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Retirement in Alaska

Where We Are Today

In 2005, the Alaska Legislature passed Senate Bill 141, dismantling the public employee Defined Benefit retirement pension and health care system and replacing it with a 401K system or Defined Contribution plan. Overnight, Alaska went from having a fair and secure retirement system to having one of the worst in the country.

This change made Alaska the only state in the nation to have neither a Defined Benefit pension system or participation in Social Security. For employees who will not receive Social Security, there is no guaranteed retirement security with a 401K. This lack of security hurts recruitment and retention of the best and brightest employees. Not just in the school setting with educators, but also firefighters, police, nurses and others who simply will take their Alaska training and go to other states that will provide them with a secure retirement.

What Will Happen if We Do Nothing?

Alaskans will pay the price. With the Defined Contribution 401K plan and no Social Security safety net, the State will have to pick up the costs of providing welfare programs for retirees who outlive their 401K. Inadequately funded retirements and poor health care funding will endanger the retiring worker and will expose the State of Alaska to more financial risk. Studies show that poorly funded 401Ks caused a significant increase in use of social services among the retired. In addition to dependency on government for services, the amount of money moving in the economy will be less as retirees have less overall disposable income. In addition to retirees’ having less to spend overall, the lack of a predictable monthly payment leads retirees to spend less when the economy is in trouble. This compounds the boom and bust cycle of the Alaska economy and diverts resources to avoidable expenses at the cost of needed economic projects.

What We’re Working On

NEA-Alaska has worked with the Alaska Public Pension Coalition (APPC) for the past eight years to change the Defined Contribution system to one that offers Alaskan employees both options: a hybrid system.

This Hybrid System would offer state employees a personal choice between the Defined Contribution 401K System and the Defined Benefit Pension System. This way, public employees can choose the plan that’s best for them, based on their career path. For example, Defined Benefit plans are a great option for public employees who want to work their full careers in Alaska. Whereas, mid or late-career professionals may choose the Defined Contribution plan if they have a military or private sector pension they can depend on.

This Hybrid System patches the hole in Alaska’s safety net. Since public employees in Alaska do not earn Social Security benefits, and, in fact, lose Social Security benefits they’ve earned in past jobs the longer they work in the public sector, this hybrid system offers them an option that will cover their expenses in retirement regardless of how long they live. Additionally, if the stock market crashes at the wrong time, their retirement savings won’t disappear. Currently, in both the case of a stock market crash and someone living longer than their retirement had been planned for, the State of Alaska will have to foot the bill by paying more for social services and Medicaid.

Keeping teachers in Alaska can also be a challenge. According to statistics from Buck Consultants, prepared for the Alaska Retirement Management Board (ARM), Alaska hired 3,037 teachers between 2006 and 2012. However, by June 2012, only 632 of these teachers stayed in Alaska for more than 5 years (that’s only 20.8% or four out of every five teachers leaving Alaska!). With a Defined Benefit option, public employees would be encouraged to work in Alaska longer, whereas the current system only requires them to work in Alaska for five years before they can take the money the state has invested in their individual retirement accounts to a new job or state. Since Alaska switched to the Defined Contribution-only system, a troubling number of public employees have not been working past five years of service, especially in our most vulnerable communities. This does not just hurt the state in terms of potential dollars leaving the state, it also costs us when we then have to rehire and retrain for that position.

We will continue to work on this issue until Alaska’s educators and public employees get the secure retirement option they deserve. If you’d like to help, consider contacting your legislator.

Hybrid Retirement for Public Workers

Frequently Asked Questions

In Alaska, the Defined Benefit system is a pooled retirement that offers a predictable defined monthly benefit to retired employees. A Defined Benefit pension provides a steady income stream that is guaranteed for the remainder of the retiree’s life. The Defined Benefit system is the primary retirement benefit for Alaska’s public employees hired before July 1, 2006.
In a traditional Defined Benefit pension system all eligible employees are automatically enrolled in the pension system. The amount of monthly income each employee receives is based on the years of service, the employee’s pay at the end of his/her career, and a fixed multiplier. For example, Alaska retirement systems provide a benefit multiplier that starts at 2% of pay. If an employee works for 30 years and has a final average salary of $40,000, this Alaskan’s annual pension income will be $24,000 (40,000 x 30 x 2.0%), which translates into a pension income of $2,000 per month.
Alaska’s Defined Benefit pension systems are funded by a combination of employer and employee contributions. However, the bulk of pension funding comes from investment earnings. Between 1993 and 2007, 10.3 percent of total state and local pension fund receipts came from employee contributions, 19.4 percent from employer contributions, and 70.4 percent from investment earnings.
The Alaska Retirement Management (ARM) Board has the fiduciary duty to ensure that the retirement fund is operating in the best interest of workers and retirees. The ARM board hires professional asset managers to steer the investment of these funds.
Characteristics of Alaska’s Defined Benefit pension systems make them effective in supporting retirement security. Specifically, Alaska guarantees lifetime pension income and health insurance to retirees. The pension system also provides other benefits, such as survivor and disability benefits. It is agreed that a “three-legged stool” is important to provide Alaskans with financial security in retirement: Social Security benefits, Defined Benefit pension income, and individual savings. In Alaska, where public employees do not participate in Social Security, the pension benefit must take the place of two legs of the stool. Currently, Alaska offers only the Defined Contribution plan, which provides only one leg of the stool; retirement savings accounts.
Defined Benefit pensions are an effective and important retention tool in Alaska. The Defined Benefit pension system represents the most efficient way for younger workers to save for retirement. Pensions are a proven tool for recruiting and retaining highly effective young professionals. Additionally, turnover of employees creates significant training costs. For example, to train an Alaskan police officer costs nearly $150,000. The State of Alaska cannot afford to become the training ground for the Lower 48. Without the retirement incentive to stay and build a life in Alaska, we are losing our best and brightest to other states, where most public employees have a pension. The portability provisions in the Defined Contribution retirement plan encourages trained and experienced public employees to leave Alaska once they are vested (5 years).
All Alaskans have an interest in making certain that all workers can retire with an adequate income. Compared with other types of retirement benefits, Defined Benefit pension systems are the most economically efficient use of tax funds. In addition, public employee contributions and investment returns have historically paid for about 80 percent of retirement benefits. Only 20 percent of pension contributions come from taxes.
Defined Benefit pension income plays a substantial role ensuring that Alaskans remain self-sufficient in retirement. In 2010, retiree pensions contributed more than $1.7 billion to the Alaskan economy, which generates over 12,000 jobs. Without the predictable income that pensions provide, many retirees will leave the state and Alaska’s economy will suffer. Every dollar contributed by Alaskans to state and local pensions results in $6.35 in total economic activity.
Yes. A recent analysis of the cost to deliver the same retirement income to a group of employees is 46 percent lower in the Defined Benefit system than in the Defined Contribution plan. The reasons for such cost savings are threefold. First, because Defined Benefit systems pool the longevity risks of large numbers of individuals, they need only to accumulate enough funds to provide benefits for the average life expectancy of the group. Second, Defined Benefit systems take advantage of the enhanced investment returns that come from a diversified portfolio over long periods of time. Third, Defined Benefit systems achieve greater investment returns than Defined Contribution plans.