How One Person Could Determine City’s Social Security Future

Are you dying for the chance to make a big decision, something that would affect people’s lives for generations? You might consider applying to be one of the first people hired at the city of San Diego after voters approve a controversial pension reform initiative — assuming they do.

That first employee could own the decision about whether the city re-enrolls in Social Security after operating nearly three decades outside of the federal system.

Keeping that from happening will be one of the many wonky challenges at City Hall if the measure gets on the ballot and is approved. Supporters say their polls show it running strong but major ballot initiatives, even well-funded ones, have stumbled lately collecting the signatures required to get on the ballot.

The measure would change the retirement benefits of future employees at the city. The chance they will not get even the most basic guaranteed retirement benefit, Social Security, has arisen as one of the chief complaints about the initiative. But supporters have also begun championing that possibility as one of the chief benefits.

City Councilman Carl DeMaio, appearing on the radio with me recently, said the measure allowed for the city to be an “employer of choice.”

“In the ballot measure, we give an option, if they want to enroll in Social Security, we let them,” he said. He later added that the employees would be attracted to avoiding the 6.2 percent of their paychecks most people deliver to Social Security: “What if they could actually take that money and put it into a 401(k)?”

It was a conservative’s fantasy: Allow people to compare a government benefit program with a private option they could control. Let the best one win.

For many decades, free-market advocates have stabbed at Social Security privatization strategies. The city, having long been outside of Social Security, now offers a chance to experiment with allowing employees complete control over all of their retirement funds. It would simply be their choice.

But it’s not so clear that employees will get this choice if the measure passes. After DeMaio’s radio appearance, I pressed the campaign for a vision of how it would work. They didn’t know. Lani Lutar, the CEO of the San Diego County Taxpayers Association, said the decision about employees’ future with Social Security would be the City Council’s. DeMaio ended up stressing his view of what happens is only his, not reflective of his colleagues managing the rest of the campaign.

The confusion led me through a maze of Social Security policy and local assumptions about it.

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At the end of it, one thing was clear: If employees are left with the choice, only a few of the newest ones hired after the measure passes, or even just one, will determine the future of Social Security at the city. The council could try to make sure the decision is postponed to allow for more new employees to come aboard and make the choice. But the longer it waits, the more people will end up working several months or years without knowing what their long-term benefits will be.

To understand what’s going on, dial the clock back 30 years.

City employees, whenever they’re feeling defensive about their retirement benefits, remind us that they are not enrolled in Social Security. In 1982, the city made them a bargain: If they spared the city the burden of having to give money to Social Security, the employees would get health care coverage for life. And, of course, they had good, guaranteed, pensions.

In 2008, after years of pension enhancements and resulting scandal, Mayor Jerry Sanders signed off on a grand new deal. He had called it Comprehensive Pension Reform. It preserved current employees’ pensions but lowered them drastically for future employees.

“All in all, I think this is a very fair compromise for both taxpayers and future city employees,” he said at a press conference hailing the deal.

Apparently it was only fair for a couple of years. Now a new version of Comprehensive Pension Reform, what the mayor and supporters of this new ballot measure are calling it, would eliminate those guaranteed pensions altogether. Again, the change would affect only future employees, including firefighters and lifeguards but not police officers.

This provoked an outcry. Labor leader Lorena Gonzalez sent the mayor a present: cat food.

“What is a retiree to do when the market crashes and seniors lose nearly all value of that 401k, without the safety net of Social Security? I guess Mayor Sanders would simply let them live on cat food,” Gonzalez said in a statement.

The truth is the Mayor’s Office does see a route to Social Security for new employees if the measure passes. And those workers may have a choice to stay out of it, as DeMaio claims.

But they also may not.

Here’s how it would work: If the measure passes in June or November 2012, the City Council will have to begin negotiations with employee groups and set a date for it to go into effect.

New employees hired after that effective date will get a straight 401(k) — up to 9.2 percent of their salary set aside by the city (or 11 percent for public safety employees). Proponents of the plan derived the 9.2 percent from a 3 percent 401(k) plus 6.2 percent, which is the standard rate employers contribute to Social Security.

DeMaio hopes to convince employees to keep that money for themselves. He said the mayor and City Council should leave the decision about whether to do that to workers.

But the mayor and council would have to decide to give them that choice. If they do, only the new employees affected by it will be able to vote. Depending on how fast the city hires new people, this could be a small community.

If the mayor and City Council did decide to offer the new employees a choice to enroll in Social Security, they would have to choose one of two ways to get there.

Scenario 1: An Employee Referendum

The City Council could set in motion a vote of its employees. If there’s only one new employee at the time of the vote, he or she will make the decision. If there’s five, then those five will make it, and so on.

“The employer can literally decide to let the first person make the choice or they could opt to allow a pool of people to be assembled first,” said Bob Burton, a spokesman for CalPERS, which administers Social Security policy in California.

If the City Council and mayor don’t allow the first few people to make the choice, that means they’re waiting to assemble a larger pool of people. But that also means potentially dozens of employees or more could be hired without knowing whether Social Security will be in their future.

When the vote comes, if a majority does not want to enroll in Social Security, that’s it, no Social Security. If they vote to enroll in Social Security, then everyone gets it, even those who voted no and all future employees.

One caveat: The city could give them the opportunity to retroactively make up lost ground but each employee would have to pay back what they didn’t over that period. That’d be quite a bill after even just a year.

Scenario 2: Social Security for All, Plus a Chance for First People to Stay Out

The city could also allow this small group of new city workers to choose individually whether they want to enroll in Social Security.

“So if there were 10 people and six of them decided they wanted Social Security they would get it and the four others wouldn’t,” said Jay Goldstone, the mayor’s chief operating officer, who researched the scenarios on behalf of the city.

However, no matter what these individuals decided to do, the people who follow them into city service would automatically be enrolled in Social Security. In other words, in this scenario, the city would be deciding to enroll all future employees into Social Security but giving the few newest members of the group the chance to stay out.

That’s how it would work.

So DeMaio is right, the city could try to give new employees a choice. A group of people could decide whether to enroll in Social Security. But the group could be quite small and it will make the decision for many, many thousands of workers who will come after them.

Lutar said she hopes the city will be patient.

“There can and should be a healthy debate about the pros and cons of enrolling in Social Security,” she said in an email. The decision doesn’t really impact the city, as it will be putting 6.2 percent in either a 401(k)-style account or in Social Security.

For employees, though, it will be a major issue. Will they too will have to send money to Social Security, a system that DeMaio and others say the younger generations can’t trust? But without it, will they have any guaranteed retirement of any kind, an understandable worry considering the effects the recession had on 401(k) accounts?

Also, remember, in 2008, new city employees were already given a much reduced pension. The head of the city’s largest labor union has said, by his reading, the new 401(k) isn’t that much worse than the guaranteed pensions new employees already expect.

The difference is the risk. When I asked DeMaio why it was so important to pursue this if it wasn’t that much of a difference than what new employees already got, he pointed to risk.

“We see how the system has been gamed. We see how investment returns have not materialized. Retroactive benefits have been given. If you continue that lifelong taxpayer funded guaranteed program, taxpayers are looking at way too much risk,” DeMaio said on the radio.

So wait, if the city ends up enrolling these new employees in Social Security, are they essentially outsourcing their small pensions to the federal government?

“I wouldn’t say they’re outsourcing it,” said Goldstone, the city’s COO. “But they’re shifting the risk to the federal government.”

You can contact me directly at scott.lewis@voiceofsandiego.org or 619.325.0527 and follow me on Twitter (it’s a blast!): twitter.com/vosdscott.