Mandatory Coverage Would Benefit the Social Security Program

SSA estimates that extending mandatory Social Security coverage to all newly hired state and local employees would reduce the trust funds’ 75-year actuarial deficit by about 10 percent. Figure 1 shows that SSA’s analysis indicates that extending mandatory coverage to new state and local employees would extend the trust funds’ solvency by about 2 years, from 2032 to 2034. Extending mandatory Social Security coverage to all newly hired state and local employees would also simplify program administration by eliminating, over time, the need to administer and enforce special rules for noncovered state and local employees. Effect of Mandatory Coverage for Employers, Employees, and Their Public Pension Plans Would Vary

If Social Security becomes mandatory, all newly hired state and local employees would be provided with the minimum income protection afforded by Social Security. States and localities could examine other pension plans that are already coordinated with Social Security and provide newly hired employees with similar benefits. This response would also likely result in an increase in total retirement costs and some additional family and other benefits for newly hired employees. Since Social Security benefits are weighted in favor of families and lower income employees—and because Social Security benefits are fully indexed for inflation, while many pension plans provide limited or no cost-of-living protection—total lifetime benefits for some new employees would be greater than those provided to current employees. The study also found that the magnitude of the cost increase would depend on the pension plan’s current benefits. Level Retirement Spending Would Mean Reduced Benefits

Several employer, employee, and pension plan representatives with whom we spoke stated that spending increases necessary to maintain level retirement income and other benefits would be difficult to achieve. Legal and Other Considerations

Mandatory coverage presents several legal and administrative issues, and states and localities with noncovered employees would require several years to design, legislate, and implement changes to current pension plans. Legal Issues

Although mandating Social Security coverage for state and local employees could elicit a constitutional challenge, mandatory coverage is likely to be upheld under current U.S. Supreme Court decisions. On one hand, the Social Security program would benefit from the decision. However, the implications of mandatory coverage for public employers, employees, and pension plans are mixed.
Why GAO Did This Study

Pursuant to a congressional request, GAO examined the implications of extending mandatory social security coverage to all newly hired state and local employees, focusing on: (1) the implications of mandatory coverage for the Social Security Program and for public employers, employees, and pension plans; and (2) potential legal or administrative problems associated with implementing mandatory coverage.

What GAO Found

GAO noted that: (1) the Social Security Administration (SSA) estimates that extending mandatory social security coverage to all newly hired state and local government employees would reduce the program's long-term actuarial deficit by about 10 percent and would extend the trust funds' solvency by about 2 years; (2) in addition to helping to some extent resolve the solvency problem, mandatory coverage would broaden participation in an important national program and simplify program administration; (3) the impact on public employers, employees, and pension plans would depend on how state and local governments with noncovered employees responded to the additional costs and benefits associated with social security coverage; (4) social security retirement benefits are fully protected from inflation and are weighted in favor of families and low-income employees; (5) many public pension plans, on the other hand, permit employees to retire earlier and provide a higher retirement income benefit than social security; (6) those states and localities that decide to maintain benefit levels for new employees consistent with the earlier retirement age and enhanced retirement income benefit would experience increased costs; (7) however, those employees would also have the additional family and other protection provided by social security; (8) alternatively, states and localities that choose to maintain level retirement spending might need to reduce some retirement benefits for newly hired employees; (9) several employer, employee, and plan representatives stated that mandating social security coverage for all new state and local government employees would raise constitutional issues and would be challenged in court; (10) however, GAO believes that mandatory coverage is likely to be upheld under current Supreme Court decisions; (11) mandatory coverage would also present administrative issues for implementing state and local governments; and (12) up to 4 years could be required for states and localities to develop, legislate, and implement pension plans that are coordinated with social security.