QUESTION No. 11 How is social security coverage terminated? ANSWER Under the terms of the Federal-State coverage agreement, the State may terminate the coverage agreement in its entirety or for one or more coverage groups. In order to do this, at least 2 years' advance notice of the intent to terminate must be sent by the State to the Secretary of HHS. Social security coverage must have been in effect for at least 5 years at the time notice is given. The termination notice may be withdrawn by the State at any time within the waiting period. In addition, if the group is still undecided about whether or not to terminate coverage, the State can request a one-time 1-year extension of the waiting period, without filing a new notice. QUESTION NO. 12 How many State and local government entities have terminated their social security coverage? ANSWER For the past 21 years, States have had the option of terminating social security coverage for State and local government employees. During that time, the States have filed notices of termination of social security coverage for 1,112 State and local groups. Significantly, 53 percent (590) of those requests have been filed since 1976. Of the 1,112 requests to terminate, 145 were withdrawn, 700 have become effective and 267 are still pending. The 700 terminations that have become final affected approximately 130,000 employees. This figure represents only about 1 percent of all State and local government employees currently covered by social security. However, it is worth noting that, since 1977, for the first time in the history of the program, the number of State and local employees terminating coverage in a given year has exceeded the number becoming newly covered: Prior to 1978, the law provided that, if the requirement for a 2-year waiting period had been met, a State could request that social security coverage for a group of State and local government employees be terminated as of the end of any calendar quarter. However, beginning with requests filed in 1978, termination can be effective only at the end of a calendar year. Why was this change made? ANSWER This change was needed in order to avoid giving an unfair advantage as a result of a change in the way quarters of coverage (QC's) are earned under the social security program beginning in 1978-to groups terminating coverage before the end of a year. A QC is the basic measure used to determine eligibility for social security benefits. In order to be eligible for benefits, a worker must have earned a certain number of QC's. This number varies according to the worker's age and the type of benefit involved (retirement, disability, etc.). Workers acquire QC's when they earn at least a certain amount in a job covered under social security.3 Prior to 1978, employers reported their employees' earnings to the Social Security Administration (SSA) on a quarterly basis. It was, therefore, possible to establish clearly whether a quarter of coverage was earned in a specific calendar quarter. (Before 1978, a worker earned one QC for any calendar quarter in which he or she earned $50.) However, beginning in 1978, employers began reporting their employees' earnings only at the end of the year, so that it was no longer possible to assign earnings to a specific period of time within that year. Therefore, for work in 1978 and later, individuals acquire up to four QC's per year on the basis of the annual earnings, regardless of when the work was performed during the year (one QC is earned for each $310 of earnings in 1981). This change could have meant that many employees in a group terminating coverage in the early part of a year would already have enough earnings to be credited with four QC's for that year, even though they were not covered under social security, and were not paying social security taxes, for part of the year. For this reason, it was decided to allow terminations only at the end of a calendar year. QUESTION No. 14 Can a group regain social security coverage once that coverage has been terminated? ANSWER Any State which terminates its coverage agreement in its entirety cannot enter into another agreement to cover any public employees in the State. If the termination applies only to a particular coverage group, the State's agreement cannot again become applicable to that coverage group. QUESTION No. 15 Do State and local government employees have a voice in the decision to terminate social security coverage? ANSWER While some States and localities require a referendum before social security coverage is terminated, the vast majority do not. Employees can, in fact, have their social security coverage terminated by the State without notice and without being given a voice in the decision. Since See question No. 8 for a description of how many QC's a worker needs to be insured it is up to each State to determine how terminations are accomplished, there are no uniform standards on how much influence the employees themselves have in the decision, or how and when they are notified of the termination of their social security coverage. QUESTION NO. 16 Why aren't there uniform requirements to protect State and local government employees' rights in the termination process? ANSWER In keeping with the voluntary nature of social security coverage for these employees, the Federal Government imposes no restrictions on the termination process other than those described previously (i.e., 2 years advance notice after termination has been in effect at least 5 years). Some constitutional concerns about States' rights might be raised if the Federal Government would unilaterally modify the Federal-State contract by mandating new restrictions in the termination process, even if the restrictions were designed to protect employees' rights. Chapter 2 ALASKA'S WITHDRAWAL: A NEW ATTITUDE IN THE SOCIAL SECURITY ADMINISTRATION On January 1, 1980, in the single largest termination to date, Alaska became the first State in history to terminate social security coverage for all its State employees. This much-publicized event has been viewed as a symbol of a lack of confidence in the social security system, and many supporters of social security, both within and outside the Social Security Administration (SSA), fear that it may have a ripplelike effect, influencing other State and local groups to withdraw from the program. Others maintain that Alaska is unique, and that there may be some question of the applicability of Alaska's decision to other States. Alaska is indeed unique. In addition to its geographic uniqueness (it is the largest in area and northernmost State) it ranks highest in average pay and has the youngest and most transient work force. Nevertheless, the issues raised by Alaska's withdrawal and the events surrounding it were significant enough to spur a change in the way SSA reacts to pending terminations. BACKGROUND The sequence of events leading to Alaska's withdrawal from the system began in 1975 with the approval of a union contract calling for a study to be undertaken by the State. The purpose of that study was to examine the desirability of continuing social security coverage for State employees. At the same time, the State sent notice to the Secretary of Health and Human Services (HHS) (formerly HEW), requesting termination of Alaska's social security coverage, to be effective January 1, 1978. The notice of termination was submitted so that if the study showed that social security coverage was no longer desirable, there would not be a full 2-year waiting period left to serve after completion of the study. At the time, Alaska's notice of intent to withdraw all State employees from social security coverage was the single largest notice of termination ever received. Naturally, it raised much concern within SSA. However, the agency lacked a well-formed policy regarding the way it responded to possible withdrawals and, although it was concerned about the trend toward increasing numbers of terminations, had traditionally been a passive observer of the termination process. It was considered somehow inappropriate for SSA to lobby on behalf of its own program. The result was an agency position of benign neglect. The Administration believed that the social security program was clearly superior to other retirement plans, and that this would, hopefully, become clear to Alaska's employees. This combination of concern coupled with a traditional passive role created an atmosphere of frustration within the agency. When a letter was drafted to the Governor of Alaska expressing concern over the possible effects termination could have on present and future employees and their families, and listing several issues to be considered before any decision to termination was finalized, this was considered a breach of traditional policy. A considerably weakened version of the letter was actually sent. In July 1977, Alaska withdrew its notice to terminate, primarily as a result of the conclusions of the study it had undertaken. That study, performed by William Mercer, indicated that duplicating the package of benefits available under social security would cost 22 percent of wages (as compared to approximately 12 percent-about 6 percent each for the employer and employee-under social security), and that a substitute plan would be difficult and expensive to administer. It appeared then that SSA's aloof posture would have no ill consequences. However, only a few months later, Alaska undertook a second study of the desirability of social security coverage. When interviewed by the committee, Alaska's Commissioner of Administration, Bill Hudson, stated that the employees demanded this second study, since the majority were intent on leaving the social security program and were therefore dissatisfied with the results of the first analysis. Unlike the first study, however, the new one was designed to examine alternate kinds of protection that might be more desirable to the State employees, rather than attempting to develop a State system to duplicate social security protection. Around the time the new analysis was begun, a second notice of termination, to be effective January 1, 1980, was sent to SSA. Mr. Hudson was quick to point out that the State did not push the idea to terminate and tried to present both sides of the argument. Mr. Hudson told the committee that it is common knowledge that "only social security can do it all." However, he went on to point out that it was clear that many employees were determined to leave the social security program regardless of the kind of protection that would be offered to replace social security. The Commissioner attributed this determination to several factors. First, he stated there was a great frustration with the lack of information about the social security program. Specifically, there was unease about how the social security contributions were being spent and a concern that the system was being "watered down" by welfare payments. There was also much disgruntlement with the rising cost of the program and worry over its long-term solvency. Just as significant, or even more so, in the eyes of Mr. Hudson, however, was the sentiment within Alaska against the Federal Government as a whole. According to Mr. Hudson, there was some carryover resentment against other unrelated Federal activities (such as the Alaska lands bill) that influenced the vote against social security. And there was also the feeling that the Federal Government was centered too far away to understand the needs of the people of Alaska. Throughout the termination process, the only State employee group opposing withdrawal from the security program was the Public Employees Local No. 71 of the AFL-CIO. According to Jim Younger, assistant business manager of the local, the union's primary concern |