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Outside the Box: As Social Security’s finances teeter, Congress could make it worse with this rule change

If you want to understand the financial decline of Social Security, look no further than the “Social Security Fairness Act of 2021.” This very short proposed legislation, which has around 268 co-sponsors from both parties in the House of Representatives, would actually make Social Security less fair and would jeopardize the retirement security of those of us who have yet to retire. 

The proposal would do so by eliminating the Windfall Elimination Provision (WEP) and the Government Pension Offset (GPO) rules of Social Security. Without these provisions, Social Security would steer inappropriately high levels of benefits to people who freely chose to opt out of Social Security. 

In other words, Congress would like to overpay retirees who quit Social Security at the expense of everyone else. That isn’t fair. 

According to the Social Security Administration, the proposed law would cost future retirees roughly $700 billion in benefits, and would push the exhaustion of the trust funds forward by a year to 2033. So, voters should ask why Congress wants the program to take on new obligations when it can’t keep the promises that it has already made to the tens of millions of people who will be retired in 2034.

By way of background, Social Security does not cover the entire workforce. About 6.5 million Americans currently work for employers, mostly state and local governments, which do not participate in the program. These employees and employers are required by law to contribute to an employment pension equal to Social Security.

If you work in a job exempt from Social Security taxes, the law requires that the employer provide a pension with a minimum benefit that is at least equal to the annual Primary Insurance Amount the employee would have had under Social Security. 

As a result, it is possible for workers to collect benefit checks from more than one Social Security-style systems. At this point, about 2 million retirees are currently collecting checks from at least two different retirement systems.

These folks present a problem to Social Security because in its raw state the system tends to overpay them as retirees, and undercharge them as workers. Unfortunately, the benefits formula treats dual-entitled retirees as lower-income workers with spotty work histories — who benefit from Social Security’s system of bend points — even if they are actually well-paid employees working a full career. As a result, most people who opt out of Social Security pay a fraction of the price for annual benefits as paid by the rest of us.

What does $100 buy from Social Security?

Base assumption: a worker with $88,000 in average earnings

Career length in Social Security

Annual FICA tax (OAS only)

Career payroll tax

Annual benefit

Annual benefit for every $100 of payroll tax

10 years

$9,328

$93,280

$15,173

$16.27

35 years

$9,328

$326,480

$32,918

$10.08

40 years

$9,328

$373,120

$32,918

$8.82

Source: Author’s calculation based on tax rates for the old-age/survivors program of Social Security

For the sake of discussion, this chart looks at identical workers who earn $88,000 over long careers, where the only difference is the choice to work for an employer with coverage by Social Security. In the case above, the person who opts out of Social Security after 10 years pays for roughly half the price for annual benefits as the person who remained in Social Security for a full career. 

To be fair, there is an issue with the status quo: the WEP/GPO provisions mandate adjustments that are inaccurate. The rules date back to the Stonehenge era of Social Security when the agency had neither the data nor the technology to effectively neutralize the quirks of the system. 

These rules need to be reformed – desperately. Academic research going back nearly a decade suggests that these rules as they exist today penalize lower-income workers and do not sufficiently reduce the benefits of higher-income Americans. Thus the rules as they are, subsidize the rich at the expense of the poor. 

Supporters of this legislation claim that the rules unfairly reduce Social Security benefits for those who have devoted much of their careers to public service. They are simply wrong. These workers do not pay into the system just like the rest of us. Moreover, these reductions are fair because the workers knew the rules when they decided to take a job which doesn’t participate in Social Security.

If anything, the public servants are the victim of Congressional stagnation. Policy options, which would improve the accuracy of these rules and would save money for future retirees, have been readily available to lawmakers for nearly a decade. Congress has all of the tools it needs to create a fairer system for everyone – including future retirees. Until that happens, the WEP/GPO provisions, as imperfect as they are, provide as much fairness as possible.

The legislation under consideration is not only unfair; it is profoundly unwise policy. 

Brenton Smith writes about Social Security.

More on Social Security

To save Social Security all options should be considered — including increasing the full retirement age

Raising Social Security’s full retirement age from 67 to 70 would be the wrong way to fix the program

Republicans have painted themselves into a corner over fixing Social Security’s finances

My husband claimed Social Security and I haven’t yet. How will that impact my benefit?

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