Social Security: Mandating Coverage for State and Local Employees
(Testimony, 05/21/98, GAO/T-HEHS-98-127).

Pursuant to a congressional request, GAO discussed extending mandatory
Social Security coverage to all newly hired state and local government
employees, focusing on: (1) the implications of mandating such coverage
for the Social Security program, public employers, newly hired
employees, and the affected pension plans; and (2) potential legal and
administrative issues associated with implementing mandatory coverage.

GAO noted that: (1) mandating coverage for all newly hired public
employees would, reduce Social Security's long-term financial shortfall
by about 10 percent, increase participation in an important national
program, and simplify program administration; (2) the impact on public
employers, employees, and pension plans would depend on how states and
localities with noncovered employees would react to these new coverage
provisions; (3) one often-discussed option would be for public employers
to modify their pension plans in response to mandatory Social Security
coverage; (4) costs would likely increase for those states and
localities that wanted to keep their enhanced benefits for newly hired
employees; (5) alternatively, states and localities that wanted to
maintain level spending for retirement would likely need to reduce some
pension benefits; (6) regardless, mandating coverage for public
employees would present legal and administrative issues that would need
to be resolved; (7) in deciding whether to extend mandatory Social
Security coverage to all newly hired state and local employees, Congress
would need to weigh several factors: (a) the Social Security program
would benefit from mandatory coverage; (b) the long-term actuarial
deficit would be reduced; and (c) the trust funds' solvency would be
extended for about 2 years; (8) states and localities with noncovered
workers would likely need to increase total retirement spending to
provide future workers with pension benefits that, when combined with
Social Security benefits, approximate the benefits provided to current
workers; (9) at the same time, Social Security would provide newly hired
employees with benefits that are not available, or are available to a
lesser extent, under current state and local pension plans; (10) states
and localities might attempt to halt mandatory Social Security coverage
in court, although such a challenge is unlikely to be upheld; and (11)
states and localities could require up to 4 years to implement mandatory
coverage.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  T-HEHS-98-127
     TITLE:  Social Security: Mandating Coverage for State and Local 
             Employees
      DATE:  05/21/98
   SUBJECT:  Social security benefits
             Retirement pensions
             Employee retirement plans
             State employees
             Government retirement benefits
IDENTIFIER:  Social Security Program
             
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Cover
================================================================ COVER


Before the Subcommittee on Social Security, Committee on Ways and
Means, House of Representatives

For Release on Delivery
Expected at 10:00 a.m.
Thursday, May 21, 1998

SOCIAL SECURITY - MANDATING
COVERAGE FOR STATE AND LOCAL
EMPLOYEES

Statement of Cynthia M.  Fagnoni, Director
Income Security Issues
Health, Education, and Human Services Division

GAO/T-HEHS-98-127

GAO/HEHS-98-127T


(207032)


Abbreviations
=============================================================== ABBREV

  SSA - Social Security Administration

SOCIAL SECURITY:  MANDATING
COVERAGE FOR STATE AND LOCAL
EMPLOYEES
============================================================ Chapter 0

Mr.  Chairman and Members of the Subcommittee: 

Thank you for inviting me to testify on extending mandatory Social
Security coverage to all newly hired state and local government
employees.  Currently, the Social Security Administration (SSA)
estimates that about 30 percent--or about 5 million employees--of the
state and local workforce is not covered by Social Security.  As you
are aware, SSA projects Social Security revenues to fall short of
expenditures starting in 2021 and the trust funds to be exhausted by
2032.  To offset a part of the financial shortfall, the 1994-1996
Social Security Advisory Council favored extending mandatory coverage
to all newly hired state and local government workers. 

Today, I would like to focus on the implications of mandating such
coverage for the Social Security program, public employers, newly
hired employees, and the affected pension plans.  I will also address
potential legal and administrative issues associated with
implementing mandatory coverage.  My testimony is based on work we
are currently conducting for the Chairman of this Subcommittee. 

