Teacher Pensions Blog

Senator Elizabeth Warren recently announced a plan for Social Security reform. Among many other things, the plan includes one key provision that would be good for some very long-serving Massachusetts teachers and firefighters, but which would be bad for the rest of us. 

Tucked inside the much longer plan, Warren writes:

My plan also ensures that public sector workers like teachers and police officers get the full Social Security benefits they’ve earned. If you work in the private sector and earn a pension, you’re entitled to your full pension and your full Social Security benefits in retirement. But if you work in state or local government and earn a pension, two provisions called the Windfall Elimination Provision and Government Pension Offset can reduce your Social Security benefits. WEP slashes Social Security benefits for nearly 1.9 million former public-sector workers and their families, while GPO reduces—and in most cases, eliminates—spousal and survivor Social Security benefits for 700,000 people, 83% of whom are women. [emphasis added]

The bolded section is a clever piece of writing. Let me explain. If you work in the private sector and earn a pension, you’re entitled to your full pension and your full Social Security benefits because you’ve been contributing to Social Security your whole career. If you work in state or local government and earn a pension, you’ll be eligible for your full pension and your full Social Security benefits if you contributed to Social Security your whole career

Catch the distinction there? When Congress created Social Security, they made participation mandatory for private-sector workers, but optional for state and local governments. Today, about 25 percent of all state and local government workers are not covered by Social Security, including about 40 percent of teachers spread across 15 states. That includes Warren’s home state of Massachusetts, where teachers, firefighters, police officers, and other state employees are not covered.

When public-sector workers are not covered by Social Security, that means they don’t contribute the 6.2 percent payroll tax that all the rest of us pay. Their employers also do not contribute. As far as the Social Security Administration’s records are concerned, those workers basically do not exist. Someone else—the state pension plan—is supposed to be providing those workers with adequate retirement benefits.

But a problem arises when workers change jobs or move across state lines. If they have what’s called split coverage—meaning they work some years in Social Security and some years outside it—the Social Security formula would otherwise think they earned less income than they actually did. When it comes time to award their benefits, the Social Security formula would give them a more generous benefit than they truly deserve. (The same is true for spouses in households with split coverage.)

An example might help here. Consider two workers, Teacher A and Teacher B. Assume they both earn $50,000 a year for 40 years of work, for a total lifetime earnings of $2 million. Teacher A works her entire career in New York, where teachers participate in Social Security. The Social Security Administration collects taxes, and will pay benefits*, based on her entire $2 million in lifetime earnings.

Now consider Teacher B. She splits her career in two, half in New York and half in Massachusetts. She earned the same $2 million over her career, but the Social Security Administration only knows about (and taxed) half of that. When Teacher B goes to retire, Social Security would only see half of her lifetime earnings, the $1 million she earned in New York. Because Social Security offers more generous benefits to lower-income workers, the standard formula would replace a higher percentage of Teacher B’s earnings than it would for Teacher A.

Or, consider how Teacher B compares to other type of workers. Teacher B, the teacher with split coverage, would have the same Social Security earnings as someone who worked for the same length of time (40 years) but at half the salary (just $25,000 a year). Teacher B would also have the same Social Security earnings as someone who worked at the same $50,000 salary but for only half the time (20 years). Should Teacher B, with a Massachusetts state pension waiting for her and an extra $1 million in lifetime earnings, receive the same Social Security benefit as these other types of workers?

Congress said no. It decided giving Teacher B this type of “windfall” wasn’t fair. In response, it introduced the WEP provision to preserve the integrity of Social Security’s progressive benefit structure. (The WEP applies to individual workers, as in the example above, and the GPO applies to spouses in households with split coverage.)

To be fair, Warren is not the first Democrat to propose getting rid of the WEP and GPO. But Warren’s proposal stands out because of where she sits. That is, Warren is in a position to do something about this situation given her perch as a a senator from the state of Massachusetts and a member of the Senate Health, Education, Labor, and Pensions Committee.  

Remember how the Social Security Administration ignores non-covered workers? It does so under the assumption that states will provide some basic level of retirement benefits in the place of Social Security. Congress wrote into law that if a state does not provide its workers with a retirement plan, then the state must join Social Security.

