A Report From The Last Frontier, Part III

When it comes to retirement benefits for public sector workers, Alaska is an outlier state offering only 401(k)-style defined contribution (DC) benefits to its workers. Alaskans who deliver essential public services lack a defined benefit (DB) pension plan, and teachers do not even participate in Social Security. Not only are these workers at an extreme financial security disadvantage, but the state also faces a highly problematic shortage of public workers – including teachers and public safety employees.

Now, Alaska stands at a crossroads. Known for their pioneering spirit, Alaskans now are contemplating a return to pensions for their public workers to help address the workforce crisis. If Alaska were to move forward with a return to pensions, here’s what the state could expect.

First, the transition back to pensions would mean current employees would be asked to choose the retirement plan that aligns with their goals and preferences between the pension or savings plan. Additionally, Alaska’s public employees would have to decide whether to use their current DC account savings to purchase past service credits in the pension plan.

Second, at the administrative level, the Alaska Retirement Management (ARM) Board would be responsible for crafting and implementing the new retirement benefit structure. Drawing on insights from states like Wisconsin and South Dakota, the board likely would seek to devise a benefit system that balances affordability with sustainability. The ARM Board might consider establishing a collaborative process among stakeholders that would drive decision making on post-retirement benefit increases and cost-sharing, or adopting a more automatic, formulaic approach that grounds these decisions on metrics such as funding ratios or contribution levels.

In particular, the experiences of the South Dakota Retirement System (SDRS) offer valuable lessons for Alaska’s deliberations. The SDRS board reviews retirement plan returns and asset levels annually, which serves as the linchpin for determining the feasibility of various benefit levels. This process, grounded in the plan’s fiscal performance, has yielded stable costs over time.

Third, central to a return to pensions would be the alignment of stakeholders’ interests. Whether it’s employees, retirees, or taxpayers, all parties have a vested interest in the successful funding of the pension plan. By fostering a collaborative environment where incentives are well-aligned, Alaska can chart a course toward a robust and resilient retirement system. The chart below illustrates how well risk-sharing has worked in the state-run plans in South Dakota (SDRS) and Wisconsin (WRS) when you compare how level costs have been against other public plans during the extremely volatile period of 2001-2023.

In the past, Alaska offered retirement plans that placed all risks on employers. Today, the DC retirement plans place all the risk on workers. The new retirement plan proposal offers a middle -ground with employers, retirees, and employees sharing risks, which upholds the state’s commitment to supporting Alaska’s public workforce while also safeguarding fiscal responsibility.

It is not clear how quickly retention of workers might improve if a pension plan is back in place, or whether the improvement will bring retention to the level of those who worked under the prior pension tier. But we know that between healthcare, retirement, and other benefits, companies spend hundreds of billions of dollars every year trying to provide benefits that employees will value so they stay with those firms. The retention effects of benefit plans are the basis of the entire employee benefits industry. So, the fact that workers have been rallying for the option to return to pensions offers real hope that the workforce and retirement challenges will turn around.