1.2 million American teachers aren’t covered by Social Security

Most of today's debates about Social Security are about taxes or changing how benefits are pegged to inflation by a few tenths of a percentage point. While those things are important, we've mostly ignored the fact that millions of Americans, including 1.2 million public school teachers, are completely denied access to the retirement and disability protections offered by Social Security.  Even if they leave and begin employment that is covered by Social Security, they'll never get Social Security benefits for those years they didn't participate. Instead, they must rely more heavily on under-funded and poorly structured government pension plans and their own personal savings.

Today, nearly nine out of 10 Americans age 65 and older depend on Social Security benefits for a comfortable and secure retirement. Among middle- and lower-class Americans, Social Security makes up 43.5 to 83.2 percent of retiree income.  Yet despite its importance and its salience as a political issue, most Americans don't realize that many workers do not participate in Social Security.

Beginning in the 1950s, state and local governments were given the choice to enroll their workers in Social Security. A minority of states opted not to, on the theory that their state pension plans alone could offer better benefits than a pension plus Social Security. Those states do offer slightly more generous pension formulas to make up for the fact that they don't offer Social Security. But those formulas offer the most significant benefits only to teachers who stay a full career in one place, which most do not. So state pension plans work ok for those teachers — the few who earn the most generous pensions — but they leave everyone else unprotected.

Today, public school teachers remain one of the largest groups of uncovered workers. Nationwide, about 1.2 million teachers (40 percent of all public K-12 teachers) are not covered by Social Security. Those teachers are concentrated in 15 states — Alaska, California, Colorado, Connecticut, Georgia, Illinois, Kentucky, Louisiana, Maine, Massachusetts, Missouri, Nevada, Ohio, Rhode Island, and Texas — and the District of Columbia, where many or all public school teachers lack coverage.

In a new report for TeacherPensions.org (where I serve as editor), Leslie Kan and I discuss the history and politics of teachers and Social Security and then examine case studies of teachers at varying experience levels to estimate how much they could benefit from Social Security coverage. While Social Security coverage alone is not an adequate retirement savings plan or a substitute for other teacher retirement initiatives, universal coverage would benefit teachers, states, and the Social Security program itself. Here are 8 reasons why:

1) Current teacher retirement plans do not work for most teachers

Today's teacher pension plans are not working. Half of all new public school teachers won't teach long enough to qualify for even a minimal pension benefit, and less than one in five will remain long enough to earn a normal retirement benefit. Even for teachers who do qualify, the structure of the traditional system offers minimal benefits to those who stay for 10, 15, or even 20-plus years. The Urban Institute estimates that, in half of all plans covering public school teachers, teachers must wait at least 24 years (!) before their pension is finally worth more than their own contributions. In a field like teaching where turnover is high, only a small percentage of teachers will make it that long.

Having a secure retirement makes teachers happy (Jason Bahr/Getty Images)

2) Social Security is the ultimate portable benefit

Traditional pensions, which presume that a teacher will stay in a single retirement system for an entire career, have not kept up with changes in the teaching workforce. Fitting with national trends, teachers frequently move within and across sectors. The most common number of years a teacher has served in the profession has dropped from 15 years in 1988 to five years today.

A teacher who moves to another state cannot easily transfer her service years from one state to another. Because states have enacted provisions penalizing teachers who try to withdraw or purchase additional "service credits," a 30-year veteran teacher who moves, even one time, can lose more than half her net pension wealth, resulting in hundreds of thousands of dollars in lost retirement wealth.

States could improve their own retirement offerings to workers, but they'll never be able to match the national portability that Social Security provides.

3) Social Security would provide all teachers with a solid floor of retirement savings. Teachers of all ages would benefit

Retirement savings are often described as a three-legged stool: Social Security, employer retirement plans, and personal savings. The extent of employer-provided benefits will vary by job, and personal savings are a function of financial circumstances, investment returns, and planning foresight. For many American workers, Social Security is the most consistent portion of the three-legged model, providing a minimum threshold and solid plank of social insurance that is portable from job to job. Teachers lacking Social Security face substantial uncertainty and must rely more heavily on their state pension plans and personal savings.

