Most public pension plans without Social Security coverage—which account for about 27% of state and local workers, including 40% of teachers—fail to meet The Pew Charitable Trusts’ guidelines for retirement security for career workers. In contrast, nearly all of the plans that participate in the federal Social Security program provide or come close to providing retirees with at least 90% of their preretirement take-home pay, Pew’s target replacement income ratio.
This finding raises real concerns about how well states that do not participate in Social Security are preparing their long-term public workers for retirement. Federal law allows states to decide not to take part in the federal retirement program—if they provide total benefits comparable to those offered by Social Security.
Still, many public workers in states that do not participate in Social Security fall behind. That’s because those in participating states often receive healthy state-sponsored benefits—in addition to ones from Social Security. And these differences are exacerbated by the fact that workers receiving Social Security benefits tend to be protected by cost-of-living adjustments (COLAs) that are higher than those offered by most public sector retirement programs.
For this analysis, Pew reviewed the 81 state and teacher public retirement plans for new employees in all 50 states to determine their replacement income ratios. Called the “replacement rate,” this calculation compares workers’ income from a state retirement benefit—plus Social Security where available— with their preretirement take-home pay.
Among the plans analyzed, 63 participate in Social Security. In all but 14 of those plans, workers who spend 35 years with a public employer can replace at least 90% of their take-home pay in retirement; several others receive at least 80%. The plans examined include traditional defined benefit plans or pensions, hybrid designs, and employer-funded defined contribution plans, similar to 401(k)s.
On the other hand, among the 18 systems that do not participate in Social Security, only three met Pew’s 90% replacement rate threshold, while 10 provide less than 80%. Those that did reach or surpass 80% use different approaches to providing benefits, indicating that there is no one size fits all approach for plans that opt out of Social Security.
The state retirement plans that do not participate in Social Security do provide higher benefits, on average, than their Social Security-participating counterparts, highlighting that it is the availability of the federal program that helps workers attain target income replacement levels where they have access to the program. Among the defined benefit or traditional pension plans that Pew analyzed (the most common plan type for non-Social Security plans), the average multiplier—the percent of final average salary that a plan pays for every year of a worker’s service—is 1.9% for plans that participate in Social Security, compared with 2.3% for plans that do not.
In the most common plan design for state employees, a worker’s annual benefit is calculated based on a formula that factors in years of service, final average salary, and that benefit multiplier. Pew added any applicable defined contribution accounts and Social Security benefits, where applicable. The analysis adjusts for inflation and take-home pay to estimate what share of a worker’s final salary before retirement is replaced throughout his or her retirement. When applying this calculation to state workers and teachers that do not participate in Social Security, most retirees will fall short of target replacement rates without Social Security income.
Importantly, Social Security provides COLAs that tend to match inflation (over the last 10 years, the annual COLA has averaged 2.6%). However, the average retirement plan for state workers and teachers offered a 2.02% COLA in 2023. As a result, some state retirement benefits may be less valuable in the long term than Social Security benefits.
Congress recently addressed a long-standing issue for some workers in public plans that do not provide Social Security. Historically, public employees in those plans who also worked in the private sector or received spousal or survivor benefits could see their Social Security benefits reduced or eliminated, even though they paid into the system.
These workers were affected by two provisions that had been in federal law since 1983—the Windfall Elimination Provision and the Government Pension Offset. The Social Security Fairness Act of 2023, which became law on Jan. 5, will eliminate those reductions once fully implemented. Workers who have been affected by those two provisions were not considered in this more general analysis. Pew’s calculations assume that workers have no separate Social Security-covered employment and do not consider spousal benefits, personal savings, or other assets.
Although many career workers in systems without Social Security may not be on a path to retirement security, some state and local systems have identified ways to provide career workers with adequate replacement income after they leave their jobs.
The non-Social Security plans that meet or come close to meeting Pew’s 90% replacement rate threshold use a range of designs to meet retirement security goals. For example:
Most public sector retirement plans that participate in Social Security provide adequate retirement benefits for career workers, but many of the plans that have opted out struggle to meet Pew’s target replacement rate. And that leaves many long-time public workers and teachers less prepared for retirement. As the examples above demonstrate, some plans that don’t participate in the federal income replacement program do succeed in meeting Pew’s benchmarks. There is no one approach that works for all, but state policymakers can look to creative and tested solutions to ensure that workers continue to have sufficient income once they retire.
Mollie Mills is an officer and Aleena Oberthur is a director with The Pew Charitable Trusts' state fiscal policy project.