7-28-05, 11:13 am
Right-wing Alaska legislators, working in conjunction with an arrogant and mean-spirited governor, have pushed through a new, privatized retirement plan for public-sector workers such as teachers and state employees. This plan is very similar to the increasingly common 401(k) plans that have been favored in the last couple of decades by corporations looking to increase profits. The idea is pretty simple. Take away the traditional “defined benefit” pension that paid a retired working person a guaranteed monthly payment, and replace it with a cheaper “defined contribution” plan. In a defined contribution plan, the employer and the employee regularly contribute an amount of cash into the employee’s private account for retirement – maybe.
There is a bit more to this story that needs to be told, but the bottom line is this: beginning July 2006, Alaska public employees will be less protected in their golden years than the public workers of any other state. But it will not end there. This is the just the beginning. If we do not stop it and reverse it in Alaska, this horror will be knocking on the front door of your state soon.
Right Wing Ram Through Bad Policy
On May 23 the State House voted 21-18 to begin implementation of a defined contribution plan for all public employees on July 1, 2006. SB 141 was rammed through in the just-ended special legislative session called by Governor Murkowski. The 15-day special session (which cost Alaskans an estimated $450,000) was spent on legislation that should have been passed in the preceding 121-day session, but was not due to resistance by progressive legislators. The Legislature was forced by the governor to stay an extra two weeks, until enough votes could be changed to get a bill passed which would destroy the public employee pension system. The special session gave the governor and his right-wing legislative cronies time to deliver bribes in the form of extremely large capital project appropriations for the districts of some balky legislators. Other legislators were worn down, and succumbed to the need to return to family and work obligations.
The bill faced major opposition from organized labor, including police officers and firefighters from across the state. They were successful in having disability and death benefits restored in the bill. They, along with teachers from throughout the state, have also testified that recruiting young people to teach, to work in a municipality, or to work for state government will be very difficult. Although the salaries may not be competitive with other states, very often Alaska’s pension and health care benefits have helped with recruiting. SB 141 would make it very unlikely that a younger person would choose to work in the public sector, because benefits and salaries in other states will be much more attractive than what Alaska can offer.
Background
It is important to note that there is a critical 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. In a defined benefit plan: “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,’ 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). [Definitions provided by Employment Benefit Research Institute] 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 no 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 1980’s, this loophole was partially closed. 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 1980’s, 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 which guarantees retired public workers a pension until the end of their lives – at least that is true until July 2006. In July 2006, new Alaska public employees will lose their retirement security completely because they will lose their only defined benefit plan. This will make Alaskan public workers the most vulnerable public workers in the entire United States. 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 percent of the United States population.
What’s Wrong with a 401(k)-Type of Retirement Plan?
The share of private employers offering 401(k) (defined contribution) plans jumped from 34 percent in 1981 to 75 percent in 1996. In fact, one in every four Americans has a private 401(k) account, so there are a lot of workers who now have privatized retirement accounts. The glowing rhetoric speaks of portability of funds through the employee’s career, and the opportunity to manage their own private retirement account and salt away huge stock market gains.
Glowing rhetoric aside, how have workers with privatized retirement accounts fared? According to recent research, workers with retirement accounts are not doing well. The Washington-based Employee Benefit Research Institute just conducted their nationwide retirement confidence survey. Institute researchers found that two-thirds of the employees they surveyed believed that they will reach their retirement-savings goal by the time they stop working, but at the same time fewer than half said they are on schedule to do so. The majority of workers interviewed could not keep up with adequate contributions to their private retirement accounts because of everyday bills and child-rearing expenses. In addition, workers reported that employers have been forcing them to pay a larger proportion of medical costs in recent years, and this has been another major reason why they have not been able to keep up with their savings and retirement account contributions.
Half of the surveyed workers who were still working believed that they would retire at or after 65 years of age, and two-thirds of the workers expected to work for pay after they retired, in order to augment savings. Many of these workers are far too optimistic about future earnings, because the fact is that two-thirds of workers retire before age 65. They are typically victims of medical problems or layoffs, and they are frequently unable to work, and unable to earn much after retirement.
According to a recent study by Teresa Ghilarducci, an economics professor and pension expert at Notre Dame, close to half of all workers nationwide with privatized retirement accounts have less than $10,000 in their plans.
It is not possible to outlive Social Security (a defined benefit plan). It is not possible to outlive the current Alaska defined benefit plan. It is possible, in fact likely, to outlive the defined contribution plan which will go into effect as a result of SB 141. Alaska’s teachers, municipal employees and state employees have been barred from participation in Social Security. It is all too likely that future retired teachers and state and municipal employees will use up all the funds in their defined contribution account and face their “golden years” with no visible financial support. This will particularly be a problem for lower paid employees whose contributions will also be lower and, upon retirement, exhausted more quickly.
