Big Apple Bye-Bye

For most Americans the Social Security tax is one that cannot be evaded or even reduced. Not so for state and local governments; unlike private businesses, they are free to pull themselves and their employees out of Social Security if they choose. In the past two years 138 cities, counties and other jurisdictions, including Alaska, have given up their memberships in the Social Security system, and another 207 government units have declared their intention to do so. Last week Mayor Abraham Beame announced that New York City, the biggest local government of all, would join the dropouts, and New Jersey's fiscal affairs office recommended that the state consider a pullout.

Since by law state and local governments are immune from federal taxation, the ones that participate in Social Security join voluntarily. They may quit after ten years by declaring their intent two years in advance and may change their minds during the notice period. The roster of dropouts is growing because Social Security taxes are mounting--employer and employee shares have each reached a maximum $895.05 a year--and are likely to keep climbing. Private pension plans often turn out to be a better investment, especially since the 1974 Employee Retirement Security Act ensures that workers whose private pension plans collapse will be paid with federal funds.

The Metropolitan Washington Council of Governments, for example, which includes various communities near the District of Columbia, found it could enter into a private pension plan and pay no more than it paid to Social Security, but employees could retire at age 60 instead of 65, with no loss in benefits. In San Jose, Calif., which left the system last year, city workers now contribute 3% less than they did under Social Security and enjoy benefits that average 25% higher.

Starting the Clock. New York City has a more urgent motive for quitting: the need to balance its books after its close brush with bankruptcy. Columbia University Professor Raymond Morton, staff director of a commission on city finances, concluded that New York could save as much as $183 million a year by leaving the Social Security system for two years and setting up its own program to provide death and disability benefits. But a temporary pullout would require permission from Congress, so Beame decided to "start the clock running" on the two-year notice period for a permanent defection.

For the time being, only workers under direct control of the mayor's office --112,000 of the city's 250,000 employees--stand to be affected. If New York does abandon Social Security in 1978, these people will take home considerably more money--up to $895.05 a year if today's tax rate still applies. Of course, the city would have to join a private plan or set up one of its own to cover employees who are not vested and supplement the benefits of those who are.

Leaders of New York's municipal unions headed by Victor Gotbaum, executive director of the State, County and Municipal Employees Union, were outraged and threatened to go to court to block the dropout. City officials may seek concessions from the unions in upcoming negotiations in return for sticking with Social Security. Elsewhere, employees have favored quitting. In March 1975, 14 of the 15 bargaining units representing the employees of Sacramento County, Calif, asked the board of supervisors to study alternatives to Social Security; three months later the county filed its intent to withdraw.

Social Security Administration officials do not consider the defections ominous--yet. As employment by local governments grows, they point out, more municipal employees are coming into the system than are leaving it. But the gap is narrowing. In 1974, 7,845 local-government employees left, while 25,000 came in; last year there were 18,000 exits and 25,000 entrances. With the addition of New York, some 170,000 more workers may leave in the next two years.

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