This week Congress will attempt to close a loophole in Social Security law that has allowed teachers in Texas to collect tens of thousands of dollars in extra retirement benefits for just a single day's work. The government is right to fix that loophole, which unfairly benefits some individuals at the expense of Social Security's financial health. However, it should go further to allow voluntary personal retirement accounts within Social Security, which would close all loopholes and make benefits fairer for everyone.
Social Security's history is complex, and so are the rules governing benefits. While most workers are covered by Social Security, many state and local workers are exempt from the program because they are covered by their own pension plans. Most public employees are happy with these plans and don't want to change. The complication comes when Social Security and state/local systems are mixed.
For instance, the spouse (in practice, almost always the wife) of a worker who has paid into Social Security is entitled to a monthly benefit to equal to half the worker's benefit. So if Bill Smith collects a monthly Social Security benefit of $600 per month, his wife Mary would be entitled to a spousal benefit of $300 per month.
However, 100 percent of any benefits Mary is entitled to based on her own earnings are "offset" against her spousal benefits. For instance, if Mary's own earnings entitle her to $200 per month, then she receives only $100 per month in spousal benefits.
Now, if Mary were a public employee not covered by Social Security, technically she would have no Social Security benefits of her own. Thus, she could receive both her own pension plus Social Security spousal benefits based on her husband's earnings, with no offset whatsoever.
Congress didn't intend this double dipping, and passed a law called the "Government Pension Offset." Public employees who are exempt from Social Security have 66 percent of their government pension benefits offset against any Social Security spousal benefits they are entitled to. So if Mary had been a public employee and was entitled to $200 per month from her government pension, her Social Security spousal benefits would be reduced not by $200 but by only $132. Even after this offset, almost all public employees will receive higher total retirement benefits than if they had been covered under Social Security.
However, thousands of Texas teachers -- and likely many more across the country -- have found a loophole in the law that allows them to evade the government pension offset entirely. According to the law, if a teacher works her final day within the school system in a job that is covered by Social Security, she's not subject to the government pension offset.
So last year some 3,500 Texas teachers spent their last day of employment not in the classroom but mopping floors, serving lunches in the cafeteria, or other non-teaching jobs that are covered by Social Security. This one day's work in a Social Security-covered job brings an average teacher some $5,200 in extra annual benefits and fully $100,000 more over his or her lifetime, according to the government's General Accounting Office.
Many school districts even charge a "processing fee" of $100 to $500 -- in effect, a kick-back -- to place teachers in Social Security-eligible jobs. One school district collected $283,000 in such fees from teachers in just one year, according to the GAO.
In one sense, it's hard to blame Texas teachers for trying to game the system. Social Security's complicated benefit structure doesn't establish a clear relationship between what you pay in and what you receive back. Given this, people see little harm in exploiting loopholes in the law.
At the same time, receiving $100,000 in additional benefits in exchange for one day's work is obviously unfair. Moreover, the government pension loophole will drain billions from Social Security's finances. Just last year's use of the loophole by Texas teachers will cost Social Security $355 million -- and that will multiply as more public employees around the country learn to exploit the loophole. On March 17, Social Security's trustees -- one of whom is Texas A&M economics professor Thomas Saving -- reported that Social Security faces over $25 trillion is cash shortfalls over the next 75 years. We need to reduce that shortfall, not increase it. Teachers will protest. But basic fairness demands that this loophole be closed.
A larger solution to these problems is to incorporate voluntary personal retirement accounts into Social Security, as President Bush has long advocated. Personal accounts create a clear, unambiguous and fair relationship between taxes and benefits: Workers deposit money into their accounts, which grow over time and help provide a monthly benefit retirement in retirement. There are no scams, no loopholes, no way to get someone else to pay for your benefits. The fact that personal accounts can help put Social Security back on a sound financial basis is an extra benefit.