Articles, Research & Spotlights 

• Mississippi Reshapes Public Pension to Address Growing Debt
• Reason’s Research on Alaska’s Retirement Plan Debate
• North Carolina Weighs Taking More Investment Risks

Pension News in Brief
Quotable Quotes
Data Highlight
Articles, Research & Spotlights

Mississippi Adopts Hybrid Retirement Design in Major Pension Reform

In a groundbreaking move to tackle decades of growing public pension debt, Mississippi has enacted a significant reform to reshape the retirement benefits of new public employees. With analysis and technical consulting from Reason Foundation’s Pension Integrity Project, Mississippi lawmakers established a new tier (Tier 5) of benefits for new hires. Beginning in 2026, new hires will be enrolled in a hybrid plan that introduces defined contribution benefits in combination with a partial pension benefit, which will greatly slow the growth of pension liabilities and reduce the risk of pension debt that has been driving up costs for governments and taxpayers. Reason’s analysis indicates that this reform will reduce pension liabilities by more than $80 billion over the next 50 years and could help the state fully fund the Public Employees’ Retirement Plan of Mississippi decades sooner than its current trajectory. Additionally, the defined contribution element of the new tier gives employees a benefit that grows faster and is more flexible to the needs of a modern workforce. Still, modeling suggests that the plan remains vulnerable to future insolvency unless funding changes are made to the legacy pension plan. Lawmakers will need to address those problems in future legislative sessions.

Webinar: The Impacts of Pensions on the Alaska Budget

Tomorrow, in a webinar hosted by Americans for Prosperity, Reason Foundation policy analysts Ryan Frost and Mariana Trujillo will detail their research on how a proposal to bring back defined benefit pensions would impact Alaska’s annual budget. House Bill 78 and Senate Bill 28 would reopen a defined benefit pension and close the cost-balanced defined contribution plan that was the centerpiece of the state’s 2006 public pension reform. In comments submitted to the Alaska House of Representatives Finance Committee, Frost explains that the bill would add $2.1 billion in costs over the next 30 years under the best-case scenario, and the proposal could end up costing more than $11 billion if investment outcomes end up resembling those of the last few decades.
Join the Webinar on Thursday, April 17: Will There Be a Statewide Tax in Alaska?
Testimony: Alaska House Bill 78 Would Reopen Defined Benefit Plans

Changing North Carolina’s Investment Strategy Would Bring Significant Risks to Taxpayers, Public Pensions

North Carolina’s newly elected state treasurer, Brad Briner, has discussed overhauling how the Teachers’ and State Retirement System invests its pension assets, departing from the state’s unique, lower-risk approach with these crucial retirement funds. While North Carolina’s pension returns have come in lower than most other states, that is an expected feature of the low-risk strategy adopted by the state’s previous treasurer. Taking on more investment risks in an attempt to boost returns on pension assets can potentially reduce government costs, but it also increases the risk of taking on significant losses and exposing taxpayers to enormous, unexpected costs and pension debt. Taxpayers and lawmakers should be aware of these risks and tradeoffs before taking on more risks with the funds earmarked for fulfilling pension promises.

News in Brief

Public Employee DC Participants Are More Likely to Accept Default Investment Options

Defined contribution (DC) plans have the advantage of giving flexibility to employees in how they would like to see their retirement savings invested, but these options must be carefully curated by employers to maintain a focus on retirement security. This is particularly important when setting the default options for those who do not make an active selection, since this tends to shape the outcome for most participants. A study by MissionSquare Research Institute explores the impact of default options by studying the investment decisions of 340,000 public employees enrolled in defined contribution plans. The study, looking at data from 2020–2023, finds that over 80% of public DC participants accept their plan’s default investment option—typically a target date fund, which tends to be the best choice for most employees. Notably, these default selection rates are higher than seen in the private sector, even when controlling for age and income. Opt-out rates increased sharply during COVID-19 pandemic-related market volatility, suggesting members may trust defaults less and seek out alternative retirement investment strategies during economic uncertainty. The authors suggest that this could lead to sub-optimal savings outcomes for many people and that public retirement plans should consider offering the opportunity to revisit decisions made during periods of volatile markets. 

Five Ways Defined Contribution Retirement Plans Would Benefit New Hampshire

A new analysis by Andrew Cline at the Josiah Bartlett Institute cites Reason Foundation’s Annual Pension Solvency and Performance Report to illustrate ongoing funding challenges for New Hampshire’s pension system for public workers, “Taxpayers remain on the hook for $5.6 million in unfunded liabilities while state employees have to put in a decade of service to vest in a plan that doesn’t generate great returns.” He also notes, “A 2024 Reason Foundation study of public pension plans in 12 states found that 62% of public workers leave before their pensions vest.” Cline concludes, “Creating a DC plan for new state employee hires is a financially sound way to lower state costs, stop crowding out other government programs, reduce taxpayer obligations and create a fully funded, portable retirement plan that doesn’t take a decade to vest.”

