Universal Social Security Coverage: Extending Mandatory Coverage

U N I V E R S A L SOCIAL SECURITY COVERAGE: EXTENDING MANDATORY COVERAGE ISSUE B R I E F NUMBER I B 8 0 0 8 6 PLUTHOR: Dennis Snook Education and Public Welfare Division THE L I B R A R Y OF C O N G R E S S CONGRESSIONAL RESEARCH SERVICE MAJOR I S S U E S S Y S T E M DATZ O R I G I K A T E D 09/16/80 DATE UPDATED 01/19/83 FOR A D D I T I O N A L I N F O R M A T I O N C A L L 2 8 7 - 5 7 0 0 CRS- 1 iSSUE DEFINITION "Universal s o c i a l s e c u r i t y coverage" refers t o a v a r i e t y of issues r e s u l t i n g from t h e e x i s t e n c e of employment n o t c o v e r e d by social .security. Of C u r r e n t interest are those Federal, S t a t e and local, and p r i v a t e , n o n p r o f i t j o b s which a r e n o t p r o t e c t e d b y , and n o t t a x e d f o r , t h e p r o v i s i o n s of t h e s o c i a l s e c u r i t y program. Eliminating o p p o r t u n i t i e s f o r noncovered employment c o u l d c o r r e c t c e r t a i n d i s p a r i t i e s i n t h e t r e a t m e n t of workers, improve t h e f i n a n c i a l o p e r a t i o n of t h e p r o g r a m , a n d r e s u l t i n a s h o r t t e r m i n f u s i o n of r e v e n u e t o t h e S o c i a l S e c u r i t y T r u s t Fund. Universal c o v e r a g e would precipitate substantial restructuring of complicated retirement systems, and e n t a i l a d d i t i o n a l c o s t s f o r many government and n o n p r o f i t employers. R e p r e s e n t a t i v e s of governmental employee g r o u p s b e l i e v e t h a t t h i s r e d e s i g n of p u b l i c p e n s i o n p l a n s , a n d t h e s t r a i n on c o s t - c o n s c i o u s governments of p a y i n g the employer's s h a r e of the social retirement r i g h t s and income s e c u r i t y t a x , W i l l mean s e r i o u s c u t b a c k s o f p r o t e c t i o n s t h a t noncovered employees have a c q u i r e d d u r i n g t h e y e a r s of t h e i r e x c l u s i o n from s o c i a l s e c u r i t y . Opponents of mandatory coverage of Federal social. workers a l s o argue t h a t a n y s h o r t term f i n a n c i n g a s s i s t a n c e t o s e c u r i t y r e s u l t i n g f r o m c o v e r a g e i s i l l u s o r y , a n d i s a c t u a l l y a r e l i a n c e upon g e n e r a l r e v e n u e s t o f u n d a p o r t i o n of t h e program b e n e f i t s . B A C K G R O U N D A N D POLICY ANALYSIS, Current Law Covered employment i s employment i n which e a r n i n g s a r e t a x e d f o r social s e c u r i t y and i n which t h e income p r o t e c t i o n of t h e program i s a c q u i r e d . C u r r e n t l y , 90% of t h e w o r k f o r c e i n t h e U n i t e d S t a t e s works i n employment c o v e r e d by social security. However, most employment i n t h e F e d e r a l Government, a b o u t o n e - t h i r d o f t h e employment i n S t a t e a n d l o c a l g o v e r n m e n t s , and about one job i n e i g h t i n p r i v a t e , n o n p r o f i t o r g a n i z a t i o n s i s n o t covered by t h e r e t i r e m e n t , s u r v i v o r s , d i s a b i l i t y , a n d h o s p i t a l i n s u r a n c e p r o g r a m s . In a d d i t i o n , c e r t a i n k i n d s o f m a r g i n a l employment remain e x c l u d e d (some their schools, a n d f a m i l y members newpaper v e n d o r s , s t u d e n t s employed i n the e x a c t number o f noncovered working w i t h i n t h e d o m i c i l e ) . Although w o r k e r s i s unknown, e s t i m a t e s p r o d u c e d f o r t h e U n i v e r s a l S o c i a l S e c u r i t y employees would b e Coverage s t u d y i n d i c a t e t h a t between 6 and 7 m i l l i o n a f f e c t e d by expanding coverage t o i n c l u d e a l l government and p r i v a t e , n o n p r o f i t employment. NOTE: T h i s s t u d y , m a n d a t e d by t h e 1 9 7 7 Amendments t o t h e S o c i a l S e c u r i t y A C ~ , was c h a r g e d w i t h d e t e r m i n i n g t h e " d e s i r a b i l i t y and f e a s i b i l i t y n of extending s o c i a l s e c u r i t y coverage t o a l l F e d e r a l , S t a t e and Local, and p r i v a t e , non-profit employment. The r e p o r t of the Universal S o c i a l S e c u r i t y S t u d y G r o u p was r e l e a s e d i n March 1 9 8 0 . The major groups n o t covered are: A. F e d e r a l c i v i l i a n employees covered under a n o t h e r U.S. retirement system. By f a r t h e g r e a t e s t n u m b e r o f t h e s e e m p l o y e e s a r e c o v e r e d b y the social Civil Service Retirement System. Federal employees covered by s e c u r i t y i n c l u d e t h o s e i n t h e armed f o r c e s , T e n n e s s e e V a l l e y A u t h o r i t y (TVA), nonappropriated fund a c t i v i t i e s , and o t h e r q u a s i - F e d e r a l o r g a n i z a t i o n s . CRS- 2 B. Employees of State and l o c a l governments w h o have not been covered by a Federal-State agreement. About two-thirds o f S t a t e and local employees a r e covered because their employers have entered i n t o voluntary agreements to provide such coverage. These agreements c a n , within certain restrictions, be terminated. C. Employees of certain nonprofit organizations that h a v e not arranged for social security coverage for their employees. Organizations tax-exempt under 5 0 1 (a) of t h e type described i n 501 (c) ( 3 ) of the Internal Revenue C o d e may cover their e m p l o y e e s through voluntary agreements. About seven of every eight regular jobs i n nonprofit organizations a r e presently covered. These agreements c a n , u n d e r certain c o n d i t i o n s , be terminated. P r o b l e m s of Non-Covered Employment Certain problems result from t h e existence of noncovered employment. Under current l a w , employees who m o v e between jobs covered by social security experience periods without i n c o m e to those not covered or vice versa may protection for themselves and their dependents i n c a s e o f death or disability, may n o t build adequate credits toward retirement pensions, a n d may actually f o r f e i t a n y return on contributions. s o m e e m p l o y e e s , on t h e other hand, a c q u i r e benefits from social security under especially f a v o r a b l e conditions, and y e t receive f u l l benefits from a public staff pension plan. Underlying these individual a n d structural' problems i s a fundamental question: Under w h a t conditions a r e exemptions warranted from a program t h a t requires mandatory participation f o r most citizens a n d that f u l f i l l s certain social objectives? History When the s o c i a l security program o r i g i n a t e d , primary and i m m e d i a t e attention w a s directed to covering employees i n c o m m e r c i a l , nonagricultural enterprises. Many of those employees excluded from participation w e r e already eligible f o r some form of i n c o m e protection, o r w e r e engaged in employment n o t r e a d i l y assimulated i n t o a beginning social i n s u r a n c e program. Since i t s enactment i n 1 9 3 5 , social security h a s been marked by incremental expansions of coverage and of changes in the t y p e a n d generosity of benefits provided. T h e program currently provides benefits to o v e r 3 5 million beneficiaries. Recommendations t o mandate social security c o v e r a g e f o r a l l noncovered employment a r e a s old a s the system itself. Over t h e y e a r s , none of t h e various reports a n d studies which have examined the i s s u e of mandatory coverage for a l l p u b l i c and private nonprofit employees h a s resulted in options a c c e p t a b l e t o Congress. An option t o join under voluntary agreements w a s provided in 1 9 5 0 to private nonprofit organizations; i t w a s thought a t the time t h a t the goal of providing needed i n c o m e protection without endangering t a x exempt s t a t u s could best be accomplished i n that fashion. Under these a g r e e m e n t s , i f a n