NCSL Labor and Economic Development Committee - Policy

Maintaining the Solvency of Social Security

expires August 2011

The National Conference of State Legislatures (NCSL) strongly believes that the federal government must preserve the financial integrity of the Social Security system and assure the long-term solvency of the program. State legislatures believe that Social Security must ensure a safety net for low-income older retirees as well as provide survivor benefits and disability insurance. It is critical that all workers paying into the system have confidence that Social Security will continue to be available to them at retirement or to provide for their survivors after their death. NCSL believes that efforts to assure solvency should strengthen the existing program upon which so many beneficiaries and their families rely. Social Security reform should continue to encourage private savings and employer-provided pension plans as important components of retirement savings.

While Social Security currently has a surplus, the Social Security Board of Trustees report of 2008 predicts that in 2020 2017 trust fund expenditures will begin to exceed payroll tax revenues and interest on accumulated assets will need to be drawn down to pay benefits. By 2041, the trust funds will be exhausted.

The Administration and Congress face difficult choices in maintaining the solvency of Social Security.  As Congress considers alternatives to maintain Social Security solvency, it must analyze and understand the impact of these proposals on states, taxpayers, state budgets, and state laws. Social Security reform will have major impacts on state employees, teachers, local government, private employers and taxpayers. State legislators oppose reform proposals that finance this shortfall by shifting federal costs to state budgets. If Social Security does not continue to provide a stable form of assistance to the elderly, state low-income programs and state budgets would be severely impacted. NCSL strongly opposes any efforts to reform Social Security that create unfunded mandates for the states or preempt state laws and authority.

NCSL encourages federal policymakers to consider the following concerns when deliberating Social Security reform proposals:

Mandatory Social Security Coverage of State and Local Government Employees

NCSL has long opposed further involvement of the federal government in the administration of public retirement plans including the expansion of mandated Social Security coverage to state and local employees not currently covered under the system. NCSL maintains that state and local governments should be allowed to affiliate their retirement plans voluntarily with Social Security, as was the case before passage of the Omnibus Budget Reconciliation Act of 1990. The imposition of mandatory coverage on state and local employees who are not currently required to contribute to the system constitutes a direct cost shift to states and will have a detrimental effect on state budgets, state retirement plans and the retirement savings of state and local employees. The extension of mandatory coverage to new categories of state and local employees does not solve the insolvency problem and creates new obligations for the system. NCSL's policy, "Mandatory Social Security Coverage of State and Local Government Employees," continues to oppose this mandate.

Increasing the Return on Social Security Investments

States and local retirement system choices provide models for federal reform of Social Security. We encourage Congress and the Administration to review state laws, funding choices and programs, whether they choose to create individual private accounts, authorize public investment in private markets, or pursue other options for reform. The return on Social Security has historically been far below the return on public and private pension plan investments in the market. NCSL believes that Congress and the Administration must act to increase the return on Social Security investments. NCSL believes that the best means to increase the return on Social Security investments is through some level of investment in the private markets. NCSL maintains that this investment must:

  • Be administered through an independent board well insulated from political interference;
  • Include Social Security beneficiaries on the board;
  • Be invested for the exclusive benefit of Social Security beneficiaries as in state pension law;
  • Guarantee the current level of Social Security benefits;
  • Be protected from steep administrative costs;
  • Be used solely for retirement, survivor benefits and disability; and
  • Not preempt state laws governing securities fraud;

General revenue from sources other than FICA should not be used to finance changes to the existing system that would allow market investment or private accounts and changes to the existing system should not increase the federal deficit, compromise funding of state-federal partnerships or require more borrowing that would add to the federal debt.

A strong public education program must accompany reform that would create individual accounts or provide for market investment so that beneficiaries will have the knowledge necessary to make good investment decisions.