Quotable Quotes on Pension Reform

“At some point, if we can no longer afford to fund the pensions, we won’t be able to hire firefighters, we won’t be able to keep our firefighters on. We could be looking at not having fire services because we won’t be able to adequately provide for the benefits related to being a firefighter or a police officer.”
— Forest Park Village Administrator Rachell Entler quoted in, “Could selling village-owned Altenheim land make small dent in pension funding?” Forest Park Review, March 17, 2025.

“With this bill, we would decide to take that surplus through a merger and pay for a permanent long-term COLA [cost-of-living adjustment] for PERS-1 and TERS-1. We should understand what this is. That’s a multi-billion-dollar decision to spend money in a year when we have a significant budget deficit.”
—Washington state Sen. John Braun (R-Centralia) quoted in “Bill to merge three closed retirement systems, increase COLA passes WA Senate” Queen Anne & Magnolia News, March 12, 2025. 

“To me, it’s a shared sacrifice, and we’re not seeing the sacrifice on part of the pensioners. I don’t understand the reasons why the actual employees, in this case, police and fire, are not willing to kick in a little more on their part.”
—Texas state Sen. Charles Schwertner (R-District 5) quoted in “New Senate bill could affect fight between city and Dallas police, fire pension” The Dallas Morning News, March 20, 2025.

Data Highlight

Each month, we feature a pension-related chart or infographic. Reason’s Truong Bui compares the annuities (at the age of retirement) that could be earned under Mississippi’s current pension plan, the hybrid that will be offered to new hires beginning in 2026, and a proposed defined contribution plan. The graphic shows that a public employee hired at age 32 will now enjoy an improved retirement benefit for most years of service, and an optional DC plan could further improve the lifetime retirement benefits offered to public workers. 

The post Pension Reform News: Mississippi reshapes public pension to address growing debt appeared first on Reason Foundation.

Alaska House Bill 78 proposes reinstating a defined benefit (DB) pension plan for new public employees in Alaska. The stated goal is to improve recruitment and retention, but it is important to evaluate whether this change addresses the workforce challenges you face and whether it does so in a way that’s fiscally responsible and sustainable. 

Our actuarial modeling shows that, under a best-case scenario, HB 78 would cost Alaska an additional $2.1 billion over the next 30 years. Under a more realistic scenario, if investment returns over the next 30 years resemble those Alaska has experienced over the past 23 years, the cost increases to $11.4 billion​. 

The outcome of this legislation is directly tied to investment assumptions. HB 78’s costs are based on an assumed rate of return of 7.25%, placing it among the top five highest assumptions in the nation. Yet Alaska’s pension funds have earned only 5.8% annually on average since 2001​. That disconnect matters. If Alaska adopted a more realistic rate—say, 6.5%, which aligns with current actuarial best practices—current unfunded liabilities would immediately increase by $2 billion​. Getting these assumptions right is critical. Otherwise, you risk creating a benefit structure that appears affordable on paper but proves unsustainable in practice. This body should be all too familiar with that practice, as you are still on the hook to pay $7.6 billion in unfunded pension liabilities to plans that have been closed for two decades. 

Advocates of HB 78 often cite employee turnover as a rationale for moving back to a DB system. But the data doesn’t support the idea that Alaska is an outlier in this area—or that a DB plan would solve the problem. 

According to our analysis of workforce data, Alaska actually retains public workers better than most states. In fact, from 2012 to 2023, Alaska had the 11^th-lowest state employee turnover rate in the country, despite operating under a defined contribution (DC) system. During this period, Alaska’s average annual turnover rate was 13.6%, well below the national average of 18.7%​. 

Even in more recent years, when public sector workforce challenges have intensified nationwide, Alaska has remained relatively stable. From 2019 to 2022, turnover rose across all states, largely driven by pandemic-era labor disruptions. In Alaska, turnover reached a high of 17.5%, while the national average reached a high of 22.9%. This suggests that Alaska is experiencing the same labor market pressures as other states, not something unique to your retirement system’s design. 

There’s also no clear evidence that states with DB plans perform better on recruitment or retention. Oklahoma, which transitioned to a DC plan in 2011, has not seen a rise in public employee turnover. In fact, it now has the second-lowest turnover rate among neighboring states, most of which still offer traditional pensions​. 

If recruitment and retention are unlikely to change from HB 78, who does this bill actually benefit? Because for most new employees in Alaska, HB 78 won’t actually improve retirement outcomes. Based on our modeling of Alaska’s benefit structure, more than 90% of new hires would receive lower retirement benefits under the proposed DB plan. That’s because most employees don’t stay long enough to benefit from a back-loaded DB formula. According to the pension system’s own assumptions, 50% of public safety workers and 70% of teachers leave within 10 years​. For these employees, the current DC plan provides better retirement value and portability. Yet this bill would completely eliminate this DC option. 

