Answers and questions
I moved to Alaska in 1982 to take a job in a fledgling nonprofit organization. By 1988 I had blundered into a teaching position at the University of Alaska Anchorage. Among other benefits included with the job was a traditional pension. At the time, I was a young man more interested in a paycheck. “Pension shmension” -- who cared?
Now I am an older guy who has been retired several years. That reliable monthly pension check is by far the biggest part of my income, more than double my Social Security income. The life my wife and I lead as older persons would be severely diminished without it. In fact, the whole state of Alaska benefits from our collective pensions. According to a 2014 study by NIRS, in 2012, expenditures stemming from state and local pensions supported:
• 16,054 jobs that paid $633 million in wages and salaries
• $2.1 billion in total economic output
• $349.2 million in federal, state, and local tax revenues
What is a traditional pension and how are they funded?
A traditional pension plan (also called a “defined benefit” pension plan) is a pooled retirement plan that offers a guaranteed, predictable monthly benefit in retirement for the life of the retiree. It helps middle-class retirees remain in the middle-class after retirement. Traditional pensions help employers recruit and retain an educated and skilled workforce. Finally, traditional pensions support the economy even in recessions.
Pension plans for state and local government employees are usually funded jointly by employer and employee contributions. Employees typically make regular payments to the fund directly out of their paychecks. Private sector pensions are generally funded by employers. But in both cases, the biggest contributor of all to retirement funds is investment earnings.
For example, according to a classic study done by the National Institute of Retirement Security (NIRS) in 2010, between 1993 and 2007, 10.3 percent of total state and local pension fund receipts came from employee contributions, 19.4 percent from employer contributions, and 70.4 percent from investment earnings. Consequently, it is important to emphasize that earnings on investments — not taxpayer contributions — have historically built up pension funds.
Who does and doesn’t have a pension?
During the past 25 years, traditional pension coverage has plummeted in the private sector. In 1975, 88 percent of private sector workers with a retirement plan at work had been covered by a traditional pension plan. In recent years that number has dropped to just 18 percent, often replaced with an inferior retirement plan like a 401k.
Currently, nearly three in ten seniors receive traditional pension cash payouts. The median annual benefit received is $13,200. Overall, pension benefits constitute the third-largest source of income for seniors after Social Security and earned income, providing 17 percent of total income.
Household coverage by a traditional pension plan is higher than coverage by individual workers since many married couples have at least one spouse covered under a plan. Fully 31 percent of households were covered by a traditional pension in 2010. However, that breadth of coverage will likely decline over time due to the disappearance of traditional pension plans in recent decades.
Some sectors of the workforce are much more likely to have pensions than others. Fully 78 percent of the public-sector workforce has pension coverage. It is also high among unionized workers in the private sector, with 67 percent covered by traditional pension plans. In contrast, only 13 percent of non-union private-sector workers have traditional pensions. Low private-sector coverage primarily reflects the historic decline in unionization.
What happened in Alaska?
In Alaska, legislation was enacted in 2005 that destroyed the traditional pension program for most public workers and replaced it with a savings plan for all new employees. At the time, the state faced a combined unfunded liability of $5.7 billion for its two traditional pension plans and a retiree health care trust. The size of the unfunded liability was the result of the state’s failure to adequately fund pensions over time, stock market declines, and actuarial errors and/or negligence. The total unfunded liability grew to $12.4 billion by 2014.
The elimination of the traditional pension plan was explained by the governor and most legislators as a way to retard the growth of the unfunded liability. A statewide coalition of Alaska organizations provided detailed analysis indicating that the unfunded liability could be managed using traditional strategies commonly employed by many pension funds, but their analysis was largely ignored by the politicians. There were persistent rumors the pension was destroyed as part of an anti-union vendetta by certain key legislators, but the real political motivations to destroy the Alaska public workers’ pension system remain obscure.
Perhaps, in the end, this destructive policy will be reversed. In January of 2017 House Bill No. 83 was introduced to reinstate a traditional pension plan. For more information, visit akleg.gov, and search for HB 83.
