How Have Older Workers Fared During the COVID-19 Recession?

One-quarter of state and local government employees Ð approximately 6.5 million workers Ð are not covered by Social Security on their current job. To remain outside of Social Security, federal law requires that these employees be covered by an employer pension of sufficient generosity. Since many public pensions have grown less generous in recent years and a few plans could exhaust their assets, the question is whether state and local plans currently satisfy the federal standards. This brief, which is based on a recent study, attempts to answer that question.1 The first step is to determine whether the retirement plans for noncovered state and local employees satisfy the Òletter of the law.Ó Specifically, do they meet the IRS ÒSafe HarborÓ parameters, and do these parameters provide income equivalent to Social Security at age 67? Even if the plans meet these requirements, however, noncovered state and local employees still may not receive Social Security-equivalent resources because they face long vesting periods and may not get full cost-of-living adjustments (COLAs) Ð albeit, they can claim full benefits earlier than under Social Security. Thus, the second step requires incorporating vesting, the COLA, and retirement ages to produce lifetime retirement wealth. The final step involves addressing the additional complication caused by low funded ratios in a number of pensions for noncovered state and local employees. The discussion proceeds as follows. The first section presents a brief history of the federal regulations that affect noncovered workers. The second section compares the plans currently offered to noncovered workers to the Safe Harbor requirements. The third section examines whether the requirements provide Social Security-equivalent benefits at age 67. The conclusions are that virtually all plans satisfy the Safe Harbor provisions and that participation in a Safe Harbor plan produces about the same level of benefits at age 67 as Social Security. The fourth section shifts from benefits at 67 to a lifetime-wealth measure that reflects differences in vesting requirements, COLAs, and normal retirement ages. This wealth-based generosity test suggests that 43 percent of noncovered public pension plans fall short of Social Security for a significant minority of new hires. The fifth section addresses the implications for valuing benefits of underfunded pensions and potential exhaustion of assets in a few plans. The final section concludes that the issues regarding generosity could be eliminated by extending mandatory Social Security coverage to state and local workers, but the question of how to value underfunded benefits remains a challenge.