In summary, our work shows that mandating coverage for all newly
hired public employees would reduce Social Security's long-term
financial shortfall by about 10 percent, increase participation in an
important national program, and simplify program administration.  The
impact on public employers, employees, and pension plans would depend
on how states and localities with noncovered employees would react to
these new coverage provisions.  One often-discussed option would be
for public employers to modify their pension plans in response to
mandatory Social Security coverage.  We will focus on this option. 
For example, many public pension plans currently offer a lower
retirement age and higher retirement income benefit than Social
Security.  Social Security, on the other hand, offers complete
inflation protection, full benefit portability, and dependent
benefits, which are not available in many public pension plans. 
Costs would likely increase for those states and localities that
wanted to keep their enhanced benefits for newly hired employees. 
Alternatively, states and localities that wanted to maintain level
spending for retirement would likely need to reduce some pension
benefits.  Regardless, mandating coverage for public employees would
present legal and administrative issues that would need to be
resolved.  For example, states and localities could require up to 4
years to design, legislate, and implement changes to current pension
plans. 


   BACKGROUND
---------------------------------------------------------- Chapter 0:1

The 1935 Social Security Act mandated coverage for most workers in
commerce and industry, which at that time comprised about 60 percent
of the workforce.  State and local government employees were excluded
because they had their own retirement systems and there was concern
over the question of the federal government's right to impose a tax
on state governments. 

Subsequently, the Congress extended mandatory Social Security
coverage to most of the excluded groups, including state and local
employees not covered by a public pension plan.  The Congress also
extended voluntary coverage to state and local employees covered by
public pension plans.  Since 1983, however, public employers have not
been permitted to withdraw from the program once they are covered. 
SSA estimates that 96 percent of the workforce, including 70 percent
of the state and local government workforce, is now covered by Social
Security. 

Social Security provides retirement, disability, and survivor
benefits to insured workers and their dependents.  Insured workers
are eligible for full retirement benefits at age 65\1 and reduced
benefits at age 62.  Social security retirement benefits are based on
the worker's age and career earnings, are fully indexed for inflation
after retirement, and replace a relatively higher proportion of the
final year's wages for low earners.  Social Security's primary source
of revenue is the Old Age, Survivors, and Disability Insurance
portion of the payroll tax paid by employers and employees.  The
payroll tax is 6.2 percent of earnings each for employers and
employees, up to an established maximum. 

SSA estimates that 5 million state and local government employees,
excluding students and election workers, are not covered by Social
Security.  SSA also estimates that annual wages for noncovered
employees total about $132.5 billion.  Seven states--California,
Colorado, Illinois, Louisiana, Massachusetts, Ohio, and
Texas--account for more than 75 percent of the noncovered payroll.  A
1995 survey of public pension plans found that police, firefighters,
and teachers are more likely to occupy noncovered positions than
other employees. 

Most full-time public employees participate in defined benefit
pension plans.  Minimum retirement ages for full benefits vary;
however, many state and local employees can retire with full benefits
at age 55 with 30 years of service.  Retirement benefits also vary,
but they are usually based on a specified benefit rate for each year
of service and the member's final average salary over a specified
time period, usually 3 years.  For example, plans with a 2-percent
rate replace 60 percent of a member's final average salary after 30
years of service.  In addition to retirement benefits, a 1994
Department of Labor survey found that all members have a survivor
annuity option, 91 percent have disability benefits, and 62 percent
receive some cost-of-living increases after retirement. 

As part of our study, we examined nine state and local defined
benefit plans covering over 2 million employees.  For those plans,
employer contributions ranged from 6 to 14.5 percent of payroll and
employee contributions ranged from 6.4 to 9.3 percent of payroll. 
(See the appendix.)


--------------------
\1 Beginning with those born in 1938, the age at which full benefits
are payable will increase in gradual steps from age 65 to age 67. 


   MANDATORY COVERAGE WOULD
   BENEFIT THE SOCIAL SECURITY
   PROGRAM
---------------------------------------------------------- Chapter 0:2

Extending mandatory Social Security coverage to states and localities
with noncovered workers would reduce the trust funds' long-term
financial shortfall, increase program participation, and simplify
program administration. 

SSA estimates that mandatory coverage would reduce Social Security's
financial shortfall by about 10 percent--from 2.19 percent of payroll
(a present discounted value of $3.1 trillion) to 1.97 percent of
payroll (a present discounted value of $2.9 trillion)--over a 75-year
period.\2 Figure 1 shows that mandatory coverage would also extend
the program's solvency by about 2 years, from 2032 to 2034.  As with
most other elements of the reform proposals put forward by the
1994-1996 Social Security Advisory Council, such as raising the
retirement age, extending mandatory coverage to newly hired state and
local employees would resolve only a part of the trust funds'
solvency problem.  A combination of adjustments will be needed to
extend the program's solvency over the entire 75-year period. 

