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Mandatory
Social Security
(updated
November 9, 2007)
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You
Need to Know: |
"Mandatory
Social Security would be felt in all 50 states and over time would
add new beneficiaries to the program who would draw down benefits
like other Social Security recipients, increasing financial
pressures on the system...The least disruptive and most
cost-effective solution would be to allow the well-established
public sector retirement system to continue in its current form."
Terri Bierdeman, Chair, Coalition to Preserve Retirement Security |
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Effect
on PERA Members |
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Congressional
Proposals (Revised
11/9/07) |
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Coalition
to Preserve Retirement Security |
What Mandatory Social
Security Would Mean to PERA Members
One of the proposed solutions for
the ailing Social Security system would require new state and
local government employees to pay Social Security taxes.
Mandatory Social Security coverage of new employees would affect
PERA members, benefit recipients, and employers. If Social
Security taxes were required for all new employees,
contributions to PERA for new hires would have to jump to
provide a plan that, in combination with Social Security,
provided the same level of benefits that PERA now provides. To
maintain the same level of benefits for new employees as current
employees have, employer contributions for new hires would need
to increase by over 6 percent of salary. To afford this increase, employers would have to cut
services. While new employees could share in this increase by
paying higher contribution rates than current PERA members, this
could hurt recruiting.
If contribution rates stayed the
same as they are now, benefits for new hires generally would be
much lower. For example, a new hire who worked 30 years and
retired at age 62 would receive a total of about 45 percent of
Highest Average Salary (HAS) from Social Security plus PERA. The
current PERA plan pays 75 percent of HAS for a member retiring
with that service and age. The state, school districts, and
other PERA employers would have difficulty recruiting if
retirement provisions for new hires are much worse than the
current PERA plan.
While benefits for benefit
recipients probably would not be reduced if mandatory Social
Security were adopted for new hires, any future enhancements to
existing PERA benefits could become impossible.
The rationale for covering new hires under Social Security is that this
would:
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Be best for new hires. |
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Generate revenue to help solve Social Security’s
funding problems. |
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Be "fair" since some public employees receive
Social Security benefits anyway. |
These arguments ignore the fact
that PERA and many other public plans already provide a
comprehensive plan of excellent retirement, disability, and
survivor benefits for their members. Social Security offset and
windfall provisions are designed to prevent PERA members and
retirees from receiving any unfair advantage by spending part of
their career in Social Security-covered employment or by being
married to a Social Security-covered worker.
The PERA Board is strongly
opposed to mandatory Social Security, as are a number of
Colorado employee and employer groups and retirement plans. PERA
and other retirement systems gave information to the U.S.
General Accounting Office for a study it finished in August
1998. The study examined the effect that mandatory Social
Security would have on benefits and costs of public plans and
other issues. The report concluded that new hires would have
much lower benefits if Social Security is mandated, unless
retirement contributions are dramatically increased.
More recently, PERA submitted testimony to the
Social Security Subcommittee of the House Ways and Means
Committee following a hearing on mandatory coverage in May 2003,
that mandatory Social Security would hurt PERA and in the long
run, it would not help Social Security. PERA wrote that “PERA members, benefit recipients and the Board of Trustees
of PERA have worked hard for many years to maintain the ability
to provide retirement benefits pursuant to the state law
governing PERA, free from any mandate to cover employees under
Social Security. The Colorado General Assembly has stated
several times that it also believes that its employees are
already well-served by existing retirement plans that do not
include Social Security.”
A publication from The
Brookings Institution said that mandatory Social Security
coverage for all newly hired public employees would cost those
workers and their employers $55 billion over seven years. In
Restoring Fiscal Sanity: How to Balance the Budget, a chapter on
the aging population presents a plan for Social Security reform.
The plan includes a call for the forced participation in Social
Security of all newly hired state and local workers starting in
2008 and projects that, from that point through 2014, the
measure would increase Social Security revenues by $55 billion.
The Segal Company calculated in 2005 that the cost of mandatory coverage
would total $44 billion
over five years. Segal concluded that the expense would lead to
higher taxes, reduced public employee retirement benefits, cuts
in government services, or a combination of those things. Yet
mandatory coverage would add just two years to the projected
solvency of Social Security.
