Abaque · Non-covered public employment

When the employer is a government

Roughly a quarter of state and local employees earn no Social Security at all for the years they work. Congress wrote that exemption, wrote the vesting protections that do not reach their pensions, and wrote them a deferral account with rules no private employee gets. This sheet reads the three together.

Governing variableYears of service
Measured inYears of salary
Rules as of2026
Figures3
SheetRev A
A pension is not a benefit. It is a bet on tenure, and the legislation makes the bet non-linear. A defined contribution balance grows from the first day and leaves with you. A pension pays nothing at all until a vesting date, then multiplies by final salary — and because governmental plans are exempt from ERISA, no federal law caps how long that wait may be. Meanwhile the Social Security you would have earned elsewhere accrues smoothly and is simply forgone. Fig. 1 draws the three curves; where they cross is the whole decision.
Inputs

Set the operating point

20
40
2.00% / yr
5 yrs
No federal floor applies — see the ERISA note.
9.0%
5.0%
65
88
$90,000
Enters in one place only — the PIA bend points are dollars.
3.0%
Public path
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The private path instead
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—
Social Security forgone
—
—
Years to break even
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—
Extra shelter per year
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Fig. 1

The tenure curve — and where it overtakes what you gave up

Reading the chart
  1. Enter along the bottom at the number of years you would realistically stay.
  2. Read up to the blue line for the pension, and to the orange for what the private job would have built instead.
  3. Left of the crossing the private path wins. Below vesting the pension is worth only your own contributions back.
  4. Everything is in years of salary, so the pay cancels — except on the Social Security curve, which bends because its formula is written in dollars.
Table view — Fig. 1
Fig. 2

Two cliffs: the vesting date, and the fortieth quarter

Table view — Fig. 2
Fig. 3

What the law gives back — the 457(b)

Table view — Fig. 3
Notes

Three pieces of legislation, and what each one does

1. The exemption from Social Security

Employees of a state or local government sit outside Social Security where a qualifying retirement system covers them and no §218 agreement elects coverage — 26 U.S.C. §3121(b)(7)(F). The consequence is easy to state and easy to miss: those years add nothing to the Social Security record. Not earnings, and not the forty quarters needed to qualify for any benefit at all.

Medicare is different. Anyone hired after 31 March 1986 pays Medicare tax regardless — §3121(u)(2) — so Medicare eligibility keeps building while the Social Security record does not. Only one of the two stops.

The single most important check before taking such a job mid-career: are forty quarters already banked elsewhere? Below that line the Social Security curve in Fig. 1 is not merely reduced. It is zero.

2. The vesting protections that do not apply

A private defined benefit plan must vest on a statutory schedule — five-year cliff or seven-year graded. A governmental plan is exempt from ERISA under 29 U.S.C. §1003(b)(1), so no federal floor governs its vesting at all, and ten-year cliffs exist. Nor is there a PBGC guarantee behind it: if the sponsor underfunds the plan, the remedy is political rather than statutory.

That exemption is the reason Fig. 2 has a step in it. Leave one day early and the employer's entire contribution evaporates; you receive your own money back, with interest, and nothing more.

The second erosion is quieter. Vest, then leave decades before the retirement age, and the benefit is typically frozen in nominal dollars until it becomes payable. No COLA runs in the interval. Twenty years of ordinary inflation can halve it, which is why the deferred branch of Fig. 2 sags rather than holding flat.

3. The account no private employee gets

A governmental 457(b) carries two features found nowhere else:

  • Its limit is independent of §402(g). The coordination rule was repealed in 2001, so an employee offered both a 457(b) and a 401(k) or 403(b) may defer the full amount to each. Fig. 3 draws the resulting doubling.
  • §72(t) never reaches it. Not an exception carved out — a 457(b) simply is not a "qualified retirement plan" within §4974(c), which is the definition the penalty hangs on. After separation, distributions are available at any age, taxed as ordinary income, with no 59½, no rule of 55 and no SEPP. It is the best early-retirement bridge in the code.

Both are destroyed by rolling the balance into an IRA, after which §72(t) does apply. The same trap, in a different plan, as the rule of 55.

What changed in 2025, and why old analysis is wrong

Until the Social Security Fairness Act (Pub. L. 118-273, January 2025), a non-covered pension reduced the Social Security a worker had already earned elsewhere, through the Windfall Elimination Provision, and gutted spousal and survivor benefits through the Government Pension Offset. Both are repealed, for benefits payable from January 2024.

Prior covered earnings now pay in full alongside the pension. This is the largest change to the economics of non-covered public employment in decades, and anything written before 2025 gets it wrong.

What this sheet cannot see

  • The pay difference. The sheet compares retirement value at equal salary. If the public job pays less — frequently the case — that gap is an immediate, certain cost against an uncertain future benefit, and it usually dominates everything drawn here.
  • Retiree health coverage, which some systems offer and others have withdrawn from newer tiers. Where it exists it can outweigh the pension itself; where it does not, retiring before 65 means buying cover on the open market.
  • The plan's funded ratio. No PBGC stands behind a public plan. A weakly funded system is a genuine input to a career decision in a way a private pension's funding is not.
  • Tier changes. Multipliers, vesting and retirement ages are routinely cut for new hires. The terms you are offered are not the terms colleagues hired earlier enjoy, and are not guaranteed against future revision.
  • Purchase of prior service, reciprocity between systems, disability and survivor provisions, and state income tax — several states exempt their own pensions and not others.
  • One discount rate for both sides. A pension is a guaranteed annuity and a contribution balance is not, so in principle the pension deserves the lower rate. Using a single rate systematically flatters the private path — raise the rate and watch the crossing move right. Treat the direction of that sensitivity as the finding, not the crossing year itself.
  • Salary growth. Everything is in today's dollars at a flat salary. A steep late-career rise favours the pension, because the benefit multiplies by final average pay while a contribution account only ever received the earlier, smaller contributions.
This is arithmetic, not advice. The statutory mechanics here are stable; the plan terms are not statute at all but one employer's contract, which is why they enter as axes rather than as data. The PIA bend points and the deferral limits are re-set every January. Read the summary plan description before relying on any of it, and take a real decision to a fee-only planner.
Indexed figures are re-set every January and this snapshot will go stale. Get notified when they are re-verified → · All fifteen sheets