Social Security

The Social Security Act of 1935 excluded state and local government employees from coverage because of concerns about the federal government's right to impose a tax on state governments and because many state and local employees were already covered by public pension plans. Over the years, Congress has extended mandatory Social Security coverage to workers not covered by a public pension plan and voluntary coverage to other state and local government workers. The Social Security Administration estimates that 5 million state and local government workers, with annual salaries totaling $132.5 million, are currently not covered by Social Security. This report examines the implications of extending mandatory coverage to all newly hired state and local employees. Specifically, GAO discusses the implications of mandatory coverage for the Social Security program and for public employers, employees, and pension plans. GAO also identifies potential legal or administrative problems associated with mandatory coverage.

GAO noted that: (1) the Social Security Administration (SSA) estimates that extending mandatory social security coverage to all newly hired state and local government employees would reduce the program's long-term actuarial deficit by about 10 percent and would extend the trust funds' solvency by about 2 years; (2) in addition to helping to some extent resolve the solvency problem, mandatory coverage would broaden participation in an important national program and simplify program administration; (3) the impact on public employers, employees, and pension plans would depend on how state and local governments with noncovered employees responded to the additional costs and benefits associated with social security coverage; (4) social security retirement benefits are fully protected from inflation and are weighted in favor of families and low-income employees; (5) many public pension plans, on the other hand, permit employees to retire earlier and provide a higher retirement income benefit than social security; (6) those states and localities that decide to maintain benefit levels for new employees consistent with the earlier retirement age and enhanced retirement income benefit would experience increased costs; (7) however, those employees would also have the additional family and other protection provided by social security; (8) alternatively, states and localities that choose to maintain level retirement spending might need to reduce some retirement benefits for newly hired employees; (9) several employer, employee, and plan representatives stated that mandating social security coverage for all new state and local government employees would raise constitutional issues and would be challenged in court; (10) however, GAO believes that mandatory coverage is likely to be upheld under current Supreme Court decisions; (11) mandatory coverage would also present administrative issues for implementing state and local governments; and (12) up to 4 years could be required for states and localities to develop, legislate, and implement pension plans that are coordinated with social security.