Commentary

Reforming Alabama’s Retirement System

A recent report by the Alabama Policy Institute examines the public retirement system in Alabama and recommends substantive reforms to bring about fiscal sustainability. As a whole, Alabama’s pension system is unfunded by $15.2 billion, with a funded ratio of only 66 percent. This year alone, the state is expected to spend nearly $1 billion on pension contributions, which have increased annually by 11.9 percent on average since 2004. The pension cost accounts for 12 percent of the entire state budget (excluding federal funding), and is the second-largest outlay in all of state government, behind only education.

Alabama attempted to bring down pension costs with two bills in 2011 and 2012, which raised the employee contribution rate and created a new tier for new employees with a more affordable benefit formula. These changes are estimated to save the state about $162 million annually on average over the next 30 years. The measures, however, still left some fundamental problems unaddressed. The report’s recommendations aim at fixing these problems:

  • Cash balance pension plan: a switch to a cash balance plan would provide more portability for employees through individual accounts, and reduce taxpayers’ contingent liability by allowing mutual risk sharing between the public employer and the employees.
  • Judicial pension reform: the current benefit formula for judges is excessive and should be made more consistent with those of other state employees.
  • Eliminate piggyback agency participation: the definition of “teacher” for eligibility to participate in the state pension system is too broad, allowing a private lobbying group to benefit from taxpayers’ money. Fixing the definition would narrow the pension benefits to the intended workers.

To read the report, go here.

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