organization decided to join, employees voting a g a i n s t coverage were n o t included in the coverage a g r e e m e n t but a l l n e w e m p l o y e e s were covered automatically. Also in 1 9 5 0 , S t a t e and local employees n o t covered by a retirement system sponsored by their employer governments were provided a n opportunity f o r social security e o v e r a g e , if their employer elected such c o v e r a g e , and if CRS- 3 IB80086 UPDATE-01/19/83 their State had entered into a n agreement with the Federal Government to permit such coverage. In 1954, State an8 local government employees (except to elect policemen and firemen), under a retirement system were permitted coverage. In 1956, firemen and policemen in designated States were permitted coverage. Also, in 1956, some States were granted the option for coverage purposes of dividing an existing retirement system into two systems, one excluding employees not desiring coverage, and the other integrating social security coverage into a new system. The new system was to include all employees electing coverage and any employees hired after the effective date of coverage. In 1957, coverage was extended to the uniformed services. During the initial stages of development, the 1977 Amendments to the Social Security Act contained a provision that would have extended social remaining noncovered government and nonprofit security coverage to ;he employees. This provision was deleted during consideration on the floor of the House of Representatives. In its place, Congress directed the Department of Health, Education and Welfare (DHEW) to conauct a 2-year study of the desirability and feasibility of covering currently nonccvered public and private, nonprofit employment. The Universal Social Security Coverage Study Group released that report in March 1980. The report made no recommendations (although its chairman publicly endorsed coverage of these noncovered employees), but die contain substantial empirical data on the consequences of permitting some employment to remain outside the social security program. The report also contained several options for action on the issue. In addition to the Universal Coverage Study, three other government sponsored studies have commented on this issue in the past year. The 1979 Advisory Council (a group of citizens and experts established regularly to assess che social security system and recommend changes) endorsed social security coverage for Federal, State and local, and nonprofit employees. The President's Commission of Pension Policy and the National Commission on Social Security, two ad hoc groups set up to study and report on issues in the Nation's retirement income programs, have recommended in their interim reports that serious consideration be given to mandatory coverage for these noncovered employees. Another group, the Fund for Assuring an Independent Retirement (FAIR), opposes universal coverage. This group, organized and supported by groups representing public employees and annuitants, also commissioned a study of universal coverage. The report from that study asserts that in order to insure equitable treatment of employees, no employee should receive less than would have been received had no changes been made. Not only would this be expensive, the report argues, but the necessary program restructuring required to integrate social security coverage with currently noncovered retirement plans would introduce "unnecessary confusion and unwarranted complexities," and accomplishes r,o.significant purpose. Social Security a s a Compulsory Program The program was compulsory for its first participants and most subsequent expansions of coverage have been mandatory. One justification is based upon the relationship of benefits to financing; only by requiring participation of both high and low cost participants can benefits be adequately financed. Another justification for compulsory participation follows from the observation that, because of the pressure of immediate economic demands, most people are unable or unwilling to prepare adequately themselves or their dependents, for income loss due to retirement, death or disability. Social philosophers, in advocating socia1,insurance programs, argue th-at the nature CRS- 4 IB80086 UPDATE-01/19/83 of social i n s u r a n c e i s c ~ m p u l s o r y : a voluntary government income replacement program would n o t differ i n substance from the array o f savings and insurance Only by requiring participation opportunities a v a i l a b l e i n a f r e e economy. can society b e protected f r o m the undesirable effects of destitution among citizens w h o a r e not expected to work because of old a g e , disability, or dependency. S o c i a l i n s u r a n c e provides both a n income in retirement and an income i n s u r a n c e against unforeseen catastrophes. Consistent with these social o b j e c t i v e s , the program began paying benefits t o early participants in s p i t e of t h e relatively s h o r t span of employment in which they contributed. Comparing S o c i a l Security and Staff Pension Plans Many public servants, especially F e d e r a l employees, receive relatively high retirement benefits, but these same employees often receive less generous d i s a b i l i t y , s u r v i v o r s and inflation protection than i s offered by employees covered by the social security program. As a g e n e r a l rule, most both staff pension plans a n d social security have broader income protection with higher benefits than employees covered by a staff pension plan alone. O n e major exception must b e noted. Most public pension plans permit employees to r e t i r e under a f u l l pension before a g e 62, the earliest a g e of social security old a g e retirement. Many public staff plans permit retirement a t a g e 5 5 a f t e r 3 0 years o f service. Policemen a n d firemen often retire a t a g e 5 0 or y o u n g e r with 2 0 y e a r s sf service. A s a consequence, em2loyees w i t h f u l l c a r e e r s covered by staff retirement plans often a c q u i r e t h e protection o f s o c i a l security a f t e r qualifying for benefits in a noncovered plan. T h e r e p o r t of the Universal Coverage study claims that a s many a s t h r e e o u t of every f o u r Civil S e r v i c e annuitants eventually may qualify for a s o c i a l s e c u r i t y benefit. In addition, because of the criteria by which s o c i a l security establishes eligibility, many employees retain or a c q u i r e social security i n s u r a n c e protection while employed in noncovered jobs, protection earned by prior o r c o n c u r r e n t employment covered by social security. Social security i s m o s t o f t e n referred to a s social insurance; i t i s designed t o r e p l a c e e a r n i n g s lost due t o retirement, death o r disability and i s financed by a payroll t a x o n both e m p l o y e r s and employees with benefits granted by entitlement. R e t i r e m e n t b e n e f i t s a r e earned through accumulation of quarters o f covered e a r n i n g s ; d i s a b i l i t y and survivors protection i s @arned t h e s a m e w a y , o n l y m o r e quickly: F u l l benefits a r e paid a t a g e 6 5 ; . a reduced benefit i s a v a i l a b l e a t a g e 62. Benefits a r e related to earnings which a r e adjusted to c u r r e n t v a l u e s before benefits a r e calculated. Benefits a r e tilted i n f a v o r of r e c i p i e n t s with career histories o f l o w wages. T h e r e a r e c o m p r e h e n s i v e medical benefits available in the program. Additional b e n e f i t s a r e g r a n t e d to dependents. Earned credits a r e fully portable from o n e covered j o b to another. Benefits a r e t a x f r e e and adjusted annually f o r c h a n g e s in. t h e cost-of-living. Civil S e r v i c e R e t i r e m e n t i s a staff retirement plan, financed by employee contributions a n d government general f u n d payments, with benefits available upon reaching