November 1998

Mandating Social Security for All Public Employees: Pros and Cons

Today, about one-quarter of all state and local government workers (5.5 million persons) are not covered by Social Security. Although they are only a minority of state and local government workers, they represent 85 percent of all U.S. workers outside the Social Security system, and are the single largest occupational group without full Social Security coverage. Many current reform proposals include provisions mandating that all new state and local government hires participate in the system. The following is a list of frequently heard arguments supporting and opposing such a mandate.

Pros
  • Unlike many pension plans, Social Security is portable (that is, benefits cannot be lost because of job change).
  • Social Security offers automatic cost-of-living adjustments, unlike many public employee plans.
  • Social Security always includes security for dependents. State and local employees often receive a reduction in benefits if they opt to include survivors' benefits in their policies.
  • Social Security coverage of all public employees would eventually eliminate the government pension offset. The government pension offset applies to moderate and higher income earners who are entitled to both Social Security benefits from covered employment and a government pension from noncovered employment. The offset is designed to prevent these earners from benefiting from Social Security's redistributive benefit formula.
  • Including all public employees in Social Security would reduce the program's long-term financial shortfall by 10 percent over 75 years, according to the Social Security Administration (SSA). Using data from the 1998 Social Security Board of Trustees' report, the General Accounting Office estimates that mandatory coverage of state and local government employees would extend the Social Security program's solvency by about two years.
  • Including all public employees would increase participation in an important national program.
  • Program administration would be simplified in the long run. In December 1996, SSA's Office of the Inspector General reported that Social Security provisions related to coverage of state and local employees are complex and difficult to administer.

Cons
  • Social Security is a "one-size-fits-all" program. Many of the current public employee programs are tailored to meet the needs of specific groups.
  • Adding public safety workers (such as firemen and policemen) into Social Security might increase the cost since these workers are more likely than the general population to receive Survivors and Disability Insurance.
  • Unlike some state and local disability plans, disability benefits from Social Security are not available if individuals are able to work in some profession. Consider the example of a 50-year-old firefighter who is covered by Social Security: He or she sustains an injury and is no longer able to work as a firefighter. The injury is such that he or she is able to work but only at a lower-paid profession. Social Security's disability insurance program would not provide benefits and would essentially require the firefighter to change to a lower-paid profession. Moreover, since Old-Age, Survivors, and Disability Insurance (OASDI) is calculated using a worker's 35 years of highest earnings, his or her retirement benefits under Social Security in many cases would be less than would be received under a state or local pension system.
  • For the next decade or so, Social Security will be accumulating payroll tax reserves in its trust funds. These reserves are invested in special government securities and loaned to other parts of the government to finance expenditures -- a practice that some object to. Requiring new state and local workers to pay into Social Security would enable the federal government to borrow additional money from these "trust funds."
  • Under current law, the Social Security trust fund can be invested only in U.S. Treasury bonds. State and local governments are able to invest their pension plan assets in a greater diversity of investment vehicles, thereby possibly achieving a greater rate of return on these assets.
  • Inclusion of public-sector employees in Social Security would increase public-sector employers' tax burden. To make these increased tax payments, public-sector employers would be forced to hire fewer workers, reduce employees' wage increases, reduce cost-of-living increases for current retirees, and/or make cuts in other benefit areas such as health care.
  • Some claim that state and local governments face morale problems with new hires who are required to be included in Social Security.

For additional information on Social Security, go to the following link on EBRI's Web page: http://www.ebri.org/SSProject/sslisting.htm

For more information, contact Ken McDonnell, (202) 775-6342, or Kelly Olsen (202) 775-6330, or see EBRI's Web site at www.ebri.org.

11/98