So where is the real gap in Alaska’s retirement security? It’s not in the pension structure; it’s in coverage under the Supplemental Annuity Plan, or SBS. Alaska public employees don’t participate in Social Security. SBS was designed as a replacement, providing a second layer of retirement income funded equally by the employer and employee with the same contributions that otherwise would have gone into Social Security. Because SBS acts as a true retirement account, it provides substantially better benefits than is given to participants of Social Security. 

However, teachers are not covered by SBS, leaving them with no Social Security and no SBS benefit in retirement. This is a significant shortfall. Our modeling shows that, for a full-career teacher, SBS would provide an additional $60,000 per year in retirement. This is 73% greater than Social Security would be for the same worker​. Expanding SBS coverage would do more to enhance retirement security than shifting back to a DB system that helps only a small segment of long-tenured workers. 

In summary, Alaska is not facing a unique retention crisis, nor does it lag behind other states. Your turnover rates are better than average, and your DC plan—when combined with SBS—is already delivering retirement benefits better than most other states. HB 78 would add significant financial risk without clear evidence of improved outcomes. A more productive approach would focus on expanding SBS coverage and strengthening your existing retirement framework. 

The post Alaska House Bill 78 would reopen defined benefit plans for public employees appeared first on Reason Foundation.

HB 78’s estimated costs are dependent on a flawed discount rate. The claim that HB 78’s proposed changes would not require any additional state funding relies on the pensions’ current investment return assumption being met. Alaska’s pension plans would need to achieve overly-optimistic 7.25% annual returns on investments for decades to avoid additional costs. 

• Overly-optimistic investment return assumptions were a major contributor to the $7.6 billion debt that is still owed on Alaska’s legacy pension plans, the Alaska Public Employees’ Retirement System, PERS, and Teachers’ Retirement System, TRS. 

• Since 2001, Alaska’s pension plans have earned just 5.8% annual returns on average. 

• Nationally, the average assumed rate of return used by public pension systems is around 6.9%, so Alaska’s current return rate assumption is rosier than most other states. 

• The discount rate is used when pricing the amount needed from employees to purchase their “past service.” The plan continuing to earn under 7.25% or dropping that assumed rate would add hundreds of millions of dollars in new unfunded liabilities.  

HB 78 could cost Alaska an additional $11.4 billion over the status quo. Actuarial analysis of Alaska PERS and TRS that anticipates market stress over the next 30 years similar to market stresses from 2001-2024 shows HB 78 likely exposes the state to significant additional costs. 

Bottom Line

HB 78 could cost Alaska more than $11 billion in the coming decades. Since most public employees leave their positions before being fully eligible for their pension benefits, this could be very costly legislation that only benefits a relatively small group of workers.

Full Backgrounder: House Bill 78 exposes Alaska to significant additional costs

The post House Bill 78 exposes Alaska to significant additional costs appeared first on Reason Foundation.

In 2006, to address rising costs and funding challenges, the state transitioned new employees to a defined contribution (DC) plan similar to the 401(k) plans that nearly all private sector workers have. Government-sponsored defined benefit (DB) pension systems often become underfunded due to the difficulties in accurately pre-funding employees’ future retirement benefits.

Like most U.S. states, Alaska has grappled with unfunded employee pension liabilities. This debt has escalated year after year, topping over $7 billion in 2023, despite massive increases in contributions from the state.

Despite concerns, official turnover data does not show Alaska has ever encountered a unique retention crisis. Alaska’s public employee turnover is actually quite typical, lower than that of many states offering DB pensions today, which is surprising given Alaska’s reputation as a state with high employee turnover in the private sector.

Since Alaska does not publicly release the turnover rates of its employees, this analysis relies on turnover data provided directly to the Reason Foundation upon request. For more details on data and sources, please refer to the technical note at the end of this piece.

Alaska’s public employee turnover rate is typical among states.

Turnover among Alaska's public employees remains within typical ranges for U.S. states. In 2022, Alaska reported a turnover rate of 18%. Among the 24 states that publicly report public employee turnover data in workforce reports, Alaska's rate is typical and lower than that of several states offering defined benefit (DB) pensions, including Texas (23%), Utah (28%), and Kansas (23%).

However, other DB states, such as New York and Pennsylvania, reported lower turnover rates of 11%.

Among the states with defined contribution (DC) plans, Michigan reported a 13% turnover rate, while Oklahoma's was slightly higher at 16%.

These variations show no clear pattern linking turnover rates to the presence of DB or DC retirement plans, suggesting that other factors may drive differences in employee retention.

Turnover rates declined nationally in 2023, including in Alaska, suggesting that broader labor market and economic conditions, rather than retirement plan design, most likely drove the volatility in Alaska's turnover.

As illustrated in Figure 2, Alaska's public employee turnover rate has generally mirrored national trends.

Alaska’s public employee turnover is better than the private sector.

Alaska's turnover rate being on the lower end nationally is extraordinary, given the broader context of the state. However, merely comparing turnover rates between states does not provide a complete picture.