a combination of years o f service and a g e ; most employees retire before a g e 60 with m o r e than 2 5 years of service. Benefits a r e calculated a c c o r d i n g to s a l a r y and y e a r s of service -- longer service means a higher percentage of s a l a r y replaced a n d higher salary means a higher annuity. T h e r e a r e b e n e f i t s for survivors of deceased employees. Benefits for survivors of a n n u i t a n t s a r e a v a i l a b l e but c a u s e lower annuities. Disability b e n e f i t s a r e p a i d ; however, there i s no a l l o w a n c e f o r dependents except in t h e c a s e of work-incurred disability. R e t i r e m e n t credits a r e transferable o n l y with F e d e r a l employment. Annuities a r e taxable a f t e r the CRS- 5 IB80G86 UPDATE-01/19/83 employee h a s r e c e i v e d t h e v a l u e of h i s c o n t r i b u t i o n i n payments; generally Annuities are adjusted annually a r o u n d 18 m o n t h s a f t e r b e n e f i t s c o m m e n c e . f o r changes i n the cost-of-living. P u b l i c ' employee r e t i r e m e n t systems of S t a t e and l o c a l governments v a r y in a v e r a g e s i z e and t y p e of employee covered. Of t h e a p p r o x i m a t e l y 6 , 0 0 0 p l a n s , Two-thirds of all plans a b o u t 3% c o v e r a b o u t t h r e e - f o u r t h s of t h e workers. a r e l o c a l p o l i c e and f i r e f i g h t e r s , b u t t h e t o t a l membership of these plans r e p r e s e n t s o n l y a b o u t 3% of a l l S t a t e and l o c a l government employees. I n g e n e r a l , S t a t e and l o c a l government pension p l a n s coordinated with s o c i a l s e c u r i t y a r e n o t much d i f f e r e n t f r o m p l a n s f o r e m p l o y e e s not covered by' s o c i a l s e c u r i t y . H o w e v e r , r e t i r e e s who a c q u i r e s o c i a l s e c u r i t y b e n e f i t s a f t e r becoming e l i g i b l e f o r b e n e f i t s f r o n t h e i r staff r e t i r e m e n t p l a n may receive total retirement pay g r e a t e r than employees w i t h coordinated coverage. This may b e e s p e c i a l l y t r u e f o r p o l i c e and firefighters. T y p i c a l l y , t h e s e e m p l o y e e s r e t i r e a t a g e 5 0 o r 5 5 w i t h 20 y e a r s of service a n d o f t e n c a n r e t i r e a t a n y a g e w i t h 20 y e a r s o f service. Many o f these employees have second c a r e e r s under s o c i a l s e c u r i t y covered employment. and/or irregularly Much n o n c o v e r e d n o n p r o f i t e m p l o y m e n t i s v o l u n t e e r , compenszted. Pension protection, if available, i s usually a defined contribution plan with benefits based e n t i r e l y on c o n t r i b u t i o n s (and any a c c u m u l a t e d i n t e r e s t on t h o s e c o n t r i b u t i o n s ) made d u r i n g p a r t i c i p a t i o n . R e l a t i o n s h i p Between Noncovered Employment a n d S o c i a l S e c u r i t y Most noncovered workers a r e p a r t i c i p a n t s in staff retirement plans s p o n s o r e d by t h e i r employers. Four major consequences f o l l o w from t h e e x i s t e n c e o f e m p l o y m e n t n o t c o v e r e d b y s o c i a l s e c u r i t y b u t c o v e r e d by staff retirement plans: Some e m p l o y e e s may e x p e r i e n c e p e r i o d s w i t h o u t i n c o m e p r o t e c t i o n a s t h e y move b e t w e e n j o b s c o v e r e d a n d n o t c o v e r e d by s o c i a l s e c u r i t y . These periods without income p r o t e c t i o n occur because b o t h s o c i a l s e c u r i t y a n d t y p i c a l s t a f f p l a n s r e q u i r e t h a t employees work a s p e c i f i e d p e r i o d of t i m e p r i o r t o becoming p r o t e c t e d by d i s a b i l i t y , s u r v i v o r , a n d c e r t a i n o t h e r p r o v i s i o n s o f t h e i r r e s p e c t i v e programs. In addition, typical s t a f f r e t i r e m e n t p l a n s o f t e n l a c k some o f t h e f e a t u r e s o f social security. Benefits for disability, survivors, and d e p e n d e n t s , as w e l l as f u l l c o s t - o f - l i v i n g adjustments, and comprehensive medical b e n e f i t s a r e f e a t u r e s of s o c i a l s e c u r i t y g e n e r a l l y s u p e r i o r t o ' s i m i l a r p r o v i s i o n s of s t a f f p l a n s . Some w o r k e r s p a y i n t o s o c i a l s e c u r i t y w i t h o u t b e c o m i n g e l i g i b l e f o r any b e n e f i t s . These workers r e c e i v e no r e t u r n on t h e i r s o c i a l s e c u r i t y c o n t r i b u t i o n s . Some w o r k e r s a l s o l e a v e noncovered employment w i t h o u t r e t a i n i n g any pension r i g h t s , and could reach r e t i r e m e n t a g e w i t h o u t an adequate s o u r c e of r e t i r e m e n t income. T h e s e f i r s t two c o n s e q u e n c e s have b e e n c a l l e d c o v e r a g e o r b e n e f i t "gaps. " Some e m p l o y e e s who s p e n d o n l y a p o r t i o n c f t h e i r w o r k c a r e e r i n e m p l o y m e n t c o v e r e d by s o c i a l s e c u r i t y a c q u i r e b e n e f i t s from t h e program under e s p e c i a l l y f a v o r a b l e conditions. These so-called "windfalls" a r e a product o f t h e m e t h o d s by w h i c h s o c i a l s e c u r i t y b e n e f i t s a r e The p r e s e n t f o r m u l a i s c o m p u t e d u n d e r p r e s e n t law. h i g h l y f a v o r a b l e t o t h o s e w i t h low e a r n i n g s . This f e a t u r e of t h e program i s d e s i g n e d t o a l l e v i a t e t h e ecenomic wants t h a t might o t h e r w i s e r e s u l t from g i v i n g e q u a l t r e a t m e n t t o e a r n i n g s r e g a r d l e s s o f how h i g h o r low t h e y a r e . H o w e v e r , " l o w e a r n i n g s 1 ' may r e s u l t f r o m s h o r t t e r m work i n c o v e r e d employment c o u p l e d w i t h a f a i r l y l o n g t e n u r e i n n o n c o v e r e d w o r k -- w o r k i n w h i c h a s u b s t a n t i a l retirement benefit i s earned. The r e s u l t i s an unintended s u b s i d i z i n g of s o c i a l s e c u r i t y b e n e f i t s f o r t h o s e w h o s e l o w e a r n i n g s d o n o t r e p r e s e n t a situation of econamic need. I R a d d i t i o n , b e c a u s e of a f e a t u r e i n c h e c o m p u t a t i o n i n t e n d e d t o d i s r e g a r d up t o 5 y e a r s of e x c e p t i o n a l l y low wages b e f o r e b e n e f i t s a r e c a l c u l a t e d , workers w i t h a n e a r l y f u l l c a r e e r of covered e a r n i n g s , b u t some n o n c o v e r e d e a r n i n g s , c a n h a v e t h e same b e n e f i t s a s s o m e o n e who h a s c o n t r i b u t e d t o s o c i a l s e c u r i t y 5 years longer. T h i s i s known a s a " c o n t r i b u t i o n g a p . " (4) Workers i n n o n c o v e r e d employment a r e exempt from t h e t a x a t i o n t h a t supports t h e s o c i a l o b j e c t i v e s of t h e s o c i a l s e c u r i t y program. This t a x burden i s mandatory f o r a l l w o r k e r s who a r e n o t e x e m p t f r o m p a r t i c i p a t i o n , Mandatory s o c i a l s e c u r i t y coverage f c r c u r r e n t l y noncovered workers could eliminate an estimated $840 m i l l i o n yearly i n windfalls and unintended s u b s i d i e s , and could r e s u l t i n a d d i t i o n a l revenues of an estimated $1.1 billion from e l i m i n a t i o n of contribution gaps, according t o t h e DHEW Universal Coverage Study. I m p a c t on t h e S o c i a l S e c u r i t y T r u s t Fund o f U n i v e r s a l C o v e r a g e . E l i m i n a t i n g o p p o r t u n i t i e s t o work i n n o n c o v e r e d employment h a s a d d i t i o n a l short-run i m p l i c a t i o n s f o r t h e f i n a n c i a l c o n d i t i o n of the social security program. I f a l l c u r r e n t l y noncovered workers were covered beginning i n 1982, t h e o f f i c e of t h e A c t u a r y o f S o c i a l S e c u r i t y estimates t h a t $22.5 b i l l i o n