How Will COVID-19 Affect Pensions for Noncovered Workers?

WP#2021-19

Abstract

Federal law allows certain state and local government employees to be excluded from Social Security if they are covered by an employer pension of sufficient generosity.  As a result, approximately one-quarter of state and local workers are not covered by Social Security on their current job.  Before COVID-19, these “FICA replacement plans” all satisfied the letter of the law in terms of providing benefits of sufficient generosity.  This study has three aims.  The first is to document the immediate impact of COVID-19 on the financial status of FICA replacement plans.  The second is to investigate whether COVID-19 has led to cuts in benefit promises among plans, as well as the likelihood of future cuts.  The third is to investigate the likelihood that FICA replacement plans will exhaust their trust fund assets and default on benefit promises.

The paper found that:

  • The immediate impact of COVID-19 on noncovered public pension plans has been minimal. In fact, strong investment returns and resilient tax revenues have resulted in better funded ratios than prior to the pandemic and a positive near-term outlook.
  • Given the minimal impact of COVID-19 on public plans, benefit cuts due to the pandemic have been virtually nonexistent. And recent pre-COVID trends suggest that benefit cut activity will continue to be infrequent.
  • A projection of future assets levels for noncovered plans over the next decade suggests only one of 57 plans analyzed faces any real risk of exhausting its assets.

 
The policy implications are:

  • While COVID has had little impact on noncovered plans, these plans – like other public plans – still face the same underlying financial challenges that they did before COVID.
  • At the same time, though, virtually all of the noncovered plans analyzed are expected to be able to continue paying benefits over the projection period.

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