In just 13 years, the social security trust funds will not be able to pay the promised benefits in full. Unfortunately, the bipartisan House bill could exacerbate the budget imbalance by increasing payments to an estimated 5 million state and local government workers.
The Social Security Fairness Act, in which 301 people participate, would increase payments to retirees who did not pay Social Security taxes during part of their working lives. They are mostly former government employees who participated in state and local pension plans.
According to the Congressional Budget Office, the bill would cost $150 billion over the next decade, potentially raising the OASI (OASI) insolvency date by a full year. An Urban Institute analysis of similar plans proposed by President Biden and Sen. Elizabeth Warren (D-MA) found that they would increase annual benefits by an average of about $3,600 for the lowest-income retirees, but by $8,900 a year for those with the highest incomes . The measure “would not significantly affect the poverty rate,” Urban’s pension policy program said.
In general, Social Security is designed to partially redistribute income by providing higher returns per dollar of contributions to those with low lifetime earnings. But some retirees who participated in a state or local pension that appears to be for Social Security purposes have low earnings throughout their lives, even though they don’t. Therefore, their benefit formula will be excessively generous.
To prevent this problem, the Social Security Act includes two provisions – the Windfall Exclusion Provision (WEP) and the Government Pension Offset (GPO) – which are designed to avoid transfers to retirees (or surviving dependents) whose earnings life is higher than calculated Social Security.
WEP and GPO are poorly targeted and need to be reformed. But there is the best ways to do it than to cancel them individually. Solutions could range from administrative changes that better track the earnings of these workers to universal social security.
Any discussion of WEP and GPO reform must consider the overall fiscal health of the Social Security system. According to the latest official estimates, the OASI Trust Fund will not be able to pay the full payout 2035 year. At that point, if Congress doesn’t act, payments will be cut by about 20 percent. No politician wants to reach that tipping point, but few want to consider the combination of sweeping tax and benefit changes needed to sustain the program.
Democrats often propose tax increases. For example, President Biden campaigned on a plan raise the Social Security payroll tax cap. And some Republicans are in favor of reducing payments. But each party has put “no tax increases” or “no benefit cuts” as the line in the sand, and many proposals fail to address the need low-income seniors.
The problem of workers spending part of their careers paying state and local pensions instead of Social Security is a real one. But this is insignificant compared to the instability of the social insurance system as a whole. Instead of kicking down or even worsening the fund’s finances, policymakers should focus on how to restore balance to the overall program. All future retirees will be better off if lawmakers fix the WEP and GPO in the context of these reforms.