The Effect of Social Security Coverage on U.S. State and Local Government Public Pension Plan Funding

Abstract

Approximately a quarter of U.S. state and local workers’ pension plans are not covered by Social Security. This is problematic and sometimes surprising for many public sector workers, who may receive limited or no Social Security benefits upon retirement due to insufficient or no contributions paid into the system throughout their careers. While non-covered public pension plans are legally obliged to provide a comparable degree of coverage, the lack of a de-facto partial federal guarantee on pension funding has interesting implications explored in this paper. We find that pension plans not covered by Social Security have lower funded ratios and are more volatile due to greater dependence on potentially more aggressive plan investments, assumptions, and performance. We also find that the funded ratio deteriorates over time for both types of plans, and this deterioration might be faster for Social Security covered plans.