Mark Warshawsky Talking Points 4/17/18

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1 Mark Warshawsky Talking Points 4/17/18 Introduction Good morning, I am Mark Warshawsky, the Deputy Commissioner for Social Security s Office of Retirement and Disability Policy. Welcome to today s workshop, Implications of the Changes and Challenges Facing State Retirement Systems. SSA asked the NBER Retirement Research Center to organize this workshop to facilitate expert discussion on an important topic of retirement policy state and local government employee pensions. NBER has brought together an impressive group of experts on the subject for today s workshop. The variety of institutions represented by the people in this room indicates that state and local government pensions are an important area for discussion on retirement policy. I only have a few minutes, so I would like to use them to set the stage for why we at Social Security would be interested in research on state and local pensions. Section 218 Since 1950, states have been able to elect Social Security coverage for state and local government employees under Section 218 of the Social Security Act. Today, about 72 percent of state and local employees are covered by Social Security. State and local governments that do not participate in Social Security have been required since 1990 to include their non-covered employees in a pension plan. Benefits under these plans need not be the same as Social Security, but must be comparable. For a defined contribution plan, opt out requires the system to provide for an allocation to the employee s account of at least 7.5 percent of the employee s compensation. For defined benefit plans, it is at least 1.5 percent of average 1

2 compensation during an employee s last three years of employment, multiplied by the employee s number of years of service. State and local retirement systems are subject to state constitutional, statutory and case law and must comply with a variety of public statutes, regulations, standards, policies and procedures. In particular, the states have various and varied requirements relating to funding, vesting, and disclosure. However, they must still comply with some Federal tax age discrimination and other requirements. According to the National Association of State Retirement Administrators (NASRA), included in the approximately one-fourth of employees of state and local government participate in a public retirement system in lieu of Social Security are approximately 40 percent of public school teachers and over twothirds of firefighters, police officers, and other first responders. Every state has groups of public employees that do not participate in Social Security. Most to substantially all of the public employees in Alaska, Colorado, Louisiana, Maine, Massachusetts, Nevada, and Ohio are not in Social Security. Size of the Issue Many states have underfunded public pension plans. That is not necessarily a problem if there is a prospect of great future revenue growth to the plan or declines in costs, but in some cases funding is so low there is legitimate worry that plans are not sustainable in a fairly short time horizon. See, for example, research by Boston College. Estimates of the extent to which public plans are underfunded vary, depending on methods and assumptions. A 2017 Bloomberg article found that the funding ratio recently declined in 43 states. With the median funding ratio declining to 71.1 percent in 2016 from 75.6 percent in Based on GASB Statement No. 67, states have funding ratios 11 below 60 percent, with Kentucky, Illinois, and New Jersey having funding ratios in the 30s. [Bloomberg] A Center on Budget and Policy Priorities study using data from 2008 showed that, on average, states contribute approximately 4% of their operating budgets to their 2

3 pension plans. They estimate that most would have to raise this to 5% to 9% to cover projected funding shortfalls. The Boston College research cited above has higher numbers. By some measures, the unfunded liabilities of municipal pension plans are larger than those of state governments. A study by Gordon, Rose, and Fischer (2012) show that, on average, pensions consume nearly 20% of municipal budgets. Some local governments would have to allocate 50% of tax revenue to pension plans in order to meet their obligations to retired workers. Early Results of Shortfall in Pension Funding In several recent cases, local governments with underfunded pension plans have filed for bankruptcy and subsequently cut the pension benefits of both current and future retirees. In 2013, Detroit filed for bankruptcy protection in federal court and received permission to reduce its pension obligations by cutting benefits. Cities and towns in Alabama, California, Rhode Island and other states have taken similar steps. The Commonwealth of Puerto Rico faces an especially severe crisis with an unfunded pension liability estimated at $50 billion, equal to half the island s annual GDP, and five times greater than its annual general fund government revenue. The Windfall Elimination Provision and Government Pension Offset Federal law requires states and localities to provide pensions to workers who are not covered by Social Security. As a result, they or their spouses can be affected by two provisions of the Social Security Act that reduce the benefits paid to individuals who receive pensions from non-covered employment. The Windfall Elimination Provision, or "WEP", reduces the Social Security benefits of retired workers who also have pensions from jobs not covered by Social Security. Its reduces an advantage a windfall that these workers would otherwise receive because of Social Security's progressive benefit formula. About 3 percent of Social Security beneficiaries 1.7 million people are affected by the WEP. 3

