Earlier this month in my column, I discussed the issue of some people working in jobs that are not covered by Social Security, as well as the legal issues contributing to this situation. Many have been puzzled as to why this is the case, with even those in non-Social Security covered jobs feeling confused. So, what factors lead to certain jobs not being included in the social security system?
When the Social Security Act was first passed in 1935, the program was mandatory for almost all Americans at the time. Most workplaces back then did not have any form of retirement pension plans.
The Congress at that time decided not to mandate the federal pension program (Social Security) for state and local government employees. Therefore, they provided a mechanism for these individuals to choose whether to opt into Social Security. Most chose to join. Over time, other initially uncovered state and local groups eventually joined the program. However, there are still some groups of state and local employees not covered by the social security system, such as some teachers in certain states and firefighters and police officers in other states. These employees often have their own retirement pension systems. They make up about 20% of all state and local government employees.
Another group not covered by Social Security are occupational railroad workers. The railroad retirement system was established in 1934, a year before the Social Security Act was born. However, after the establishment of Social Security, the two systems developed a special relationship that continues to this day. For instance, if you have over 10 years of railroad work experience and also have worked in positions where you paid taxes under the Social Security system, your Social Security income will be transferred to the Railroad Retirement Board, who will pay you a combined retirement benefit. On the other hand, if your railroad work experience is less than 10 years and the rest of your career is in Social Security-covered positions, your railroad income will be transferred to the Social Security Administration, where it will be integrated into your Social Security record.
Another group initially not covered by Social Security were federal government employees. In 1935, Congress believed that federal employees did not need to be included in the new Social Security program because they were already covered by the Civil Service Retirement System (CSRS) established in 1920.
However, over time, Congress felt an increasing need to include federal employees in the Social Security system. This was based on two main reasons. First, there was a belief that all domestic employees should be covered by the same retirement system. (Although to fully adhere to this idea, all state and local employees, as well as all railroad workers, would need to be brought into the Social Security system.)
But the second reason carried more weight: at that time, federal government employees, Congress members, members of the judiciary, and the President did not pay Social Security taxes. They, like all other federal employees, were covered by the Civil Service Retirement System. Additionally, for politicians to enact laws regarding retirement plans (Social Security) but not be part of it themselves was politically awkward.
This led to various conspiracy theories (which still exist today), mainly suggesting that top government officials enjoy substantial retirement benefits while distributing meager Social Security benefits to the general public. Although this is not the reality, even today, there are millions of Americans who believe in this notion.
In any case, by the 1980s, political pressure to include federal employees in the Social Security system had grown stronger. Congress ultimately passed a law in 1983 requiring all federal employees hired after December 31, 1983, to be included in the Social Security system. At the same time, the law also mandated that starting on January 1, 1984, all members of Congress, the President, Vice President, and federal judges would begin paying Social Security taxes. (So, we should dispel this misconception.)
The new retirement plan established by Congress was called the Federal Employees Retirement System (FERS). They provided an option for all government employees hired before 1984 to switch from the Civil Service Retirement System (CSRS) to FERS. By the way, I was one of them, having been hired in 1973. I remember struggling internally when making that decision: should I stick with CSRS or switch to FERS? (Switching to FERS had some advantages – too complex to explain here.) In the end, I chose to stay with CSRS. Honestly, to this day, I’m not sure if I made the right choice. Some of my old friends and former colleagues who opted for FERS now that we are both retired seem to be in a somewhat better situation. But that’s my problem, not yours.
FERS employees have Social Security taxes deducted from their salaries. Additionally, a portion of their salaries is withheld to fund federal retirement benefits as a supplement to their Social Security benefits. So, like federal retirees such as myself who only receive a monthly CSRS pension check, the retirees covered by FERS will receive a Social Security check and a smaller FERS pension check – less than the CSRS pension amount. The purpose of the new retirement plan is to combine Social Security with FERS benefits to achieve benefits comparable to those received by CSRS retirees. But as I mentioned, some of my FERS friends seem to be getting more. Oh well, forget about it.
In summary, these are the reasons why some people do not pay Social Security taxes. To provide clarity, those groups mentioned in this column as not covered by Social Security (some state and local government employees, railroad workers, and former federal retirees like me) account for approximately 10% of the American workforce. In other words, 90% of jobs in the United States are covered by Social Security.