New Sources Of Revenue 1 - New State & Local Employees

New Sources Of Revenue 1 – New State & Local Employees

The BEST Social Security Mod Plan proposes to improve Social Security’s solvency without increasing the retirement age or cutting benefits by adding new sources of revenues to the trust fund.

One source is requiring newly hired State and local government employees to be covered by the Social Security program and to contribute payroll taxes to the Social Security trust funds.

Currently, some State and local governments participate, but some do not. They were offered the option of participating and some governments have opted in.

As background information, the federal government’s original pension and retirement system, the Civil Service Retirement (CSR) system predated the advent of the 1935 Social Security program. These federal employees did not pay Social Security payroll taxes. However, on January 1, 1987 revamped its retirement programs and effectuated the Federal Employees Retirement System (FERS) which made paying into Social Security and collecting Social Security benefits an integral part of the federal government’s retirement system.

States and local governments were required to pay the 1.45% (2.90% including employer share) Medicare payroll tax in the 1990’s. At that time, State and local employees who were not under any kind of pension plan were also required to be covered by Social Security and to contribute payroll taxes. An example of this type of employee could be a school crossing guard, a part time employee or substitute teacher. However, the definition of a “pension plan” was pretty loose and some governments merely set up minimal 401k type accounts for these employees to get around the law change.

Given that many State and local pension funds are very stressed, it may make sense for them to revamp their pension programs and join Social Security. Historically, whether or not to mandate participation in the Social Security program has been viewed as a “States’ Rights” issue.

As noted in my November 26, 2013 post, one of the important features of the Social Security program is that contributors are eligible for Disability benefits. A thirty one year old, or older worker, is required to have paid Social Security payroll taxes for five of the ten years immediately preceding the onset of a disability. This is known as being “currently insured” for disability benefits.

Newly hired State and local employees who stop paying Social Security payroll taxes immediately upon their hiring, lose their currently insured status after working in non-covered State and local employment within five years or sometimes more quickly depending on their work history. Unfortunately, for these workers, they may not be vested in their new non-covered pension plan, and if they become disabled will be ineligible for Social Security disability or a disability payment from their State and local employer. As a result, despite having a full work history, these workers are force to rely on public assistance for their existence due to their inability to work.

Thus, at minimum, The Best Social Security Modernization Plan proposes that all newly hired State and local employees be required to pay Social Security payroll taxes for a minimum of five full years from the date they are hired. This will provide them and their families with much needed disability insurance protection during their working transitional period.

Mandating all newly hired State and local employees to permanently pay Social Security payroll taxes should also be considered.