Highlights
Introduction
The U.S. Senate is likely to vote on legislation that will provide government workers a windfall, increase the deficit by $196 billion, and advance the date of Social Security’s insolvency by 6 months. And there’s a good chance this legislation becomes law. Such is the outlook for the inaptly named Social Security Fairness Act, which passed the House of Representatives in November.
The State of Social Security
The last time Congress meaningfully legislated on Social Security was in 2015, when the Disability Insurance (DI) Trust Fund, which funds the Disability Insurance component of the Social Security program, was facing depletion within one year. As it had nearly 10 years prior, Congress responded to the looming insolvency of this fund by temporarily reallocating payroll tax receipts away from the trust fund that funds Social Security retirement benefits to the DI Trust Fund.
It is one thing for Congress to reallocate financing within the Social Security program, while recognizing that the overall program is in need of comprehensive reform. Indeed, according to the latest report from the Trustees of Social Security and Medicare, the combined Social Security Program is facing insolvency in 2035. Over the long term, the exhaustion of the Social Security Trust Fund would require a reduction in benefit cut of 27 percent. It is another thing entirely to raid the trust fund so retired state and local workers covered by pensions outside of Social Security can receive extra Social Security benefits.
Covered and Non-Covered Employment
That is exactly what the Social Security Fairness Act does. Social Security serves as the primary federal retirement security program. Upon retirement, these workers receive benefits that progressively replace a portion of their earnings. This structure ensures that retirees with lower lifetime earnings receive a higher percentage of their earnings compared to those with higher lifetime earnings. While the tax financing Social Security is somewhat regressive, the benefits system introduces progressivity overall.
For most workers, this process is straightforward. However, around one-quarter of state and local government employees, as well as federal employees hired before 1984, do not participate in Social Security. These workers are exempt from payroll taxes but also do not accrue Social Security benefits because they have not paid into the system. Instead, they contribute to and later receive benefits from alternative pension plans. For those who remain solely in these systems, the situation is uncomplicated.
Challenges can arise for individuals who have worked in both Social Security-covered and non-covered employment. Without adjustments, such workers would receive both Social Security benefits based on their covered employment and pension payments from their non-covered employment. Their Social Security earnings history would resemble that of a lower-income retiree, resulting in a disproportionately higher benefit relative to their actual lifetime earnings. In reality, these individuals are also receiving a pension from their non-covered employment, creating a potential imbalance. Similar issues can emerge with survivor benefits.
To address these discrepancies, Congress implemented the Windfall Elimination Provision (WEP) and the Government Pension Offset (GPO). These measures are intended to ensure fairer benefit distributions by preventing unintended overpayments to retirees.
From Reform to Repeal
The benefit adjustments under WEP/GPO are not perfect, and indeed some workers covered by these provisions receive different benefits than other retirees with similar incomes. There are several approaches to reforming this policy to improve horizontal equity without raiding the Trust Fund to benefit a small percentage of retirees. Instead, the Social Security Fairness Act simply repeals the WEP/GPO adjustment without any associated reforms. Congress appears to be heading towards handing out nearly $200 billion in excess Social Security benefits to retirees that did not pay into Social Security for a significant period of their working years.
Conclusion
The Social Security Fairness Act would exacerbate the long-term fiscal challenges facing Social Security, which pose significant risks to over 70 million retirees. By repealing the WEP and GPO without meaningful reforms, Congress risks undermining the program’s fairness and hastening its insolvency. Rather than handing out $196 billion in benefits to a small subset of retirees, lawmakers should focus on comprehensive reforms that ensure Social Security’s sustainability for all Americans. Without responsible action, the program’s solvency will remain at risk, and future retirees may face significant benefit cuts.