   Figure 1:  Comparison of
   Projected End-of-Year Trust
   Fund Balances With and Without
   Mandatory Coverage, 1998 to
   2048

   (See figure in printed
   edition.)

Note:  SSA data were based on intermediate assumptions in the 1998
Board of Trustees report.  SSA assumed that mandatory coverage would
be effective beginning January 1, 2000. 

Source:  GAO analysis of SSA data. 

SSA data indicate that revenues from payroll taxes on the newly
covered workers, taxes on their benefits, and interest on the added
trust fund balances would substantially exceed additional
expenditures throughout the 75-year period.  SSA assumes that payroll
tax collections for new employees would accelerate early in the
75-year period, while benefits for those employees would not rise
significantly until later in the period. 

While Social Security's solvency problems have triggered an analysis
of the impact of mandatory coverage on program revenues and
expenditures, the inclusion of such coverage in a comprehensive
reform package would need to be grounded in other considerations.  In
recommending that mandatory coverage be included in the reform
proposals, the Advisory Council stated that mandatory coverage is
basically "an issue of fairness." The Advisory Council report stated
that "an effective Social Security program helps to reduce public
costs for relief and assistance, which, in turn, means lower general
taxes.  There is an element of unfairness in a situation where
practically all contribute to Social Security, while a few benefit
both directly and indirectly but are excused from contributing to the
program."

Mandatory coverage would also simplify program administration in the
long run.  SSA's Office of Research, Evaluation, and Statistics
estimates that 95 percent of noncovered state and local employees
become entitled to Social Security as either workers, spouses, or
dependents.  SSA's Office of the Chief Actuary estimates that 50 to
60 percent of noncovered employees will be fully insured by age 62
from covered employment. 

The Congress has established the government pension offset and
windfall elimination provisions to reduce the unfair advantage that
workers who are eligible for pension benefits based on noncovered
employment might have when they apply for Social Security benefits. 
The earnings histories for workers with noncovered earnings may
appear to qualify them for the higher earnings replacement rates that
Social Security assigns to lower earners, when in fact they have
substantial income from public pension plans.  With some exceptions,
the government pension offset and windfall elimination provisions
require SSA to use revised formulas to calculate benefits for workers
with noncovered employment. 

However, a separate GAO study for the Chairman of this Subcommittee
indicates that SSA is often unable to determine whether applicants
should be subject to the government pension offset or windfall
elimination provisions.\3 We estimate that failure to reduce benefits
for federal, state, and local employees caused $160 million to $355
million in overpayments between 1978 and 1995.  In response, SSA
plans to perform additional computer matches with the Office of
Personnel Management and the Internal Revenue Service (IRS) to get
noncovered pension data in order to ensure that these provisions are
applied.  Mandatory coverage would reduce benefit adjustments by
gradually reducing the number of employees in noncovered jobs. 
Eventually, all state and local employees, with the exception of a
few categories of workers, such as students and election workers,
would be in covered employment. 

Additionally, in 1995, SSA asked its Inspector General to undertake a
review of state and local government employers' compliance with
Social Security coverage provisions.  In December 1996, SSA's Office
of the Inspector General reported that Social Security provisions
related to coverage of state and local employees are complex and
difficult to administer.\4 The report stated that few resources were
devoted to training state and local officials and ensuring that
administration and enforcement roles and responsibilities are clearly
defined.  The report concluded that there is a significant risk of
sizeable noncompliance with state and local coverage provisions.  In
response, SSA and IRS, which is responsible for collecting Social
Security payroll taxes, initiated an effort to educate employers and
ensure compliance with legal requirements for withholding Social
Security payroll taxes. 


--------------------
\2 SSA uses a period of 75 years for evaluating the program's
long-term actuarial status to obtain the full range of financial
commitments that will be incurred on behalf of current program
participants. 

\3 Social Security:  Better Payment Controls for Benefit Reduction
Provisions Could Save Millions (GAO/HEHS-98-76, Apr.  30, 1998). 

