By James Brooks
Alaska Beacon 

Public employee retirement plan falls short of benefits under previous system

 


Alaska’s 401(k)-style retirement system for new employees is providing significantly smaller benefits than the pension-style retirement system discontinued for new hires in 2006, according to an analysis from the state Division of Retirement and Benefits.

The analysis, presented Feb. 23 to the Senate Finance Committee, comes as legislators are considering whether to revive a pension system for new employees as a way to encourage hiring. Almost one in six state government jobs were vacant in December, according to the governor’s Office of Management and Budget.

Though there are growing calls to bring back a traditional pension system for public employees in Alaska, Sitka Sen. Bert Stedman, co-chair of the Finance Committee, said it’s too early to say whether that should happen.

“I would say there needs to be more analysis done,” he said, adding that an analysis of “big issues” in the Legislature “normally takes a couple of years, and there’s all kinds of actuarial analysis if you’re going to actually do a new plan.”


As a first step, Stedman intended last month’s analysis to answer a simple question: Does the new system offer the same benefits as the one it was intended to replace?

Seventeen years after its introduction, the answer is no.

“There is a gap between defined benefit and defined contributions,” said Ajay Desai, director of the Division of Retirement and Benefits.

The state’s current 401(k)-style system is frequently called a “defined contribution” system because employees and the state each set aside a certain amount of money each month, and invest that money in an employee-chosen investment account.


How much the employee earns depends on how successful their investments are.

A “defined benefit” system is typically a traditional pension; an employee pays throughout their career and the state pays a defined amount of money to the employee after they retire, based on years of service and their average wage. The state bears the burden of contributing to the pension plan and investing to have enough money for those future payments.

Most Alaska municipalities participate in the state-managed retirement system, including Wrangell, which means that city and borough employees hired after July 1, 2006, also are in the defined contribution plan.


The goal of the state plan is to have a retirement system that pays a worker 70% of their peak earnings each year during retirement.

Thursday’s study concluded that an average employee — someone who entered state service at a $58,000 per-year job, worked for 30 years, was promoted along the way, retired at 60 and died at 85 — could expect to receive about 64% of their last salary in retirement benefits under the old-style retirement system. Under the new system, they’re expected to get only 61%, a difference of about $4,000 per year.

That’s just a projection because the new system isn’t 30 years old.

The actual numbers to date, after 15 years, show a bigger gap.

Actual payouts rely on employees’ individual success as investors, most are saving significantly less than needed.

Many employees who have worked 15 years under the new system would receive only 18% of their average earnings if they retired today, the analysis showed. That’s compared to about 30% under the old system.

For a typical employee, that’s a 40% loss from the old system to the new one.

“I knew the defined contribution was worse,” said Juneau Sen. Jesse Kiehl, a member of the Finance Committee. “I didn’t know it was such a pig.”

The committee plans more hearings on the issue.

The Alaska Beacon is an independent, donor-funded news organization. Alaskabeacon.com.

 

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