Expand Social Security Coverage to Include Newly Hired State and Local Government Employees

CBO periodically issues a compendium of policy options (called Options for Reducing the Deficit) covering a broad range of issues, as well as separate reports that include options for changing federal tax and spending policies in particular areas. This option appears in one of those publications. The options are derived from many sources and reflect a range of possibilities. For each option, CBO presents an estimate of its effects on the budget but makes no recommendations. Inclusion or exclusion of any particular option does not imply an endorsement or rejection by CBO.

Billions of Dollars 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2019-
Change in Revenues 0.7 2.2 3.8 5.4 6.9 8.5 10.3 12.1 14.0 16.0 19.0 80.0

Source: Staff of the Joint Committee on Taxation.
This option would take effect in January 2019.
The change in revenues would consist of an increase in receipts from Social Security payroll taxes (which would be off-budget), offset in part by a reduction in individual tax revenues (which would be on-budget). In addition, the option would increase outlays for Social Security by a small amount. The estimates do not include those effects on outlays.


Nearly all private-sector workers and federal employees are covered by Social Security, but a quarter of workers employed by state and local governments are not. Under federal law, state and local governments can opt out of enrolling their employees in the Social Security program as long as they provide a separate retirement plan for those workers. (State and local governments may also have their employees participate in both Social Security and a separate retirement plan.) By contrast, all federal employees hired after December 31, 1983, are covered by Social Security and pay the associated payroll taxes. Furthermore, all state and local government employees hired after March 31, 1986, and all federal government employees pay payroll taxes for Hospital Insurance (Medicare Part A).

Paying the Social Security payroll tax for 10 years generally qualifies workers (and certain family members) to receive Social Security retirement benefits. Employees must meet different work-related requirements to qualify for disability benefits or, in the event of their death, to allow certain family members to qualify for survivors' benefits. In 2017, Social Security receipts from payroll taxes totaled $850.6 billion.


Under this option, Social Security coverage would be expanded to include all state and local government employees hired after December 31, 2018. Consequently, all newly hired state and local government employees would pay the Social Security payroll tax. That 12.4 percent tax on earnings, half of which is deducted from employees' paychecks and half of which is paid by employers, funds the Old-Age, Survivors, and Disability Insurance programs.

Effects on the Budget

If implemented, this option would increase revenues by a total of $80 billion from 2019 through 2028, the staff of the Joint Committee on Taxation estimates. That estimate incorporates the assumption that total compensation would remain unchanged but allows for behavioral responses to the higher tax. (Total compensation comprises taxable wages and benefits, nontaxable benefits, and employers' contributions to payroll taxes.)

If total compensation remained unchanged, then increases in employers' contributions to payroll taxes would have to reduce other forms of compensation. The decrease in taxable wages and benefits would reduce the income base for individual income and payroll taxes, partially offsetting the increase in employers' payroll taxes. The estimate for the option reflects that income and payroll tax offset.

In addition, the higher payroll tax would create an incentive for employers and employees to change the composition of compensation, shifting from taxable compensation to forms of nontaxable compensation. The estimate accounts for that behavioral response.

Although extending Social Security coverage to all newly hired state and local government employees would eventually increase the number of Social Security beneficiaries, that increase would have little impact on the federal government's spending for Social Security in the short term. From 2019 through 2028, outlays would increase by only a small amount because most people hired by state and local governments during that period would not begin receiving Social Security benefits for many years. However, the effects on outlays would grow in the following decades. The above estimate does not include any effects on outlays.

The estimate is uncertain because the Congressional Budget Office's underlying projections of income subject to Social Security payroll taxes and the number of workers who are not covered by Social Security are uncertain. Those projections rely on CBO's projections of the economy over the next decade—particularly projections of wages and employment—which are inherently uncertain. The estimate also relies on projections under current law of state and local governments' choices about enrolling workers in Social Security and projections of state and local governments' hiring and retention, which are likewise uncertain.

Other Effects

One argument for implementing this option is that it would slightly enhance the long-term viability of the Social Security program. CBO projects that, if current law remained unchanged, income dedicated to the program would be insufficient to cover benefits specified in law. Under the option, the additional benefit payments for the expanded pool of beneficiaries would amount to less, in the long term, than the additional revenues generated by newly covered employees. That is largely because, under current law, most of the newly hired workers would receive Social Security benefits anyway—either because they held other, covered jobs or because they were covered by a spouse's employment.

Another argument for implementing the option concerns fairness. Social Security benefits are intended to replace only a percentage of a worker's preretirement earnings. That percentage (referred to as the replacement rate) is higher for workers with low career earnings than for workers with higher earnings. But the standard formula for calculating Social Security benefits does not distinguish between people whose career earnings are low and people who only appear to have low career earnings because they spent a portion of their career in jobs that were not covered by Social Security. Under current law, to make the replacement rate more comparable for workers with similar earnings histories, standard benefits are reduced for retired government employees who have spent a substantial portion of their career in employment not covered by Social Security. However, that adjustment is imperfect and can affect various government employees differently. This option would eliminate those inequalities.

Finally, implementing this option would provide better retirement and disability benefits for many workers who move between government jobs and other types of employment. By facilitating job mobility, the option would enable some workers who would otherwise stay in state and local government jobs solely to maintain their public-employee retirement benefits to move to jobs in which they could be more productive. Many state and local government employees are reluctant to leave their jobs because pensions are structured to reward people who spend their entire careers in the same pension system. If their government service was covered by Social Security, they would be less reluctant to change jobs because they would remain in the Social Security system. State and local governments, however, might respond to greater turnover by reducing their investment in workers (by cutting training programs, for example), causing the productivity of state and local government employees to fall.

The main argument against the option concerns the impact it would have on the pension funds of affected state and local governments. That impact would depend on the preexisting structure of state and local government pension plans and how those plans would be restructured in response to this option. State or local governments could potentially have employees participate in Social Security in addition to their existing pension plans. Alternatively, their pension plans for new employees could be reduced or eliminated in response to the expansion of Social Security coverage: New employees would contribute less (or nothing) during their tenure, and they would receive smaller (or no) pension benefits when they retired. Implementing those changes would not be particularly difficult for fully funded pension plans, which could use their current assets to pay benefits for existing employers. However, many state and local government pension plans are underfunded, and such plans would probably need future contributions to fund the benefits received by current retirees or by those about to retire under the existing pension system. Any reduction in future contributions to such plans would increase the financial pressures on them.