Alaska's labor market operates under unique conditions that shape workforce trends across all industries. The state's geographic isolation, extreme weather, and seasonal employment fluctuations lead to a particularly challenging labor market characterized by high turnover. According to the Bureau of Labor Statistics, Alaska consistently reports the highest overall workforce turnover rate (public and private sectors combined) in the nation.

To understand Alaska's public employee turnover, a more meaningful comparison would be between the state's public sector turnover and the state's total turnover. In contrast to Alaska's public employee turnover rate of 17.5% in 2022, Alaska's total statewide workforce turnover, which includes both private and public sector employment, was 78%.

Public employee turnover is commonly lower than a state's overall workforce turnover. However, among the states that publish turnover data, Alaska has the highest difference between its public employee turnover rate and the statewide turnover rate—meaning its public sector experiences the lowest turnover relative to the state's overall workforce. This indicates a strength in Alaska's public sector recruitment and retention capabilities compared to other employers in the state.

This figure suggests that Alaska's public sector is unusually stable relative to its broader labor market, which experiences extremely high turnover. This relative stability contradicts claims of a public sector recruitment and retention crisis in Alaska.

If public sector jobs were highly unattractive, one would expect a smaller difference or even a higher public employee turnover rate relative to the general workforce and to other states.

Teacher turnover is lower than private sector, in line with the national average.

Teachers and other school district employees were also part of the transition to the defined contribution system in 2006. Over the past decade, Alaska's education turnover has aligned with national public education turnover trends, which is, once again, surprising given the state's generally high turnover rates.

Alaska's teacher and principal turnover rates have stayed consistent with national trends, aligning with the U.S. public education average while being significantly lower than turnover in private-sector education.

The turnover rate in the Anchorage School District has consistently been lower than both state and national averages. This suggests that, as anticipated, rural and less central districts may experience higher turnover rates among school district employees, likely driving the average upward.

Why would retirement benefits impact turnover?

The academic literature overwhelmingly concluded that the kind of retirement benefit offered to public employees bears little impact on their decision to apply for or quit a job. Exit and entry surveys with public employees suggest the same: It's not pensions driving decisions, but rather salary, work-life balance, and workplace conditions that are the main factors influencing job decisions.

Further evidence of the weak role of pensions in recruitment is that the kind of pension offered, defined benefit or defined contribution, or its generosity, such as multiplier and cost-of-living adjustments, is rarely mentioned in job listings. As of the time of writing this article, none of the job listings on governmentjobs.com for open roles with the state government of Alaska mention retirement benefits.

Alaska's public employee turnover data does not indicate a crisis. In fact, the state's public sector remains one of the most stable employment sectors in Alaska, with turnover rates that are significantly lower than both statewide and national private-sector averages and lower than most other states offering DB plans across the country. In context, Alaska's public employee turnover rate might be among the best.

About the data used in this piece:

Because Alaska does not publicly release its public employee turnover data, this piece relied on data sent by the executive branch and the Alaska Anchorage School District upon request.

• Alaska's public employee turnover: This dataset was provided by the executive branch to the Reason Foundation upon request. It covers key state agencies, including Health and Social Services, Corrections, Public Safety, and Transportation. This turnover reflects voluntary and involuntary separations, including resignations, retirements, and terminations. While the dataset excludes local government and school district employees, its broad agency coverage makes it the best currently available proxy for Alaska's public workforce trends.

• Alaska's teacher and principal turnover: Sourced from the Institute of Education Sciences 2021 update to its 2019 REL Northwest report.

• Alaska Anchorage School District's turnover: This dataset was provided by the Anchorage School District upon request.

• National and statewide averages: Sourced from the Job Openings and Labor Turnover Survey (JOLTS) program of the Bureau of Labor Statistics (BLS). The series are not seasonally adjusted. Following BLS guidelines, monthly turnover rates within a year were summed to create yearly turnover rates.

The post Alaska is retaining public workers better than most states appeared first on Reason Foundation.

During pension reform discussions, proposals that deviate from the entrenched and familiar defined benefit (DB) pension are often seen as heretical. Unions and other pro-DB proponents tout that because DBs are allegedly much better for public employees, it’s harder to attract and keep talent without them.

However, as Reason Foundation’s Jen Sidorova argues, some research shows pension enhancements or structure changes have not been demonstrated to impact the turnover or retention of public employees.

Proponents of defined benefit pension plans have responded to these findings by suggesting that more effective education to employees would “enhance” the desirability of such pensions, as “financial literacy [is] a significant challenge in the United States.” They advocate for public employers to provide their workers with “the necessary education around these benefits” so that they understand just how valuable defined benefit pension plans supposedly are.

However, both common assumptions popularized by defined benefit plan sponsors—that such pension plans are inherently better for most public employees and that their members will come to appreciate them under proper financial education—are false. While members who work for an entire career in a DB plan will earn a good retirement benefit, how many public employees stay long enough to gain the benefits? Very few.

