Recent History of Alaska’s Retirement Systems
In recent years, Alaska educators have taken to calling Alaska’s worst in the nation retirement system “the death tier”. An acknowledgement that even though there is a “retirement” system in place, many people will outlive their retirement savings and will be forced to work until they die.
In 2006, educators, public employees and many Alaskans warned of the harm that this transition would have on retirement security, retirement costs and expenses, and competitive benefits for recruitment and retention of public employees. However, there was a major national push for privatizing retirements, that included pressure from the White House. Alaska’s legislators succumbed to the false promise of savings, which have never been achieved – while shifting all of the risk to individual employees to navigate the stock market and individually manage their retirement security.
The change to a DC system was particularly damaging to TRS employees, all of whom currently don’t participate in Social Security through their school districts, and some PERS employees who have neither Social Security or SBS (Supplemental Benefit Savings). A recent analysis by the Chief Investment Officer of the State of Alaska shows that after working a 30 year career, as many as 75% of TRS members could run out of retirement savings after 20 years of retirement – with no Social Security as a safety net.
Some employees appreciate the “portability” of the new DC plan. After 5 years, you can take all of your contributions and 100% of the employer contributions and move out of Alaska with no penalty. This is problematic for several reasons, but most importantly it gives little to no incentive for educators to spend their entire career and retire in ALaska, and in some cases, actively encourages people to leave after 5 years. We know the more experience a teacher has, the better they are at educating students. When we lose educators after 5 years it costs money to recruit new employees who are often earlier in their careers. Recent research documented a 22% turnover rate for Alaska teachers.
In addition to the damage done to new hires with no access to a pension, there are no new contributions being made to Alaska’s DB system. The plan has been “closed”. As members retire and start to draw their pensions, there are no additional funds contributing to maintain the health of the pension system. Eventually, this system will run out of money.
To learn more about why closing Alaska’s DB plan has not saved the state money read “Enduring Challenges: Examining the Experience of States that Closed Pension Plans.”
“Closing the pension plans made it more difficult for the state to manage the existing unfunded liability because new employees no longer pay into the system As a result of the ongoing underfunding, the state decided to make a one-time $3 billion contribution to the closed pension plans in 2014-2015. Despite this significant infusion of the state’s financial resources, the combined unfunded liability for pension benefits was higher in 2017 ($6.3 billion) than it was in 2005 ($4.1 billion). Closing the plans did not reduce the unfunded liability. Alaska has managed to improve the funded status of both plans modestly –from 65.7 percent to 66.7 percent in PERS and from 60.9 percent to 75.9 percent in TRS– but this is due almost entirely to the $3 billion contribution. Meanwhile, the unfunded actuarial accrued liability for pension benefits has increased in both plans since 2005.”
To learn more about why pensions are a better deal for employers and employees read: Still a Better Bang for the Buck: An Update on the Economic Benefits of Defined Benefit Pensions
Analysis finds that there are three unique drivers of the cost savings.
More specifically, DB pensions:
- Pool the longevity risks of large numbers of individuals to provide Americans with stable income that won’t run out in retirement. Said another way, pensions only have to save for the average life expectancy of a group of individuals. Absent a group retirement plan, individuals must save enough on their own should they be among the half of retirees who will live longer than the average life expectancy. This DB pension longevity risk pooling feature generates a 10% cost savings.
- Are “ageless” and therefore can perpetually maintain an optimally balanced investment portfolio. In contrast, a typical individual investor must down shift investments over time to a lower risk portfolio of cash and bonds, sacrificing higher investment returns generated from stocks.This DB pension balanced portfolio feature generates an 11% cost savings.
- Achieve higher investment returns as compared to individual investors because they have lower fees and are managed by investment professionals. This lower fees and higher returns DB pension feature generates a 27% cost savings.