The Impact of Mandatory Coverage on State and Local Budgets

Alicia H. Munnell, Jean-Pierre Aubry, and Anek Belbase
Publication Date: 
May 2014

In several states, public sector workers such as teachers, police and firefighters, and government employees do not pay into or receive benefits from Social Security. Congress has repeatedly proposed extending mandatory coverage to newly-hired workers in states that do not provide coverage. Many public sector employers and employees oppose mandatory coverage because of costs. However, opponents often overlook that the ultimate cost of benefits depends on how a state chooses to coordinate their existing pension system with Social Security.

In this Center for Retirement Research paper, the authors calculate the cost of integrating Social Security with the state pension system. The authors examine four different integration strategies for 11 states that do not provide public employees with Social Security coverage: 1) keep existing pension contribution and benefit levels and simply add on Social Security; 2) reduce current plan benefits so that the combined defined benefit and Social Security in the retiree's first year equals the amount that the worker would have received under the defined benefit plan alone; 3) reduce current defined benefit plan benefits and costs by an amount that preserves lifetime pension benefits; or 4) reduce current defined benefit plan benefits and costs by an amount similar to neighboring states that already have Social Security coverage. The authors believe that the second option, preserving first-year pension benefits, is the best option for employers and employees, and estimate that this strategy would be modest, costing approximately 1 percent of a state’s budget.

In conclusion, the authors argue that providing Social Security for all public workers would resolve equity issues and gaps in coverage while representing a modest increase in costs for state employers.