Industry News

On January 14, 2026, Moody’s Ratings released its report, Social Security Funding Needs Could Translate to New Municipal Pension Risk. According to the report, if the federal government potentially mandates that all state and local government employees should participate in Social Security to help address the program’s funding shortfalls, it may complicate retirement benefits and cause additional financial strain on fiscal budgets for U.S. states and cities.

In this report, Moody’s Ratings analyzed the impact on Social Security’s revenue that would increase if all newly hired state and local government employees are required by the federal government to participate in the program. Currently, the Congressional Research Service estimates that over five million state and local employees do not participate in the program. However, these employees receive retirement benefits from their government employers’ respective defined benefit pension systems. Social Security’s Chief Actuary projects that requiring the participation of new state and local employees would decrease the system’s long-range deficit by about 4%.

The potential effects of mandating Social Security for state and local governments may result in challenging decisions for benefit design that would constrain the cash flow of their current retirement systems. Governments with retirement systems that have large unfunded liabilities, heavy benefit outflows, and rely on employee contributions for pension cash flow would likely be adversely affected.

The report indicates that a required contribution to Social Security of 6.2% of salary in addition to contributions to an existing retirement system may be challenging for newly hired workers. In addition, it notes that a potential Social Security requirement for new state and local government employees could possibly prompt the creation of new benefit tiers with lower contributions, or the closure of legacy retirement systems to new hires.

Eventually, the federal government is expected to act to balance Social Security’s revenues and expenses. In the coming decades, the gap between Social Security’s revenue and expenses are expected to continue to increase. In the future, this gap may possibly be closed through a combination of new revenue, reduced benefits, or redirected funds from other federal spending.

According to the report, since Social Security’s trust fund is estimated to not be exhausted until 2034 based on the Chief Actuary’s projections, any near-term legislation to address the program’s deficit is unlikely. However, the report indicates that the long-term solvency of the Social Security program with the projected shortfalls that require adjustments may possibly create new credit risks for municipal employers.

The report is available here.