in a d d i t i o n a l r e v e n u e w o u l d f l o w t o t h e S o c i a l S e c u r i t y T r u s t Fund by 1985. Over a g e n e r a t i o n , t h i s s u r p l u s of revenue o v e r b e n e f i t payments would diminish. Revenue s u r p l u s c c c u r s e a r l y i n t h e t r a n s i t i o n t o f u l l coverage i n t h e f u l l amount because, employee/employer c o n t r i b u t i o n s would b e paid i m m e d i a t e l y , w h i l e b e n e f i t o b l i g a t i o n s would n o t come d u e u n t i l employees began t o r e t i r e , o r o t h e r w i s e became e n t i t l e d t o b e n e f i t s . CRS- 7 TABLE 1. IB80086 UPDATE-01/19/83 Additional OASDI and HI contribution income resulting from universal coverage (?n calendar years after the effective aate through 1990) (in billions) New entrants only Calendar year Total Federal State and Local Effective Jan. 1 , 1982 Effective Jan. 1 , 1985 1985 1986 1987 1988 1989 1990 1.0 3.3 5.4 7.6 -------(1) 10.1 13.8 0.5 1.7 2.6 3.7 4.9 6.8 Less than $ 5 0 million. Nonprofit CRS- 8 IB80086 VPDATE-01/19/83 All current and future employees Calend,ar year Total Federal State and Local Nonprofit Effective Jan. 9 , 1982 Effective Jan. 1 , 9985 1985 1986 1987 1988 1989 1990 -------Note: Source: 21.4 24.9 27.1 29.5 32.1 37.4 12.2 13.5 14.7 16.0 17.5 20.5 9.9 10.8 11.3 12.3 14.7 1.3 1.5 1.6 1.7 1.9 2.2 Estimates are Sased on the July 1980 Mid-Session Review assumptions through 1984 and extended through 1990. Social Security ACministration, Office of the Actuary, July 29, 1980. CRS- 9 Of c o u r s e , i t i s u n l i k e l y t h a t a u n i v e r s a l coverage proposal c o u l d be (say, e f f e c t i v e f o r a l l new a n d c u r r e n t e m p l o y e e s i n 1 9 8 2 -- s o m e e m p l o y e e s employees e l i g i b l e t o r e t i r e ) would l i k e l y need t o be exempted. S t a t e and l o c a l governments would need s e v e r a l 'years l e a d t i m e t o manage' t h e v a r i o u s complexities of r e t i r e m e n t s y s t e m , r e d e s i g n and development of any required revenue gains i n various alternative financing. T a b l e 1 shows s h o r t t e r m combinat+ons of e f f e c t i v e d a t e s and a f f e c t e d employees. Some a n a l y s t s b e l i e v e t h a t t h e s o c i a l s e c u r i t y program i s f a c e d With protential cash flow shortages i n the near future. Any such cash-flow s h o r t a g e would r e q u i r e a p a y r o l l t a x i n c r e a s e , a b e n e f i t c u t , o r t h e u s e o f a new r e v e n u e s o u r c e i n t o t h e S o c i a l S e c u r i t y T r u s t F u n d . The s h o r t t e r m i n f u s i o n of r e v e n u e f r o m e x t e n d i n g c o v e r a g e t o p r e v i o u s l y n o n c o v e r e d w o r k e r s c o u l d a l l e v i a t e t h e p r o b l e m , a l t h o u g h n o t i n t h e same s e n s e as e i t h e r a t a x increass or benefit cut. Kandatory Coverage f o r P u b l i c Employees I f t h e d e c i s i o n w e r e made t o p r o c e e d t o u n i v e r s a l c o v e r a g e , C o n g r e s s c o u l d c o v e r p u b l i c e m p l o y e e s by a m e n d i n g t h e S o c i a l S e c u r i t y A c t ; s u c h a n amendment These would p r e c i p i t a t e r e s t r u c t u r i n g of a f f e c t e d s t a f f retirement plans. m o d i f i c a t i o n s would b e r e q u i r e d t o a s s i m i l a t e t h e f e a t u r e s of s o c i a l s e c u r i t y i n t o t h e s t r u c t u r e of income p r o t e c t i o n p u b l i c employees c u r r e n t l y p o s s e s s . There a r e t h r e e major considerations social security: in coordinating staff plans with (1) T h e B e n e f i t P a c k a g e Would Need R e d e s i g n i n g . T h i s r e d e s i g n would inclnde changing t h e b e n e f i t formula t o e i t h e r implicity o r e x p l i c i t l y consider t h e v a l u e of expected s o c i a l s e c u r i t y payments; i . e . , b e n e f i t s could case, an appropriate Se o f f s e t by each o t h e r o r added t o g e t h e r . In either l e v e l of combined b e n e f i t s i s a d e t e r m i n a b l e p o l i c y c h o i c e . However, i f the s o c i a l s e c c r i t y f o r m u i a i t s e l f were n o t m o d i f i e d , i t would be necessary to d e t e r m i n e t h e e f f e c t t h e s o c i a l s e c u r i t y "tilt" t o lower e a r n i n g s would have on t h e c o o r d i n a t e d p e n s i o n p l a n b e n e f i t s . One o b j e c t i v e m i g h t b e t o r e p l i c a t e i n t h e c o o r d i n a t e d p l a n any b e n e f i t s t h a t would h a v e been e a r n e d u n d e r t h e o l d s t a f f plan. Major problems a r e coordination. encountered i n t r y i n g t o r e p l i c a t e b e n e f i t s before and after Social security benefits are not taxable; certain ancilliary benefits of s o c i a l s e c u r i t y v a r y W i t h f a m i l y Composition; l e n g t h of employment i n jobs c o v e r e d b y t h e c o o r d i n a t e d s y s t e m would v a r y . Each of these f a c t o r s would v a r y t h e degree t o which t h e c u r r e n t s o c i a l s e c u r i t y b e n e f i t formula would a f f e c t t h e r e l a t i o n s h i p between t h e s t a f f b e n e f i t - and the social security benefit. A strategy replicating current staff plan benefits while coordinating the plan with the current social security s t r u c t u r e i s theoretically possible. A 100% o f f s e t of any s o c i a l s e c u r i t y b e n e f i t s e a r n e d i n employment c o v e r e d by the staff plan would p e r m i t b e n e f i t replication a n d would completely n e u t r a l i z e t h e d i s t r i b u t i o n a l e f f e c t s of t h e s o c i a l s e c u r i t y b e n e f i t tilt. However, e s t a b l i s h i n g t h e a p p r o p r i a t e p o r t i o n o f s o c i a l s e c u r i t y t o b e o f f s e t would be a d m i n i s t r a t i v e l y d i f f i c u l t ; t h e f o r m u l a i t s e l f would b e cumbersome and would r e q u i r e b e n e f i t payment i n f o r m a t i o n n o t p r e s e n t l y a v a i l a b l e . There i s some r i s k t h a t t h e " 1 0 0 % o f f s e t " t e c h n i q u e would r e s u l t i n low income employees r e c e i v i n g most of t h e i r r e t i r e m e n t income from s o c i a l s e c u r i t y and few o r no b e n e f i t s from t h e s t a f f p l a n , w h i l e h i g h e r income workers would r e c e i v e a larger proportion of higher t o t a l benefits from t h e staff plan. U n d e r such a structure, the staff retirement component could be made a t t r a c t i v e to high income, long term employees, but lower income o r short term employees would not receive the same staff plan annuity value for each y e a r of service a s their higper paid co-workers. Internal Revenue Service regulations prohibit private staff pension plans from fully neutralizing the s o c i a l security tilt in the staff plan benefit formula, although these IRS regulations d o not necessarily apply to government plans. Because of t h e social security benefit tilt to lower e a r n i n g s , a formula t h a t seeks to duplicate a s closely a s possible retirement benefits earned u n d e r the current pension format, and t h a t maintains t h e social security t i l t , would h a v e to target the intended post-retirement replacement r a t e t o a particular preretirement salary level. Under any f o r m u l a that maintains the s o c i a l security t i l t , employees whose i n c o m e i s less than the target salary would receive benefics greatsr than the current replacement r a t e for the salaries, less. An additional t a r g e t salary -- employees with higher s u p p l e m e n t , o r "thrift plan." could mitigate this l o s s to nigher paid employees. Ancilliary f e a t u r e s , e.g., medical, disability, survivors o r dependents benefits, could be modified or eliminated to accommodate o v e r l a p t h a t might r e s u l t from providing social security coverage a s well a s t h e provisions of t h e staff retirement plan. Plan s p o n s o r s could a l s o look upon the restructuring a s a n opportunity to modify t h e plan i n ways n o t necessarily caused by social security coverage. (2) S o m e Current Employees Might Need t o b e Exempt f r o m the Transition to Coverage. If t h e decision i s made to extend social sesurity to c u r r e n t 5 non-covered employment, this would seem to promote including a s many current employees a s i s feasible. D a t a developed by the Universal C o v e r a g e Study s u g g e s t that m o s t current employees could be covered with n o reduction in c u r r e n t benefit expectations. However, many analysts h a v e argued that f o r political and other reasons only n e w employees o r emp,loyees w h o h a v e not y e t acquired vested benefit rights should be required t o participate in any coordinated system. In all cases, benefit rights earned under old rules could be f r o z e n and combined with benefits earned under n e w rules. One transition option frequently mentioned a s a possibility, and currently a v a i l a b l e to S t a t e or local plans entering social s e c u r i t y , i s to i n c l u d e a l l n e w employees under the coordinated plan a n d provide a n option to participate t o all current employees. T h i s strategy could b e combined with actions intended t o c l o s e coverage gaps and diminish windfalls. (3a) Coverage of Federal Employees May H a v e Cost Implications. T o assess a c c u r a t e l y t h e exteni to which universal caverage would a f f e c t taxpayers r e q u i r e s further analysis of the Complex interrelationships in pension rights a n d social security entitlements earned by a l l current noncovered employees. As previously illustrated, i n the short run mandatory coverage would i m p r o v e the financial coneition of the social security system. T h e near-term a d d i t i o n a l revenues would exceed the near-term additional expenditures. Over t h e long t e r m , improvement i n the f i n a n c i a l operation of t h e social security p r o g r a m s would result Only if the savings from eliminating windfall benefits a n d contribution gaps exceeds the costs of bringing n e w participants into the s o c i a l security system. T h e social security actuaries estimate t h a t there would be a n a v e r a g e long term (75 years) advantage to covering a l l currently noncovered public and private, nonprofit employees. T h e a c t u a r i e s estimate that the savings t o the social roughly -5% of t a x a b l e p a y r o l l . security program would be equivalent to The s h o r t t e r m e f f e c t upon t h e u n i f i e d F e d e r a l b u d g e t i s r o u g h l y t h e same whether coverage i s extended o r n o t . Federal 'outlays f o r both social s e c o r i t y and c i v i l s e r v i c e r e t i r e m e n t b e n e f i t s , r e f l e c t r i g h t s earned some years p r i o r t o t h e commencement o f p a y m e n t . These r i g h t s would continue t o be honored; c o n s e q u e n t l y o u t l a y s f o r b e n e f i t s would c o n t i n u e as b e f o r e . While t h e F e d e r a l Government would now b e a contributor to the social s e c u r i t y system, i n a d d i t i o n t o paying t h e c o n t i n u i n g c o s t s of the existing C i v i l S e r v i c e Retirement System, t h i s t r a n s a c t i o n would be i n t e r n a l , t h a t i s , i t would b e a n i n t e r g o v e r n m e n t a l transfer of funds r e s u l t i n g i n n o cew revenues o r e x p e n d i t u r e s t o t h e F e d e r a l Government. In t h e long run, t h e b e n e f i t o b l i g a t i o n s of t h e C i v i l Service Retirement System would be r e d u c e d i f s o c i a l s e c u r i t y c o v e r a g e were p r o v i d e d Federal employees. I n a w r i t t e n r e s p o n s e t o a q u e s t i o n s u b m i t t e d by t h e House P o s t O f f i c e a n d C i v i l S e r v i c e C o m m i t t e e , t h e DHEW U n i v e r s a l C o v e r a g e study group suggested t h a t any l o n g term changes i n F e d e r a l p e n s i o n o u t l a y s would "depend on t h e g e n e r o s i t y o f t h e c o o r d i n a t e d s y s t e m v , of viewing the implications on t h e H o w e v e r , t h e r e i s a d i f f e r e n t way F e d e r a l b u d g e t o f c o v e r i n g F e d e r a l w o r k e r s by social security. There a r e b a s i c a l l y t h r e e p o s s i b l e methods of improving t h e f i n a n c i n g of the Social S e c u r i t y T r u s t Funds: payroll tax increases, benefit reductions, o r new sources of revenue. An e x p a n s i o n o f c o v e r a g e t o i L c l u d e n o n c o v e r e d S t a t e a n d l o c a l e m p l o y e e s i s a new s o u r c e o f Federal revenue. Coverage of Federal w o r k e r s , however, i s n o t t h e same s o r t of revenue infusion: employee c o n t r i b u t i o n s c u r r e n t l y g o i n g t o t h e C i v i l S e r v i c e R e t i r e m e n t Fund would be r e d i r e c t e d t o s o c i a l s e c u r i t y ; t h e employer's s h a r e of the social security t a x w o u l d l i k e w i s e come f r o m w i t h i n t h e F e d e r a l b u d g e t . W h i l e t h e s e a r e new revenue sources for social s e c u r i t y they do not constitute additional revenues t o t h e Unified Federal budget. I f mandatory c o v e r a g e i s m o t i v a t e d i n p a r t by t h e d e s i r e to improve t h e f i n a n c i n g of t h e s o c i a l s e c u r i t y s y s t e m , t h e n i t d i m i n i s h e s t h e need t o u s e o t h e r m e a n s t o s t r e n g t h e n t h e s o c i a l s e c u r i t y s y s t e m wh.ich would increase Federal revenue (e.g., through a p a y r o l l tax increase) or reduce Federal expeneitures (e-g., through benefit d e l i b e r a l i z a t i o n s ) . These a l t e r n a t i v e s would a f f e c t t h e F e d e r a l d e f i c i t ( o r s ~ r p l ~ s i, f it existed). Although d i f f e r e n t i n form, mandatory coverage of Federal employment h a s the same i m p l i c a t i o n s f o r Federal f i s c a l p o l i c y as d i r e c t g e n e r a l funs f i n a n c i n g of s o c i a l s e c u r i t y -- i t d o e s n o t b r i n g a d d i t i o n a l revenues into the Federal Government. (3b).For State Entailed. and Local Governments, Some Additional Costs May-Be - Most S t a t e a n d l o c a l e m p l o y e e s c o n t r i b u t e t o their pension plans. If social security s o c i a l s e c u r i t y i s expanded t o i n c l u d e t h e s e employees, t h e t a x may b e c o n s i d e r e d t o o g r e a t a n a d d i t i o n a l t a x b u r d e n o n them, and t h e amount eemployees c o n t r i b u t e t o t h e s t a f f r e t i r e m e n t p l a n m i g h t b e reduced. I n t h e l o n g r u n , some of t h i s l o s s i n r e v e n u e w o u l d b e o f f s e t by the lower c o s t s a s s o c i a t e d w i t h r e p l a c i n g a p o r t i o n o f t h e s t a f f p l a n b e n e f i t by s o c i a l security. A t t h e same t i m e , a n y a d d i t i o n a l l o n g r u n c o s t s w o u l d b e a result of improvement i n t h e employee b e n e f i t package. During t h e p e r i o d of t h e t r a n s i t i o n , however, coverage could r e s u l t in a n e t increase in sponsor expenditures for employee income protection. For i n s t a n c e , a plan t h a t , upon coordination, foregoes employee contributions from a l l new employees would gradually decrease the ratio of employees contributing to those not contributing. However, benefit rights accrued by c u r r e n t annuitants and employees would continue through t h e attrition under t h e old plan of a l l eligible beneficiaries'. T h e smaller staff plan benefit earned by n e w employees would not result in reduced plan c o s t s until those employees reached retirement age. T h u s , the of n e t result t o t h e plan i s a diminishing s o u r c e of revenues in the period transition with a reduction