Alaska’s state retirement system shows a benefits gap compared to old pension plan

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

The analysis, presented Thursday to the Senate Finance Committee, comes as legislators are considering whether to revive a pension for new employees as a way to encourage hiring.

Sen. Bert Stedman, R-Sitka and co-chair of the 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 Thursday’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. The state bears the burden of saving and investing to have enough money for those future payments, which are constitutionally mandated.

The goal 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 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 just under 30% under the old system. 

Even overperforming 15-year employees — those earning a rate of return greater than 7% on their retirement plans — would earn less than those under the old system. 

For a typical employee, that’s a 40% loss from the old system to the new one, but Desai said the eventual gap should be smaller than that because of a variety of factors, including the way investments compound over time.

The estimates presented Thursday show the gap shrinks over time, as long as markets perform as predicted.

That assumption caused Sen. Jesse Kiehl, D-Juneau and a proponent of a pension program, to ask Desai pointed questions until Stedman brusquely cut him off.

“This is put together by Miss Rose E. Scenario,” Kiehl said after the presentation, “and it still fails over and over.”

In addition to the normal retirement system, most state employees have access to the Supplemental Benefits System, the state’s replacement for Social Security. By paying a state-matched 6.13% of their wages, they can receive an additional retirement payment in addition to the usual program.

Not all employees have access to that program, however. Many municipal-government employees who rely on the state retirement system are barred from SBS, and teachers — who rely on a slightly different retirement system than normal state employees — are barred from both SBS and Social Security.

That leaves them particularly vulnerable to a shortfall in benefits, causing teachers’ unions and school districts to repeatedly testify that a change is needed in order to prevent teachers from leaving the state.

Legislation to meet those requests is expected in the Capitol as soon as next week. 

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