We model the effects of universal Social Security coverage on young, middle, and full-career teachers in Chicago (see example below for what we called "Ms. Middle"). Teachers of all ages and experience levels would be net winners from participating in Social Security, even after subtracting out employee and employer contributions. The added security and savings for teachers participating in Social Security would be significant, especially for teachers who currently receive very little from their state pension plan. Most importantly, Social Security would extend retirement benefits to 100 percent of employees, rather than less than half covered under current state pension plans. The result would be greater retirement security for all teachers.

4) Social Security is progressive

Unlike state pension plans, which give the most generous benefits to the workers with the highest salaries and the longest work histories, Social Security benefits are progressive. Social Security awards lower-income workers with a greater proportion of benefits relative to their income than it does for higher-income workers. That progressivity would be especially beneficial given the modest salary levels that many teachers face across their working careers.

In order to preserve the intent behind Social Security's progressive formula, Congress created two provisions to apply to workers who split their careers between covered and uncovered positions. Because teachers and other workers with mixed coverage do not contribute for a full career, upon retirement they would appear to be lower-income than they really were. The two complicated, little-understood provisions-called the Windfall Elimination Provision (WEP) and the Government Pension Offset (GPO)-are  products of inconsistent Social Security coverage. They could be eliminated if all workers were covered by Social Security.

5) Social Security offers better protection against inflation

Social Security bases its benefit formula off a worker's 35 highest-paid years of contributions, and it indexes those earnings and contributions to current dollars. Teacher pensions work differently. They're typically based off a teacher's "final average salary" in the last three or five years of employment. The salaries are not inflation-adjusted, meaning teachers have a strong incentive to earn those highest salaries just before they retire. For an early- or mid-career teacher who qualifies for a pension but leaves for another job, her final salary will remain frozen in time. By the time she does retire, her pension will actually be worth far less, in real dollars.

Teacher pensions typically start receiving inflation adjustments upon retirement. But those are often ad-hoc cost-of-living adjustments (COLAs) that are dependent on market conditions and the whims of state legislators. Social Security benefits, on the other hand, automatically adjust for inflation and do not lose their purchasing power over time. This is a significant advantage for Social Security, given that many state and local pension plans cut their COLAs during recent budget crises.

6. Social Security is more than just a retirement program, it also offers superior disability and survivor benefits

Currently, workers moving in and out of Social Security face gaps in disability coverage. Social Security Disability Insurance pays monthly cash benefits to people who are disabled and can no longer work, but it requires workers to have at least five years of Social Security employment in the last 10 years. Teachers moving in and out of covered employment face gaps in coverage and may lose out on disability benefits. Additionally, Social Security provides more generous survivor benefits to dependents and spouses than state pension plans do.

7. Social Security would lessen the reliance on state pension plans

State pension plans in states without Social Security coverage are in worse financial shape than pension plans in other states, leaving uncovered teachers vulnerable to future benefit cuts or increases in their employee contributions. That's exactly what happened in response to the 2007-2009 recession: States cut retirement benefits for new hires by increasing the amount of time workers need to serve before qualifying for a pension, raising the normal retirement age, and reducing benefit formulas.

Extending Social Security coverage to all workers would reduce the reliance on state pension systems as the sole retirement savings benefit.

Happy teachers make happy students (John Leyba/The Denver Post via Getty Images)

8) Universal coverage would reduce the long-term Social Security shortfall

The Social Security Administration projects that beginning in 2021 it will pay out more benefits than it will have incoming revenue. Its reserves will be depleted within the next 20 years if no reforms are made.

Extending coverage to all state and local workers would reduce the program's long-term deficit. Studies conducted by the Social Security Administration, the Government Accountability Office, and the 2010 Simpson-Bowles Commission all find that extending coverage to newly hired state and local workers (including teachers) would reduce the long-term shortfall by 8 to 10 percent. This policy change in itself would be sufficient to push off the shortfall for another two to three years.

Recent figures suggest that millions of Americans face a "retirement security" crisis whereby they'll have to work more years or survive on significantly lower incomes, a result of poor savings habits, stagnant wages, and an uneven economy. The failure of retirement saving in the private sector is a result of poor individual decisions and an absence of strong public policies supporting positive saving habits. Teachers, however, suffer from public policies that directly impair their retirement security. It's dreadful public policy to disadvantage the retirement security of 1.2 million public school teachers, a large and important group of college-educated, middle-class public servants.