Public employees and Social Security

Approximately one-fourth of employees of state and local government do not participate in Social Security. This includes most to substantially all public employees in Alaska, Colorado, Louisiana, Maine, Massachusetts, Nevada, and Ohio.

In addition, approximately two-thirds of public safety officers--firefighters and police officers--do not participate in Social Security. These workers are in the seven states listed above and many other states.

An estimated one-half of public school teachers do not participate in Social Security, including a majority to substantially all in California, Connecticut, Illinois, Kentucky, Missouri, and Texas.

Also, more than one-fourth, but less than one-half of public school teachers in Georgia and Rhode Island also do not participate in Social Security.

Both employers and employees who do not participate in Social Security do not pay the Social Security portion of the FICA tax, (6.2 percent of payroll each). Public pension benefits for non-Social Security-eligible employees usually are higher than those of other public employees, to compensate for the absence of Social Security benefits.

Non-participation in Social Security dates to the origins of the Old Age, Survivors, and Disability Insurance program in 1935, when coverage was limited to private sector workers due to constitutional concerns regarding the authority of the federal government to impose taxes on states and political subdivisions (see Section 218 agreements, below). These concerns were addressed in Social Security Amendments of 1950.

Proposals to require Social Security participation

Lauren Damme of The New America Foundation in August 2010 posted an overview of Social Security participation among employees of state and local government would offer multiple advantages:

First, it would protect both state budgets and workers’ retirement savings from market volatility even as it improves pension coverage and contribution rates. Second, the inclusion of public workers would expand the number of workers paying into the social security system and may therefore help ease some of the financial stresses associated with the retirement of baby boomers. This would, of course, have the greatest impact if the other thirteen states that exclude public workers also put their employees into the system. Most interesting is the possibility that putting public workers into the system could change the politics of Social Security. Specifically, the movement of unionized public sector workers into the federal system may bring the strength of Social Security under the umbrella of union agendas. Unions may, in turn, pressure the federal government to strengthen Social Security. Just as importantly, it would put public and private workers into the same boat, reducing pension envy and the political pressure to cut pension benefits.

Writing in Governing Magazine, Girard Miller in August 2010 referred to the issue as "the FICA free-lunch crowd," proposing that all new state and local government hires be required to participate in Social Security and that "Incumbent employees pay a Social Security equalization (income-redistribution) tax of 5.3 percent for that portion of their individual earnings above the national average individual payroll earnings level of $40,000."

In response to Mr. Miller's column, Tom Lussier, Administrator of the Coalition to Preserve Retirement Security, pointed out the flaws in Mr. Miller's column, including:

• The cost of mandatory coverage would inevitably result in separate or restructured tiers for new hires in existing state and local retirement plans.
• Those exempt public employees who ultimately collect Social Security earn their benefit by paying FICA taxes based on non-public sector employment.
• Millions of public employees -– firefighters, police officers, teachers, nurses, and others -– in non-covered systems have placed their faith and their future in their pension plans, and have planned their retirement accordingly.
• Mandatory coverage increases Social Security liabilities.
• Public Employees didn’t exempt themselves from Social Security –- The Social Security Act of 1935 specifically excluded state and local workers from participating in the program.

See also

• Social Security: Mandatory Coverage of New State and Local Government Employees, Congressional Research Service, July 2011
• Coalition to Preserve Retirement Security
• GAO report on mandatory Social Security coverage
• Report by The Segal Company on mandatory Social Security Coverage