Mandatory Social Security (updated March 1, 2011)

What Mandatory Social Security Would Mean to PERA Members

The 2010 report by the Social Security trustees projects that beginning in 2015, annual benefits paid by Social Security will exceed payroll taxes paid into the system by employees and employers covered by the system.  The Social Security trust fund will start to shrink, and unless Congress makes changes to shore up Social Security, the Social Security retirement and disability trust funds are projected to be exhausted in 2037. As a result, policymakers in Washington are considering changes needed to maintain Social Security for the long term.

One of the proposed solutions for the ailing Social Security system would require new state and local government employees to pay Social Security taxes. Mandatory Social Security coverage for new employees would affect PERA members and employers. Because it would increase total costs for PERA employers, it would affect the salaries and other benefits that employers could provide to current employees as well as to new hires.

Contribution rates to PERA are scheduled to increase gradually over the next few years for PERA employers in the State, School, and DPS Divisions. These increases in the AED (Amortization Equalization Disbursement) and SAED (Supplemental Amortization Equalization Disbursement) payments to PERA are needed to restore PERA to full funding on an actuarial basis within 30 years. For new hires, a large part of the employer contributions including the AED and SAED will be used to pay off the unfunded liability of PERA during the next 30 years. This will have to be paid whether the new hires are covered by PERA or by another type of plan such as Social Security. As a result, if mandatory Social Security were required for new hires, PERA employers would have to pay about 6 percent of salary more than if they just covered the new hires under PERA. That’s 6 percent of salary on top of the scheduled increases in AED and SAED for PERA. Under Social Security, employers pay 6.2 percent of salary into Social Security, and employees pay the same amount.

What would employees who were hired after the date mandatory Social Security became effective receive from Social Security, compared to what they would receive under PERA? According to the benefits consulting firm of Mercer LLC, a worker currently earning $43,000 per year is projected to receive a Social Security benefit equal to 42 percent of their final salary at retirement at age 67, after a full career covered by Social Security. PERA, on the other hand, pays a monthly benefit of 75 percent of Highest Average Salary (HAS) to a member retiring at age 62 with 30 years of service. While Senate Bill 10-001 in Colorado changed the early retirement eligibility for new hires, it preserved the basic benefit formula of 2.5 percent of HAS per year. Current members as well as new hires are eligible for 75 percent of HAS at age 62 with 30 years of service. The state, school districts, and other PERA employers would have difficulty recruiting if new hires are provided only Social Security as a retirement plan.

The rationale offered for covering new hires under Social Security is that this would:

• Be best for new hires, because Social Security benefits provide stable income and state and local retirement systems have funding challenges.
• Generate revenue to help solve Social Security’s funding problems.
• Be "fair" since some public employees receive Social Security benefits anyway.

These arguments ignore the fact that PERA and many other public plans already provide a comprehensive plan of excellent retirement, disability, and survivor benefits for their members. Social Security offset and windfall provisions are designed to prevent PERA members and retirees from receiving any unfair advantage by spending part of their career in Social Security-covered employment or by being married to a Social Security-covered worker.

The PERA Board is strongly opposed to mandatory Social Security, as are a number of Colorado employee and employer groups and retirement plans. In May 2003, PERA submitted testimony to the Social Security Subcommittee of the House Ways and Means Committee following a hearing on mandatory coverage that mandatory Social Security would hurt PERA and in the long run, it would not help Social Security. PERA wrote that “PERA members, benefit recipients and the Board of Trustees of PERA have worked hard for many years to maintain the ability to provide retirement benefits pursuant to the state law governing PERA, free from any mandate to cover employees under Social Security. The Colorado General Assembly has stated several times that it also believes that its employees are already well-served by existing retirement plans that do not include Social Security.”

The Segal Company calculated in 2005 that the cost of mandatory coverage would total $44 billion over five years. Segal concluded that the expense would lead to higher taxes, reduced public employee retirement benefits, cuts in government services, or a combination of those things.
When mandatory Social Security was a threat in previous years, PERA and other members of a national group called the Coalition to Preserve Retirement Security (CPRS) asked the U.S. Senators and members of Congress from the states most affected by the mandatory Social Security issue to take an active role in ensuring that legislation does not include mandatory coverage for newly hired state and local employees.

CPRS also urged state legislators to let lawmakers in Washington know the damage that mandatory coverage for new hires would cause. SJR 10 was adopted by the Colorado Legislature in 1999 to encourage Colorado’s U.S. Senators and Representatives to continue their efforts opposing mandatory Social Security for Colorado’s state and local workers. The 2005 study by The Segal Company estimated there are 263,000 public employees in Colorado who are covered by PERA or other plans and not covered by Social Security.

