included calls to mandate coverage for newly hired state and local government workers. A 2021 report from the Congressional Research Service outlined several relevant considerations, which include:
Potential positive impact on the Social Security Trust Fund
Social Security currently faces a long-term financing shortfall, with costs outpacing growth in U.S. gross domestic product (GDP) through the mid-2030s. This is primarily due to the rapid aging of the U.S. population. Current estimates suggest that the trust fund will be able to pay scheduled benefits on a timely basis until 2034. At that point, the fund's reserves will become depleted and continuing tax income will be sufficient to pay only 77% of scheduled benefits. The SSA’s chief actuary projects that mandatory Social Security coverage for newly hired state and local government employees would have a net positive effect on the Social Security trust fund over the next 75 years. A policy change for these workers could potentially close 5% of the system’s projected long-range funding shortfall. Other analysts note that at a certain point, the cost of increased benefit payments would offset those improvements.
Implications for the windfall elimination provision (WEP) and government pension offset (GPO)
The WEP is a modified benefit formula that reduces the Social Security benefits of certain retired or disabled workers who are also entitled to pension benefits based on earnings from jobs that were not covered by Social Security. Its purpose is to remove an unintended advantage or “windfall” that these workers might otherwise enjoy as a result of the interaction between the regular Social Security benefit formula and the workers’ relatively short careers in Social Security-covered employment. The GPO similarly reduces Social Security benefits paid to spouses and widow(er)s of insured workers. These controversial provisions impose an administrative burden. For one thing, the SSA must generally rely on self-reported data to administer the WEP and the GPO for state and local government employees, which can make enforcement difficult. The provisions are not well understood by many of the people who are affected, and inconsistent self-reporting can raise equity issues. Each session, a slew of state resolutions are introduced, complementing federal legislative activity to repeal or modify them. Mandatory coverage for state and local workers would eventually obviate the need for the WEP and GPO.
Benefit Adequacy Questions for Non-Covered Workers
Social Security generally provides better inflation protection, disability benefits, and a benefit formula aimed at helping employees who earn less over the course of their careers. The ability to accrue and receive Social Security benefits could be particularly valuable for the many state and local government workers who leave public service without ever becoming vested in a government pension (or who vest but never reach the steep part of the benefit accrual path). State and local government employers can only remain outside of the Social Security program if they sponsor a retirement plan that meets generosity standards specified in IRS Employment Tax Regulations. The Center for Retirement Research has collected data on pension benefit formulas and compared noncovered pension benefits to Social Security benefits for hypothetical workers. It found that while all state and local plans follow the letter of the law, they do not always provide Social Security-equivalent resources throughout retirement. Specifically, 43% of plans shortchange workers who leave their noncovered job with 6 to 20 years of tenure and finish out their careers in other employment. This medium-tenure group falls short because their pension benefits are based on more modest earnings when they leave noncovered government employment rather than higher earnings at retirement. In contrast, Social Security benefits replace a percentage of career-average salary, adjusted for wage growth. Pension benefit accrual schedules tend to be heavily backloaded; Social Security benefit accrual patterns are more uniform across the course of a career. There are tradeoffs, of course. For example, some public employees like police officers and firefighters are eligible to collect full benefits at much younger ages than Social Security claimants. They tend to retire early and receive benefits for many years.
Effect on state and local plans
A 2015 study found that states with governmental pension plans that have greater levels of underfunding tend also to have a smaller proportion of state and local workers that are covered by Social Security. Mandatory coverage could impose administrative and cost burdens on state and local governments and their employees, potentially exacerbating existing funding challenges. Shifting contributions from current state and local plans to Social Security could spell lower investment earnings on assets, compounding funding concerns. State governments could potentially have to administer existing retirement systems that operate outside of Social Security alongside new retirement systems for employees required to participate in the program. In addition, a mandate could prompt retirement plan design changes with implications for plan funding and benefit generosity. Some of the changes states and localities might entertain include adjustments to existing defined benefit formulas, shifts to defined contribution plans, or creating hybrid plans that combine defined benefit and defined contribution features.