Earlier this month, I wrote about the Windfall Elimination Provision and the Government Pension Offset, two provisions in Social Security which are designed to prevent double-dipping by workers who participated in both Social Security (directly or as a spouse) as well as another retirement system which opted out of Social Security.
Who are these workers?
Federal government workers who were hired before 1984 and who in 1984 declined to make a switch when offered the option, are covered by the Civil Service Retirement System, and
Public employees in 15 states, including California, Texas, and Illinois. (In Illinois, most direct state employees are covered by Social Security, depending on classification; employees at schools and universities as well as municipal workers are not.)
In addition, clergy and religious workers who complete Form 4361 and declare that they conscientiously/religiously opposed to social insurance, are exempt from FICA taxes for their ministerial income, and forego not just Social Security but also Medicare, which personal finance expert Dave Ramsey says he would do “in a nanosecond” but the site The Pastor’s Wallet issues strong cautions. For most of us, however, this is merely a bit of trivia.
To be sure, when Social Security was first enacted, far more workers were excluded: self-employed workers, government, farm, domestic, and non-profit workers were all added later. 1950 amendments added farm workers, domestic workers, and the self-employed; in each case with subsequent adjustments loosening the eligibility requirements. Also in the 1950 amendments, non-profit employers were included if two-thirds of their employees elected to be covered; in 1984, coverage was extended to all non-profit employees, except that religious groups who, as an organization, object to Social Security, are permitted to opt out as an entity; however, their workers must still pay in as if self-employed, except for those exempt as objecting clergy.
(And here’s an incidental piece of information on the question of coverage: it has long been claimed that the exclusion of farm and domestic workers was due to the demands of racist Congressmen from the South, because they wanted to keep black workers bound to low-paying jobs in their fields and kitchens; however, the record shows that their actual objection was to the social assistance provisions of Social Security rather than the social insurance elements earned by work history.)
All of which is context for an article from late January profiling the situation for teachers in Alaska, “No Social Security? For Alaska teachers, that’s just the way it is.” (The article is bylined as “Presented by NEA-Alaska” rather than being the product of a reporter at the Anchorage Daily News, where it’s published.) I’ve written before about the Illinois Tier 2 pensions, in which newly-hired teachers may accrue pension benefits lower than they would have under Social Security, and school districts may find themselves failing the “adequacy test” for public systems that don’t participate in Social Security. In Alaska, the legislature created a different sort of retirement system reform for teachers hired after 2006, a defined contribution system in which the employer contributes 7% of pay into workers’ accounts. That’s not in addition to Social Security benefits — that’s instead of Social Security.
At the same time, teachers and other public employees aren’t permanently excluded from Social Security. As the article explains:
“’Any single district can allow a vote to opt back into Social Security,’ [NEA Alaska President Tim] Parker said. “That option is right there in front of us.” From there, teachers in the district would decide the matter, either a straight up-or-down vote or an opt-in vote that would allow in those who wished to join, while other positions would be phased into Social Security as employees left and were replaced.
But, he added, a school district that wanted to opt in to Social Security would have to be prepared to pay for it.
“‘They’re on the hook for 6.2 percent for every one of their employees, every year,’ Parker said. ‘The employee is also on the hook for 6.2 percent. These things all happen in addition to the numbers that are going in on the defined contribution side.’
“At a time when state funding is tight, he acknowledged that might be a tough sale.
“’Where do you find an extra 6.2 percent?’ Parker asked. ‘It’s not an easy thing. Our budgets are very tight.’
“Still, Parker said he wouldn’t be surprised to see some of the state’s smaller districts, where teacher turnover is especially high, opt in to Social Security as a way to attract candidates.”
And that’s the key:
In the same way as federal employees were moved to the Social Security system in 1984, so, too, for state and local public employees to be moved into Social Security should not be a choice left to be made by school districts or teachers focused on the short-term expense of an additional a 6.2% of pay each.
After all, to revisit the nonprofit workers: in 1951, they were provided a mechanism to opt into Social Security. In 1981, over 20% of those workers were still not a part of the system, necessitating the 1984 legislation mandating their inclusion.
And I’ll point out that my longstanding proposal to move Social Security to a flat benefit system would solve the issue nicely. But that’s hardly the only way to get from here to there: although the system initially excluded all state and local workers due to federalism concerns (that it, it was seen as inappropriate for the federal government to tax state or local governments), and only in the 1950s permitted states to elect participation, the federal government’s power relative to state governments has expanded to such a degree (whether directly or in the guise of withholding grant money to states) that it’s hard to find this rationale credible any longer.
As always, you’re invited to comment at JaneTheActuary.com!