Author update: I have received a fair amount of email about this piece. Almost all of it deals with spousal benefits, which are affected by GPO rather than WEP. I am not defending WEP or GPO. The legislation however (a) deals solely with WEP (b) makes the system more generous rather than addressing the structural issues or fairness of WEP (see comments section).
The Social Security Administration released its analysis of the bipartisan Public Servants Protection and Fairness Act (H.R. 4540) at the end of September. (author note : I wish that the Congressman’s office was more responsive. Apologizes for a little guesswork.)
The legislation would provide a break to older Americans (and their spouses) from the Windfall Elimination Provision (WEP) which reduces the size of the checks coming from Social Security when a person collects a pension from a job not covered by Social Security. The actuaries at the Social Security Administration estimate that this relief will cost the general taxpayer $33 billion over the next 10 years.
As you can guess, I am not a fan of public subsidies for the program because every dollar of subsidy erodes the independence of the system. (see Turning Social Security Into Welfare). Moreover, the legislation would spend these billions to compensate retirees for rules created by a Congress that they elected decades ago. I do not see this expense at a time when future retirees are looking at substantial reductions to benefits.
These rules date back to the 1980s, when Congress decided that people who choose to not participate in Social Security really didn’t deserve to collect checks on better terms as those workers who had contributed over a full career. While that intent is sensible, the application of rules reflects a best guess effort which likely falls horribly short of common sense.
Here is the problem: Social Security incorporates a subsidy from high-wage workers to low-wage workers that provides an incentive for people who work in jobs not covered by Social Security to take on part-time work or summer jobs sufficient to qualify for benefits. The program has no way to really judge whether the worker is a person who has struggled to find work or whether the person is a high-wage worker in a job not covered by Social Security.
To illustrate, my father worked a summer job in order to generate the 40 credits required by Social Security to qualify for benefits. His primary pension however came from his teaching position which was not covered by Social Security, so he collected money from two pensions.
The WEP was simply an imprecise way to ensure that Social Security does not overpay benefits to people like him, who freely choose to work in jobs that they knew weren’t covered by Social Security.
This proposal would mandate a new way to calculate benefits, allowing new retirees to collect the larger of the new and old formulas. That is a modest part of the cost. The larger cost is giving existing retirees $150 per check regardless of whether they lost any money or not. This is roughly double what a retiree in 2018 expects to lose from the WEP (see comments section).
The patch formulas are likely an improvement, but here is the simple solution: allow these retirees to convert their non-Social Security pensions into program credits.
For example, someone who earned $65,000 in 2004 as a teacher could transfer 12.4% of that sum in a one-time payment from their pension fund to buy credits. If they convert all of their non-Social Security years into Social Security contributions, they get a full Social Security unburdened by the complexity of the WEP (and GPO) rules.
Here is another easy solution: expand Social Security to cover all jobs in the U.S. This eliminates the ability of public servants to buy into Social Security on unequal terms. That would be fairness.
Here is another easy solution: we could calculate the Social Security benefit on a combined earnings history so that the paycheck tracks the intent of Social Security. In the case of my dad, his benefit would have started in the 15% weight tier, rather than the 90%. Yes, this would eliminate the incentive for well paid public servants to take on part-time jobs just to qualify for benefits.
Here is the worst way to do it: allow Congress to appease one set of voters at the expense of another. This legislation does not fix the formulas. We are making the system more generous for a select group of retirees, who in all honesty want the benefits of being poor without actually having to suffer the economic effects of it.
If you want to build your own solution, here is the working papers from the CRS and SSA: