Senior Policy Analyst
Congress is considering a new way to compute Social Security benefits for beneficiaries with earnings outside the Social Security system. The House Ways and Means Committee will hold a hearing tomorrow on this alternative approach, and it merits serious consideration.
All but about 4 percent of U.S. workers pay into Social Security. About a quarter of state and local employees, plus some federal workers hired before 1984, don’t pay Social Security taxes, and their non-taxed earnings don’t count towards Social Security benefits. Instead, they pay into “non-covered” pension systems meant to replace Social Security. Nonetheless, most of these workers eventually receive Social Security, either through other work covered by Social Security or through their spouses.
Addressing Social Security beneficiaries who have worked outside the system is tricky, because Social Security’s benefit formula is progressive — that is, benefits replace a greater share of earnings for low earners than for high earners. Workers with earnings outside the system can look like low earners, even when they’re not. Without adjustment, non-covered workers would receive benefits that replace a larger share of their earnings than similar workers whose earnings were totally covered — plus pensions that were intended to replace Social Security benefits.
To level the playing field, policymakers enacted the Windfall Elimination Provision (WEP) and Government Pension Offset (GPO), which reduce the Social Security benefits of some beneficiaries who also receive non-covered pensions. Data limitations of years ago forced policymakers to use imprecise rules of thumb. Starting next year, however, the Social Security Administration will have the data it needs to calculate a benefit based on all of a worker’s earnings using the standard formula, and can then determine what proportion of that benefit can be attributed to the worker’s covered earnings.
There’s bipartisan support for using this “proportional” approach to treating beneficiaries who worked outside the system. President Obama, House Ways and Means Committee Chairman Kevin Brady, and the bipartisan Social Security Advisory Board have proposed similar methods.
The proportional approach would:
The proportional approach also raises some concerns. It would: