A Report From The Last Frontier (Part I)

Amid deeply troubling public employee recruitment and retention challenges, the Alaska Senate recently passed a bill to return public employees to a defined benefit pension plan. This would reverse a 2005 decision that closed Alaska’s two statewide pension plans to new hires. I’m in Alaska this week meeting with stakeholders and sharing the findings from a recent NIRS report requested by the Alaska Department of Education on teacher recruitment and retention as the legislative session quickly approaches its 2024 conclusion.

Over the course of this week, I intend to share my observations from what are proving to be highly interesting conversations about the retirement benefit outlook in Alaska. In this first column, I’m setting the stage on the retirement and workforce situation here in the Last Frontier State.

Alaska’s Experiment: Weren’t Other States Going to Follow Us?

In 2005, it probably seemed as though other states would soon follow Alaska’s lead in abandoning its pension plans. It hasn’t turned out that way though as nearly every state continues to offer a pension as its primary retirement benefit.

In fact, Alaska remains the sole state to only offer a savings-based plan to its teachers (see Table 1 from the NIRS report). It’s also important to highlight that Alaska’s teachers do not participate in Social Security, which means these public employees are solely relying upon their individual savings for retirement.

Public safety and other public workers across the country also continue to have access to DB pensions. Even after the Great Recession, most states modified their pension offerings by implementing new tiers, adding risk-sharing, and often requiring workers to help shoulder more costs, rather than moving away from pensions. Some states allow workers a choice between a pension and a 401(k)-style retirement plan, as well.

But radical changes to retirement benefits were largely rejected because retaining a career employment model through pensions remained important to states.

The results are now in regarding Alaska’s decision to do away with pensions, and they are not good for Alaskans. Some 58 percent of those working in the new 401(k)-style savings plan have less than five years of service, as do 42 percent of teachers in the new plan. In a state that already had workforce challenges, employee retention is worsening and the trend here in Alaska is diverging more and more from the workforce retention experiences of other states.

Stakeholders Want to Know Why Alaska Should Bring Back Pensions

This is a reasonable question I’m hearing here in Alaska: How do I explain to a mother of two, working without a pension, why lawmakers should bring back pensions to public employees? Well, the answer is simple and straight-forward. In most schools in America, it is very common to meet a teacher who has spent decades working in that school, become part of that community, and matured in their profession. In Alaska, it is growing more and more rare to see career educators. The number of those who are still working under the pension plan continues to shrink while half of newly hired teachers don’t reach a third year. This is because pensions are intentionally designed to retain workers, and 401(k) plans aren’t.

As noted in the NIRS report mentioned earlier, retention in the new defined contribution retirement plan has been worsening over time. Given that the shift away from pensions has had time to ripen, it’s worth comparing the results to other states. Today, Alaska expects to receive about six years of service from a newly hired teacher on average. In sharp contrast, every nearby state expects to receive between 70 percent to 200 percent more years of service per teacher hired. Those fewer years of service will have a deep impact on the quality of education in Alaska and create a less stable, lower quality classroom experience for students because experienced teachers really matter.

The chart below illustrates this stark contrast to other northwestern states.

But it’s not just teachers.

NIRS currently is working on a study of police and fire retirement plans. We’re finding that 52 percent of newly hired police officers and firefighters in the 28 plans studied will stay until they retire from the plan. This means they do not quit, leave through disability, or pass away. Only 42 percent of new hires will ever voluntarily quit. That’s good news for communities and public employers, especially at a time when it’s increasingly difficult to hire and keep public workers.

Again, the contrast is staggering when looking at the experience in Alaska. Only 10 percent of male and four percent of female public safety new hires will retire from the plan. And, those numbers exclude death and disability. In other words, 90 percent of male and 96 percent of female public employees in Alaska’s DC plans will quit before becoming eligible to retire.

Unfortunately, these are the real-world consequences that will impact services for the public – public safety, education, snow removal, and the like. These indirect impacts are difficult to score, meaning they are too often sluffed off as meaningless by policymakers.

Scoring Discussions in Alaska

It is worth mentioning the many conversations I’m hearing around the State Capital related to “scoring” of the financial impacts of this decision, or how much it will cost.

Though several actuaries have provided cost projections that are clear and cover a number of scenarios for returning to a pension plan, the issue remains murky. Why? Because it’s complicated.

Though the pension plan is being proposed to address workforce challenges, no one can predict exactly what will happen. Will retention improve suddenly? Will it take time? Will it ever?

Here’s what we know:

· If the state returns to pensions and retention doesn’t improve, retirement costs are projected to be lower (saving taxpayers money).

· If retention improves, the financial projections should anticipate less turnover. Yes, this is the whole point. Thus, payroll would be higher, health costs would be higher, and there would be more people participating in the pension. However, this dynamic is often understood (and often presented as) ‘pensions cost more’. Most of the additional costs are not even related to retirement directly, but payroll and health care, which rise because more experienced workers remain on the job and these workers are paid more than new hires.

· Finally, we know that the official scoring misses the additional cost of hiring and turnover, which is very difficult to score*. More anecdotal impacts are seen each year, from police departments closing for part of the day to $40,000 hiring bonuses for bus drivers (who may leave within a few years).

*The importance of acknowledging these indirect costs was noted by economist and retirement expert Teresa Ghilarducci in her analysis of the pension legislation here in Alaska. She pointed out that the actuarial analyses of SB 88 are incomplete because they do not account for:

“1) direct savings in hiring and training costs; 2) direct savings from a higher return and less risky return on DB assets compared to DC assets; 3) indirect, but real, savings from improved productivity from reduced turnover; 4) indirect, but real, economic activity induced by more reliable public safety, public education, and public services.”

Dr. Ghilarducci also concluded that “the most conservative – and incomplete — estimated cost savings created by switching to a DB plan is $76M per year.”

This Alaska Workforce Crisis Will Not Resolve Itself

It seems foolish to hope that the challenges in Alaska will simply reverse without a change in policy. Each year workers have become more and more aware of the situation, and each experience study has shown a steady march to higher turnover among workers in the DC plans.

Are we at the cusp of trying something new once again? Will the moment of truth arrive? Or, will it once again fall into a decision to be made next year? Only time will tell…

A Final Thought

The pension plan that was closed left all risks on the employer. Under the DC plan, all risks were shifted to employees. So, the leaders in Alaska have now experienced both ends of the spectrum.

Taking from these learnings, the Senate bill balances risks for all three major stakeholders of the plan: retirees, workers, and employers. Retirees would sacrifice post-retirement increases if the plan is less than 90 precent funded. Workers would also then contribute more to their pension. And employers would hold some of the risk, but not exclusively as once was the case.

It’s also noteworthy that the proposed plan looks very similar to the plans run by Wisconsin and South Dakota that have received praise from a broad spectrum of people interested in retirement including myself, actuaries and actuarial groups, the Pew Charitable Trusts, and the Reason Foundation.

It also shares similar important features that helped Maine’s PLD plan be recognized by the American Academy of Actuaries for its design that includes considerations such as “withstands market shocks” and “Maintains balance between sustainability and adequacy.”

Stay tuned for more!