\4 Social Security Coverage of State and Local Government Employees,
SSA Office of the Inspector General (A-04-95-0613, Dec.  13, 1996). 


   IMPACT OF MANDATORY COVERAGE ON
   EMPLOYERS, EMPLOYEES, AND THEIR
   PENSION PLANS WOULD VARY
---------------------------------------------------------- Chapter 0:3

If all newly hired public employees were to receive mandated Social
Security coverage, they would have the income protection afforded by
Social Security.  Also, they and their employers would pay the
combined Social Security payroll tax of 12.4 percent of payroll. 
Each state and locality with noncovered workers would decide how to
respond to the increase in retirement costs and benefits.  They could
absorb the added cost and leave current pension plans unchanged or
eliminate plans completely.  From discussions with state and local
representatives, however, we believe states and localities with
noncovered workers would likely adjust their pension plans to reflect
Social Security's costs and benefits.  To illustrate the implications
of mandatory coverage to employers and employees, we examined three
possible responses: 

  -- States and localities could maintain similar benefits for
     current and newly hired employees.  This response would likely
     result in an increase in total retirement costs and some
     additional benefits for many newly hired employees. 

  -- States and localities could examine other pension plans that are
     already coordinated with Social Security and provide newly hired
     employees with similar benefits.  This response would also
     likely increase costs and benefits for newly hired employees. 

  -- States and localities could maintain level retirement spending. 
     This response could require a reduction in pension benefits. 

According to pension plan representatives, each of these responses to
mandatory coverage would result in reduced contributions to current
plans, which could affect long-term financing of the plans. 


      MAINTAINING LEVEL BENEFITS
      WOULD LIKELY INCREASE COSTS
-------------------------------------------------------- Chapter 0:3.1

States and localities with noncovered workers could opt to provide
newly hired employees with Social Security and pension benefits that,
in total, approximate the pension benefits of current employees. 
Studies indicate that such an option could increase retirement costs
by 7 percent of new-employee payroll.  Using SSA's data and its
assumption that mandatory coverage would start January 1, 2000, a 7
percent of payroll increase in retirement costs for newly hired
employees would mean additional costs to states and localities with
noncovered workers of about $9.1 billion over the first 5 years. 

A 1980 study of the costs of providing Social Security coverage for
noncovered workers provides support for the estimated 7 percent of
payroll increase.  The Universal Social Security Coverage Study Group
developed options for mandatory coverage of employees at all levels
of government and analyzed the fiscal effects of each option.  The
study group used two teams of actuaries to study over 40 pension
plans.  The study estimated that costs, including Social Security
taxes and pension plan contributions, would need to increase an
average of 2 to 7 percent of payroll to maintain level benefits for
current and newly hired employees.\5

The study assumed that most newly hired employees would have salary
replacement percentages in their first year of retirement that would
be comparable to those provided to current employees.  For example,
employees retiring before age 62 would receive a temporary
supplemental pension benefit to more closely maintain the benefits of
the current plan.  Since Social Security benefits are fully indexed
for inflation and many pension plans have limited or no
cost-of-living protection, total lifetime benefits for many newly
hired employees would be greater than those provided to current
employees.  Existing pension plan disability and survivor benefits
were also adjusted to reflect Social Security disability and survivor
benefits. 

More recent studies by pension plan actuaries in Colorado, Illinois,
and Ohio also indicate the cost increase would be in that same range. 
For example, a December 1997 study for a plan in Ohio indicated that
providing retirement and other benefits for future employees that,
when added to Social Security benefits, approximate benefits for
current employees would require an increase in contributions of 6 to
7 percent of new-employee payroll.  A 1997 study for a pension plan
in Illinois indicated the increased payments necessary to maintain
similar total benefits for current and future employees would be
about 6.5 percent of new-employee payroll. 

The 1980 study stated that the causes of the cost increase cannot be
ascribed directly to specific Social Security or pension plan
provisions.  The study also states, however, that certain Social
Security and pension plan provisions are among the most important
factors contributing to the cost increase.  Social Security is fully
indexed for cost-of-living increases, is completely portable, and
provides substantial additional benefits for spouses and dependents. 
In addition, pension plans would need to provide special supplemental
benefits for employees who retire before age 62, especially in police
and firefighter plans. 