Current Outlook on Mandatory Social Security

While there has been no direct action or any legislation proposed to implement mandatory Social Security coverage in 2011, there has been a lot of concern in Washington that growth in spending for Social Security and other entitlements might need to be limited in order to control the federal debt. President Obama established the National Commission on Fiscal Responsibility and Reform by executive order in 2010. The 18-member Commission was chaired by former U.S. Senator Alan Simpson (R-WY) and Erskine Bowles, former Chief of Staff for President Clinton.

The mission of the Commission was to “propose recommendations designed to balance the budget, excluding interest payments on the debt, by 2015. This result is projected to stabilize the debt-to-GDP ratio at an acceptable level once the economy recovers.” In his executive order, the President also said “the Commission shall propose recommendations that meaningfully improve the long-run fiscal outlook, including changes to address the growth of entitlement spending and the gap between the projected revenues and expenditures of the Federal Government.”

This Commission recommended several changes to reform Social Security: (1) Gradually phase in changes to the formula for calculating benefits, to curtail benefits for higher-income workers, (2) Increase the ages for retirement eligibility over time, (3) Gradually increase the maximum wage level subject to payroll taxes, (4) Change the calculation of the consumer price index used for adjusting benefits each year, (5) Cover newly hired state and local workers hired after 2020, and (6) Increase the special minimum benefit and protect the most vulnerable elderly. The Commission’s report was issued on December 1, 2010. A majority of Commission members supported the report, but not a supermajority that would have required an up-or-down vote by Congress.

In recommending mandatory Social Security for all new state and local workers, the Commission seemingly failed to appreciate the value of the defined benefit plans in place for these workers without Social Security. The report said: “Under current law, more than 90 percent of all workers are covered by Social Security, but a small share of states and localities exclude their employees from Social Security and instead maintain separate retirement systems. As states face a double hardship of prolonged fiscal challenges and an aging workforce, relying entirely on this pension model has become riskier for both government sponsors and for program participants, and a potential future bailout risk for the federal government. To mitigate this risk and to plan for an orderly transition to comprehensive Social Security coverage, the Commission proposes to mandate coverage for all state and local workers newly hired after 2020.”  

A report issued by The Bipartisan Policy Center in November 2010 made similar recommendations for reforming Social Security. In recommending mandatory Social Security for new state and local workers hired after 2020, the report, called “Restoring America’s Future,” cited the same reasons the Commission report offered. The rationale offered for mandating Social Security is that state and local retirement systems are in bad shape, Social Security is more stable (or would be with the reforms), and state and local workers need the protection that Social Security could provide.

The U.S. Senate Special Committee on Aging issued a report in March 2010, “Social Security Modernization: Options to Address Solvency and Benefit Adequacy,” and mandatory Social Security was included as one of the options. (The Committee didn’t endorse any of the options, just enumerated them.) The report said that “If, over a five year period, all newly-hired state and local employees were brought into Social Security coverage, this change is projected to reduce the 75-year deficit by about nine percent, or 0.17 percent of payroll.” Other reports have projected that mandatory Social Security would extend the date on which Social Security trust funds are exhausted by two years. 

The U.S. Congressional Budget Office issued a report in July 2010. The report, “Social Security Policy Options,” focused on options that would directly affect outlays for Social Security benefits or federal revenues dedicated to Social Security. The report says that options that would not have sizable effects of Social Security’s finances were excluded from the study. Mandatory Social Security was excluded from the study.

There have been a number of bills introduced in Congress the last few years that would eliminate the Government Pension Offset (GPO) and the Windfall Elimination Provision (WEP). The cost to eliminate these provisions, however, is about $80 billion over a 10-year period. Mandatory coverage of new hires under Social Security would be a terrible price for state and local governments to pay for action on the GPO and WEP.

The Coalition to Preserve Retirement Security (CPRS)

The Coalition to Preserve Retirement Security (CPRS) was formed in 1999 and continues to develop strategies for convincing Congress and other parties that mandating Social Security for state and local employees should not be part of any reform package. PERA is a member of CPRS.

To learn more about CPRS, read testimony to Congress in hearings on mandatory Social Security, find out what CPRS is doing to preserve retirement security, and for more information about the issues of mandatory Social Security and Offset and Windfall provisions, visit the CPRS Web site at www.retirementsecurity.org.

This site includes information about PERA programs and benefits. It is not intended to cover every conceivable situation that could arise regarding the programs or benefits. Rights, benefits, and obligations regarding PERA are governed by Title 24, Article 51 of Colorado Revised Statutes, and the Rules of the Colorado Public Employees' Retirement Association, which take precedence over any information on this site. Information specific to members/benefit recipients is available on the secured pages of this site to persons who have requested and received a Personal Identification Number (PIN) from PERA. Colorado PERA's Security Disclosure.