i n benefit obligations not occurring for some time. In a d d i t i o n , t h e sponsoring political entity would b e responsible for t h e employer's s h a r e of the social security tax. This burden would increase a s t h e ratio of employees covered t o those n o t covered increased. F o r some s p o n s o r s , outlay c o s t s proSably would r i s e , a t least for a f e w years. For i n s t a n c e , plans that have beec i n existence long enouqh to a c q u i r e a generation of participants, and that make payments to beneficiaries these from current operating revenues, would f a c e a long period during which payments would continue at l e v e l s earned prior to coordination. At the same t i m e , the sponsoring employer would acquire t h e additional burden of paying t h e employer's s h a r e of the s o c i a l security tax for a n y covered employees. T h e s e government employers might require s o m e advance notice before mandatory s o c i a l seenrity coverage became effective i n order to develop a fund through w h i c h flexible financing of benefit obligations could be arranged. F o r plans a l r e a d y practicing s o m e form of advance f u n d i n g , the additional c o s t s entailecl by social security coverage may be more easily managed. Plans t h a t invest s o m e revenue from a n y employee o r sponsor contributions develop a p o o l o f assets t h a t partly f u n d pension benefits i n a d v a n c e of their receipt. T h e s e plans c o u l d , f o r a limited period o f t i m e , forego a portion of their c u r r e n t i n v e s t m e n t rate. While t h i s would r e s u l t in some deterioration in t h e ratio of a s s e t s t o benefit liabilities, and in some c a s e s may even result of i n a reduction i n t h e investment portfolio i t s e l f , the additional burden t h e employer s h a r e of the social security t a x might be managed without substantial i n c r e a s e s in sponsoring government outlays. Alternatives to Coverage Alternatives t o mandatory social security coverage for noncovered employees that a t t e m p t to m e e t objections to t h e present situation have been discussed. Each of the four alternatives discussed below would diminish o r eliminate at l e a s t some of t h e f o u r problems mentioned earlier. None would a l l e v i a t e all o f t h e problems. All have serious policy implications if enacted separately. A combination of these alternatives designed to treat a l l of the problems possibly would b e a s complicated a n C controversial a s (and possibly l e s s effective than) universal ccverage itself. Establishing Federal minimum standards for staff pensions could help r e d u c e coverage gaps. These minimum standards would have n o effect upon windfalls. State and local governments may resist Federal authority t o m a n d a t e pension plan standards for public employee retirement systems. A system f o r transferring credits between social security and nonccvered retirement systems could be developed. Transfer schemes currently under discus,sion would diminish coverage or benefit gaps, but could be expensive, complex, and probably incapable of satisfying the objective of combining pension protection earned in all covered and noncovered employment. A method for "offsetting" or reducing social security bdnefits earned by employees with portions of their career i n . n o n c o v e r e d employment is possible, and could greatly diminish windfalls. An effective method might require revisions in social security, might adversely affect employees with second jobs, and would not eliminate coverage and benefit gaps. The social security system could be revised. If the program became voluntary or established a strict relationship between contributions and annutities for all workers across all categories, problems created by the existence of noncovered employment would diminish considerably. This strategy would constitute a major departure from the current social security program and could encounter political resistance. Several alternatives to mandatory social security coverage of noncovered employees might attract support from groups opposed to. coverage and the staff plan modifications coverage entails, but willing to accept a proposal diminishing opportunities for windfall benefits. Several of tnese alternatives address the problem of windfall benefits but leave the basic structure of employee benefits intact. These alternatives generally focus on the social security formula, revising it in such a way as to diminish the advantages received by workers with fairly low career totals of covered earnings derived from employment other than in their primary noncovered weignted employment. Such a m3ve attacks the essence of windfalls benefits intended for low income workers received by workers with much higher incomes from noncovered public employment. To the extent that these strategies are successful the financial operation of social security would be improved. It is worth repeating, however, that these revisions to social security would not solve all problems created by the existence of non-covered empioyment and might result in detrimental effects to some truly low income workers with dual employment. -- Problems Encountered by a Mandatory Coverage Plan Developing a rational system of income protection is a difficult project attempting to restructure a n existing system under the best of conditions amidst various pressures and constraints is even more difficult. -- The task of establishing a new benefit formula, which on the one hand respects the benefit tilt of social security, and, on the other, maintains total benefits a t current levels is a problem, given. that most staff retirement systems provide, for employees with the same number of years of service, a gross income replacement rate constant across all income levels. This problem is further complicated because post-retirement income is generally less than pre-retirement income and is thus taxed at a lower rate; that portion of post-retirement income paid by social security is not taxed at all. The net replacement rate is thus significantly affected by the substitution of nontaxable social security benefits for a portion of taxable pension benefits. As a consequence, net replacement rates are exactly replicable Only in some cases, although formulae can be developed that assure all affected employees at least as much a s the currently entitled or that provide higher replacement rates for employees with relatively lower final salaries. No l e s s i m p o r t a n t i s t h e v e r y p o p u l a r f e a t u r e i n many p u b l i c p e n s i o n p l a n s o f a r e t i r e i n e n t a g e e a r l i e r t h a n t h e a g e 6 2 minimum f o r s o c i a l security I t may b e i m p o s s i b l e t o m a i n t a i n b e n e f i t s a t l e v e l s e q u a l t o t h o s e benefits. this relatively early retirement were paid under a -noncovered p l a n i f If employees could retained following coordination with social security. c o n t i n u e t o r e t i r e a t 5 5 b u t would n o t r e c e i v e t h e s o c i a l s e c u r i t y p o r t i o n o f t h e i r b e n e f i t s u n t i l 6 2 , t h e n e a r l y r e t i r e m e n t b e n e f i t s would be less a f t e r c o o r d i n a t i o n , o r some p r e - 6 2 s u p p l e m e n t w o u l d b e r e q u i r e d . -- p r e s u m e s a T h e p r i m a r y s o l u t i o n o f f e r e d -- t h e l e v e l l i f e s u p p l e m e n t supplement i n a d d i t i o n t o t h e s t a f f plan benefit. This supplement would b e r o u g h l y e q u a l t o t h e e x p e c t e d s o c i a l s e c u r i t y b e n e f i t p a y a b l e a t a g e 62 a n d w o u l e c o n t i n u e f r o m t h e commencing d a t e o f t h e s t a f f p l a n a n n u i t y u n t i l the a g e a t which s o c i a l s e c u r i t y b e n e f i t s a z t u a l l y would b e g i n . A major drawback e x i s t s t o che level life supplement. In a s t