Teachers: Here’s How to Ace Retirement Without Social Security

When it comes to saving for retirement, many teachers can’t use the standard lesson plan. What's different for them? Social Security — or the lack thereof.

About 40% of public school teachers aren't covered by the Social Security system, according to the National Association of State Retirement Administrators. ^[0]

Here's what you need to know about your options:

How teachers can save for retirement

Teacher retirement options vary by state, but you’re generally offered either a pension or a defined contribution plan like a 403(b) or 457(b), or both.

Pensions

Pensions have plenty of perks, most notably a guaranteed benefit in retirement that lasts as long as you live. But they’re not without downsides. For example, many are underfunded and typically don't travel well, requiring you to participate in the plan for a certain number of years before you’re vested (“vested” means promised the full pension benefit you’ve accumulated). Generally, the longer you work, the larger your pension benefit.

To ensure your retirement is all you want it to be, it’s wise to supplement your pension. We'll tell you two ways to do that.

A defined contribution plan

You may be eligible for a 403(b) or 457(b) plan alongside your pension. Both allow you to put aside money for retirement pretax. The annual contribution limit for 2024 is $23,000, with additional catch-up contributions in some cases. Those limits are separate if you have both a 403(b) and a 457(b). You may also earn employer-matching contributions.

The money you contribute generally grows tax-deferred and will be taxed as income when you take distributions in retirement. Both plans may also offer a Roth option, which allows you to put away after-tax dollars and take retirement distributions tax-free.

A Roth or traditional IRA

These are accounts you would open and fund on your own at an online broker. With an IRA, you can contribute up to $7,000 in 2024 and 2025 ($8,000 if age 50 and older).

» Find the best IRA account for you

Or, if managing your own IRA isn't your idea of fun, consider a robo-advisor. These companies use computer algorithms to manage your investments at a lower cost than an online broker.

With a traditional IRA, you make tax-deductible contributions, then pay taxes on distributions in retirement. With a Roth IRA, your contributions don’t get you an upfront tax break, but distributions in retirement are tax-free. Depending on your income, you may be able to combine IRA contributions with a 403(b) or 457(b), increasing how much you put away for retirement each year. Review the IRA contribution limits to find out.

Why teachers aren’t covered by Social Security

Remember how 40% of public school teachers aren't covered by Social Security? That goes back to the initial draft of the Social Security Act in 1935, which left state employees out in the cold. Most states have since opted into Social Security for their public-sector employees, but some states haven't. In those states, teachers and other state and local government workers are exempt from paying Social Security taxes and instead typically rely on a state-run pension plan.

So, why aren't teachers covered? The short answer: In part, it’s because they don’t pay into the Social Security system. But in some cases, even if they’ve paid in at some point in their career, Social Security benefits — including retirement, disability and survivors benefits — could be reduced if they also have a state pension.

The retirement and disability benefit reduction is due to a rule called the Windfall Elimination Provision, which is designed to block state and local public employees from collecting a pension alongside Social Security benefits. ^[0]

The Windfall Elimination Provision

You might wonder how Social Security can be reduced if you weren’t covered by the program in the first place. The answer is that it can’t. The Windfall Elimination Provision doesn’t directly affect you if you’ve never paid into the Social Security system; you simply won’t receive benefits.

But if you have contributed to the system — most likely because you paid Social Security taxes in a different job — and you now work for a state or local government in a role that doesn’t participate in Social Security, the Windfall Elimination Provision could reduce any Social Security retirement or disability benefit for which you’re eligible based on that past work. The Social Security Administration has a specific formula to calculate what the reduction might be.

» More on the Windfall Elimination Provision

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