According to actuarial estimates, most public employees do not remain in their positions long enough to vest full retirement benefits.

Most public workers will leave their jobs within five years

Figure 1: Retention Probability of newly hired employees by year of service in 12 state-run pension systems 

The analysis above plots the probability of a newly hired employee staying in their role (reported as a theoretical employee starting in the position at age 30) in 12 state-run public pension systems Reason Foundation’s Pension Integrity Project is examining. Reason Foundation plots these curves using withdrawal and retirement rate assumptions from actuaries based on historical data of each plan’s workforce.

As the graph shows, based on the actuarial estimates of the listed pension systems, many public employees will never accrue substantial retirement benefits. Among these 12 pension systems, only 42.1% of new hires will remain in the system for over five years, and only 38.03% are expected to stay long enough to meet the system’s vesting requirements.

Consider the probabilities: A newly hired employee has varying chances of staying in their role long enough to vest retirement benefits from a defined benefit pension plan. The Teacher Retirement System of Texas (TRS) is the plan with the highest retention rates of our sample. It requires five years of service to vest, and even then, the plan’s actuaries estimate only 57.8% of newly hired members will still be in service after five years.

The public pension plan in our 12-plan sample with the lowest retention rates, the Public Employees’ Retirement System of Mississippi (PERS), requires eight years of service to vest retirement benefits. By then, actuaries estimate only 20.4% of newly hired members will still be in service. This means that approximately 80% of all new hires in Mississippi PERS will never earn a retirement benefit from the plan.

According to a 2022 Equable study, the average minimum vesting period for state-defined benefit plans was 6.9 years. On average, teachers and public school employees typically need 6.4 years, while public safety officers require eight years of service—with many plans stipulating at least 10 years of service for the entitlement of retirement benefits.

As most public employees tend not to stay long enough in their roles to reap significant retirement benefits of their pension, the labor force’s demonstrated unresponsiveness to DB plans seems perfectly rational.

Even for public workers who stay, defined benefits are often suboptimal

Most public workers will not remain in their jobs long enough to earn full pension benefits. However, even for the minority who stay long enough to optimize their benefits through vesting, the benefits are often suboptimal compared to what a defined contribution (DC) plan could offer.

This dynamic was illustrated in a recent analysis presented by the Reason Foundation to the Alaska House of Representatives regarding Senate Bill 88, which proposed switching public employees from a DC to a DB plan. As the analysis demonstrates, DC plans provide better benefits than the proposed DB unless an employee stays in their role for over 26 years—an unlikely scenario for most workers.

Figure 2: Annuity Earned at Tenures of Service for Alaska’s PERS Defined Contribution and Defined Benefit Plans

The difference is that contributions to DC plans continue to compound until one’s retirement, offering better annuities—even for workers who leave public sector jobs early. In contrast, DB benefits are, as the name would suggest, defined. If a member leaves the plan, their benefits are frozen in time, and are unable to compound before retirement. This leads to suboptimal returns for most employees entering a DB plan today.

Additionally, defined contribution plans, by design, can never become underfunded. In a DC plan, benefits are determined by the actual contributions made and their investment performance, not by formulas. DB plans, however, often become underfunded as investment income and contributions tend to fall short of the initial estimated amounts needed to cover the legal promises made to public employees when they were hired. When that happens, employers and, often, employees must increase contribution rates. This puts pressure on city and state budgets and directly impacts employees’ take-home pay, all for a benefit that won’t be realized for decades. Consequently, DC plans eliminate the systemic fiscal risk that unfunded pension debt poses to municipalities and, ultimately, taxpayers.

Pension indifference on the rise

The belief that defined benefit pensions are inherently superior and that educating workers about these plans will increase their appeal is misguided. Workers’ disengagement with DB pensions is completely rational. Public employees, especially newcomers, would be even less likely to value their defined benefit pensions as they recognize the likelihood of them staying in the system long enough to vest substantial benefits is slim.

As technology enables employees to find and switch jobs more easily than ever, this trend will likely intensify. Understanding this new reality is crucial for policymakers aiming to implement effective public pension reforms that align with the evolving preferences of their workforce and the future workers they’re hoping to attract.

The post Why defined benefit plans fail the majority of public workers appeared first on Reason Foundation.

Educators who are required to contribute higher rates to their pensions will see more drawn from their paychecks and, consequently, less in the amount of pay they are taking home. 

A comparison of the required teacher pension contribution rates for each state in 2024 shows a number of issues that public teachers and government policymakers should be aware of.

Not all public pension benefits are exactly the same. Each pension plan offers a guaranteed lifetime benefit that is calculated using the employee’s final average salary, their years of service, and a unique multiplier that determines the ultimate value of the benefit. Some states offer benefits that are more generous than others, and most are gated behind vesting requirements that can vary significantly from one plan to another.

