It’s looking that way.
The United States Senate is approaching a vote on the so-called “Social Security Fairness Act,” legislation that would eliminate adjustments to Social Security benefits for a select of public sector employees who are not covered by Social Security but instead participate in alternate government pension systems as a substitute for Social Security. The Social Security Fairness Act overwhelmingly passed the House in early December and on December 18 cleared a key Senate procedural vote by 73 to 27. Senate Majority Leader has promised a final vote before the Senate leaves for Christmas. While Democratic support for the Social Security Fairness Act is to be expected, given public employee unions’ strength in the party, for Republicans to support this legislation would betray principles of both fairness and fiscal conservatism.
Around the country, about one-quarter of state and local government employees are not covered by Social Security. Instead, they participate in government pensions that substitute for Social Security. In retirement, however, Social Security and these exempt government pension plans can interact. And, lacking rules to handle these unusual interactions, retired state and local government employees can receive substantial Social Security benefit windfalls. These potential windfalls have been understood for nearly half a century. Today, I can identify no Social Security policy expert of any political inclination who does not recognize that these windfalls exist.
The Social Security Fairness Act would repeal two Social Security benefit rules, the Government Pension Offset (GPO) and the Windfall Elimination Provision (WEP). The GPO affects the Social Security spousal benefits paid to individuals who did not participate in Social Security but instead receive benefits from an alternative state or local government pension. The WEP affects the Social Security benefits of public sector employees who qualified for benefits both under an alternate public pension plan and Social Security.
For reasons of simplicity, I focus here on the Government Pension Offset, which is easier of the two to understand. My goal here is simply to explain how, in the absence of the GPO, public sector employees who did not participate in Social Security can nevertheless receive substantial benefit windfalls from the program. The following example is drawn directly from a Congressional Research Service analysis of the GPO.
Imagine a couple, John and Mary. John is the higher-earning spouse and his earnings would generate a Social Security retirement benefit for himself of $2,000 per month. Mary has lower earnings; based on those earnings, Social Security would pay her a monthly benefit of $900. However, Mary also would be eligible for Social Security’s spousal supplement, which ensures that the lower-earning spouse receives a total benefit that is no less than one-half of the higher-earning spouse’s. Since John has a $2,000 monthly benefit and Mary’s benefit based on her own earnings is only $900, Mary receives a spousal supplement of $100 per month to boost her total benefit to $1,000.
But Social Security’s spousal supplement comes with a key limitation: it is only paid if the lower-earning spouse’s benefit is less than half that of the higher-earning spouse. If, for instance, Mary’s earnings entitled her to a monthly benefit of $1,100, she would receive no spousal supplement.
So that’s how Social Security works if both spouses worked under the program all their lives.
But the CRS then presents an example where John works only in Social Security-covered jobs, but Mary instead works for a state or local government whose employees aren’t covered by Social Security. Mary pays into a government pension system that substitutes for Social Security. The CRS assumes that Mary’s government pension would pay her the same $900 monthly benefit she would have received had she participated in Social Security.
Seemingly, nothing of substance has changed.
But the end result for benefits can be dramatically different. If the Government Pension Offset were not in place, Mary could receive both her $900 monthly government pension and a full $1,000 Social Security spousal benefit. The reason is that Social Security’s basic benefit formula does not factor in Mary’s earnings or pension benefits from a non-Social Security covered job. It treats her as if she had zero earnings and therefore would be eligible for a full $1,000 monthly spousal benefit.
In this scenario, Mary’s total monthly benefit from Social Security and her government pension would be $1,900, which is $900 per month more than she would have received had she worked in a Social Security-covered job instead of an exempt state or local government position. According to Social Security’s actuaries, a 65-year old woman can expect to live for an additional 22 years in retirement. And so, over her full retirement, Mary would receive $237,600 more in Social Security benefits than had she participated in Social Security over her career versus participating in a substitute state and local government pension.
That nearly quarter million dollars of additional benefits is a windfall. It is not granted based upon need: in fact, the higher John’s earnings, the bigger the windfall she receives. Plus, public sector pensions are the most generous retirement plans in the country and public sector retirees tend to have above-average incomes. Mary’s windfall also isn’t based on equity or merit: remember, she didn’t pay a penny into Social Security.
The Social Security Fairness Act would restore these windfalls.
Now, half a century ago, Congress realized that Social Security benefit windfalls for public sector employees were costly, unnecessary and unmerited. And so in 1983 Congress established a Social Security benefit rule called the Government Pension Offset (GPO). The GPO reduces the Social Security spousal supplement paid to a retiree with a non-covered pension by two thirds of the pension’s amount.
So let’s look again at the Congressional Research Service’s example showing how Mary’s benefits would be affected by the GPO. John would still receive a $2,000 monthly benefit based upon his own Social Security-covered earnings. Mary would receive the same $900 per month from her state/local government pension. However, Mary’s $1,000 Social Security spousal benefit would be reduced by two-thirds of her $900 government pension; this $600 reduction would leave Mary with a Social Security spousal benefit of $400 per month. Mary’s total monthly benefit would be reduced from $1,900 before the GPO is applied to $1,300 after application.
But note: Mary’s $1,300 per month total benefit is still higher than the $1,000 per month she would have received had she participated in Social Security throughout her working life. Mary still receives a windfall, just a reduced one.
But the Social Security Fairness Act would repeal the Government Pension Offset and restore the full quarter-million dollar lifetime windfall that a government employee such as Mary could receive. Over 10 years this so-called fairness would cost Social Security nearly $200 billion and would, according to the Congressional Budget Office, increase Social Security’s funding gap, speed the program’s insolvency and reduce the amount of benefits Social Security could afford to pay to everyone else.
My contacts on Capitol Hill tell me that many Senate Republicans are troubled by the Social Security Fairness Act. However, many also had previously pledged to support the bill, either because they failed to understand its details or because they assumed it would not gather the votes to pass. In that latter case, supporting the Social Security Fairness Act would be a costless way to win support from police and firefighters, who have trended toward Republicans in recent years. Only a few Senators have given the Social Security Fairness Act the critical scrutiny it deserves. Sen. Rand Paul (R-KY) has promised an extended debate, arguing that any increased Social Security benefit costs must be offset with savings to maintain the financially-troubled program’s solvency.
It is one thing for Congressional Democrats to vote to repeal the Government Pension Offset. Public sector employees are core supporters of the Democratic Party and such transactional politics, while wrong, aren’t exactly unexpected.
But for Republicans to restore potentially massive Social Security windfalls to retired public employees who may not have paid a penny into Social Security and who already have high-quality government pension plans, at the cost of nearly $200 billion over 10 years and a year off of the life of Social Security’s trust, fund is a travesty of both fairness and fiscal conservatism.
