Both actions were huge victories for public employee unions and their retired members. Time will tell whether these actions will eventually bring on a “Newton’s third law” political reaction from Capitol Hill budget hawks who grumble that the unions pulled one over on the taxpayers.
Biden’s action to grant student loan forgiveness to more public employees, bringing the total to nearly five million, was not unexpected. His administration had tried several times to provide even broader reprieves, only to be overruled by the courts, but this lame-duck action looks to have a better chance of actual implementation. By extending the reach of the longstanding Public Service Loan Forgiveness program, tens of thousands more state and local government workers who have paid installments on their loans for 10 years will be relieved of further obligations. And last week the White House announced a more ambitious plan that, if it stands, could benefit another 6,100 public workers.
On the Social Security front, December’s congressional action was a classic Capitol Hill quarterback sneak. Although public employee unions have been angling for repeal of Social Security’s Windfall Elimination Program (WEP) and the related Government Pension Offset for many years, sensible fiscal experts such as those at the Committee for a Responsible Federal Budget opposed this giveaway.
The critics cite its cost and the inequity of double-dipping by teachers, firefighters and others who earn oversized benefits from exempted public pension systems in 13 states where they pay no Social Security tax on their main job but can then rack up disproportionate Social Security benefits, typically from side jobs in the private sector. The congressional repeal won’t materially impact any of those public employers’ operating budgets for now, but it has opened a door to possible new corrective tax policies that would.
There are two problems here, both of them involving Social Security’sincome redistribution formulas in different ways. So let’s start with the double-dipping issue. Those exempted firefighter-moonlighters and teachers working summer vacation jobs can pick up Social Security credits for their part-time and part-year work, which entitles them to parallel retirement benefits from the federal system that often subsidize them actuarially as if they were low-paid full-time workers without any other retirement income sources.
For example, a full-time firefighter or teacher who picks up $25,000 of extra income each year for 10 years by working on the side will now collect a Social Security windfall on top of their government pension — with far more in Social Security benefits than most of them ever pay into it — because the federal system assumes that’s their total income and they lived in poverty their entire career. Never mind that a good number will ultimately retire with public pensions that exceed their states’ median income — pensions now sweetened by Social Security benefits.
Let me be clear that I have deep appreciation and respect for the valuable work done by public employees. Most of them don’t get paid what counterparts in the private sector can earn. Biden’s student loan forgiveness has merit on those grounds. So for now, an arrangement to waive a chunk of overhanging tuition debt for those who’ve already toiled a decade for the public good strikes me as a fair deal. We’ll soon see whether the new White House team blinks on this one.
Likewise, I never begrudge the work ethic of public employees who moonlight or carry a second job to make ends meet and get ahead in life, as long as they faithfully perform their duties while on the clock for their public employers. Whether they are educating our children, delivering critically needed social services, policing our streets or valiantly battling wildfires like those that have ripped through Los Angeles, they merit fair, equitable treatment.
Where I part company with the double-dippers is with the legislative oddity that excludes more than a dozen states’ pension systems from the Social Security system in the first place and then awards their millions of employees disproportionate benefits at others’ expense. These systems and their employees, not just the double-dippers, are all free riders. There’s a story behind that, and it takes some explanation to fully appreciate what’s been going on here.
The Free Rider Problem
Several states already had public pension systems before Social Security was enacted in 1935. President Franklin Roosevelt favored universal participation, but yielded to what were then deemed to be states’ rights to run their own deal, so Congress carved out an exclusion for those public employees. In later years, policymakers came to realize that these and other exemptions were not a good idea actuarially: After all, Social Security is not just a pension or insurance system based on contributions — it includes an income redistribution element as well, with higher-paid workers ultimately subsidizing benefits for lower-income retirees. Most workers who earn more than the median national income could probably do better with a private retirement annuity savings plan.
So the roughly $10 billion annual exemption for the grandfathered states enables today’s lucky excluded public pension systems to divert their share of this cost and instead deliver a bigger retirement benefit for their workers than everybody else receives for each dollar of payroll contributions.
If all state and local pension systems were to offer this sweet deal, one could argue that it’s a fair way to compensate public servants for a lifetime of often thankless financial and personal sacrifice. But that’s not what we have now. Congress partially closed the door on this exemption in the 1950s when it allowed the states to join Social Security and then mandated it for those without a pension plan at least equivalent in benefits.
