Personal Finance
New Social Security benefit legislation points to need for broader reform
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When President Joe Biden signed the Social Security Fairness Act on Jan. 5, it was a victory for those who tirelessly lobbied for years for new changes that will provide more generous benefits to public workers with pensions.
Yet for the policy community, the enacted change backed by overwhelming bipartisan support in both the House and Senate is a huge disappointment.
“Literally, you cannot find a Social Security expert who thought Social Security Fairness Act was a good idea,” said Andrew Biggs, senior fellow at the American Enterprise Institute.
The new law eliminates two provisions that adjusted Social Security benefits for individuals who also receive pension income from work performed in the public sector where payroll taxes to Social Security were not paid.
The now defunct Windfall Elimination Provision, or WEP, reduced Social Security benefits for approximately 2 million individuals who also have pension or disability benefits from work where they did not contribute to Social Security. The WEP was enacted in 1983.
The Government Pension Offset, or GPO, reduced Social Security benefits for nearly 750,000 spouses, widows and widowers who receive their own pensions from work in the public sector. The GPO was created in 1977.
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The provisions were intended to help ensure all Social Security beneficiaries get a comparable payout from the program. Because Social Security is progressive and intended to be an anti-poverty program, low-income workers receive a higher income replacement rate when they collect benefits. The WEP and GPO were intended to adjust public workers’ benefits so they were not treated as low-income workers.
Once the bill was signed, organizations that lobbied for the change praised the new law for finally providing affected workers the full Social Security benefits they had earned. For the National Committee to Preserve Social Security and Medicare, the new law caps off a decades-long fight to either modify or repeal the rules.
“It’s a way of cutting benefits for a class of people who are providing a public service for our communities,” said Maria Freese, senior legislative representative at the National Committee to Preserve Social Security and Medicare.
“They got singled out, and their Social Security earns them less in benefits than a person who decided not to go into public service,” Freese said.
As the new law is phased in, Social Security beneficiaries may see monthly benefit increases ranging from an average of $360 to $1,190, the Congressional Budget Office has estimated. Affected beneficiaries will also get lump-sum payments for the extra benefits they would have received throughout 2024.
The law makes the program “more fair” now that people will no longer be penalized for income earned outside of the system, said John Hatton, staff vice president for policy and programs at the National Active and Retired Federal Employees Association, or NARFE.
Notably, income from capital gains or inheritances already did not influence the size of Social Security benefits. The same should be true for income earned outside of the program, Hatton said.
Yet many policy experts maintain the changes never should have been enacted.
“What we saw was a huge special interest push for a very poorly developed and poorly targeted policy which is creating windfalls for a number of recipients,” said Maya MacGuineas, president of the bipartisan Committee for a Responsible Federal Budget.
Notably, that change will cost almost $200 billion over 10 years, according to the CBO, at a time when Social Security’s trust funds are already running low. The program’s combined trust funds are expected to last until 2035, at which point 83% of benefits will be payable, Social Security’s trustees projected last year. Eliminating the WEP and GPO will bring move that depletion date six months closer.
Experts both for and against the Social Security Fairness Act agree Congress needs to address the program’s funding shortfall sooner rather than later.
Provisions aimed to prevent benefit windfalls
The WEP and GPO rules, and how their intricacies affect individual beneficiaries, are complex.
“There is an injustice here that the provisions tried to correct, maybe not perfectly,” said Alicia Munnell, senior advisor at the Center for Retirement Research at Boston College.
Despite experts’ tireless efforts to explain the provisions to lawmakers, “we all failed,” Munnell said. Now what’s left is “bad policy,” she said.
Put simply, without the WEP, state and local workers who only work in jobs that pay into Social Security for a short time look like low earners and consequently get the extra benefits aimed at low earners, she said.
The elimination of the GPO also now makes it so a nonworking spousal Social Security benefit goes to a full-time worker with their own pension benefit, noted Charles Blahous, senior research strategist at George Mason University’s Mercatus Center.
“There’s zero justification for doing that,” said Blahous, who called the legislation “unserious” and “disappointing.”
While the WEP and GPO were imperfect, they were needed to prevent the payment of benefit windfalls to a small number of people who didn’t pay Social Security taxes for years, he said.