a f f r e t i r e m e n t s y s t e n , b e n e f i t s u s u a l l y a r e p a i d when a n i n d i v i d u a l reaches the a g e of r e t i r e m e n t e l i g i b i l i t y and r e t i r e s , r e g a r d l e s s of whether o r n o t t h a t i n d i v i d u a l a c q u i r e s employment With some o t h e r e m p l o y e r . Under social s e c u r i t y , a n a g e 62 s o c i a l s e c u r i t y r e c i p i e n t c a n e a r n no more t h a n $4,440 i n 1982 without l o s i n g b e n e f i t s . A f t e r t h a t amount, b e n e f i t s a r e reduced one d o l l a r f o r each $2 i n earnings. If the supplement were p a i d t o workers r e t i r i n g a t a g e 55 a n d d i s c o n t i n u e d a t a g e 6 2 , s o m e r e t i r e e s who s e c u r e d o t h e r employment a f t e r r e t i r e m e n t from C i v i l S e r v i c e would f a c e a n income reduction a t age 62. These a n n u i t a n t s would, upon reaching age 62, lose t h e i r s u p p l e m e n t , a n d , i f t h e y e a r n e d more t h a n t h e amount p e r m i t t e d in the social security retirement test, would a l s o have t h e i r s o c i a l s e c u r i t y benefit reduced. T h e r e f o r e , t h e s e a n n u i t a n t s would be c u t a t a g e 62. Another solution t o t h e problem of benefit disparities c r e a t e d by c o o r d i n a t i n g s o c i a l s e c u r i t y w i t h pension programs having e a r l i e r r e t i r e m e n t a g e s i s t o h a v e a l l r e t i r e m e n t a g e s t h e same as t h o s e o f t h e s o c i a l security program, o r simply g r a n t f a r fewer b e n e f i t s f o r e a r l y r e t i r e m e n t . Many a n a l y s t s a r e a r g u i n g t h a t r e t i r e m e n t a g e s a r e t o o low g e n e r a l l y a n d t h a t even s o c i a l s e c u r i t y s h o u l d h a v e a h i g h e r a g e of e l i g i b i l i t y . The i s s u e o f the proper r o l e of an age requirement for retirement eligibility i s quite c o m p l e x , r a i s i n g a s i t d o e s q u e s t i o n s a b o u t common e x p e c t a t i o n s i n g r o u p s with d i f f e r i n g l o n g e v i t y , i n v o l u n t a r y s e p a r a t i o n of l a t e career employees, t h e c i r c u m s t a n c e s o f a f u t u r e economy, d i f f e r e n c e s i n j o b a t t r a c t i v e n e s s a n d compensation, and t h e appropriate relationship between workers and nonworkers. S e r i o u s a t t e n t i o n i s , however, b e i n g p a i d r e t i r e m e n t age q u e s t i o n s . The P r e s i d e n t ' s Commission on P e n s i o n Policy, in addition to, endorsing the p r o p o s a l t o r a i s e t h e s o c i a l s e c u r i t y r e t i r e m e n t a g e , recommended r a i s i n g t h e normal r e t i r e m e n t a g e f o r F e d e r a l employees t o a g e 65, with actuarial reductions for e a r l i e r retirement. Such a p r o p o s a l i s c e r t a i n t o meet vigorous r e s i s t a n c e from Federal employees. M a n d a t o r y s o c i a l s e c u r i t y c o v e r a g e f o r n o n p r o f i t e n t e r p r i s e s may p r e s e n t law, religious, charitable, or other s p e c i a l problems. Under current tax-exempt o r g a n i z a t i o n s of t h e t y p e d e s c r i b e d i n 501(c) (3) of the Internal Revenue Code c a n b e c o v e r e d by s o c i a l s e c u r i t y on a v o l u n t a r y b a s i s if they waive t h e i r exemption t o t h e s o c i a l s e c u r i t y t a x . Replacing t h e opportunity c o v e r a g e would raise serious f o r v o l u n t a r y agreements w i t h mandatory q u e s t i o n s c o n c e r n i n g t h e n a t u r e of t h e p r e s e n t exemption. The Constitution clearly accords a measure of protection from government nonprofit activities may also claim special status. While it is unclear where the boundaries of this freedom lie, there appears to be some reservoir of immunity from government interference, at least for religious activities and possibly for all nonprofit enterprises meeting the definition of a 501(c) (3) organization. involvement in religious activities, and certain other Very little information exists o n noncovered nonprofit employment. Much of the noncovered, nonprofit employment appears to occur in organizations of short duration or limited constituency. Spontaneous religious activities and altruistic secular enterprises are often marginal economic entities. These "free associationsw arise independent from government contact and could dissolve if faced with government involvement during the initiai stages of development. Often such loose or eccentric organizations are generated from the enthusiasm of a small group of dedicated individnals, and disband when a n income source depleted, a goal met, an idea exhausted. enthusiasm wanes -- By far the greatest number of regular jobs in nonprofit organizations are in the established an6 enduring institutions. Most private schools, religious or charitable organizations and hospitals, for instance, already are covered by social security on a voluntary basis. to to of of Proponents for mandatory coverage for nonprofit enterprises, in citing the aforementioned arguments in favor of extending social currently noncovered employees, suggest that the uncertain nature nonprofit employment amplifies the need for the income protection the social security program. addition security of much features Opponents of mandatory coverage for nonprofits argue that little additional coverage woule be gained, that the administrative difficulties imply that substantial effort and expense would be required to secure coverage, and that substantive constitutional grounds may exist to continue the exemption nonprofits currently enjoy. Legal Ques'tions Raised by a Proposal to Mandate Social Security for - all Federal, State and Local, and Private, Nonprofit Employment Even if all administrative and program design problems can be overcome, and social security is extended to currently noncovered public and private nonprofit employment, certain legal challenges are possible. There seems to be no disagreement with the view that the Federal Government may legally mandate social security coverage for its employees. Some disagreement does exist, however, as to whether the Federal Government may modify existing pension agreements to accommodate such coverage. As a general propositiOn, Congress has the authority to alter provisions of Civil Service Retirement. It appears, however, that Federal employees have a vested right in their contributions to the Civil Service Retirement fund, and Congress may be restricted from adversely affecting such property rights. No proposal exists that would transfer the accumulated contributions of CSRS participants to social security. Civil Service retirees may also have a vested right to benefits after retirement has commenced; if so, the courts. may rule that employees eligible to retire or nearing retirement may have some right to retire under current provisions. An unbroken line of Supreme Court cases holds that Congress may modify government pension entitlements to meet changing needs. Within constitutional limitations Congress may "revise, modify or recall" f u t u r e benefits of the Civil Service Retirement Act. It would a l s o appear that classification o f current employees by a g e and/or service f o r the purpose of exempting some and including others in the development of a coofdinated system i s permissible provided a legitimate purpose i s served by such a distinction. For further discussion of the legal issues see the C.R.S. Report entitled "Csnstitutionality of Legislative Modifications of t h e S o c i a l Security Act a n d the ~ e d e r a lCivil Service Retirement Act," by K a t h l e e n S. Swendiman (American Law Dipision), Feb. 2 7 , 1979. T h e question of whether Congress can legally mandate social security coverage for employees of State and local government r e m a i n s unsettled. The United States Supreme Court's decision i n National