Today only a quarter of state and local government employees, about 7 million, are grandfathered into this exemption. On average, they contribute 9 percent of salaries for their pensions, but for them that’s a net gain of more than 3 percentage points because they don’t also pay the standard 6.2 percent toward Social Security. Similarly, these exempted states, cities, counties and school systems enjoy a similar or larger employers’ payroll cost advantage. These have become the sacred cows of public-pension-land.
That inequity is part of what the now-repealed Windfall Elimination Provision attempted to address. Unsurprisingly, that law had its warts, and any resultant disadvantages that it caused for some retirees were consistently brandished in lobbying campaigns to repeal it. Those years of whining and cajoling finally paid off when December’s stealth repeal bill flew through both houses under the radar.
What Congress Should Do
Now the question is, what next? I would say that what’s done is done: Let the retirees have their cake and eat it too. The problem is like Humpty Dumpty: You can’t put WEP back together again. So the question now should be one of fairness to a hundred million other U.S. taxpayers — including most of the other 20 million state and local government employees — who contribute their mandatory fair share to the income redistribution features of Social Security while several million lucky public workers don’t. Let’s at least fix the free rider problem.
The first step, from a fairness and budget-math standpoint, would be for Congress to require all new hires of states and localities to participate in Social Security. That won’t make the unions happy, and would probably wipe out some public employers’ recruitment and cost advantages. But it would follow the First Rule of Holes, which is to stop digging. This legislative change would also work to the benefit of congressional tax leaders who will soon be searching for novel ways to trim the federal deficit (on paper, at least) and juice up the Social Security trust funds: These new contributing workers typically won’t retire for many years, well beyond current lawmakers’ tenure — and beyond the 10-year period Congress uses to keep score on budget deficits.
A second step, to deal with the 7 million free-riding, not-yet-retired employees in these pension systems, would be much trickier: There’s really not a simple way to trim and unwind the vested pension benefits for those already employed without it becoming really messy with a lot of local labor law snags. But Congress could enact an excise tax of maybe 2.5 percent of each exempt employee’s annual pay that exceeds the national median of $42,000, for both the workers and their employers.
That would put a price on the carve-out privilege those workers and employers enjoy and directly address the Social Security income-redistribution issue. Those earning more than the national average would pay their fair share to support America’s lower-income elderly, like the rest of us. With the average public employee earning $70,000, that works out to $700 each, plus an equal employer contribution, for an effective tax rate of 1 percent; for employees paid at or above the maximum subject to the Social Security tax, it would work out to 1.9 percent or less.
This may seem like a petty nuisance tax, but it would eliminate a glaring $10 billion annual inequity nationwide. Unions and double-dippers might have a hissy fit, but labor contracts rarely include guarantees about federal tax policy. For those who hate such a new tax, these employers would always have the option to now join Social Security instead and locally negotiate new pension formulas for future service to the extent permitted under state laws. And if optics would help to get this passed in Congress, it could include a free pass for some workers, such as perhaps 10 years for valiant frontline first responders who log a designated number of field hours in an active federal disaster area like the L.A. wildfires or coastal hurricanes.
Which brings us to the third alternative, an actuarially compensating tax on just these specific public employers — and not their exempt employees — perhaps also in the range of 2.5 percent of total payroll. While that’s less than half of what all other employers pay into the federal old-age insurance pool, it would obviously crimp those public employers’ budgets, but it could be phased in over a few years to smooth the financial adjustment process. For the workers, this would all be invisible on payday.
For now, I don’t expect pension and fiscal hawks to march on the Capitol with pitchforks to demand such reflexive tax policy “corrections,” but the laws of unintended consequences will likely return someday to bite the groups now celebrating their success in repealing the Windfall Elimination Program. Given the disruptive regime change and anti-bureaucrat mindset arriving in Washington, it’s certainly a conceivable tax bill reaction. But as Social Security funding creeps toward the crisis stage, it may just be a matter of time for the other shoe to drop — regardless of who occupies the White House and Capitol Hill this year and beyond.
Governing's opinion columns reflect the views of their authors and not necessarily those of Governing's editors or management.
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