The Social Security Act of 1935 required most workers in commerce and industry, then about 60 percent of the workforce, to be covered. Amendments to the act in 1950, 1954, and 1956 allowed states, generally acting for their employees, to voluntarily elect Social Security coverage through agreements with SSA. The amendments also permitted states and localities that elected coverage to withdraw from the program after meeting certain conditions. Policymakers have addressed the issue of extending mandatory Social Security coverage for state and local government employees on several occasions. In response to financial problems the Social Security system faced in the early 1970s, for example, the 1977 Social Security amendments directed that a study be made of the desirability and feasibility of extending mandatory coverage to employees at all levels of government, including state and local governments. The Secretary of the Department of Health, Education, and Welfare—now the Departments of Health and Human Services and Education—established the Universal Social Security Coverage Study Group to develop options for mandatory coverage and analyze the fiscal effects of each option. Recognizing the diversity of state and local systems, the study group selected representative plans for analysis. Two data sources were developed and analyzed. First, the Actuarial Education and Research Fund, sponsored by six professional actuarial organizations, established a task force of plan actuaries to study 25 representative large and small noncovered retirement systems. Second, the Urban Institute, under a grant from several government agencies, used an actuarial firm to obtain data on 22 of the largest 50 noncovered employee retirement systems. The study group report, issued in 1980, provided information on the costs and benefits of various options but did not draw conclusions about their relative desirability. In 1983, the Congress removed authority for states and localities that had voluntarily elected Social Security coverage to withdraw from the program, which effectively made coverage mandatory for many state and local employees. Additionally, in 1990, the Congress mandated coverage for state and local employees not covered by public pension plans. SSA estimates that 96 percent of the workforce, including 70 percent of the state and local government workforce, is now covered by Social Security. During 1997, Social Security had $457.7 billion in revenues and $369.1 billion in expenditures. About 89 percent of Social Security’s revenues came from payroll taxes. The Social Security payroll tax is 6.2 percent of pay each for employers and employees, up to an established maximum. Maximum earnings subject to Social Security payroll taxes were $65,400 in 1997 and are $68,400 in 1998. Social Security provides retirement, disability, and survivor benefits to insured workers and their families. Insured workers are eligible for full retirement benefits at age 65 and reduced benefits at age 62. The retirement age was increased by the 1983 Social Security amendments. 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. Benefit amounts are based on a worker’s age and career earnings, are fully indexed for inflation, and as shown in table 1, replace a relatively higher proportion of the final year’s wages for low earners. Social Security provides additional benefits for eligible family members, including spouses aged 62 or older—or younger spouses if a child meeting certain requirements is in their care—and children up to age 18—or older if they are disabled. The amount of a spouse’s or child’s benefit is one-half the insured worker’s age-65 benefit amount. A spouse’s benefit is reduced if taken earlier than age 65, unless the spouse has a child in his or her care. SSA estimates that about 5 million state and local government employees, excluding students and election workers, occupy positions not covered by Social Security. SSA also estimates that the noncovered employees have annual salaries totaling about $132.5 billion. Seven states—California, Colorado, Illinois, Louisiana, Massachusetts, Ohio, and Texas—account for over 75 percent of the noncovered payroll. Based on a 1995 survey of public pension plans, the Public Pension Coordinating Council (PPCC) estimates that police, firefighters, and teachers are more likely to occupy noncovered positions than other employees are. According to a 1994 Bureau of Labor Statistics (BLS) survey, most full-time state and local employees participate in defined benefit pension plans. Table 2 shows membership and contribution rates for nine defined benefit state and local pension plans that we studied as part of the review. For the most part, active members in the nine plans occupy positions that are not covered by Social Security. Defined benefit plans promise a specific level of benefits to their members when they retire. Minimum retirement age and benefits vary; however, the BLS and PPCC surveys indicate that many public employees can retire with full benefits at age 55 or earlier with 30 years of service. The surveys also indicate that plan members typically have a benefit formula that calculates retirement income on the basis of specified benefit rates for each year of service and the members’ average salary over a specified time period—usually the final 3 years. For example, the benefit rates for members of the Colorado Public Employees’ Retirement Association are 2.5 percent of highest average salary per year over a 3-year period for the first 20 years of service and 1.5 percent of highest average salary per year for each additional year of service. Full retirement benefits are available at any age with 35 years of service, at age 55 with 30 years of service, age 60 with 20 years of service, or at age 65 with 5 years of service. Therefore, plan members who retire at age 55 with 30 years of service receive annual retirement income amounting to 65 percent of their highest average salary. Reduced retirement benefits are available, for example, at age 55 with 20 years of service. In addition to retirement income benefits, most public pension plans provide other benefits, such as disability or survivor benefits. For example, BLS reported that of defined benefit plan members, 91 percent were provided with disability benefits, all have a survivor annuity option, and 62 percent receive some cost-of-living increases after retirement. Public pension plan coverage for part-time, seasonal, and temporary employees varies. In Ohio, for example, part-time and temporary state employees participate in a defined benefit plan. In California, the 16,000 part-time, seasonal, and temporary state employees have a defined contribution plan. Plan benefits are based on plan contributions, which consist of 7.5 percent of the employees’ gross pay deducted from their pay and returns on plan investments. SSA estimates that extending mandatory Social Security coverage to all newly hired state and local employees would reduce the trust funds’ 75-year actuarial deficit by about 10 percent. The surplus payroll tax revenues associated with mandatory coverage and interest on that surplus would extend the trust funds’ solvency by about 2 years. Extending mandatory coverage to newly hired employees would also increase program participation and, in the long run, simplify program administration. Table 3 shows SSA’s analysis of the present discounted value of revenues and expenditures with and without mandatory coverage over the 75-year period beginning January 1, 1998. The analysis indicates that extending mandatory coverage to all state and local employees hired beginning January 1, 2000, would reduce the program’s long-term actuarial deficit by 10 percent, from about 2.19 percent of payroll to 1.97 percent of payroll. Figure 1 shows that SSA’s analysis indicates that extending mandatory coverage to new state and local employees would extend the trust funds’ 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, extending mandatory coverage to newly hired state and local employees would contribute to the resolution of—but not fully resolve—the trust funds’ solvency problem. A combination of adjustments will be needed to extend the program’s solvency over the entire 75-year period. SSA’s analysis indicates that revenues resulting from an extension of mandatory coverage, including payroll taxes and interest on surplus revenues, 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 accelerate until later in the period. For example, annual revenues from payroll taxes collected from the newly covered employees and their employers are expected to exceed expenditures for benefits to those employees until 2050. In that year, however, revenues resulting from an extension of mandatory coverage, including interest on cumulative surplus revenues, are projected to exceed expenditures on those employees by over 300 percent. While Social Security’s solvency problems triggered the analysis of the effect of mandatory coverage on program revenues and expenditures, the inclusion of such coverage in a comprehensive reform package would likely be grounded in other considerations as well, such as broadening Social Security’s coverage and simplifying program administration. 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. According to SSA, one important way that noncovered employees benefit from, without contributing to, Social Security is that their parents, grandparents, or other relatives receive Social Security’s retirement, disability, or survivor benefits. Social Security is designed as a national intergenerational transfer program where the taxes of current workers fund the benefits of current beneficiaries. SSA stated that those not contributing to the program still receive the benefits of this transfer. Extending mandatory Social Security coverage to all newly hired state and local employees would also simplify program administration by eliminating, over time, the need to administer and enforce special rules for noncovered state and local employees. For example, SSA’s Office of Research, Evaluation, and Statistics estimates that 95 percent of state and local employees occupying noncovered positions become entitled to Social Security as either workers or dependents.