L e a g u e of Cities v . Usury, 426 U.S. 6 3 3 , i s relevant to any analysis of Congress' power to mandate coverage for S t a t e and local employees. In that d e c i s i g n that Court set f o r t h the view that State sovereignty is a limitation o n t h e Commerce power, a n d that Congress may not "displace the States' freedom t o structure integral operations in areas of traditional governmental functions." T h u s , Federal regulation of State activities must be assessed to d e t e r m i n e if i t unduly interferes with those functions that a State performs i n i t s sovereign capacity. Opponents of mandatory coverage contend that such legislation interferes (1) State and l o c a l with S t a t € sovereignty on at least three grounds: governments have some measure of immunity from Feaeral taxation, i n this coverage c a s e , t h e employer share of the social security tax; (2) mandatory would impermissibly involve the Federal Government i n t h e States' power to coverage would structure employer-employee relationships; and (3) mandatory c r e a t e a financial burden upon certain S t a t e and local government functions. Proponents of mandatory coverage point o u t that C o n g r e s s has enacted a n d t h e Supreme C o u r t has upheld legislation that inposes i n c o m e taxes o n State a n d l o c a l government employees, and that while limits d o exist on t h e power o f Congress t o impose taxes o n States, t h e Constitution d o e s not necessarily prevent application of the social security tax to g o v e r n m e n t s a s employers. P r o p o n e n t s of mandatory coverage a l s o argue that coverage d o e s not interfere with States' rights to structure employment and w a g e s , but merely requires government employers to comply with a n important Federal program. In s h o r t , proponents a s s e r t , mandatory coverage would be upheld by the Court if it could be established that mandatory coverage i s a compelling Federal i n t e r e s t , a claim that would no doubt be strengthened if it could a l s o be demonstrated t h a t the specific mechanism to bring a b o u t such coverage did n o t i n v o l v e an excessively burdensome cost upon State and l o c a l governments. Mandatory coverage of private nonprofit religious and charitable enterprises constitutes removal of an exemption these o r g a n i z a t i o n s currently possess. That exemption may be an exclusion based on administrative convenience, but might also b e based upon more s u b s t a n t i a l constitutional grounds. The First Amendment protection granted to r e l i g i o u s a c t i v i t i e s and f r e e aSSOCiationS might be interposed a s a defense a g a i n s t mandatory coverage o f private, nonprofit employment. LEGISLATION 3.R. 1018 (Conable et al.) Repeals the increases in the contribution and benefit base enacted by the Social Security Amendments of 1977. Amends the Internal Revenue Code tax rates for employers, employees, and self-employed individuals to (1) increase the tax rate for coverage under Title I 1 (Old Age, Survivors and Disability insurance) of the Social Security Act; and (2) reduce the rates for hospital insurance benefits under Title XVIII (Medicare) of the Social Security Act. (1) include Federal employees wit9in the coverage of Amends Title I 1 to: such title; and (2) establish a working spouse's benefit. Introduced Jan. 22, 1981; referred to more than one committee. Civil Service Reform Act of 1982. Completely restructures civil service retirement system by covering Federal employees by social security, "defined contributionw pension, and establishing a fully-paid-by-employer adding a voluntary "thrift planv with matching government contributions. Also replaces the present sick-leave disability configuration with a new one providing for distinctions between short and long term disability. Provides that all new employees would be brought in under the new system and incentives for voluntarily joining are provided to current workers. Introduced Sept. 1 4 , 1982; referred to Committee on Governmental Affairs. HSARINGS U.S. Congress. House. Committee on Post Office and Civil Service. Subcommittee o n Compensation and Employee Benefits. Oversight hearing on cost of merging civil service and social security retirement systems. Hearings, 96th Congress, 1st session.7 6 p. Apr. 3 , 1979. Washington, U.S. Govt. Print. Off., 1979. (LRS79-7195) "Serial no. 96-11" U.S. Congress. House. Committee on Ways and Means. Subcommittee on Social Security. Coverage and termination of Government and nonprofit organization employees under the social security system. Hearings, 94th Congress, 2d session. Apr. 26-28, 1976. Washington, U.S. Govt. Print. Off., 1976. 292 p. (LRS76-9193) . REPORTS AND CONGRESSIONAL DOCUMENTS U.S. U.S. Congress. House. Committee on Post Office and Civil Service. Coverage of Federal employees within the social security system; report on H.R. 9346. Washington, U.S. Govt. Print. Off., 1977. (95th Congress, 1st session. House. Report no. 95-702, 21 p. Part 2) (LRS77-B487) Congress. House. Committee on Ways and Means. Subcommittee on Social Security. Background material on social security coverage of governmental employees and employees of nonprofit organizations. Washington, U.S. Govt. Print. Off., 1978. 2 7 p. (LRS79-22651) At head of title: 94th Congress, 2d session. Committee print. U.S. Congress. House Committee on Ways and Means and Committee on Post Office and Civil Service. Report of the Universal Social Security Coverage Study Group transmitted by the Secretary of Health, Education, and Welfare on Mar. 2 3 , 1980. Washington, U.S. Govt. Print. Off., 1980. 296 p. (LRS80-3757) At head of title: 96th Congress, 2 d session. Joint committees print. WMCP: 96-54. U.S. Congress. Senate. Committee on Governmental Affairs. Subcommittee on Civil Service, Post Office, and General Services. Restructuring the Civil Service retirement system: analysis of options to control costs and maintain retirement income security. Washington, U.S. Govt. Print. Off., 1982. At head of title: 97th Congress, 1st session. Committee print. U.S. Congress. Senate. Special Committee on Aging. Termination of social security coverage: the impact on State and local government employees; a Working paper. Washington, U.S. Govt. Print. Off., 1976. 58 p. (LRS76-13661) At head of title: 94th Congress, 2 6 session. Committee print. ADDITIONAL REFZPENCE SOURCES Integrating civil servants into Social security. Daus, Donald G. Journal of pension planning and compliance, v. 5 , September 1979: 385-394. (ERS79-13598) Federal Reserve Bank of Boston. Funding pensions: issues and implications for financial markets. Boston, 1977. 215 p. (LRS77-11504) Conference series, no. 16 Kalman, Robert W. and Michael T. Leibig. Public pensions and social security: the inherent conflict. Journal of pension planning and compliance, v. 5 , January 1979: 9-22. (LRs79-1780) Munnell, Alicia Pf. Pensions for public employees. National Planning Association, 1979. 1 0 2 p. no. 171) (LRS79-9813) Washington. (NPA report Myers, Robert J. Extent of windfall social security benefits for civil service employees. Employee benefits journal, v. 4 , summer 1979: 40-43. (LRS79-9872) National Association af Retired Federal Employees. The future of Federal retirement -- a symposium; summary report. Washington, National A s s o c i a t i o n of R e t i r e d F e d e r a l Employees, (L2-S78-16146) 1978. Federal civil-service P r i c e , D a n i e l N . and Andrea Novotny. and s o c i a l s e c u r i t y . Social Security b u l l e t i n , v. 40, 1977: 3-18. (LRS77-15516) 1 5 p. annuitants November ReiBa, George E. Coverage i s s u e s under t h e s o c i a l s e c u r i t y program. J o u r n a l o f p e n s i o n p l a n n i n g a n d c o m p l i a n c e , v . 5 . November 1 9 7 9 : 499-519. (LRS79-16322) Tax F o u n d a t i o n . Foundation, F e d e r a l employee r e t i r e m e n t c1978. 57 p. (LRS78-1660) systems. New Y o r k , Tax