AFP-AK: Opposing Defined Benefits

Alaska Defined Benefit Points To Consider

Background: Alaska transitioned to a defined contribution (dc) retirement plan from a defined benefits (db) plan in 2005, after the state accrued a sizable amount of debt and could no longer afford the earlier pension system. The basic difference between these plans is what they promise to participants. A defined benefit plan specifies exactly how much retirement income employees will get once they retire. A defined contribution plan only specifies what each party - the employer and employee - contributes to an employee's retirement account, similar to a 401(k)-style retirement system. For several years, there has been a push to return to the unaffordable dc plan for state employees.

A return to defined benefit (db) pension plan could further cost Alaska upwards of $9 billion in unexpected expenses.

These pension proposals could mean that Alaska would, for the first time, have either a sales tax or an income tax.

Alaska still owes more than $6.1 billion in unfunded liabilities from a previous defined benefit plan. Simply put, we cannot afford a return to a defined benefit pension plan.

Legislators already say that we cannot afford a full pfd. How will they pay for a return to defined benefit?

These bills would open new and financially risky tiers of the now-closed legacy pension systems for government workers.

86% of police stations across the country (all of which have some form of pension) are facing a shortage of members.

There is little, if any, evidence that a defined benefit pension is a relevant factor that helps drive employee recruitment and retention. A reason foundation working paper examined teacher retention in Alaska finds that retention rates did not change when the state swapped from a defined benefit to defined contribution in 2005.

Recent polling of young public sector employees ranks retirement benefits well below other factors like compensation and quality of life offerings to motivate their employment decisions.

These new pension proposals are overly optimistic on investment risk all other public pension systems are rapidly dropping their assumed rates of investment return and market forecasts predict returns more than 1% lower than these bills assume. Overly optimistic investment return assumptions were a major contributor to Alaska's $6.1 billion debt still owed on the legacy pension plan.

If these plans were properly priced, even less would go toward paying down Alaska's pension debt which would introduce significant risk to the promises the state has made on accrued benefits.

Public pension systems operate over generations, but state legislators have only been presented with minimal five-year cost projections based on an assumption that the proposed pension tier would do the impossible: hit all its actuarial assumptions.

Paid for by Americans For Prosperity Alaska