Study finds scrapping pensions was a bad idea
November 1, 2019
What was the worst piece of legislation enacted in Alaska in the last quarter century? Well, OK, there have been some doozies. However, I would suggest that it was legislation enacted in 2005 that destroyed the traditional pension plan for teachers and public employees and replaced it with a grossly insufficient savings account for new employees.
At the time, the elimination of the traditional pension plan was explained by the governor and supportive legislators as a way to retard the growth of the “unfunded liability” -- the red-inked difference between assets in a pension fund and the amount of benefits the fund will be required to pay out.
A statewide coalition of Alaska labor unions and non-profit advocacy organizations provided detailed analysis by a national expert indicating that the unfunded liability could be managed using traditional strategies commonly employed by many pension funds. We held public meetings where young teachers and fire fighters said they would have to leave the state and find work outside where a real pension plan would offer long-term protection for their families. We predicted that state employee turnover would increase, as would the costs of training new employees. (Disclosure: I was a member of the coalition)
It was all to no avail. Our analysis was largely ignored by the politicians. Perhaps facts did not matter.
This year, 14 years after the pension debacle, the National Institute on Retirement Security (NIRS) released a study entitled “Enduring Challenges: Examining the Experiences of States that Closed Pension Plans.” Alaska was one of the states examined. NIRS determined why the pension plan underfunding happened in the first place:
The underfunding of these plans was caused by a variety of factors, including poor funding decisions by elected officials. [In addition,] Mercer Inc., the state’s actuary, had made
inaccurate actuarial projections and then attempted to hide them from the state. The firm had recommended the state contribute less to the plans than what was actually needed. This error alone contributed to $2.5 billion of the state’s unfunded liabilities. The state of Alaska sued in December 2007, seeking $2.8 billion in damages. Ultimately, Mercer and the State of Alaska settled for $500 million
The NIRS study closely examined the consequences of the destruction of the public employee pension system:
The state has experienced significant challenges recruiting and retaining public employees because most other states offer pensions as an essential benefit for public employees.
High employee turnover has resulted in higher training costs for new public employees.
Most of the employees participating in the current retirement plan will have insufficient savings and will not have a guaranteed monthly income in retirement. “This places those employees in a particularly precarious financial situation.”
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 pension fund. Consequently, the unfunded liability is now billions of dollars more than it was in 2005.
By the way, Alaska does not offer Social Security to state employees because it voluntarily pulled out of the Social Security system in 1978, and told the feds that it would offer a pension to replace the loss of Social Security!
So, here we are. What can be done? The damage can at least be partially corrected by reinstituting a pension plan for teachers and public employees. Several bills in recent years have attempted to do that. One of the latest is SB 46 sponsored by Senator Jesse Kiehl. As summarized by the Senator: “Senate Bill 46 lets teachers, troopers, firefighters and other public employees choose one of two state retirement systems: today’s defined contribution retirement account [a savings account] or earning a new defined benefit pension [a classic pension]. And it saves the state money in the process.”
Now we know for certain that destruction of Alaska public employee pensions was a really bad idea. Perhaps it is long past time to have the serious discussion about how to reestablish pensions for teachers and public employees.