The study also found that the magnitude of the cost increase would
depend on the pension plan's current benefits.  Cost increases would
be less for plans that already provide disability, survivor, and
other benefits similar to those provided by Social Security because
those plans would be able to eliminate duplicate benefits. 


--------------------
\5 The study estimate was 5 to 10 percent of payroll.  We deducted
the 2.9 percent of payroll Medicare tax since it was mandated for all
newly hired state and local employees in 1986, after the study was
completed. 


      MATCHING PENSION BENEFITS OF
      CURRENTLY COVERED EMPLOYEES
      WOULD LIKELY INCREASE COSTS
-------------------------------------------------------- Chapter 0:3.2

About 70 percent of the state and local workforce is already covered
by Social Security.  If coverage is mandated, states and localities
with noncovered employees could decide to provide newly hired
employees with pension plan benefits similar to those provided to
currently covered employees. 

The 1980 study examined this option and concluded that implementation
would increase costs by 6 to 14 percent of payroll--or 3 to 11
percent of payroll after eliminating the Medicare tax.  The study
also found that most pension plans for covered employees did not
provide supplemental retirement benefits for employees who retire
before Social Security benefits are available.  For most of the
examined pension plans, the present value of lifetime benefits for
employees covered by Social Security would be greater than the value
of benefits for current noncovered employees. 

Our analysis of 1995 Public Pension Coordinating Council data also
indicates that retirement costs for states and localities covered by
Social Security are higher than the costs for noncovered states and
localities.  For the pension plans that responded to the survey, the
average employee cost rate was about 9 percent of pay in covered
plans, including Social Security taxes, and 8 percent of pay in
noncovered plans.  The average employer cost rate, excluding the cost
of unfunded liabilities, was about 12 percent of payroll for
employers in covered plans, including Social Security taxes, and 8
percent of payroll for employers in noncovered plans. 

These data also indicate that many employees in covered and
noncovered plans, especially police and firefighters, retire before
age 65, when covered employees would be eligible for full Social
Security benefits.  Our analysis indicates that covered employees who
retire before age 65 initially have a lower salary replacement rate
than noncovered employees.  The average salary replacement rate with
30 years of service was 53 percent for members of Social Security
covered plans and 64.7 percent for members of noncovered plans. 

At age 65, however, Social Security covered employees have a higher
total benefit than noncovered employees.  According to the Department
of Labor's 1994 survey, for example, an employee age 65 with 30 years
of service, final earnings of $35,000, and Social Security coverage
had 87 percent of earnings replaced--51 percent by a pension plan and
36 percent by Social Security.  The same employee with no Social
Security coverage had 63 percent of earnings replaced by a pension
plan.  We did not compare the expected value of total lifetime
benefits for covered and noncovered employees because amounts would
vary depending on the benefits offered by each plan. 

Additionally, the extent to which the experience of states and
localities with covered employees can be generalized to those with
noncovered employees is limited.  According to the 1980 study, most
public pension plans that coordinated with Social Security did so in
the 1950s and 1960s when Social Security benefits and payroll taxes
were much smaller.  As Social Security benefits grew, pension plan
benefits remained basically unchanged.  Starting in the 1970s,
however, rising pension costs caused several large state systems to
consider reducing their relatively liberal pension benefits.  In the
1980s, for example, California created an alternative set of reduced
benefits for general employees to, among other things, reduce the
state's retirement costs.  Initially, general employees were
permitted to select between the higher costs and benefits of the
original plan and the lower costs and benefits of the revised plan. 
Subsequently, however, newly hired general employees were limited to
the reduced benefits. 


      LEVEL RETIREMENT SPENDING
      COULD MEAN REDUCED BENEFITS
-------------------------------------------------------- Chapter 0:3.3

Several employee, employer, and plan representatives stated that
spending increases necessary to maintain level retirement income and
other benefits for current and future members would be difficult to
achieve.  They indicate that states and localities might decide to
maintain current spending levels, which could result in reduced
benefits under state and local pension plans for many employees. 

A June 1997 actuarial evaluation of an Ohio pension plan examined the
impact on benefits of mandating Social Security coverage for all
employees, assuming no increase in total retirement costs.  The study
concluded that level spending could be maintained if (1) salary
replacement rates for employees retiring with 30 years of service
were reduced from 60.3 percent to 44.1 percent, (2) current retiree
health benefits were eliminated for both current and future
employees, and (3) the funding period for the plan's unfunded accrued
liability were extended from 27 years to 40 years. 