“It’s a very concerning indicator of Social Security’s future,” Blahous said.
Lawmakers face Social Security solvency dilemma
The Social Security Fairness Act was passed by the Senate with a 76-vote bipartisan majority. Amendments that were introduced in those final legislative hours in December — including efforts to add ways to pay for the change or alter the provisions instead of replacing them — failed. The Senate took up the bill after the House passed it in November with a 327 bipartisan majority.
Now that the WEP and GPO elimination has become law, one way to make the changes more equitable would be bring the 25% of state and local workers who do not currently contribute to Social Security into the program, according to Munnell.
While Congress could revisit the changes it just made with the Social Security Fairness Act, experts say that’s unlikely.
The bigger problem lawmakers now face is when and how to restore the program’s solvency.
“We are still in a place where politically it’s very difficult for members of Congress to come out in support of any substantive, responsible changes to the program that will address its long-term fiscal issues,” said Emerson Sprick, associate director of economic policy at the Bipartisan Policy Center.
Future action will require presidential leadership and a commitment to address the issue, Sprick said.
However, for now, President-elect Donald Trump has promised not to touch Social Security. Trump has also said he wants to eliminate taxes on Social Security benefit income. Trump’s presidential transition team did not immediately respond to a request for comment.
Because that change would be expensive, over $100 billion a year, and does not have the same fairness argument to it, it would be less likely to go through, according to Biggs.
While Trump has promised no benefit cuts, that creates a mathematical problem for Republicans, who are typically a low-tax party, he said.
Ultimately, restoring Social Security’s solvency may require benefit cuts, tax increases or a combination of both.
“We know that we need to be addressing Social Security and Medicare because of the insolvency that they both face within roughly a decade,” MacGuineas said. “Neither party, no leader, seems to have the political will or the integrity to start talking about how to get that done.”
Nitat Termmee | Moment | Getty Images
The Trump administration’s tariff policies may raise auto insurance premiums for motorists, according to a new Insurify analysis. This at a time when drivers continue to see costs soar amid pandemic-era inflation.
A 25% tariff on imports from Canada and Mexico — which may take effect as soon as March — would increase annual full-coverage car insurance premiums by 8% to $2,502, on average, by the end of 2025, according to Insurify.
It estimates average annual premiums would rise 5% by year-end, to $2,435, without tariffs on Canada and Mexico.
Tariffs are expected to make cars and auto parts imported from Canada and Mexico — which are major suppliers for the U.S. market — more expensive. As a result, insurers pay out more money in claims when policyholders get into car accidents, and they pass on that financial risk to consumers via higher premiums.
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“When people think about tariffs, they typically think about goods they might get from somewhere else,” said Matt Brannon, a data journalist at Insurify who authored the analysis. “Many times, we don’t think about services like car insurance.”
He called the estimates of tariff impact “conservative.”
Trump tariffs proposed so far
The Trump administration has proposed tariffs on several fronts during its first month in power.
Trump imposed a 10% additional tariff on all imports from China, starting on Feb. 4. Across-the-board tariffs on Canada and Mexico were also set to take effect that day, before the White House delayed them by a month.
About six out of every 10 auto replacement parts used in U.S. auto shop repairs are imported from Mexico, Canada and China, according to the American Property Casualty Insurance Association. Some car components cross the border multiple times before final assembly.
Trump also signed a sweeping plan for retaliatory tariffs on global trading partners, after a review set to be completed by early April. He signed an order to raise duties on aluminum and steel to 25%, up from 10%, and called for a 25% tariff on automobiles, pharmaceuticals and semiconductors.
Economists don’t necessarily expect all tariffs to take effect. Trump may be wielding them as a tool to extract concessions from trading partners, they said.
“However, using tariffs as a negotiation tool doesn’t mean no imposition of tariffs,” Bank of America Securities economists wrote Friday in a research note. Those experts don’t anticipate Canada or Mexico tariffs will come to pass.
However, if they do, they’d likely exacerbate already soaring premiums for cars, parts and insurance premiums, experts said.
“Threats of 25% tariffs on the North American borders — proposed, now delayed — would disrupt more than three decades of free trade across North America and rattle every corner of the automobile business, while proposed ‘reciprocal’ tariffs would add further price pressure to an auto industry already facing affordability issues,” Cox Automotive wrote in a recent commentary.
