PREFACE 1 Four years ago, prompted by concern about the increased number of State and local government entities electing to terminate social security coverage, this committee published a working paper on the impact of these terminations on the employees involved. The working paper focused on the financial effect of the terminations on the social security system, and, more importantly, the potential impact the loss of social security coverage may have on workers and their dependents. There was concern in some sectors that the decision to end social security coverage was being made in a haphazard manner. Some suggested that workers too often failed to consider the possible consequences of their decision to end social security coverage, or lacked the basic knowledge to enable them to make an informed decision. For the majority of older Americans, social security has been, and will likely continue to be, a cornerstone of economic support in the years after retirement. It is for this reason that the committee remains concerned about the future retirement plans of those State and local government employees who either elect to end their involvement in the social security system, or are withdrawn from the program in spite of their desire to retain social security protection. The previous working paper was done at a time when terminations from social security were thought to be at an alltime high. And yet, 4 years later, the situation has not improved. The number of groups leaving the program has steadily increased over the past several years, and for the first time in the history of the program, the number of State and local government employees whose coverage was terminated in a given year has exceeded the number becoming newly covered. The committee believes this continuing upward trend in the number of people opting out of social security deserves attention. Therefore, the committee has undertaken this report to update and supplement the information in the previous paper on this subject. In preparing this report, the committee has taken a close look at the reasons for the upswing in terminations and the effect this may have on employees and their dependents. Much of this information was obtained by the committee through a nationwide survey of State and local government groups which have either recently considered terminating social security coverage, or are currently in the process of making that decision. Naturally, in order to establish what effect the loss of social security can have on workers, it is crucial to understand the value of the program. As much as possible, the committee has presented this information with dollars and cents examples, and has developed guidelines with which to evaluate the relative merits of social security protection and other typical retirement plans. What effect the loss of social security 1 "Termination of Social Security Coverage: The Impact on State and Local Government Employees," September 1976. coverage will have for any particular person or group depends upon many factors, including age, salary level, and number of dependents. Loss of social security coverage is not detrimental to every individual in every circumstance, and this report presents arguments for and against social security coverage. However, the committee believes that the problems that can arise from loss of social security coverage are serious and widespread enough that anyone planning on terminating that coverage should give the idea careful consideration before reaching a decision. The committee hopes that this report will be helpful in that process. In addition to the problems individuals may encounter when social security coverage is lost, there are significant problems for the program as a whole that arise from the way in which State and local government employees are covered by social security. These problems affect all the workers who support the program with their tax dollars, as well as the millions of program beneficiaries. Therefore, this paper also concerns itself with the rationale for present law and the problems that can arise under the present law. Social security is a large and complex program. For this reason, the public at large is often unaware of many of the program's benefits, and may, therefore, underestimate the value of social security. The committee has tried to present a clear and understandable picture of the true worth of social security. Thus, while this report is designed largely to address social security coverage for State and local workers, it is our hope that it will be of interest to many other workers who are paying to support a program they may not fully understand or appreciate. The committee wishes to express its profound appreciation to the groups who offered their frank and candid feelings about the social security program and responded to a lengthy and detailed questionnaire. We would also like to thank the Social Security Administration for their cooperation and valuable technical assistance. Finally, the committee adds a special thanks to Lynn Shiller, who was instrumental in the development of this report. LAWTON CHILES, Chairman. PETE V. DOMENICI, Ranking Minority Member. Preface Chapter 1. Some questions and answers about social security coverage for Chapter 2. Alaska's withdrawal: A new attitude in the Social Security Chapter 3. The survey. Chapter 4. A dollars and cents look at the value of social security. Chapter 6. A comparison___. Chapter 7. Guidelines for analyzing a State or local income replacement plan Chapter 8. Problems arising from present law. Chapter 9. Recommendations by various groups to change present law_ APPENDIXES Appendix 1. Senate Special Committee on Aging questionnaire_. (V) STATE AND LOCAL GOVERNMENT TERMINATIONS OF SOCIAL SECURITY COVERAGE Chapter 1 SOME QUESTIONS AND ANSWERS ABOUT SOCIAL SECURITY COVERAGE FOR STATE AND LOCAL GOVERNMENT EMPLOYEES QUESTION No. 1 Why aren't State and local government employees automatically covered by social security, like most other workers? ANSWER When the Social Security Act was enacted in 1935, employees of State and local governments were excluded from mandatory coverage because of the question of the constitutionality of levying the employer portion of the Federal Insurance Contributions Act (FICA) tax on the States.1 This constitutional issue was reflected in the 1939 report of the Social Security Board to the Committee on Ways and Means of the House of Representatives. The Board stated that "no method has yet been devised which would overcome constitutional difficulties and also protect the old-age insurance system against adverse selection".2 QUESTION No. 2 How were the problems involved with providing social security coverage for employees of State and local governments overcome? ANSWER Soon after the original Social Security Act was passed, it became clear that many State and local workers desired social security protection. Several States requested social security coverage for employees not protected under a retirement system, but opposed cover 1 Two other major groups were also excluded from social security coverage: Federal employees were excluded from social security coverage because they were protected by the Federal Civil Service Retirement System which was already well established. Employees of nonproft organizations were excluded under the Social Security Act of 1935 because of a concern that nonprofit organizations would lose their tax-exempt status if social security coverage was mandated. These organizations were later given the option of electing coverage for their employees without abandoning their tax-exempt status. 2 "Adverse selection" is the term frequently used to indicate that the social security trust funds would be made financially vulnerable if social security coverage could be chosen on an individual basis. Such a provision would adversely affect the program's financing because, presumably, only individuals who expect to get a very favorable return on their taxes would elect (select) to join the social security program, thus increasing the cost of the program. |