April 21, 2014

Teachers And Social Security

By Bellwether

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With all the noise about teacher pensions (and lately it’s more noise than signal) it’s interesting that Social Security receives so little attention.  Social Security impacts teacher retirement and is also an illustrative comparison point in terms of the decisions facing policymakers.

Let’s look at the impact first.

As Chad Aldeman and I noted in Friends Without Benefits: How States Systematically Shortchange Teachers’ Retirement and Threaten Their Retirement Security (pdf) about 40 percent of teachers are not covered by Social Security because they teach in jurisdictions that have not elected to participate in Social Security. This means these teachers don’t contribute to the Social Security system (7.65% of their income up to $117,000 this year with a corresponding 7.65% contribution from their school district) but it also means they don’t earn Social Security credit toward their retirement benefit. Some or all teachers in fifteen states—Alaska, California, Colorado, Connecticut, Georgia, Illinois, Kentucky, Louisiana, Maine, Massachusetts, Missouri, Nevada, Ohio, Rhode Island, and Texas—are not enrolled in Social Security.

By way of background, from Social Security’s inception until 1950 all State and local government employees were excluded from Social Security coverage. Congress enacted legislation in 1950 that allowed voluntary participation by State and local governments for employees not covered by another pension system.  About 28 percent of state and local government workers are not covered today.

Given the general benefits of Social Security you’d think the teachers unions would be at the forefront of trying to get their members covered by it.  You’d be mistaken. They oppose mandatory coverage and instead focus their efforts on eliminating complicated Social Security rules that exist to ensure that people who are covered by pensions cannot also collect a “windfall” in retirement based on Social Security’s progressive benefits formula.* (Yes, organizations that can’t say enough about how progressive they are champion policies that cut against the progressive nature of what’s arguably America’s most successful progressive program. Sound odd? Welcome to the through the looking glass world of education politics). So despite all the toxic rhetoric about pension reform – a genuine problem – you don’t hear much about getting teachers into Social Security.

Social Security alone is not sufficient as a retirement plan for teachers. Whether through defined-benefit plans, 401k-style plans, or hybrids such as cash-balance plans states and school districts must to more to ensure teachers are on a secure footing for retirement security. But Social Security is a portable retirement benefit that works favorably for teachers as part of a basket of supports.

Social Security is also illustrative as a comparison point for what’s happening with teacher pensions.  For starters it’s a national program.  Teacher pensions, by contrast, are state and local. As a result the overall descriptive numbers about them obscure a great deal of variance. Some pension programs are well-funded and stable, others are facing serious shortfalls. We took a look at that a few years ago in Better Benefits.

Second, “fixing” Social Security is substantively pretty straight-forward albeit politically very difficult. Raising the contribution limit and increasing the progressive features of the program are the most obvious levers (there is also a lot of support for raising the retirement age, which sounds a lot better if you do professional work rather than real labor).

Teacher pensions face problems that go beyond financial shortfalls. In particular, traditional pensions are increasingly a bad fit for a more mobile teacher workforce and an American workforce where people change careers more. This problem is becoming more acute as states increase the length of time it takes to earn a pension benefit in an effort to save money. We’re not talking about just a few years, seventeen states now have vesting periods of 10 years. In 1988, if you asked teachers how many years of experience they had, the most common answer was fourteen or fifteen years. If you asked the same question in 2008 the most common answer would have been one year, followed by two years. So there is a design problem as well as an actuarial one.

The solution? There are not easy ones but we suggest some ideas to tackle both issues in Friends Without Benefits. And we do think including all teachers in Social Security has to be part of the solution package.

*The Social Security Windfall Elimination Provision or WEP exists to remove the windfall that the Social Security benefit formula provides to individuals who have substantial pensions from employment not covered by Social Security. Essentially, the Social Security benefit formula provides workers who spent their lives in low paying jobs relatively higher wage-replacement rates than it does for higher-paid workers. As a result, without the WEP, a worker who spent a substantial part of their career in employment not covered by Social Security would be treated as a low-lifetime earner for Social Security benefit purposes and receive the advantage of the weighted benefit formula.

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