      IMPACT ON PENSION PLAN
      FINANCES IS UNCERTAIN
-------------------------------------------------------- Chapter 0:3.4

Most states and localities use a reserve funding approach to finance
their pension plans.  In reserve funding, employers--and frequently
employees--make systematic contributions toward funding the benefits
earned by active employees.  These contributions, together with
investment income, are intended to accumulate sufficient assets to
cover promised benefits by the time employees retire. 

However, many public pension plans have unfunded liabilities.  The
nine plans that we examined, for example, have unfunded accrued
liabilities ranging from less than 1 percent to over 30 percent of
total liabilities.  Unfunded liabilities occur for a number of
reasons.  For example, public plans generally use actuarial methods
and assumptions to calculate required contribution rates.  Unfunded
liabilities can occur if a plan's actuarial assumptions do not
accurately predict reality.  Additionally, retroactive increases in
plan benefits can create unfunded liabilities.  Unlike private
pension plans, the unfunded liabilities of public pension plans are
not regulated by the federal government.  States or localities
determine how and when unfunded liabilities will be financed. 

Mandatory coverage and the resulting changes to plan benefits for
newly hired employees are likely to result in reduced contributions
to the current pension plan.  The impact of reduced contributions on
plan finances would depend on the actuarial method and assumptions
used by each plan, the adequacy of current plan funding, and other
factors.  For example, plan representatives are concerned that
efforts to provide adequate retirement income benefits for newly
hired employees would affect employers' willingness or ability to
continue amortizing their current plans' unfunded accrued
liabilities. 


   LEGAL AND OTHER CONSIDERATIONS
---------------------------------------------------------- Chapter 0:4

Mandatory coverage presents several legal and administrative issues,
and states and localities could require several years to design,
legislate, and implement changes to current pension plans. 


      LEGAL CONSIDERATIONS
-------------------------------------------------------- Chapter 0:4.1

Mandating Social Security coverage for state and local employees
could elicit a constitutional challenge.  We believe that mandatory
coverage is likely to be upheld under current Supreme Court
decisions. 

Several employer, employee, and plan representatives with whom we
spoke stated that they believe mandatory Social Security coverage
would be unconstitutional and should be challenged in court. 
However, recent Supreme Court cases have affirmed the authority of
the federal government to enact taxes that affect the states and to
impose federal requirements governing the states' relations with
their employees. 

A plan representative suggested that the Court might now come to a
different conclusion.  He pointed out that a case upholding federal
authority to apply minimum wage and overtime requirements to the
states was a 5 to 4 decision and that until then, the Court had
clearly said that applying such requirements to the states was
unconstitutional.  States and localities also point to several recent
decisions of the Court that they see as sympathetic to the concept of
state sovereignty.  However, the facts of these cases are generally
distinguishable from the situation that would be presented by
mandatory Social Security coverage. 

Unless the Court were to reverse itself, which it seldom does,
mandatory Social Security coverage of state and local employees is
likely to be upheld.  Current decisions indicate that mandating such
coverage is within the authority of the federal government. 


      STATES WOULD REQUIRE UP TO 4
      YEARS TO IMPLEMENT MANDATORY
      COVERAGE
-------------------------------------------------------- Chapter 0:4.2

The federal government required approximately 3 years to enact
legislation to implement a new federal employee pension plan after
Social Security coverage was mandated for federal employees in 1983. 
According to the 1980 Universal Social Security Coverage Study Group,
transition problems for state and local employers would be different
from those faced by the federal government.  For example, benefit
provisions vary among the thousands of public employee retirement
plans, as do the characteristics of the employees covered by those
plans.  Additionally, state governments and many local governments
have laws regulating pensions.  The study group estimated that 4
years would be required to redesign pension formulas, legislate
changes, adjust budgets, and disseminate information to employers and
employees.  Our discussions with employer, employee, and pension plan
representatives also indicate that up to 4 years would be needed to
implement a mandatory coverage decision. 

