New Findings Regarding Public Employees Retirement Policies
28 April 2007The following is a copy of a memorandum sent by Senator Kim Elton to the Finance Committee summarizing recent findings by Buck Consultants, retirement system analysts who work for the State. In this document, “DB” is short for “defined benefit,” the classic retirement plan which includes a pension, and is like the type of plan Alaska public employees had before SB 141 became law (the pensions are affected of new employees hired after the bill became law, and does not directly affect public employees hired before July 1, 2006).
“DC” means “direct contribution,” which is what public employees receive now in Alaska for a retirement plan. It is not a pension, but rather something like a 401k savings account–vastly inferior from the point of view of retirement security. Now we also know it is not less expensive for the state than the former traditional pension retirement plan.
Memorandum
TO: Sens. Hoffman and Stedman, co-chairs, and Finance Committee members
FROM: Sen. Kim Elton
RE: Defined Benefit/Defined Contribution
DATE: March 30, 2007Attached are slightly reformatted charts codifying data provided by Buck Consultants in their letter dated March 19, 2007. The Buck letter responds to requests by the committee to disaggregate by tiers data that previously was dumped into only two buckets for comparison purposes—a defined benefit bucket and a defined contribution bucket. Now we have several buckets of data—four PERS buckets (tiers 1-4) and three TRS buckets.
The normal cost charts for PERS and TRS are easy-to-read comparisons of PERS pension and medical costs by tier and TRS pension and medical costs by tier. The third chart, the accrued liability chart, puts dollar amounts to liabilities by tier. Here are some demonstrable basics revealed by the Buck data:
• the PERS tier 3 DB employees are just slightly more expensive than the new DC employees;
• the new TRS DC employees are very slightly more expensive than the TRS tier 2 DB employees;
• the very slight cost advantage of a PERS tier 4 over a tier 3 is erased when tier 4 employees leave early and take employer dollars that, if left in the system, would help meet pension benefit obligations in the out years; so • the DB PERS tier 3 and the DB TRS tier 2 fundamentally fixed the problems the governor claimed had to be fixed by his new DC plan.There also are some other DB/DC inferences that can be drawn:
• recruitment for quality public employees is made more difficult when Alaska is a defined contribution pension system (without even the backstop of the defined Social Security benefit) because professionals can work with other public employers that are just as competitive on wages and almost all of whom provide a defined benefit pension; and • retention is made more difficult with the portability provisions of the defined contribution because relatively short-term employees can take their contributions as-well-as employer contributions out of the retirement systems and go to another public employer that provides a defined benefit (any federal employer, or any other state, or almost all municipalities or school districts outside Alaska). As we know, a high percentage of teachers and public employees leave before
five years and now new DC employees have a special financial inducement to leave—they can cut and run and take the employer dollars, too.These inferences are now backed with anecdotal Alaska evidence, even after less than a year’s experience with tier 4. Further, the anecdotal Alaska evidence mimics the real-life experience of the two states that actually moved to a defined contribution but later back-tracked because of recruitment and retention problems.
Given the instructive Buck numbers that finally compare the immediately previous DB plans to the replacement DC plan and given, too, the cost-sharing bills that will spread the past service costs to employers regardless of tiers, we need to review what we wrought with SB141.
We must not assume our only options now are passing a DC ‘fix-it’ bill and passing a cost sharing bill that spreads the pain of past service costs. At a minimum we must also decide whether to give new employees a choice of tier 3 or DC in the PERS system or tier 2 and DC in the TRS system. If the cost differences are a wash, why limit the ability of employers to recruit and retain, and limit new employees to a risky defined contribution plan?
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July 16th, 2007 at 8:22 pm
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