States also differ in how they balance the required contributions to pay for promised pension benefits between the teacher and the employer (usually a combination of the governing body and the school district). Some states like Arizona and Nevada balance these pension contributions 50/50, with the employer always paying the same amount as the teacher. Other states like Utah have the employer pay nearly all the costs of the pension.

Most states require teachers to pay between 5% and 12% of their pay, with the employer paying what remains to cover the benefit and whatever debt payments are needed to eliminate unfunded liabilities.

Since most state-run pensions operate with significant pension debt—aggregate state pension debt is estimated to be $1.3 trillion—nearly all employer rates greatly exceed the contribution amounts teachers are paying.

Whether teachers in a particular state participate in Social Security also warrants attention. Some states have declined to have their employees in the federal program and are therefore expected to adopt higher pension benefits and, consequently, higher contributions to make up the difference.

While the percentage of pay that teachers contribute to their pensions is merely a part of a bigger retirement plan structure, it is useful for teachers to examine and compare the deductions they will see on their paychecks.

It is also useful for policymakers to see what states around the country are requiring of their educators as they cooperate to tackle adequate funding and the growing struggles with public pension debt.

Notes on the data

The 2024 pension contribution rates were gathered from financial documents, educational materials, and the websites of state-run retirement plans for teachers.

Many states have several tiers of benefits based on a teacher’s hire date or other factors. This analysis only presents the contribution rates of the latest tier, or the tier in which new hires will be members. It does not include contribution rates from tiers that are still active but no longer available to new hires.

The funded ratios display the pension system’s ratio of assets to the estimated pension liability. These figures come from 2023 financial reports. Since 2023 figures were not available, the figures were estimated for Michigan, Nebraska, Oregon, and Wisconsin.

Additional notes on specific states:

• Indiana: Teachers are offered a hybrid plan in which employees contribute to the defined contribution (DC) portion and the employer pays into the pension portion. This analysis displays the DC contribution obligation for teachers.
• Kansas: Teachers are enrolled in a cash balance plan, which guarantees defined returns but is different from a defined benefit plan.
• Tennessee: Teachers have a hybrid plan in which 5% of their contributions go to the defined benefit (DB) portion and 2% goes to a DC.
• Utah: The tier 2 pension benefit offered to Utah teachers has the employer pay 10% pay into the DB fund, with employees covering any necessary costs that exceed that amount. Up until 2024, this has resulted in no required contributions from teachers. With pension costs continuing to grow, teachers are now seeing deductions from their paychecks for the first time.
• Vermont: Teacher contributions are set on a progressive scale based on salary. This analysis uses the lowest contribution requirement (6%) for any salary below $40 thousand.
• Washington: Employers offer a defined benefit or hybrid plan. There is 50/50 cost-sharing in the DB plan. In the hybrid, the employer pays all DB costs, and teachers cover all DC contributions, ranging from 5-15% of pay. 
• Wyoming: While teachers are required to contribute 9.25% of their pay, the employer has agreed to pick up 5.57%, meaning educators are only obligated to pay 3.68% of their salary for their pension.

The post How much teachers contribute to their retirement benefits in each state appeared first on Reason Foundation.

In the public sector, many governments and agencies report they’re having trouble attracting and retaining workers.

So, how can policymakers balance fiscal responsibility while maintaining a stable and high-quality public workforce that delivers quality services to taxpayers? Is increasing retirement benefits for public workers the answer, and can that be done without increasing public pension debt?

This Reason Foundation webinar examines those questions and more. The full webinar video and biographical information about the panelists are below.

Michael Podgursky, University of Missouri–Columbia

Michael Podgursky is the chancellor’s professor of economics at the University of Missouri–Columbia, where his research focuses on labor economics and the economics of education. Podgursky serves on the board of editors of several academic journals including Education Finance and Policy and Education Next, and advisory boards for various research institutes and education organizations. He also serves on the board of the Show-Me Institute, the Saint Louis Chess Club, and the Scholastic Center and is an affiliated scholar with the Center for Analysis of Longitudinal Data in Education Research at the American Institutes for Research and CESifo in Germany. 

Podgursky’s body of work focuses on labor markets, teacher compensation systems, and the impacts of pension plan designs on teacher retirement and workforce quality. Some of his recent studies include: “Teacher Pension Plan Incentives, Retirement Decisions, and Workforce Quality,” which found that enhancements to traditional pension plans accelerate retirement and reduce average teacher quality by pushing high-quality teachers to retire earlier than they might prefer; and “Pensions and Late-Career Teacher Retention,” which concluded that targeted incentive policies, such as late-career salary bonuses and deferred retirement plans (DROPs), can effectively retain experienced teachers in high-need areas at relatively low costs. 

Jen Sidorova, Reason Foundation

Jen Sidorova is a policy analyst with Reason Foundation’s Pension Integrity Project and a PhD candidate at Georgia Institute of Technology. She holds master of arts degrees in economics and political science from Stony Brook University. At Reason, Sidorova has contributed in-depth analysis of the Mississippi PERS, Montana PERS, Montana TRS, and North Carolina TSERS pension systems, among others. 

