For most workers, the value of Alaska’s defined contribution plan surpasses that of a traditional pension

Lawmakers in Alaska continue to evaluate a proposal to bring the state’s teachers, police, firefighters, and other public workers back into a defined benefit (DB) pension structure. Before this significant,  and potentially very costly decision is made, policymakers should examine the differences in value to employees between the current defined contribution (DC) structure and the proposed defined benefit pension. The Pension Integrity Project at Reason Foundation’s actuarial analysis finds that most Alaska employees would be better off remaining in the current defined contribution retirement plan.

To address growing unfunded liabilities and an evolving workforce, the Alaska legislature closed the state’s two DB pension plans to new public worker hires beginning in 2006. Despite no new members entering the public pensions since then, the annual costs of the Teachers’ Retirement System, TRS, and the Public Employees’ Retirement System, PERS, have continued to grow. This growth would have been far worse had new hires continued to have their obligations added—and subsequently underfunded—in the previous DB system.

Now, citing challenges with recruiting and retaining public workers, legislators, and union advocates are proposing a bill (Senate Bill 88) that would move all members back into the severely underfunded DB pension plan, which could saddle Alaska’s state government budgets with a $9.6 billion price tag.

Proponents of this proposal claim new and prospective hires will theoretically respond to a supposedly better retirement benefit, thus improving the state’s recruitment efforts and ability to keep teachers, police, and other valued public workers. A detailed evaluation of many employment situations by the Pension Integrity Project reveals that this proposed return to pensions would not improve the retirement benefits being offered for most employees, casting major doubt on the desired outcomes of SB 88.

The following tool created by the Pension Integrity Project displays the year-by-year accrual of retirement benefits for a wide variety of Alaska workers in different fields and starting at different ages. The outputs generated in this analysis represent the first annual benefit that a participating member will have earned by each year of employment. The interactive tool allows the users to adjust the entry age (a person’s age when they start employment), assumptions on investment and market returns, and wage growth.

Alaska policymakers should also consider the Supplemental Benefit System-Annuity Plan (SBS-AP) in their evaluations. The SBS-AP replaces Social Security for most of the state’s public employees. The interactive tool allows the user to toggle the SBS-AP on or off to see the impact of this supplementary plan on benefits earned. Currently, teachers do not have access to the SBS-AP like the rest of the state’s workers, which greatly hinders this group’s retirement savings. A new proposal—House Bill 302—would rectify this by making the SBS-AP available to teachers, greatly improving their current DC benefit.

Click Here for the Full Tool:
Alaska Defined Benefit vs Defined Contribution Analysis

This comparison of DB and DC retirement benefit accrual shows that the value of the DC annuity would exceed that of the legacy DB plan for many years of a worker’s service. In most cases, the value of the DB benefits would only surpass the DC plan’s benefits in a worker’s later years of service (after 27 years of service for a non-teacher hired at age 30, for example). Data suggests a worker staying on the job long enough for the defined benefit plan to be better for them is  uncommon in today’s workforce:

• According to assumptions used by the Alaska Public Employees’ Retirement System, PERS, and the Teachers’ Retirement System, TRS, about 50% of new public safety members and 70% of new teachers and other members leave the system within 10 years; and 
• About 60% of new public safety members and 77% to 85% of new teachers and other members leave their jobs within 20 years (assuming an entry age of 25). 

This analysis shows that, while a small group of workers could enjoy an improved retirement benefit by reopening the defined benefit plan, the vast majority of Alaska’s public employees would be better served in the existing defined contribution plan.

Notes on Methodology

• To calculate the annual annuity for defined contribution plans, Reason Foundation’s analysis applies the assumed return to the required contribution amounts for the average starting salary of $80,435 for public safety members, $59,581 for teachers, and $57,949 for other members. 
• In situations where a member would fulfill the requirements for full pension benefits (based on either age or years of service), the analysis assumes the member would also use existing DC savings to purchase an annuity at that point. This can come after just 20 years of service for public safety members and teachers, which (depending on entry age) can mean beginning guaranteed benefits through annuities at an unusually early age, thus generating a significant reduction in the comparable annual benefits from the DC savings. This assumption can be toggled off in the tool with the “DC Annuitization at 60: Off” button.
• The annuity payout rate is the interest rate used to convert the DC balance into an annuity. We assume a life expectancy of 85 for the annuitization calculation.
• To calculate the annual annuity generated by the defined benefit plan, the analysis applies the selected variables to the plan’s existing benefit calculation.