State and Local Government Workers

Two Social Security issues of particular relevance to state and local government workers are universal coverage and the windfall elimination provisions. 

About 93 percent of American workers participate in Social Security. In addition to private-sector workers, this includes all federal government employees hired after 1983. Most state and local government workers also participate in Social Security and are covered by a state government pension. However, about 25 percent of them remain outside the Social Security system. They participate only in their own retirement system. 

Universal participation in Social Security is desirable. It would ensure that all workers and their families receive the program’s protections. Some of those protections are missing in existing government plans. For example, many state and local government workers are not currently eligible to receive death or disability benefits. But they would receive them if their employers participated in the Social Security program. There are concerns that funding for state and local government pension benefits would be in jeopardy if these employers began participating in Social Security.  

The Government Pension Offset (GPO) lowers Social Security spousal or widow(er) benefits for people who receive a “noncovered” pension. This is a pension paid by an employer that does not withhold Social Security taxes from an employee’s salary. The GPO is intended to ensure that spousal and widow(er) benefits of those with covered or noncovered lifetime earnings are roughly equal. The Windfall Elimination Provision (WEP) adjusts Social Security benefits. It attempts to account for the time that public employees spend outside the Social Security system. During this time, they are not contributing payroll taxes to the system. For the calculation of Social Security benefits, these years would appear as if the worker had zero earnings. As a result of Social Security’s progressive benefit formula, two workers with similar lifetime earnings could receive different benefits, with the worker with earnings outside the Social Security system receiving a higher benefit than the worker who spent an entire career within the system. 

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 the Social Security system. A worker would appear in Social Security records to have no earnings in those years. 

The Social Security benefit calculation starts with a computation 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. It also causes larger benefit reductions for lower-wage workers than for other workers. The Social Security Administration now has additional data to make calculations. That data would allow it to calculate the WEP adjustment more fairly and straightforwardly.