Congress to Vote on Social Security Gift for Government Employees
Under the guise of a technical fix, the giveaway would cost $196 billion over 10 years in an already unsustainable system
With Social Security facing a $22.6 trillion deficit of the next 75 years, Congress should perhaps get down to the business of fixing it. Instead, it’s theater of the absurd: the latest proposed Social Security reform making headlines is a bill to increase Social Security for government employees.
The details of the bill, H.R. 82, can make eyes glaze over quickly. As it turns out, this particular bad idea has come up before, and as a result there’s a wealth of good analysis out there if you really want to dig into the details. My goal in this post is to try to explain it as plainly as possible.
Around 5 million of the 20 million or so employees of state and local governments currently do not pay into Social Security. They are not covered by the Social Security system. They receive only a state or local government pension. In addition, millions more are retired under this arrangement. Further, federal employee hired before 1984 didn’t pay into Social Security and were covered exclusively by federal pensions.
No problem, you might think. They don’t pay into Social Security, so they don’t get Social Security. Instead they get a state or local government pension. Easy enough.
The problem is, what if someone works part of their career in a government job and part in a private sector job? Still seems like not a big problem, right? Give them Social Security based on the part of their career covered by it, and not for the uncovered part.
The trouble comes in the calculation.
Social Security is progressive. Its formula replaces a larger percentage of working income for lower-income people than for higher-income people. In 2024, it does this by applying a replacement rate of 90% to the first $1,174 of lifetime-average indexed monthly earnings, and much lower replacement rates for earnings above that, up to a maximum above which they replace nothing.
Without some kind of adjustment, someone who worked for the government for some of their career in a position not covered by Social Security will have a bunch of $0s averaged into their monthly earnings. To the Social Security Administration, they would appear to be low-income. They would then receive an inappropriately high replacement rate for their income from their private sector career.
In 1983, Congress addressed this by modifying the formula to give a replacement rate as low as 40% to that first tier of earnings, instead of 90%, depending on how many years the employee was in uncovered work. This is called the Windfall Elimination Provision (WEP).
This was a flawed and approximate fix relative to the obvious solution: use the standard formula (e.g. with the 90% for the lowest tier of earnings) to calculate the replacement rate based on all earnings, but then apply that replacement rate only to the years of covered earnings. The Social Security Administration hadn’t collected adequate data on non-covered earnings before 1983 to do it this way, but for 40 years now they have. So nothing is stopping such a fix today, and think tanks and members of Congress from all over the political spectrum have proposed this correction.
The flawed fix that Congress implemented instead led in many cases led to Social Security payments that were too low for lower-income individuals and too high for higher-income individuals, relative to the correct and logical pro-rated approach.
One analysis from Jason Fichtner at Mercatus considered a person who earned $24,000 per year in average earnings and another who earned $100,000 per year in average earnings, supposing that each worked for 20 years in non-covered government employment and 15 years in the private sector. He showed that moving to the logical pro-rated fix from the current WEP would (appropriately) increase the monthly Social Security pension of the $24,000 earner from $342 to $487, and (appropriately) reduce the monthly Social Security pension of the $100,000 earner from $1,211 to $1,124.
Analyses have suggested such a fix would cost little, and it would address a legitimate question of fairness in the calculation of Social Security benefits for public employees.
But somehow - maybe because the most fair fix would have both winners and losers - the only change that seems to have gathered political momentum is to eliminate the WEP adjustment entirely and just ignore public sector income in calculating Social Security benefits. Surprise, surprise… this increases the Social Security benefits of both the $24,000 earner and the $100,000 earner by over $400 each. It’s a pure expansion of Social Security for government workers with private sector income, and has been estimated to cost $196 billion over the next 10 years alone, according to the Congressional Budget Office.
Government bureaucracy is not supposed to serve only the interests of the government bureaucrats. Congress should instead start paying attention to real fixes to Social Security that work for the entire economy, not additional giveaways to government workers.