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 Social Security. They participate only in their own retirement system.

Some policymakers suggest covering newly hired state and local workers to move toward universal participation. This would protect the pensions of those already participating in state and local plans and the fiscal integrity of current state and local systems.

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. Most major legislative reform proposals have included mandatory coverage.

Windfall Elimination Provision—the Windfall Elimination Provision (WEP) adjusts Social Security benefits to account for time that public employees spend outside of Social Security, i.e., not contributing payroll taxes to the system. The current method for calculating the WEP adjustment uses the number of years a worker paid into Social Security and the amount he or she earned during that time. This method excludes earnings from jobs that did not require that worker to pay into Social Security. Excluding the earnings from such jobs creates an inaccurate picture of the average amount a person earned during his or her lifetime (the basis of Social Security’s benefit calculation). Without an adjustment, workers with many years of earnings outside of Social Security could receive larger Social Security benefits than people with equivalent earnings who spent their entire careers in Social Security-covered employment.

The current method for calculating the WEP is difficult to understand and causes larger benefit reductions for lower-wage workers than for other workers. The Social Security Administration (SSA) now has data about earnings from jobs during which workers did not pay into Social Security. With this data, the SSA can now calculate the WEP 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.

State and local governments should assure retirees and workers who are currently not covered by Social Security and participate in another system that this change would not jeopardize promised government pension benefits.

Windfall elimination provision

In this policy: Federal

Congress should improve the WEP by utilizing SSA’s more detailed earnings records (which include covered and noncovered earnings) and by ensuring that workers do not receive higher replacement rates because of earnings from noncovered employment.