Social Security

Mandating Social Security coverage for all newly hired state and local government employees would reduce Social Security's long-term financial shortfall by about 10 percent, boost participation in an important national program, and simplify the program's administration. The impact on public employers, employees, and pension plans would depend on how state and localities with noncovered employees would react to these new coverage provisions. One often-discussed option would be for public employers to modify their pension plans in response to mandatory Social Security coverage. For example, many public pension plans now offer a lower retirement age and higher retirement income benefits than Social Security does. Social Security, on the other hand, offers complete inflation protection, full benefit portability, and benefits for dependents, which are not available in many public pension plans. Costs would likely increase for states and localities that wanted to keep their enhanced benefits for newly hired employees. Alternatively, states and localities that wanted to maintain level spending for retirement would likely need to reduce some pension benefits. Regardless, mandating coverage for public employees would present legal and administrative issues that would need to be resolved. For example, states and localities could require up to four years to design, legislate, and implement changes to current pension plans.

GAO noted that: (1) mandating coverage for all newly hired public employees would reduce Social Security's long-term financial shortfall by about 10 percent, increase participation in an important national program, and simplify program administration; (2) the impact on public employers, employees, and pension plans would depend on how states and localities with noncovered employees would react to these new coverage provisions; (3) one often-discussed option would be for public employers to modify their pension plans in response to mandatory Social Security coverage; (4) costs would likely increase for those states and localities that wanted to keep their enhanced benefits for newly hired employees; (5) alternatively, states and localities that wanted to maintain level spending for retirement would likely need to reduce some pension benefits; (6) regardless, mandating coverage for public employees would present legal and administrative issues that would need to be resolved; (7) in deciding whether to extend mandatory Social Security coverage to all newly hired state and local employees, Congress would need to weigh several factors: (a) the Social Security program would benefit from mandatory coverage; (b) the long-term actuarial deficit would be reduced; and (c) the trust funds' solvency would be extended for about 2 years; (8) states and localities with noncovered workers would likely need to increase total retirement spending to provide future workers with pension benefits that, when combined with Social Security benefits, approximate the benefits provided to current workers; (9) at the same time, Social Security would provide newly hired employees with benefits that are not available, or are available to a lesser extent, under current state and local pension plans; (10) states and localities might attempt to halt mandatory Social Security coverage in court, although such a challenge is unlikely to be upheld; and (11) states and localities could require up to 4 years to implement mandatory coverage.