SB 141 was rammed through in the just-ended special legislative session called by Governor Murkowski. SB 141 is the legislation that destroys retirement security for most public workers in Alaska, and replaces it with a glorified savings account similar to 401k plans across the nation. It is scheduled to take effect July 2006. One year from now, public workers in Alaska will have the worst "retirement plan" of all public workers in the United States. National research (cited in previous ACPP blog entries) indicates that the grand experiment of 401K "retirement plans" are largely a hoax. Most workers cannot rely on them for retirement security precisely because these accounts are subject to the whims of the stock market, high fees for financial services, and early withdrawals for a variety of reasons. But for Alaskan workers, it is much worse than that.

     First, a bit of background is in order. The history and details of retirement plans for public workers is narrated in a wonderful document which I strongly recommend to anyone interested in this most important subject. State and Local Retirement Plans: Innovation and Renovation, by David Rajnes, is Issue Brief #235 produced by the Employee Benefit Research Institute. The Rajnes article is very useful to compare Alaska's new "retirement plan" for public workers, with real retirement plans for public workers across the nation.

     Note that there is a very important distinction between two general categories of retirement plans: defined benefit plans, and defined contribution plans. Defined benefit plans include the classic concept of the pension, and also Social Security from its inception. The Rajnes article describes a defined benefit plan in this way:

    ".the benefit at retirement is specified by a formula, and the employer bears the investment risk to fund the benefit. Contributions can be paid by either or both parties and are held in one trust on behalf of all employees. Furthermore, defined benefit plans tend to offer lifetime annuities."

     In other words, the employee has the security of knowing that he or she will receive a pension for the rest of his or her life. However,

    "In a defined contribution plan, the cost (contribution) is specified to the employer and/or employee, and usually all contributions are placed in individual [i.e. "privatized," -ldw] accounts on behalf of each participant. The majority of direct contribution plans offer participants a choice of account investment options, and plan participants assume all investment risk, as benefits are determined by plan contributions and investment returns on account assets. Finally, direct contribution plans usually offer lump-sum benefits (paid out at one time)."

     In other words, with defined contribution plans, there is no guarantee that there will be enough money in the account to live on through retirement; indeed, there is not guarantee that there will be anything at all in the account. The retiree gambles everything on this account, but actually has little control over it in key respects. The Alaska Legislature just converted a solid defined benefit retirement security program, into a defined contribution retirement gamble plan for most public workers hired after July 2006. Moreover, the situation is much worse for future Alaskan public workers than this implies.

     Social Security, a classic defined benefit plan, was instituted in legislation passed in 1935. For a number of reasons, that legislation included nearly all workers in the private sector, but left it up to public sector elected officials whether or not their employees would be included. Decades later, in the early 1980s, this loophole was closed-partially. After that time, no public employers could opt out of the system; however, those who were already out of the system did not have to include their employees under social security. But by the early 1980s, most public employers were already in the Social Security system. Currently there are only seven states in which most or all public employees are not in the Social Security system: Alaska, Colorado, Louisiana, Maine, Massachusetts, Nevada, and Ohio.

     However, every one of these states has a classic defined benefit retirement system that guarantees retired public workers a pension until the end of their lives - at least that is true until July 2006. In July of 2006, new Alaska public employees will lose their retirement security completely; they will lose their defined benefit plan. This will make Alaskan public workers the most vulnerable public workers in the entire United States, because they will be the only public workers who have no defined benefit pension-they will have neither a defined benefit plan from the State, nor will they have Social Security, the defined benefit plan enjoyed by 95% of the United States population.

     I do not believe that the full magnitude of this emerging disaster is well understood by Alaskans, or by workers across the United States, both public and private. Historically, state pension plans have established a de facto gold standard in the marketplace that private employers had to match, more or less, if they wanted to attract desirable workers. In Alaska, that critical standard has been destroyed, and now it may be a race to the bottom as private employers realize there will be few consequences to the destruction or dilution of their retirement plans. Moreover, this disaster in Alaska sets a dangerous precedent for public workers in other states, particularly in those states which have opted out of the Social Security defined benefit plan for their public employees.

     Finally, there is hope. Based on what I have been hearing from numerous Alaskan sources, there is acknowledgement that the first conflict to retain retirement security for public workers has been lost--but the struggle is by no means over. Stay tuned.


Lawrence D. Weiss Ph.D., M.S.
Alaska Center for Public Policy

website: www.acpp.info
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