Additionally, constitutional provisions or statutes in some states
may prevent employers from reducing benefits for employees once they
are hired.  These states may need to immediately enact legislation to
draw a line between current and future employees until decisions are
made concerning the pension benefits for new employees who would be
covered by Social Security.  According to the National Conference of
State Legislators, legislators in seven states, including Texas and
Nevada, meet only biennially.  Therefore, the initial legislation
could require 2 years in those states. 


   CONCLUDING OBSERVATIONS
---------------------------------------------------------- Chapter 0:5

In deciding whether to extend mandatory Social Security coverage to
all newly hired state and local employees, the Congress will need to
weigh several factors.  First, the Social Security program would
benefit from mandatory coverage.  The long-term actuarial deficit
would be reduced, and the trust funds' solvency would be extended for
about 2 years.  However, there are other considerations besides this
relatively small contribution to the program's solvency.  Mandatory
coverage would also increase participation in an important national
program and simplify program administration. 

The implications for state and local employers, employees, and
pension plans would be determined in part by employers' responses to
Social Security coverage.  States and localities with noncovered
workers would likely need to increase total retirement spending to
provide future workers with pension benefits that, when combined with
Social Security benefits, approximate the benefits provided to
current workers.  At the same time, Social Security would provide
newly hired employees with benefits that are not available, or are
available to a lesser extent, under current state and local pension
plans. 

In addition, mandatory coverage would present legal and
administrative issues.  States and localities might attempt to halt
mandatory Social Security coverage in court, although such a
challenge is unlikely to be upheld.  Finally, states and localities
could require up to 4 years to implement mandatory coverage. 


-------------------------------------------------------- Chapter 0:5.1

Mr.  Chairman, this concludes my prepared statement.  At this time, I
will be happy to answer any questions you or the other Subcommittee
Members may have. 


NONCOVERED EMPLOYEES AND THEIR
PENSION PLANS
==================================================== Appendix Appendix

SSA estimates that about 4 million of the approximately 5 million
state and local employees not covered by Social Security are in the
seven states with the largest number of noncovered workers.  (See
table I.1.)



                         Table I.1
          
             States With the Largest Number of
                     Noncovered Workers

                                                 Number of
                                                noncovered
                                             employees (in
State                                           thousands)
--------------------------------------  ------------------
California                                           1,200
Colorado                                               200
Illinois                                               400
Louisiana                                              300
Massachusetts                                          400
Ohio                                                   800
Texas                                                  700
==========================================================
Total                                                4,000
----------------------------------------------------------
Source:  Office of the Chief Actuary, SSA. 

The nine public pension plans included in our study have about 2
million members.  For the most part, members of these plans are not
covered by Social Security.  (See table I.2.)



                                        Table I.2
                         
                           Membership, Contribution Rates, and
                           Assets for Nine Public Pension Plans

                                                  Contribution rate\a
                                           ----------------------------------
                                                                               Net assets
Public pension         Active     Benefit                                             (in
plan                  members  recipients    Employer    Employee       Total   billions)
-----------------  ----------  ----------  ----------  ----------  ----------  ----------
California State      364,000     154,000       12.5%        8.0%       20.5%       $74.8
 Teachers'
 Retirement
 System
Public Employees'     148,000      46,000        11.6         8.0        19.6        19.9
 Retirement
 Association of
 Colorado
Teachers'             137,000      59,000         7.9         8.0        15.9        17.4
 Retirement
 System of
 Illinois
Louisiana State        70,000      27,000        12.0         7.5        19.5         4.3
 Employees'
 Retirement
 System
Massachusetts          83,000      42,000        14.5         9.0        23.5         9.6
 State Employees'
 Retirement
 System
Massachusetts          69,000      29,000        14.0         9.0        23.0         9.9
 State Teachers'
 Retirement
 System
State Teachers        169,000      89,000        14.0         9.3        23.3        42.4
 Retirement
 System of Ohio
Public Employees      345,000     146,000        13.3         8.5        21.8        39.8
 Retirement
 System of Ohio
Teacher               695,000     158,000         6.0         6.4        12.4        62.2
 Retirement
 System of Texas
=========================================================================================
Total               2,080,000     750,000                                          $280.3
-----------------------------------------------------------------------------------------
\a Employer rate includes contributions toward the plan's unfunded
liability.  Employee rate is the rate for general employees. 

Source:  State and pension plan financial reports. 


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