Learn About States With No Social Security Tax

Understanding Social Security Tax and Which States Don't Require It

Social Security tax is a federal payroll tax that funds the Social Security program, which provides retirement, disability, and survivor benefits to millions of Americans. The federal government requires most workers to pay Social Security tax on their wages, currently set at 6.2% for employees and 6.2% for employers (or 15.4% for self-employed individuals). However, certain states have passed laws that allow some public employees to opt out of the Social Security system and participate in alternative pension plans instead.

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Several states operate what's known as "non-covered" or "exempt" public employee pension systems. These states include Alaska, Colorado, Illinois, Louisiana, Maine, Massachusetts, Missouri, Nevada, Ohio, Rhode Island, and Texas. Employees in these states who work for state or local government agencies may not pay Social Security taxes on their wages. Instead, they participate in state-sponsored defined benefit pension plans or other retirement systems that serve as their primary retirement security.

It's important to understand that no state completely eliminates Social Security tax for all residents and workers. Rather, certain government workers in specific states are excluded from the Social Security program under Section 218 of the Social Security Act. Private sector workers in these states still pay federal Social Security tax like workers everywhere else. The distinction matters because it affects how retirement income is calculated and what benefits workers may receive.

The history of these exemptions dates back to the 1950s when some states negotiated to maintain their own public employee retirement systems instead of participating in Social Security. These states argued their pension plans provided superior benefits compared to Social Security, and federal law permitted them to maintain this separate system. Today, roughly 7.5 million public employees work in these non-covered states.

Practical Takeaway: If you work in the public sector in one of these states, research whether your position falls under a state retirement system rather than Social Security. Review your pay stub to see whether Social Security and Medicare taxes are being withheld. Understanding your specific retirement system is the first step toward planning your financial future.

The Windfall Elimination Provision and Government Pension Offset

Workers who receive pensions from employment where they didn't pay Social Security taxes may face two special rules that reduce their Social Security benefits: the Windfall Elimination Provision (WEP) and the Government Pension Offset (GPO). These rules were created by Congress in the 1980s based on concerns that workers could receive both substantial government pensions and Social Security benefits without having contributed proportionally to the Social Security system.

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The Windfall Elimination Provision affects workers who receive a government pension and also have earned Social Security benefits based on their own work record. The WEP reduces Social Security retirement or disability benefits by up to 50% of the government pension amount. For example, if a former state employee receives a monthly government pension of $1,500 and also qualifies for a Social Security retirement benefit of $1,200, the WEP could reduce the Social Security benefit. The exact reduction depends on when the person was born and their earning history.

The Government Pension Offset affects individuals who receive a government pension and also qualify for Social Security spousal or survivor benefits. The GPO reduces Social Security spousal or widow/widower benefits by two-thirds of the government pension amount. This means a spouse who would typically receive 50% of a worker's benefit could see that amount significantly reduced if they also receive a non-covered government pension. For instance, a person might lose most or all of their spousal benefit entitlement due to this rule.

As of 2024, Congress has been considering legislative changes to modify or eliminate these provisions. Several bills have been introduced to repeal or reduce the impact of WEP and GPO, though no major changes have been enacted into law yet. Workers and their families should stay informed about potential legislative developments that could affect their benefits calculation.

Practical Takeaway: If you have a government pension from non-covered employment and also expect Social Security benefits, understand that your Social Security amount may be reduced. Use the Social Security Administration's WEP and GPO calculators or speak with a financial advisor to estimate your actual benefits. Don't assume your expected Social Security benefit will be the full amount you calculated.

Detailed Look at Specific Non-Social Security Tax States

Alaska stands out as the only state that has never participated in Social Security for public employees. Alaska created its own Public Employees' Retirement System (PERS) in 1947, predating the option for states to exclude themselves from Social Security. Alaska state employees, teachers, and many local government workers pay into this system instead of Social Security. In 2006, Alaska closed its defined benefit plan to new employees, requiring them to participate in a defined contribution plan instead. Current PERS members in Alaska receive pension benefits based on a formula considering years of service and final average salary.

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Texas represents another major non-covered state with multiple retirement systems. Texas Teachers Retirement System (TRS) covers teachers and school administrators across the state. The Texas County and District Retirement System (CDRS) covers county and district employees. Texas municipal employees often participate in the Municipal Retirement System. Teachers in Texas public schools contribute to TRS but not to Social Security, making Texas home to hundreds of thousands of non-covered workers. These systems are generally considered generous, with teachers able to retire with full benefits after 30 years of service regardless of age.

Ohio presents a complex structure with several non-covered systems. The Ohio Public Employees Retirement System (OPERS) covers most state and local government workers. The State Teachers Retirement System of Ohio (STRS Ohio) covers teachers and school administrators. The Ohio Police and Fire Pension Fund covers law enforcement and firefighters. These systems collectively exclude roughly 1 million Ohio workers from Social Security participation. Ohio's pension systems have faced financial challenges in recent years, with discussions about benefit adjustments and contribution rate increases.

Illinois operates multiple non-covered systems including the Illinois Municipal Retirement Fund (IMRF), the Teachers' Retirement System of the State of Illinois (TRS), the State Employees' Retirement System (SERS), and the Judges Retirement System. Illinois has struggled with pension funding issues, reporting unfunded pension liabilities that have affected the state budget. Despite these challenges, Illinois workers in these systems continue to participate in their respective pension plans rather than Social Security.

Practical Takeaway: Research your specific state retirement system's rules, contribution requirements, vesting schedules, and projected benefit amounts. Each system operates differently, and understanding your particular plan's details is crucial for retirement planning. Request benefit statements from your retirement system annually and review them for accuracy.

How Non-Covered Employment Affects Social Security Records

Workers in non-covered positions have their Social Security records marked differently in the federal system. When you work in a non-covered government position, the Internal Revenue Service and Social Security Administration know that years of employment shouldn't be counted toward Social Security coverage. This distinction becomes important when calculating your Social Security benefit, even if you never actually receive Social Security payments due to the Windfall Elimination Provision.

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Your Social Security earnings record shows all wages subject to Social Security tax. For years you worked in non-covered government employment, no Social Security tax appears on that record, even though you may have paid substantial amounts into your state retirement system. This creates a gap in coverage history. If you later work in private sector employment where you do pay Social Security tax, those years will show on your record. Your final Social Security benefit calculation will consider only the years where you paid into the system.

The Social Security Administration calculates benefits using a worker's highest 35 years of earnings. If you have 10 years in non-covered government work and 25 years in private sector work, your calculation uses only the 25 years of private sector earnings plus 10 years counted as zero earnings. This "zero years" issue significantly reduces the calculated benefit amount before the Windfall Elimination Provision is even applied. Some workers see their benefits reduced twice over: once because of the years without Social Security contributions, and again because of the WEP.

Understanding your earnings record is essential. You can request a free copy of your Social Security Statement through mySocialSecurity.gov or by calling 1-800-772-1213. Review this statement to confirm that non-covered years are properly marked and that your covered years show accurate earnings. Errors on your record can lead to incorrect benefit calculations, and correcting errors becomes harder the longer you wait after they occur.

Practical Takeaway: Obtain your Social Security Statement and review it annually for accuracy