State and Local Government Workers

Background

Universal coverage—about 94 percent of American workers participate in Social Security. This includes private-sector workers, all federal government employees hired after 1983, and the majority of state and local government workers. Most state and local government workers participating in Social Security are also covered by a government pension. However, about 25 percent of them (such as teachers and public-safety officers) remain outside the Social Security system. They participate only in their own retirement system.

Universal participation in Social Security is desirable because it would ensure that all workers and their families receive the program’s protections, some of which are missing in existing government plans. For example, many state and local government workers who are not currently eligible to receive death or disability benefits could receive them if they were to participate in Social Security. Proposals to require all newly hired state and local government workers to participate in Social Security would need to include financial assistance to existing state and local pension plans to ensure their ability to pay promised benefits.

Windfall Elimination Provision—the Windfall Elimination Provision (WEP) adjusts Social Security benefits to account for time that public employees spend outside the Social Security system, i.e., not contributing payroll taxes to the system. This adjustment prevents an unfair situation in which a person with some earnings outside the system would receive a larger benefit than a person who earned the same amount but paid into the Social Security system throughout his work career.

This unfair situation can occur because of how Social Security calculates average career earnings and the information that the Social Security Administration has had about earnings outside of the Social Security system. Until recently, Social Security had no record of how much people earned outside of the Social Security system. A worker would appear in Social Security’s records to have no earnings in those years. The Social Security benefit calculation starts with a calculation of average career earnings. Workers with lower career earnings receive a higher replacement rate than workers with higher career earnings. Workers with time spent outside of the Social Security system would have years with zero earnings figured into the calculation of average career earnings, lowering that average. As a result, a worker who spent a lot of time outside of the Social Security system could be viewed by the Social Security system as a low earner deserving a high replacement rate, even if that person’s earnings outside the system were substantial.

The current WEP calculation is difficult to understand and causes larger benefit reductions for lower-wage workers than for other workers. The Social Security Administration now has data that would allow it to calculate the WEP adjustment in a fairer and more straightforward manner.

STATE AND LOCAL GOVERNMENT WORKERS: Policy

Universal coverage

In this policy: FederalLocalState

Social Security should cover all workers, including all newly hired state and local government workers. Funding must be available to affected state and local plans to ensure that this change would not jeopardize promised government pension benefits.

Windfall elimination provision

In this policy: Federal

Congress should improve the Windfall Elimination Provision by utilizing the Social Security Administration’s more detailed earnings records (which include covered and noncovered earnings).