The Case for Extending Social Security Coverage to Government Employees

Abstract

This paper recommends extending social security to government employees in order to (1) improve the degree of equity in the system by treating civil servants the same as most other income-earning individuals by requiring them to contribute an amount to social security consistent with their total earnings, (2) prevent highincome government pensioners from also receiving social security benefits that are intended for the poor, (3) improve the long run solvency of the social security trust fund, (4) eliminate an incentive that distorts labor mobility and encourages individuals to work in the public sector, and (5) help Congress measure the public appetite for social security benefits and taxes. The exemption of nearly all federal employees and many state and local government employees from the social security system cannot be justified. This paper supports the thesis that social security coverage should be extended to government employees on the grounds of fairness and economic efficiency. In addition, the contention is made that by substantially increasing payroll tax revenues in the short run and providing some improvement to the trust fund balances in the short and long run, extending coverage would allow immediate cuts in payroll taxes while at the same time maintaining the present character of the system. Extending coverage is not a long run substitute for financing alternatives, such as higher payroll taxes, general revenue financing, or reducing benefit levels; rather, it is a method of providing Congress sufficient time to deal with the pressing long run issues and a means of improving economic efficiency and fairness of social security, a system comprising 26 percent of the federal budget. Potential For Extension of Social Security In 1980, about 90 percent of all wages and salaries will be covered by the social security system, but coverage will vary substantially by sector. Table I displays the ratios of covered and taxable earnings used by the Social Security Administration in estimating 1980 payroll tax revenues [ 18]. Not all wage and Mickey D. Levy holds the M.P.P. degree from the Graduate School of Public Policy, University of California, Berkeley. He has published in the National Tax Journal. Mr. Levy is a Research Associate at the American Enterprise Institute for Public Policy Research. The views expressed in this paper do not represent the views of the American Enterprise Institute. Special thanks is given to Marvin Phaup and Peter Karpoff of the Congressional Budget Office. An anonymous referee made many thorough and helpful suggestions for which the author is grateful.