Sidorova has been evaluating and discussing the literature on the recruitment and retention of public employees. Her recent article, “The Key to Attracting Public Workers? Pay, Not Pensions,” suggests that traditional defined-benefit retirement plans are not effective for improving recruitment or retention, especially among younger workers. She highlights that immediate compensation, job security, and work-life balance are more significant factors for modern employees. Sidorova has also been involved in analyzing Alaska’s pension system, where she showed that reinstating defined-benefit pension benefits would not improve retention or recruitment and would add significant unfunded liabilities. Her research on Alaska’s public pension system was presented at the Association for Public Policy Analysis and Management and the Association for Budgeting and Financial Management conferences. 

Oliver Giesecke, Hoover Institution

Oliver Giesecke is a research fellow at the Hoover Institution at Stanford University. His work focuses on asset pricing and public finance, with recent research examining the finances of state and local governments across the United States. This includes the capital structure of state governments, the book and market equity position of city governments, and the status quo and trends of public pension obligations. He holds a PhD in finance and economics from Columbia University, a master’s in economics from the Graduate Institute in Geneva, and a bachelor of arts from Frankfurt University. 

Giesecke’s research has contributed to our understanding of the financial implications of public pension systems. His recent study, “How Much Do Public Employees Value Defined Benefit versus Defined Contribution Retirement Benefits?” co-authored with Joshua Rauh, surveys public employees across the United States about their retirement plan preferences. The study finds that 89% of respondents are willing to switch from a defined benefit plan to a defined contribution plan, provided an appropriate employer contribution rate. Additionally, in his recent op-ed in The Buffalo News, titled “Why Pension Hikes Miss the Mark on Recruitment and Cost More,” Giesecke argues that increasing pension benefits is an expensive and ineffective strategy for improving public sector recruitment. He suggests that offering more flexible retirement plans and work arrangements would be more effective in retaining employees and less costly for taxpayers. 

Moderated by Mariana Trujillo, Reason Foundation

Mariana Trujillo is a policy analyst at the Reason Foundation. She holds a bachelor of arts in economics from George Mason University. Before joining Reason, she worked in Treasury Market Risk at JP Morgan, the Mercatus Center, and the Cato Institute. 

Trujillo’s research has examined the efficacy of common practices and beliefs in public pensions. In a recent commentary, “Public pension reforms aren’t impacting public employee turnover rates,” she demonstrates that public employee turnover rates are not accelerating at a different rate than private or statewide turnover rates. In other writings, she has explored the consequences of low pension funding, discussing how Mississippi’s faulty contributions have led to credit downgrades and writing discouraging the issuance of pension obligation bonds by Dallas to address its pension system underfunding, which was featured in The Bond Buyer.  

For more information on these topics, this webinar or public pension reform, please contact Pension Integrity Project experts and subscribe to our monthly newsletter. 

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Testifying before the House State Affairs Subcommittee on Retirement and Benefits Legislation, Reason Foundation’s Pension Integrity Project gave its analysis of the bill’s costs on state budgets and the potential impact on recruitment and retention of public workers that policymakers could expect to see if Alaska SB 88 passed. 

Reason Foundation’s findings indicate that the bill’s 30-year cost could exceed $9 billion, but there is little evidence to conclude that it would counteract national and state-level trends in increased employee turnover.

The Pension Integrity Project’s slides for this testimony are available below, and the video of the May 7 meeting is available here.

Analysis of Alaska Senate Bill 88

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To address growing unfunded liabilities and an evolving workforce, the Alaska legislature closed the state’s two DB pension plans to new public worker hires beginning in 2006. Despite no new members entering the public pensions since then, the annual costs of the Teachers’ Retirement System, TRS, and the Public Employees’ Retirement System, PERS, have continued to grow. This growth would have been far worse had new hires continued to have their obligations added—and subsequently underfunded—in the previous DB system.

Now, citing challenges with recruiting and retaining public workers, legislators, and union advocates are proposing a bill (Senate Bill 88) that would move all members back into the severely underfunded DB pension plan, which could saddle Alaska’s state government budgets with a $9.6 billion price tag.

Proponents of this proposal claim new and prospective hires will theoretically respond to a supposedly better retirement benefit, thus improving the state’s recruitment efforts and ability to keep teachers, police, and other valued public workers. A detailed evaluation of many employment situations by the Pension Integrity Project reveals that this proposed return to pensions would not improve the retirement benefits being offered for most employees, casting major doubt on the desired outcomes of SB 88.

The following tool created by the Pension Integrity Project displays the year-by-year accrual of retirement benefits for a wide variety of Alaska workers in different fields and starting at different ages. The outputs generated in this analysis represent the first annual benefit that a participating member will have earned by each year of employment. The interactive tool allows the users to adjust the entry age (a person’s age when they start employment), assumptions on investment and market returns, and wage growth.