Guarding Against Fraud and Abuse

NCSL strongly opposes any proposal that would preempt state authority to regulate securities or give sole authority to regulate investment fraud to the Securities and Exchange Commission (SEC). States traditionally have been the protectors of individual and small investors and should maintain this role without federal intervention or preemption.

Many states have created special laws and consumer protection programs to prevent white-collar crimes, particularly against the elderly. These laws are critical to the protection of senior citizens. NCSL strongly opposes any effort to preempt state authority to regulate crimes against the elderly. Individuals must be protected from fraud through the strong enforcement of laws governing securities fraud.

NCSL is very concerned about identity theft and fraudulent uses of identity documents. While NCSL strongly supports efforts to protect the integrity of Social Security numbers (SSNs), such efforts cannot be achieved through unfunded federal mandates on state and local government. Many states have implemented or are considering statutes to protect the integrity and restrict certain usages of SSNs.

The SSN was originally created to administer the Social Security program. However, it is extensively used by state, local and tribal governments for both record keeping and identification. The federal government often requires states to use SSNs in program management and data matching, especially in the delivery of health and human services programs. SSNs are used in vital records, paternity and divorce case documents, Motor Vehicle/Drivers License documentation, child support enforcement and administration, state retirement systems and to prevent fraudulent access to benefits and services.

Numerous pieces of Congressional legislation have been introduced in recent years that would require states to restrict the display, purchase or sale of Social Security numbers. The Congressional Budget Office found on several occasions that the cost of such provisions to state, local and tribal governments is likely to exceed the threshold amount for an intergovernmental mandate in at least one of the first five years following the date the mandates go into effect. These provisions would apply to a wide range of state and local agencies and would entail time-consuming efforts for state agencies to comply. States would have to make systemic changes to alter their document maintenance and retrieval systems. Some potential areas of cost include changes in information technology to ensure that systems only display SSNs in instances where access is permissible and labor costs to screen government documents for SSNs and then redact them before allowing citizens to access them. In many cases, especially death certificates, such redaction would have to be done by hand.

NCSL calls upon the federal government to abide by the provisions of the Unfunded Mandate Reform Act of 1995 and abandon efforts to put burdensome, unrealistic and costly mandates on state and local governments. NCSL supports a federal role in providing technical support, highlighting successful models, facilitating discussion on this issue and providing necessary funding for changes made at the discretion of the states. NCSL calls upon the federal government to begin by addressing flaws in the issuance of SSNs and to examine other ways to safeguard individual privacy, including consideration of password protection of SSNs. NCSL encourages the federal government to work with the states to develop joint recommendations on Social Security number usage.

Raising the Retirement Age

Prior Social Security reform efforts, to adjust for longer life expectancies, included a gradual increase in the "full retirement age". In 2002, the full retirement age, the age at which beneficiaries are eligible to receive unreduced Social Security benefits, began to rise gradually from 65 to 67. Contemporary solvency proposals that would increase the full retirement age even higher raise serious concerns for beneficiaries. While Americans are living longer, many workers are choosing to retire earlier than before. Conversely, some workers may be unable to continue working due to physical limitations, age discrimination or other limitations. Still other workers with shorter than average life expectancies, particularly African Americans, may experience little return from Social Security for themselves and their survivors if the full retirement age is increased.

Currently, public safety employees of state and local government are exempt from actuarial reductions to their public pension benefits. Efforts to raise the full retirement age disproportionately harm both private sector employees and non-public safety state and local employees who do not contribute to Social Security. Under current law, the age at which a more highly paid beneficiary may receive an unreduced private pension benefit is tied to the Social Security full retirement age. Due to this coupling, relatively highly compensated long-term private pension beneficiaries who choose to retire before age 65 receive an actuarially reduced benefit for life even if their employer deems them eligible to receive a full private pension benefit prior to age 65. The age at which public employees, excluding public safety employees, may receive an unreduced public pension benefit is not tied to the Social Security full retirement age but is instead defined in federal Internal Revenue Code policy, which sets the age at 62. In recognition of public safety concerns, public safety workers, like police and fire, are exempt from these actuarial reductions. More highly-compensated long-term non-public safety state and local employees who do not contribute to Social Security rely on their public pensions for the bulk of their retirement security. Actuarial reductions to public pension benefits disproportionately burden these employees. NCSL believes that public employers should be allowed to provide full pension benefits to all of their employees without the imposition of these Internal Revenue Code limits. Further, for purposes of consistency, NCSL supports the uncoupling of private sector benefit limits from the Social Security full retirement age.

