Articles

When a Pension Overhaul Comes Without Social Security

Six million public-sector workers aren’t covered by Social Security. For many of them, a pension paid by their state or local government employer is all they have to live on.

by / April 25, 2011

Like many retirees, Crystal Ward of Lewiston, Maine, worries whether her pension from working as a teacher for 34 years will be enough for her to live on. But unlike most retirees in the country, Ward, 60, can’t bank on Social Security.
 
Ward is among an estimated 6 million public sector workers whose jobs aren’t covered by Social Security. For many of them, a pension paid by their state or local government employer is all they have to live on.
 
Ward gets a pension check from the state of about $2,500 per month, although she notes that $300 of that goes straight to health insurance. “Most people believe we get both a state pension and Social Security,” Ward says. “But teachers in Maine don’t.”
 
In states across the country -- most notably Wisconsin, Ohio and Florida -- fights are breaking out over how generous public pension benefits should be and who should pay them. But the debate in Maine is a little different. The math behind any big change in pension rules doesn’t look the same when state employees and teachers sit outside the Social Security system.

Since 2009, Maine has exploring whether and how to get those workers covered. It was one of the ideas considered by a state task force formed by the Legislature to study different ideas for reforming the state pension system. Steven Crouse, a member of that task force who heads up government relations at the Maine Education Association, a teachers’ union, says the Social Security proposal is “a viable option,” although he has a number of concerns with it.
 
Not an Easy Question
 
When Social Security went into effect in the 1930s, state and local employees were expressly excluded. That’s because there were constitutional questions about whether the federal government could impose the Social Security payroll tax on state governments. This changed in the 1950s, when a federal law allowed states to get coverage for public employees if they wanted to.
 
To this day, all states have some public-sector workers who don’t participate in Social Security. But coverage varies widely. In Vermont, some 98 percent of state and local public employees are covered by Social Security, according to a 2010 report from the U.S. Government Accountability Office. Meanwhile, just 3 percent are covered in Ohio.

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Sidebar: Lacking Social Security Coverage

According to the U.S. Government Accountability Office, 27 percent of state and local public workers are exempt from Social Security. While all states have some workers who are not covered, the bulk of uncovered public sector employees reside in these 14 states:

            Alaska
            California
            Colorado
            Connecticut
            Georgia
            Illinois
            Kentucky
            Louisiana
            Maine
            Massachusetts
            Missouri
            Nevada
            Ohio
            Texas

Source: U.S. Government Accountability Office


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Overall, 27 percent of state and local public workers are exempt from Social Security, according to GAO. The bulk of uncovered public-sector employees reside in 14 states -- including Maine.
 
In practical terms, this means that a state like Maine does not contribute the usual 6.2 percent of payroll that constitutes an employer’s share of Social Security taxes. It also means that state workers and teachers in Maine do not contribute 6.2 percent of their salaries to Social Security. Nor do they earn Social Security credits used to calculate benefits, at least for as long as they continue in their jobs as state employees or teachers.
 
The question of whether to extend Social Security coverage to all public-sector workers in the future is not new. For workers, there are pros and cons either way.
 
On the plus side, unlike many state pension plans, Social Security is portable. That means benefits cannot be lost be lost because of a job change. Also, Social Security always includes coverage for dependents, something state and local pension plans often lack.
 
On the down side, public-sector unions often argue that their pension programs are tailored to meet specific needs that Social Security fails to address. For example, firefighters and police officers tend to retire earlier than other workers because of the hazardous nature of their jobs. Cops who retire in their early 50s would have to wait a decade or more to begin collecting Social Security, whereas their current pension packages are designed to take an earlier retirement age into account.
 
Incremental Costs
 
From the states’ perspective, providing Social Security coverage is costly. In Maine, the task force studying the issue concluded that any new plan based on Social Security would cost more because Social Security alone costs 6.2 percent for every employee -- currently, the state contributes 5.5 percent of payroll. Switching to Social Security, the task force estimated, would cost the state an additional $1.8 million within five years.
 
And moving new hires to Social Security would do nothing to tackle Maine’s $4.4 billion unfunded pension liability. Maine has a unique constitutional requirement to fully fund the pension system by 2028. The requirement was approved by voters in the 1990s.
 
To meet that requirement, J. Scott Moody, the chief economist at the conservative Maine Heritage Policy Center, estimates that Maine’s annual pension payments will balloon from $250 million this year to $1 billion within six years. “A billion dollars is a lot of money in Maine,” he says.

Moody’s group supports a pension proposal put forward by Republican Governor Paul LePage. That plan would increase the retirement age for state workers and require them to contribute more toward their pensions. It also would freeze cost of living increases to benefits for three years, after which a cap on that allowance would drop from 4 percent to 2 percent. The governor’s plan doesn’t address the Social Security issue.

Without action, LePage says one-in-four dollars in the general fund will go toward the pension payment. “If we do not act, people in this room will be forced to make funding decision so dire that our current state retirement system will have to be cast aside,” he warned at a budget hearing last month.

Union officials like Crouse call the governor’s pension proposal “offensive,” particularly the changes to cost of living allowances. “The impact on the long-term purchasing power for seniors and retirees would be devastating,” Crouse says.

Crystal Ward also is unimpressed. Under LePage’s plan, she says, “My retirement benefits will get smaller the older I get.”

Reprint courtesy of Stateline.org, "a nonpartisan, nonprofit news service of the Pew Center on the States that reports and analyzes trends in state policy.

Pamela M. Prah
Pamela M. Prah is a stateline.org staff writer.