Q: My understanding is that when Social Security was created in 1935 the federal government did not include federal employees as participates in the Social Security system. The decision was based on the fact the federal government already had such a system for its employees (that was more generous). States, cities, counties, etc., were given the option of participating. But if they had an existing system they were not allowed to participate. Thus, a segment of the federal government’s “Civil Service Retirement System” (CSRS) is essentially a Social Security-like segment. Many states now exempt social security from state income tax while fully taxing all of CSRS pensions. This seems contrary to federal law that requires that the state tax their own employees the same as federal employees. Oklahoma is following this theory and recognizes 20 percent of CSRS pensions as Social Security-like payments and exempts that portion for income taxes in parallel with exempting Social Security. Shouldn’t all states be required to follow Oklahoma logic?
A: False premises create erroneous conclusions. Since a segment of the federal government’s Civil Service Retirement System (CSRS) isn’t essentially a Social Security-like segment, arguing that a percentage of a CSRS annuity should be treated as if it is for state tax purposes won’t hold water. The law you referred to only requires that a state tax the retirement annuities paid to federal employees in the same way it taxes those it pays to its own employees. While the state of Oklahoma is free to exempt a portion of CSRS retirees’ annuities in the same way it does the Social Security benefits of its own employees or even its citizens, it wasn’t required to do so. Consequently, each state is free to make up its own mind.