Motor vehicle insurance premiums are up by 12% in the past year, according to the consumer price index.
Insurance costs began to rise quickly in 2022 and 2023 as Americans worked from home less often and commuted to work more frequently, Brannon said.
“A lot more people hit the road at the same time, which led to more accidents,” he said.
Protestors in New York City demonstrate against the push by President Donald Trump and Elon Musk, who leads the so-called Department of Government Efficiency, to gut federal services and impose mass layoffs, Feb. 19, 2025.
Michael Nigro/Pacific Press/LightRocket via Getty Images
The Trump administration’s purge of federal workers may ultimately amount to the biggest job cut in U.S. history, which is likely to have ramifications for the economy, especially at the local level, according to economists.
The White House, with the help of Elon Musk’s so-called Department of Government Efficiency, has fired or offered buyouts to workers across the federal government, the nation’s largest employer.
While the precise scale of the job cuts is as yet unclear, evidence suggests it’s at least in the tens of thousands so far, economists said.
The Trump administration directed federal agencies to dismiss “probationary” employees. Probationary workers are more-recent hires who have been with the federal government for only a year or two and who do not yet have full civil service protections.
There were about 220,000 federal employees with less than a year of tenure as of May 2024, according to the most recent data from the U.S. Office of Personnel Management.
Additionally, more than 75,000 federal workers have accepted a buyout offer, according to a Trump administration official. They agreed to resign but get paid through September.
The total of these two groups — nearly 300,000 workers — would make these actions amount to the “largest job cut in American history (by a mile),” Callie Cox, chief market strategist at Ritholtz Wealth Management, wrote Tuesday.
That sum doesn’t include others who may be on the chopping block, such as contractors who work at the U.S. Agency for International Development. Career civil servants who got promotions in the past year are also at risk of losing their jobs, since they’re technically on probation in their new role, Jesse Rothstein, a public policy and economics professor at University of California, Berkeley, said in a podcast Thursday.
Job cuts have come from across the government, at agencies including the Internal Revenue Service, National Park Service, Consumer Financial Protection Bureau, and the departments of Agriculture, Education, Energy, Health and Human Services, Homeland Security, and Veterans Affairs, according to the Associated Press.
“We may soon find out the hard way that people drive the U.S. economy,” Cox wrote.
Assessing the scale of federal job cuts
Arlene Rusch, former Internal Revenue Service worker, shows an email notifying her that she has been laid off, as she leaves her office in downtown Denver, Colorado, Feb. 20, 2025. The IRS began laying off roughly 6,000 employees in the middle of tax season as the Trump administration slashes the federal workforce.
Hyoung Chang | Denver Post | Getty Images
The ultimate number of cuts isn’t likely to be as high as 300,000, economists said.
For example, there may be some crossover: Probationary workers who would have been fired may have accepted a buyout. Also, in some cases, the Trump administration tried hiring back workers who’d been terminated.
Public disclosures show more than 26,000 federal workers have already been fired, excluding buyouts, according to a research note Wednesday from investment bank Piper Sandler.
That’s about the same number of workers who lost their jobs when Lehman Brothers collapsed during the 2008 financial crisis, for example.
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But Thomas Ryan, a North America economist at Capital Economics, estimates that between 100,000 and 200,000 federal staffers have probably already been let go.
That would handily beat IBM’s 1993 purge of 60,000 workers, thought to be the largest corporate layoff in U.S. history. Among other notable corporate cuts, Citigroup and Sears, Roebuck & Co. each slashed about 50,000 jobs, in 2008 and 1993, respectively.
“Certainly if all 200,000-plus probationary workers are fired [without replacement] that would be historic,” Susan Houseman, senior economist at the nonpartisan W.E. Upjohn Institute for Employment Research, wrote in an e-mail.
Even among prior federal layoffs, the scale of potential cuts appears unprecedented, experts said.
The U.S. Army, for example, eliminated 50,000 jobs in September 2011 as former President Barack Obama withdrew troops from Afghanistan and Iraq, according to outplacement firm Challenger, Gray & Christmas. The U.S. Air Force announced plans in 2005 to reduce head count by 40,000, the firm said.
We may soon find out the hard way that people drive the U.S. economy.
Callie Cox
chief market strategist at Ritholtz Wealth Management
The Bureau of Labor Statistics tracked data on federal mass layoffs from 1995 to 2003. During that period, mass layoffs affected anywhere from roughly 9,000 federal workers per year to 23,000 a year, the data show.
If the current federal job cuts “are not historic yet, it feels like we’re headed in that direction pretty quickly,” said Mark Zandi, chief economist at Moody’s.
The White House didn’t comment on the specific scale of cuts.
“President Trump and his administration are delivering on the American people’s mandate to eliminate wasteful spending and make federal agencies more efficient, which includes removing probationary employees who are not mission critical,” Anna Kelly, a White House spokesperson, said in a written statement. “This is part of President Trump’s sweeping effort to save taxpayer dollars, cut wasteful spending, and restore our broken economy.”
Potential economic impact
Job loss can be painful for household finances.
Affected workers who can’t quickly find new jobs may be forced to make ends meet without regular income. Unemployment benefits may offer a temporary stopgap to eligible workers, but they replace only about a third of prior wages, on average, according to Labor Department data.
The majority of workers who suffer job loss are affected long term, as they have trouble finding new full-time jobs and subsequently earn less money, according to a 2016 research paper by Henry Farber, professor emeritus of economics at Princeton University, who studied data from 1981 to 2015.
“There are economic impacts to [laid-off workers], their families, to the businesses they would have bought goods and services from,” said Erica Groshen, a senior economics advisor at Cornell University and former commissioner of the U.S. Bureau of Labor Statistics.
“The economic consequences of layoffs are like a domino effect that spread across local economies to businesses that seem to have no connection whatsoever to the federal government,” said Ernie Tedeschi, director of economics at the Yale University Budget Lab.
Laid-off workers may spend less at businesses such as local coffee shops, restaurants and day care facilities, he said.
There’s a psychological factor to mass layoffs, too, economists said. Other federal workers, fearful for their jobs, may pull back on spending and delay big-ticket purchases. Businesses with ties to the federal government or the federal workforce may stop hiring and investing due to uncertainty.
Washington, D.C., for example, is expected to suffer a “meaningful” increase in unemployment that would push the capital into a “mild recession,” Adam Kamins and Justin Begley, economists at Moody’s, wrote in a note Tuesday.
Close to 100,000 federal government positions will be eliminated or moved from Washington in the next couple of years, Kamins and Begley estimate. A “flood” of job applicants will limit the private sector’s ability to absorb them into the labor pool, they said.
The economies of Maryland and Virginia won’t suffer to the same degree but will be “materially” hurt due to their exposure to government employment, Kamins and Begley wrote.
Layoffs aren’t likely to show up in federal data for another month, and not until September for those who take the severance deal, according to Piper Sandler. Unemployment claims in Washington, D.C., for the week ended Feb. 8 were up 36% from the prior week.
‘Not recessionary’ on its own
Economists don’t expect the job cuts will have a huge impact on the overall U.S. economy, however.
If about 200,000 probationary workers were to lose their jobs, it would shave roughly one-tenth of a percentage point from annual U.S. gross domestic product, said Tedeschi, who served as chief economist at the White House Council of Economic Advisers during the Biden administration.
“This, on its own, is not recessionary,” he said.
Elon Musk, second from the left, walks along the colonnade at the White House on Feb. 19, 2025.
Win Mcnamee | Getty Images News | Getty Images
Ryan, of Capital Economics, said the scope of federal layoffs is relatively small when considered in the context of the U.S. labor market, which added roughly 1.5 million jobs in 2024. He said he expects most displaced federal workers to be rehired quickly since the economy is near full employment, “making any pain short-lived.”
Capital Economics hasn’t downgraded its economic growth forecasts due to the federal layoffs, Ryan said. That assessment includes potential ripple effects felt indirectly through the economy.
“Even adding the knock-on effects, it’s not going to plunge the U.S. into a recession,” Tedeschi said. “Let’s be realistic here.”
But mass layoffs add to the pressure already being placed on the economy by other Trump administration policies, such as tariffs and mass deportations, economists said.
“This was a healthy economy coming into 2025,” Tedeschi said. “And suddenly we have a number of serious potential headwinds that are stacking up. And this is one of them.”
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