Election-Year Social Security Giveaways, Part 1
A $200 billion giveaway to a group that neither paid for it nor needs it
Election years are the season for ill-considered giveaways of taxpayer money. But when the federal government’s largest program is underfunded by almost $25 trillion, lawmakers really need to think twice.
Over 300 Members of Congress from both parties are pushing for the so-called “Social Security Fairness Act,” legislation that is really anything but: the bill would grant a nearly $200 billion Social Security benefits windfall to a group to that neither paid for these benefits nor truly needs them. But as costly and (largely) unnecessary as this bill is, the topic is so complex that most people, likely including many of its sponsors, have little idea what is happening. Here I’ll explain the issues.
Social Security’s benefit formula works more or less as follows. (I say “more or less,” since the actual technical side would be tedious overkill.) When a person goes to claim benefits, Social Security’s computers look back at the earnings the person received under jobs that were covered by Social Security. The computer adds up the highest 35 of these earnings, and divides by 35 to produce an annual average, then divides again by 12 to convert to a monthly average. Those Average Indexed Monthly Earnings are then run through a progressive formula in which, for a person turning age 62 this year, Social Security benefits are paid equal to 90 percent of the first $1,174 on monthly earnings, 32 percent of earnings between $1,174 and $7,068, and 15 percent of earnings between $7,068 and the maximum amount of that’s subject to payroll taxes.
Because of the progressivity of the benefit formula, Americans with low average earnings receive a higher “replacement rate” than those with higher average earnings, meaning higher benefits relative to their earnings (and contributions). For instance, imagine a middle-income employee who earned the national average wage each year throughout their career. At retirement, they would receive a Social Security benefit equal to about 43% of their pre-retirement earnings. (Again, I’m simplifying; I have a real beef with these numbers, but they work to make the points.)
Now imagine a much lower-income worker who earned just 25% of the national average wage throughout their career. They would receive a Social Security benefit equal to about 80% of their pre-retirement earnings. Since everyone pays the same 12.4% payroll tax rate, the lowest earners receive almost twice as much benefits per dollar contributed as does a middle-income worker.
There’s nothing wrong with that. In fact, it’s how Social Security was designed.
But that system doesn’t work when handling state and local government employees who do not participate in Social Security. The reason is that these people have earnings from jobs that weren’t covered by Social Security. Social Security’s benefit formula doesn’t “see” these earnings, and so Social Security treats these public employees as if they were much poorer than they really are.
For instance, imagine a middle-income person who earned the national average wage every year of their career. But they only spent one quarter of that career in a Social Security covered job, and the other three-quarters in a public sector job where they didn’t pay into Social Security.
At retirement, Social Security’s benefit formula would only see the years that person worked in a Social Security covered job. Those years of covered earnings would be added up and divided by 35. Their Average Indexed Monthly Earnings would be equal about 25% of the national average wage.
As far as Social Security’s benefit formula is concerned, this middle-income public employee would be indistinguishable from a private sector employee who worked their entire career at very low earnings, when in fact the public employee earned four times that amount. That public employee would receive a much better return on their Social Security contributions than a person with the same earnings who worked their entire career under Social Security. The public employee would receive roughly twice as much benefits per dollar of taxes paid than would a private sector employee with the same annual earnings.
This isn’t fair. There’s no reason that one middle-income employee should receive twice the return on their Social Security taxes as another middle-income employee. It’s also not necessary: state and local government employees almost universally participate in traditional pension programs that are much, much more generous than the 401(k)s that private sector workers have. Moreover, the pensions offered to public employees who don’t participate in Social Security are typically even more generous than pensions for public employees who are covered by Social Security.
Sure, everyone likes to get more money in retirement. But giving that extra money to people who neither truly paid for it nor truly need it isn’t in the spirit of Social Security.
That’s why Congress passed laws called the Windfall Elimination Provision (WEP) and the Government Pension Offset (GPO). The WEP reduces Social Security retirement benefits for an individual who is entitled to both Social Security benefits and a pension from a non-covered job. The GPO reduces survivors benefits to people who also receive a public sector pension. The reason is that, ordinarily, a survivor can receive the greater of their own Social Security benefit or their spouse’s benefit, but not both. Without the GPO, a survivor could receive both their own full public pension benefit and a full Social Security survivor’s benefit. Without the WEP and GPO provisions, individuals with public sector pensions that don’t pay into Social Security would receive additional Social Security benefits that are intended to be paid only to the poor.
The WEP and GPO formulas are complex, which is one reason that many public employees resent them. And there would be more efficient and equitable ways to impose the WEP and GPO today, using data that weren’t available when the laws were passed in 1983. Various laws have been proposed to reform the WEP and GPO to better ensure that these provisions are not merely correct on average, but treat each individual fairly. The simplest approach is the so-called “mini-PIA” proposal (again, it’s technical), in which everyone’s benefits would be calculated not upon an average of the highest 35 years of earnings, but instead calculated separately based upon every individual year of earnings and then summed up. These reforms generally have low costs.
But the Social Security Fairness Act, which simply repeals the WEP and GPO provisions, would cost almost $200 billion over its first 10 years, during a period when Social Security itself is moving toward insolvency. Moreover, the Act’s title notwithstanding, it wouldn’t be fair: there is no reason that middle-income public sector employees should be entitled to the extra boost that Social Security’s progressive benefit formula ordinarily grants only to low-wage workers.
The Urban Institute estimated that repealing the WEP and GPO rules would increase benefits for about 4.5% of seniors, by an average annual amount of over $9,200 in today’s dollars. Moreover, the richest retirees – those with lifetime earnings in the top fifth – would receive benefit increases that are 2.5 times larger than for the poorest seniors.
It is not that public employees are attempting to cheat Social Security. But the Social Security Fairness Act would allow state and local government workers who don’t participate in Social Security in their public sector jobs to exploit a loophole in the program’s benefit formula, that Congress decades ago made the decision to close. That’s what’s happening: allowing some people to exploit a loophole in the Social Security benefit formula.
Election year or not, on Social Security we need better leadership than this.
Perfectly stated!!! This is a totally unnecessary giveaway that makes no policy sense.