Why don’t Ohio public employees contribute to Social Security?
When Congress passed the Social Security Act in 1935, the State Teachers Retirement System of Ohio (STRS Ohio) had already been in existence for 15 years. In the beginning, governmental entities, including school systems, were prohibited from participating in Social Security — especially if they had their own retirement systems in place. In 1950 Congress amended the act to permit previously excluded groups to participate. The decision to join or not join Social Security was one for the employers to make and Ohio chose not to join. We can speculate as to the reasons why public employers chose not to join, but one must assume that better benefits, a prefunded system and having to pay into only one retirement plan would have been chief among the reasons.
There are currently 13 states with public employees outside of Social Security. In addition, the majority of police and fire fighters in all 50 states are outside of Social Security.
What would be the impact of mandatory Social Security coverage?
There have been numerous proposals over the years to mandate Social Security coverage for currently noncovered state and local employees. These proposals are usually presented in an attempt to bring more revenue to the federal government for shoring up the Social Security fund. Past estimates of the impact of mandatory coverage in Social Security for new hires calculated by the Segal Company have been approximately $6.3 billion in additional costs for Ohio in the first five years. The impact would go beyond new hires. It would have a dire impact on the funding of the existing defined benefit programs; likely make any future cost-of-living adjustments and health care for retirees unaffordable; limit the State of Ohio’s flexibility in managing retirement programs for employees and employers; and increase the cost of running the programs.
Government Pension Offset (GPO)
In the late 1970s/early 1980s, the Social Security Act was again amended. Two of the changes adopted by Congress at that time are commonly referred to as the Government Pension Offset (GPO) and Windfall Elimination Provision (WEP). GPO applies to Social Security spousal benefits received by someone who also has a government-sponsored pension plan, such as STRS Ohio.
Inasmuch as Congress created spousal benefits for women and men who were financially dependent upon their spouse, allowing someone to collect both a public pension and a spousal benefit was viewed as “double-dipping” and consequently changed. The change amounted to an offset of the Social Security benefit equal to two-thirds of the public pension amount.
Example: Sue receives $1,500 a month from STRS Ohio. Her husband was employed in a position covered by Social Security that would provide a spousal benefit of $800. But, because Sue has a government pension, Social Security is deducting an amount equal to two-thirds of her $1,500 STRS Ohio pension check, or $1,000, from her $800 spousal benefit, leaving Sue with zero from Social Security.
Windfall Elimination Provision (WEP)
WEP was created by Congress to deal with another perceived inequity in the system. Social Security benefits are paid according to a formula that is weighted in favor of people who earn a low wage throughout their careers. Before WEP, the weighting had the effect of creating a windfall for some people who had spent the majority of their careers in government work. The windfall occurred because Social Security uses only the wages that are subject to the Social Security tax for the purpose of calculating a person’s benefit. The formula was unable to distinguish between people who had earned relatively low wages in a Social Security-covered position and those who had only spent a small portion of their working career in a job that paid into Social Security. In the absence of WEP, such persons would have received relatively large benefits compared to the taxes paid into Social Security on their behalf.