| 10/11/2024 -- Over 300 Members of Congress from both parties, including Virginia Democratic Gubernatorial candidate Rep. Abigail Spanberger, are pushing for legislation that would grant a nearly $200 billion Social Security benefits windfall to a group that neither paid for these benefits nor truly needs them. That legislation, called the Social Security Fairness Act, is actually anything but. As costly as this bill is, the topic is so complex that many people have little idea what is happening. Here I'll explain the issues.
Social Security's benefit formula works more or less as follows. When a person goes to claim benefits, Social Security's computers look back at the earnings the person received under jobs that were covered by Social Security. The computer adds these earnings up, and divides by 35 to produce an annual average, which is then converted to a monthly average. Those Average Indexed Monthly Earnings are then run through a progressive formula in which Social Security benefits are paid equal to 90 percent of the first xx on monthly earnings, 32 percent of earnings between x and y, and 15 percent of earnings between y and the maximum amount of that's subject to payroll taxes.
Because of the progressivity of the benefit formula, Americans with low average earnings receive a higher "replacement rate" than those with higher average earnings. For instance, imagine a middle-income employee who earned the national average wage each year throughout their career. At retirement, they would receive a Social Security benefit equal to about 43% of their pre-retirement earnings.
Now imagine a much lower-income worker who earned just 25% of the national average wage throughout their career. They would receive a Social Security benefit equal to about 80% of their pre-retirement earnings. In other words, the lowest earners receive about twice as much benefits per dollar contributed as does a middle-income worker.
There's nothing wrong with that. It's how Social Security was designed. But that system doesn't work when handling state and local government employees who do not participate in Social Security. The reason is that these people have earnings from jobs that weren't covered by Social Security. Social Security's benefit formula doesn't "see" these earnings, and so Social Security treats these public employees as if they were much poorer than they really are.
For instance, imagine a middle-income person who earned the national average wage every year of their career. But they only spent one quarter of that career in a Social Security covered job, and the other three-quarters in a public sector job where they didn't pay into Social Security.
At retirement, Social Security's benefit formula would only see the years that person worked in a Social Security covered job. Those years of covered earnings would be added up and divided by 35. Their Average Indexed Monthly Earnings would be equal about 25% of the national average wage. And so, as far as Social Security's benefit formula is concerned, this person would be indistinguishable from an employee who worked their entire career at very low earnings, when in fact they earned four times that amount. That public employee would receive a much better return on their Social Security contributions than a person with the same earning who worked their entire career under Social Security. The public employee would receive roughly twice as much benefits per dollar of taxes paid than would the non-public employee.
This isn't fair. There's no reason that one middle-income employee should receive twice the return on their Social Security taxes as another middle-income employee. It's also not necessary: state and local government employees almost universally participate in traditional pension programs that are much, much more generous than the 401(k)s that private sector workers have. Moreover, the pensions offered to public employees who don't participate in Social Security are typically even more generous than pensions for public employees who are covered by Social Security.
Sure, everyone likes to get more money in retirement. But giving that extra money to people who neither truly paid for it nor truly need it isn't in the spirit of Social Security.
That's why Congress passed laws called the Windfall Elimination Provision (WEP) and the Government Pension Offset (GPO). The WEP reduces Social Security retirement benefits for an individual who is entitled to both Social Security benefits and a pension from a non-covered job. The GPO reduces survivors benefits to people who also receive a public sector pension. The reason is that, ordinarily, a survivor can receive the greater of their own Social Security benefit or their spouse's benefit, but not both. Without the GPO, a survivor could receive both their own full public pension benefit and a full Social Security survivor's benefit. Without the WEP and GPO provisions, individuals with public sector pensions that don't pay into Social Security would receive additional Social Security benefits that are intended to be paid only to the poor.
The WEP and GPO formulas are complex, which is one reason that many public employees resent them. And there would be more efficient and equitable ways to impose the WEP and GPO today, using data that wasn't available when the laws were passed in 1983. Various laws have been proposed to reform the WEP and GPO to better ensure that these provisions are not merely correct on average, but treat each individual fairly. These reform laws generally have low costs.
But the Social Security Fairness Act would cost almost $200 billion over its first 10 years, during a period when Social Security itself is moving toward insolvency. Moreover, the Act's title not withstanding, it wouldn't be fair: there is no reason that middle-income public sector employees should be entitled to the extra boost that Social Security's progressive benefit formula ordinarily grants only to low-wage workers.
The Urban Institute estimated that repealing the WEP and GPO rules would increase benefits for about 4.5% of seniors, by an average annual amount of over $9,200 in today's dollars. Moreover, the richest retirees – those with lifetime earnings in the top fifth – would receive benefit increases that are 2.5 times larger than for the poorest seniors.
It is not that public employees are attempting to cheat Social Security. But the Social Security Fairness Act would allow state and local government workers who don't participate in Social Security in their public sector jobs to exploit a loophole in the program's benefit formula, that Congress 40 years ago made the decision to close. On Social Security, we need better leadership than this. | 
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