PERA and other members of a
national group called the Coalition to Preserve Retirement
Security
(CPRS)
asked the U.S. Senators and members of Congress from the states
most affected by the mandatory Social Security issue to take an
active role in ensuring that legislation does not include
mandatory coverage for newly hired state and local employees.
CPRS also urged state
legislators to let lawmakers in Washington know the damage that
mandatory coverage for new hires would cause. SJR 10 was adopted
by the Colorado Legislature in 1999 to encourage Colorado’s U.S.
Senators and Representatives to continue their efforts opposing
mandatory Social Security for Colorado’s state and local
workers. The 2005 study by The Segal Company estimates there are
263,000 public employees in Colorado who are covered by PERA or
other plans and not covered by Social Security.
Congressional
Proposals on Mandatory Social Security
While there has
been no direct action or any legislation proposed to implement
mandatory Social Security coverage, meetings earlier in 2007
with majority and minority staff on the House Ways and Means
Subcommittee on Social Security revealed that “there
have been conversations about the mandatory issue.”
Apparently, these “conversations”
have occurred in the context of
informal member discussions about ways to pay for the repeal of
the Government Pension Offset (GPO) and Windfall Elimination
Provision (WEP), as well as provide funds to boost the solvency
of Social Security. Staff hastened to add that no particular
representative or senator was taking the lead in considering
proposing mandatory coverage.
There have been a
number of bills introduced in the last few years that would
eliminate the GPO and WEP. The cost to eliminate these
provisions, however, is about $60 billion over a 10-year period.
Mandatory coverage of new hires under Social Security would be a
terrible price for state and local governments to pay for action
on the GPO and WEP.
In 2005 and 2006,
President Bush proposed allowing Social Security-covered workers
the opportunity to take a portion of their future FICA
contributions and invest that amount in private accounts. Bush’s
proposal gained no political momentum. Many Democrats say that
Social Security is working well although minor adjustments may
be needed. The Democrats also pointed out that the increase in
federal deficits in the last few years and the cost of the Iraq
war means that there would be no money available for Social
Security transition costs if private accounts were allowed and
reduced projected FICA contributions.
Nevertheless, many
in Congress point to the 2007 annual report by the Social
Security Board of Trustees that says the Social Security Trust
Fund will not be able to pay full benefits after 2041 unless
contribution income is increased, future benefits are reduced,
or some combination of the two is adopted. While the current
Administration isn’t likely to push a specific plan for changes
to Social Security, the U.S. Treasury Department is trying to
lay out a framework for analysis of various proposals. In its
first issue paper, the Department explains that Social Security
benefits paid are projected to exceed contributions by 2017.
“Social Security cash flows become increasingly negative after
2017; as a result, Social Security will have a larger and larger
impact on the rest of the federal budget, as general revenues
and/or greater public debt issuance are needed in order to
redeem trust fund bond holdings and fund full benefit payments
until 2041.” In 2041, under current projections, all Social
Security beneficiaries will have their benefits reduced by 25
percent compared to what is promised, if no changes in benefits
or contributions are made.
Social Security
reform could move to the front-burner in 2009 no matter who is
elected President in 2008. As the conversations in 2007 point
out, mandatory coverage is always near the table. Under
pay-as-you-go rules that force members of Congress constantly to
search for funds, the dangers are increased.
The
Coalition to Preserve Retirement Security (CPRS)
The Coalition to Preserve
Retirement Security (CPRS) was formed in 1999 and continues to
develop strategies for convincing Congress and other parties
that mandating Social Security for state and local employees
should not be part of any reform package. PERA is a member of
CPRS.
To learn more about CPRS, read
testimony to Congress in hearings on mandatory Social Security,
find out what CPRS is doing to preserve retirement security, and
for more information about the issues of mandatory Social
Security and Offset and Windfall provisions, visit the CPRS Web
site at
www.retirementsecurity.org.
Feel free to enter your e-mail address on the home page if you
wish to be notified whenever the CPRS site is updated. |