4 The Government Pension Offset, or "GPO", reduces Social Security benefits for the spouses and widows of government workers whose jobs were not covered by Social Security. Like the WEP, the GPO is intended to make the benefits of individuals in covered and non-covered employment more similar. About one percent of Social Security beneficiaries, around 600,000 people, have their spousal or widow benefits reduced by the GPO. Of these about 56% are spouses and 44% are widows or widowers. Four out of five affected beneficiaries are women. SSA faces challenges administering WEP/GPO due to incomplete information, leading to overpayments, since SSA is greatly dependent on self-reporting of pension receipt when determining whether to apply the WEP and GPO. On average, SSA has about $880M in annual improper payments resulting from unreported or incorrectly applied state and local pension information. It is the leading cause of improper payments in the Title II program. Although SSA receives information on non-covered pension payments for Federal employees who have worked and earned a pension on earnings that were not subject to the Social Security payroll tax (CSRS pensions), SSA has no mechanism for receiving similar information on state and local government workers who work in non-social Security covered positions and earn a pension based on that employment. SSA has encountered three major administrative challenges in attempting to obtain this data: First, States do not have a consolidated source of pension payment information. Each state has multiple pension systems, and thus, multiple pension payers that provide pension payments to state and local employees. For example, California alone has at least 30 pension payers. States are not required to provide pension information to SSA. SSA is dependent on the willingness of the states to provide pension payment data to SSA. In some cases, such as in Colorado, the states themselves have laws explicitly prohibiting the disclosure of pension data to SSA. The Internal Revenue Service has stated thus for that it does not have the legal authority to obtain, and then share with SSA, information on whether the pension payment data they receive is based in whole or in part on non-social Security 4

5 covered earnings. Although the IRS receives pension payment data on the 1099-R, there is no indicator of whether the pension is based in whole, or in part, on non- Social Security covered earnings. It would be very helpful if the IRS could amend the 1099-R to include a box that would flag receipt of a non-social Security covered pension. To individuals who are affected by the WEP or the GPO, they often come as a surprise. Although both provisions are described in general terms in the annual Social Security statement, more could be done to explain the WEP and GPO to people who might be affected so that they can take them into account in their retirement planning. SSA sends a notice to applicants for retirement benefits, the Potential Private Retirement Benefit Information Notice, describing deferred vested benefits earned from past employers based on information provided by IRS. However, the notice is limited to private employer retirement benefits, so the notice does not provide information on state and local government plans. In recent years, some proposals have been put forward that would calculate the WEP (the Brady Bill), or both the WEP and the GPO (President Obama s proposal), on the basis of a worker s earnings in Social Security covered employment relative to the worker s earnings in non-covered employment. The worker s combined Social Security benefit (using both covered and non-covered earnings) would be calculated. Then, the portion of that benefit that was based on covered earnings would be payable as the worker s Social Security benefit. Today s Program Today s program features three sessions and a keynote speaker to address the following questions: o What is the Financial Status of State and Local Retirement Plans and the Public Labor Force Covered by These Plans? o Do Trends in Retirement Plans Threaten the Retirement Security of Public Employees? o How do we Measure Pension Funding? 5

6 o How Will Changes in State Retirement Plans Affect Social Security and Medicare? We believe today s discussion will both inform our program policies as well as research agenda going forward. Acknowledgements I would like to finish by thanking Bob Clark, Jeff Brown, and Jim Poterba for organizing this meeting for the NBER Retirement Research Consortium and the behind-the-scenes support by Janet Stein and Emily Wiessner at NBER. Also thanks to the SSA program officials responsible for managing the project Lynn Fisher and Kristi Scott. 6

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