Federal law allows certain state and local governments to exclude employees from Social Security coverage if the employees are provided with a sufficiently generous pension. Approximately 6.5 million such workers were not covered by Social Security in 2018. Retirement systems for noncovered workers have become less generous in recent years, and a few plans could exhaust their trust funds within the next decade, putting beneficiaries at risk. This article examines data from a variety of sources to assess whether state and local governments currently satisfy the federal standards for retirement plan sufficiency and whether the standards ensure benefits equivalent to those from Social Security.

Using a lifecycle model, the authors examine the implications of persistent low real interest rates and low wage growth for individuals nearing retirement. Low returns and low wage growth are found to affect welfare substantially, often producing large compensating variations. Low economywide wage growth has a much larger welfare effect than low individual wage growth, largely because the Social Security benefit formula is progressive and incorporates wage indexing. Low economywide wage growth undercuts the effects of wage indexation as average wages fall along with individual wages. Low returns raise the optimal Social Security claiming age and the marginal benefit of working longer, while low wage growth decreases the marginal benefit of working longer. Low returns also increase the relative price of consumption during retirement, suggesting that individuals may wish to reduce future consumption relative to current consumption. The authors then compare these findings with standard financial planning advice.