Unfortunately, Congress has paid little attention to what constitutes a suitable retirement benefit, and Massachusetts offers some of the worst public-sector retirement plans in the country. When the nonpartisan Urban Institute set out to grade state retirement plans, Massachusetts was the only state to earn an “F” grade. Other analyses have found similarly dreary findings for the state teacher pension plan. 

Let’s say you’re a new teacher starting out in Massachusetts public schools this fall. Under the Massachusetts Teachers' Retirement System (MTRS), you’ll have to serve 10 years before qualifying for any pension at all. This 10-year vesting period would be illegal in the private sector, because Congress has imposed minimal requirements on company plans. There is no such protection in the public sector, and, according to MTRS’ own estimates, about two-thirds of new Massachusetts teachers will leave before reaching 10 years of service. They’ll have no Social Security and no pension to show for it.

But these early-career numbers do not get at the full scale of the problems. In a forthcoming paper, I compare MTRS benefits versus what Social Security would provide for the same years of service. These two systems could not be more different. Social Security’s benefit formula is progressive, and it offers more generous benefits to lower-income workers. In contrast, under MTRS, the longer someone serves and the higher the salary they earn, the higher the pension they receive.

When I compared these two benefit structures for new, 25-year-old teachers, I found that they would have to teach in Massachusetts public schools for 22 consecutive years before they would qualify for MTRS benefits that were at least as generous as Social Security. Due to its relatively high turnover rates, the vast majority of Massachusetts teachers will leave their service with retirement benefits that are not even as generous as Social Security.  

THIS is the problem Senator Warren should be tackling. The people who lose out from the current arrangement are lower-income workers with comparatively unstable working careers. When the Social Security Administration ran the numbers recently, they found 19.6 million retirees with split coverage (aka they had some employment in non-covered roles). Out of those 19.6 million retirees with split coverage, 18 million of them faced no penalty from the WEP at all, because they didn’t stick around long enough to earn much of a pension in the first place. 

That leaves about 1.6 million retirees who currently face some WEP penalty. But as the example above illustrated, these retirees are not exactly struggling. These are people who already earn moderate-to-large pensions from their state pension systems. In order for a Massachusetts teacher to even begin to face a WEP penalty, they would have to work at least 10 years in MTRS and at least 10 years in a job covered by Social Security. In addition, the WEP includes a special rule whereby no one's Social Security benefit can be reduced by more than half of their pension. That rule ensures that WEP only applies to people with pretty sizable pensions. 

To be clear, the people affected by WEP aren't exactly wealthy--we are talking about teachers and firefighters and other public employees here--but they also aren't the most needy. They already receive a moderate-to-large pension from their state plan, and it wouldn't be fair to also reward them the “full” Social Security benefit provided to lower-income people. 

Instead of ending the WEP and GPO altogether, Warren could pursue a few intermediate responses. As a Senator and a member of the HELP Committee, she could push the Social Security Administration to take a closer look at state retirement plans in states without Social Security coverage, like Massachusetts, to ensure the benefits they provide are at least as generous as Social Security. That’s not happening today. Warren could also sign on to other legislative proposals that are seeking to improve, not end, the WEP and GPO.

For example, there's nearly univeral agreement on the need to fix the mechanics of how the WEP and GPO get applied. Currently, the Social Security Administration relies on individuals to self-report whether they have a pension and how much that pension is worth. Inevitably, there are errors in this process. In 2017 alone, the Social Security Administration estimated it spent $870 million in "over-payments," and the WEP and GPO were the main contributors to those administrative errors. 

This implementation timeline is also a problem for individuals. The Social Security Administration only applies the WEP and GPO when someone goes to retire and files for their benefits, and that moment represents a rude wake-up call for would-be retirees, who are suddenly told they will receive less than they might have otherwise expected. The lack of transparency turns into an unpleasant financial shock (and, I suspect, a big part of the hatred toward WEP and GPO). 

The most sensible way to solve all of these problems, and get rid of the WEP and GPO provisions in the process, would be to make Social Security coverage mandatory for all. No more split coverage, no more surprises for workers, no more complexity. Full Social Security benefits for all. If Senator Warren wants to provide a real benefit to the teachers and other public servants who need the most help, she should focus on extending Social Security to all public-sector workers who currently lack it.

*This example is over-simplified, but technically, Social Security benefits are based on a worker's highest 35 years of earnings, adjusted for inflation.