NCSL encourages Congress and the Administration to consider the impact that raising the retirement age may have on various groups of workers. NCSL opposes further increases of the full retirement age.

Raising the Payroll Tax Rate

Raising the payroll tax rate constitutes a direct cost shift to employers and employees for the cost of Social Security solvency. States, as employers, would bear increased costs if the payroll tax rate were increased. As well, the payroll tax is regressive and an increase would disproportionately affect workers making less than the wage base. An increase in the payroll tax rate may also provide disincentives to employer-provided pension benefits. NCSL opposes an increase in the payroll tax rate.

Maintaining Benefits for the Poor Elderly and Survivors

Social Security prevents massive poverty among the elderly. Among elderly Social Security beneficiaries, 52% of married couples and 72% of unmarried persons receive 50% or more of their income from Social Security; 20% of married couples and about 41% of unmarried persons rely on Social Security for 90% or more of their income. Without Social Security, over half of all women 65 or older (married and nonmarried) and 40% of all older men would be poor.

Similarly, Social Security replaces lost income for workers and their spouses and children when a worker becomes disabled, dies or retires. For a young family, Social Security provides the equivalent of a $443,000 life insurance policy and a $413,000 disability insurance policy. Retired workers and their dependents account for 69% of total benefits paid. Disabled workers and their dependents account for 18% of total benefits paid. Survivors of deceased workers account for 13% of total benefits paid. Almost half (48%) of families with a disabled worker rely on Social Security benefits for half or more of their family income. 18% rely on benefits for nearly all of their income and about 6% have no other income besides Social Security.

 Almost 50 million Americans—nearly one in four households—receive monthly Social Security checks. In addition to the over 31 million retirees who collect Social Security, the program is the nation’s largest children’s program. Social Security supports 5 million American children, between 7% and 8% of all American children. In contrast, about 3 million children receive family income through TANF. The role Social Security benefits play in alleviating and preventing childhood poverty should not be lost in efforts to restore solvency or reform Social Security. Similarly, Social security provides lifetime income support to about 777,000 disabled adult children based on a parent’s work record.

Modification of the Earnings Limit

NCSL has long supported increasing the earnings test for older workers, especially those who provide essential child care services. Under current law, beneficiaries under the full retirement age may earn up to $12,000 annually without reducing the amount of benefits they receive from Social Security, after that amount Social Security benefits are reduced by $1 for every $2 of earnings. Beneficiaries who retire at their full retirement age may earn up to $31,800 in the year that they retire without receiving a reduced benefit. In the year that beneficiaries reach full retirement age earnings above the annual limit reduce benefits by $1 for every $3 of earnings.

NCSL supports the elimination of or an increase in the earnings limit on wages earned by Social Security beneficiaries. As the worker-to-beneficiary ratio continues to fall, older workers may become increasingly important to productivity. This penalty severely inhibits seniors who would prefer to and continue to be able to work.

Means-Testing of Beneficiaries

Social Security benefits are calculated based on earnings and time in the workforce. Although workers contribute the same percentage of payroll taxes to the system, a combined employer-employee contribution of 12.4% of payroll up to $90,000, lower-income workers receive a higher proportion of their contributions in benefits than to higher-income workers. NCSL opposes proposals to means-test eligibility to receive Social Security. Such proposals may reduce overall public support for Social Security and are not necessary to achieve Social Security solvency.

Labor and Economic Development Committee