Should Public Employees Be Required to Participate in Social Security?

It’s no secret that Social Security is facing financial trouble in the near future; the program is expected to deplete its reserves in less than ten years, according to the latest estimates.

There have been many suggestions for improving Social Security’s finances, one of which would involve requiring all public employees to participate in Social Security. Some public-sector pension plans—like Colorado PERA—serve as a replacement for Social Security, so neither workers nor their employers contribute via payroll deductions.

However, such a shift in federal policy could have unintended negative consequences, according to a recently released report from the Coalition to Preserve Retirement Security (CPRS) and benefits consulting firm Segal. (The Colorado PERA Board of Trustees employs Segal as its actuarial consultant.)

In “The Hazards of Mandating Social Security on the Public Sector,” the authors argue that mandatory participation could jeopardize existing retirement plans and lead to additional costs for public employees, their employers, and ultimately taxpayers.

Background

Many states have been providing their public employees with retirement benefits longer than Social Security has been around. For example, the Colorado General Assembly created Colorado PERA in 1931, four years before the federal government established Social Security.

It wasn’t until 1950 that Social Security began accepting state and local government workers into the program. Colorado was among the states that stuck with its own plan to provide retirement, disability, and survivor benefits to the majority of its public workforce (some PERA members and members of other public pension plans may contribute to both a pension and Social Security).

According to the CPRS report, more than four million public employees across the country today are not covered by Social Security, and nearly 250,000 of them are in Colorado.

The impact of mandatory Social Security

The potential implications of requiring participation in Social Security can be difficult to predict, since each state or local government and plan is different and could take a different approach.

For states that would opt to preserve existing plans and also join Social Security, there could be significant added costs. Employees and employers both contribute 6.2 percent of payroll through Federal Insurance Contributions Act (FICA) taxes. Adding those contributions to existing payroll deductions for public employee retirement benefits would eat into workers’ paychecks and put financial strain on school districts, state and local governments, and other public employers.

The CPRS report estimates the cost of additional contributions nationwide to be somewhere between $45 billion and $60 billion in the first five years. In Colorado alone, mandatory Social Security could cost more than $2.5 billion, according to the report.

There’s also the potential impact on existing retirement plans to consider. Even if existing plans closed to new members to try to offset the added cost of FICA taxes, for example, the plans would still have to pay retirement benefits their members had earned. And without contributions coming in from working members and their employers, those plans would face additional risk and uncertainty.

In addition, public retirement plans are structured to attract and retain qualified public employees and may provide better benefits that Social Security, especially for workers in demanding and dangerous positions. For example, plans that cover first responders often allow members to retire earlier than plans that don’t. Forcing all employees into Social Security could remove this benefit and make it harder to hire and maintain a talented public workforce.

RELATED: Study Confirms PERA a Valuable Tool for Recruiting, Retaining Public Workers

Would it help Social Security?

Requiring all public employees to participate in Social Security isn’t a sure bet when it comes to shoring up the program’s finances. While increasing the number of participants would increase the amount of money coming into the Social Security trust funds, those new members would also add liabilities—earned benefits—over time, leading to additional expenses for Social Security.

Improving the financial sustainability of the Social Security program is an important goal, and one that will likely require a great deal of discussion between legislators, government officials, and other stakeholders.

While requiring public employee participation may be a part of that conversation, it’s important to keep in mind the potential impacts on employees, employers, governments, and taxpayers who could face additional costs, uncertainty, and other risks.