What does this mean for the future of Alaska? It means that Alaskan legislators have changed public policy in order to force future state workers into privatized retirement accounts, guaranteeing that in the coming years tens of thousands of Alaskan retirees are likely to find themselves destitute.
The Funding Crisis May Be Fake
For a variety of reasons the Alaska Public Employees Retirement System (PERS), and the Teachers Retirement System (TRS) pension and health benefits programs appear to be under-funded due to negligence (or perhaps sabotage?) by state officials who failed to plan for inflation in health care costs, who allowed the consulting company to use outdated mortality tables which underestimated the life expectancy of retirees, who allowed locally elected officials to qualify for health care benefits while paying only a fraction of the costs, and last but not least, three years of lower than expected stock market investments.
During the 2005 legislative session, the Alaska Senate passed a bill, SB 141, which pretended to address these issues. The bill did little to address the $5.7 billion shortfall that currently exists (although the facts regarding this alleged deficit are under suspicion). SB 141 also eliminates the PERS and TRS boards as well as the Alaska State Pension Investment Board. They would be replaced by a “super board” that would be smaller and have less participation by members of PERS and TRS. Worse yet, it would be appointed entirely by the governor.
An independent actuary was hired by the legislative council, to determine whether a defined contribution plan, like SB 141 established, would offer retirement security for Alaskan public employees. His response was, “in general the defined contributions are not a reliable vehicle for a secure retirement.” When asked about a combination pension and 401(k)-type plan, his response was “that would be a very good plan.” The current TRS/PERS committee voted unanimously to oppose a strict defined contribution plan like SB 141, but right-wing legislators and the governor really didn’t care.
In 2004 the Tier Redesign Subcommittee of the Administration Department conducted a comprehensive study of the viability of the Teachers Retirement System and the Public Employees Retirement System. The subcommittee’s conclusions were that: “PERS and TRS Retirement Systems are actuarially sound and the systems are well positioned in the current pension environment. PERS and TRS experienced funding ratios similar to the current funding ratios back in early 1980s.” The subcommittee noted that PERS and TRS compare very well with other pension systems because,
PERS and TRS prefund the medical component of the pension benefit. The state of Alaska is one of only four states that prefund the medical portion of the retirement plan. Effective in 2007 the Federal Government (GASB) is going to require that all states account for the medical liability of their pension plans. This ruling will not impact PERS and TRS since they began accounting for and prefunding the medical portion beginning in the 1970s.
The subcommittee’s conclusions appear to give no justification whatsoever for the subsequent draconian SB 141 which would destroy both PERS and TERS, and replace them with inadequate privatized retirement accounts. In a recent issue of his candid and irreverent newsletter, Off the Record, progressive Alaska State Senator Elton describes the proposed legislation this way: Here’s the core of SB141: the bill changes state and municipal public employee and teacher retirement packages from a defined benefit pension that future retirees can count on to a defined contribution plan where retirement benefits depend upon the vagaries of the stock market, future health care costs, and how long you live. The bill reduces contributions by the employer and it raises contributions for most employees. The bill restricts and delays medical coverage. These fundamental changes shift risk from the state to the employee and most employees then pay more for accepting the higher risks.
Women Workers are Especially Vulnerable
The mission of the National Women’s Law Center is “to protect and advance the progress of women and girls at work, in school, and in virtually every aspect of their lives.” A couple of months ago the center released a study entitled “Social Security: Women, Children, and the States.” According to this study, women rely on Social Security more than men do, but Alaska women public workers have no Social Security coverage. Nationally, “Without Social Security, 54 percent of elderly women in the United States would be poor.”
Note also that many Social Security recipients in Alaska are not retired workers. They receive benefits either as the widow or widower, spouse or child of a worker, or as a disabled worker. Alaska public workers receive none of these benefits.
Over 9,800 surviving Alaskan widows and their children are supported by Social Security in Alaska, and altogether, 7,500 children in Alaska are supported by Social Security. Finally, Social Security keeps 11,000 over-65 retirees above the poverty level, but public workers in Alaska receive none of these benefits.
Conclusion
One year from now, public workers in Alaska will have the worst “retirement plan” of all public workers in the United States. National research indicates that the grand experiment of 401(k) “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.
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 will 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. Alaska labor unions and other progressive organizations acknowledge that the first conflict to retain retirement security for public workers has been lost – but the struggle is by no means over. Recently 300 members of IBEW, police and firefighters unions, and other organizations protested in front of the governor’s office in Anchorage. That is just the beginning of a growing statewide coalition that intends to fight for retirement security for all Alaskan workers.
The Communist Party supports a “living wage” pension for all retirees with full health care benefits at no cost, and the free or affordable availability of all support systems for elderly people such as adequate home health care, affordable and accessible assisted living, long-term care facilities that do not require the impoverization of the elderly in order to qualify. The struggle in Alaska is part of a larger national struggle against despicable military and corporate interests that would steal the very life from retired workers. People before profits! Can there be any other course?