Alaska policymakers should also consider the Supplemental Benefit System-Annuity Plan (SBS-AP) in their evaluations. The SBS-AP replaces Social Security for most of the state’s public employees. The interactive tool allows the user to toggle the SBS-AP on or off to see the impact of this supplementary plan on benefits earned. Currently, teachers do not have access to the SBS-AP like the rest of the state’s workers, which greatly hinders this group’s retirement savings. A new proposal—House Bill 302—would rectify this by making the SBS-AP available to teachers, greatly improving their current DC benefit.

Click Here for the Full Tool:
Alaska Defined Benefit vs Defined Contribution Analysis

This comparison of DB and DC retirement benefit accrual shows that the value of the DC annuity would exceed that of the legacy DB plan for many years of a worker’s service. In most cases, the value of the DB benefits would only surpass the DC plan’s benefits in a worker’s later years of service (after 27 years of service for a non-teacher hired at age 30, for example). Data suggests a worker staying on the job long enough for the defined benefit plan to be better for them is  uncommon in today’s workforce:

• According to assumptions used by the Alaska Public Employees’ Retirement System, PERS, and the Teachers’ Retirement System, TRS, about 50% of new public safety members and 70% of new teachers and other members leave the system within 10 years; and 
• About 60% of new public safety members and 77% to 85% of new teachers and other members leave their jobs within 20 years (assuming an entry age of 25). 

This analysis shows that, while a small group of workers could enjoy an improved retirement benefit by reopening the defined benefit plan, the vast majority of Alaska’s public employees would be better served in the existing defined contribution plan.

Notes on Methodology

• To calculate the annual annuity for defined contribution plans, Reason Foundation’s analysis applies the assumed return to the required contribution amounts for the average starting salary of $80,435 for public safety members, $59,581 for teachers, and $57,949 for other members. 
• In situations where a member would fulfill the requirements for full pension benefits (based on either age or years of service), the analysis assumes the member would also use existing DC savings to purchase an annuity at that point. This can come after just 20 years of service for public safety members and teachers, which (depending on entry age) can mean beginning guaranteed benefits through annuities at an unusually early age, thus generating a significant reduction in the comparable annual benefits from the DC savings. This assumption can be toggled off in the tool with the “DC Annuitization at 60: Off” button.
• The annuity payout rate is the interest rate used to convert the DC balance into an annuity. We assume a life expectancy of 85 for the annuitization calculation.
• To calculate the annual annuity generated by the defined benefit plan, the analysis applies the selected variables to the plan’s existing benefit calculation.

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This “past service” purchase mechanism puts an enormous amount of risk on the state in year one and beyond. Despite adjustments to retirement eligibility, this move could realistically add $9.6 billion in additional costs to future state budgets and reintroduce Alaska to significant pension risk—the same risk that generated over $6 billion in state pension debt and spurred the 2005 pension reform that closed Alaska’s defined-benefit pension plan to new hires in the first place.

SB 88’s estimated costs are dependent on a flawed discount rate

The claim that SB 88’s proposed changes would not require any additional state funding relies on the pensions’ current investment return assumption being met. Alaska’s pension plans would need to achieve overly-optimistic 7.25% annual returns on investments for decades to avoid additional costs.

• Overly-optimistic investment return assumptions were a major contributor to the $6.7 billion debt that is still owed on Alaska’s legacy pension plans, the Alaska Public Employees’ Retirement System, PERS, and Teachers’ Retirement System, TRS.
• Nationally, the average assumed rate of return used by public pension systems is below 7%, so Alaska’s current return rate assumption is rosier than most other states.
• Capital market forecasts by most financial experts suggest pension systems should expect investment returns to come in closer to 5%-6% for the next 10-to-15 years.
• The discount rate is used when pricing the amount needed from employees to purchase their “past service.” The plan earning under 7.25% or dropping that assumed rate would add tens, if not hundreds, of millions of dollars in new unfunded liabilities.

SB 88 could cost Alaska an additional $9.6 billion over the status quo

Actuarial analysis of Alaska PERS and TRS that anticipates realistic economic conditions and market stress over the next 30 years shows SB 88 likely exposes the state to significant additional costs.

Bottom Line

Senate Bill 88 would likely cost Alaska more than $9 billion in the coming decades. Since most public employees leave their positions before being fully eligible for their pension benefits, this could be very costly legislation that only benefits a relatively small group of workers.

Read the full backgrounder here.

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A few states have declined to have their public employees participate in Social Security, and while some states have still yet to figure out their role in providing retirement income for their public employees, the state of Alaska has put forth an effective blueprint for an alternative to Social Security. 

The Alaska Supplemental Benefits System Annuity Plan (SBS-AP) is offered to all state employees (excluding teachers) in 23 political subdivisions. Compared to other states’ plans, SBS-AP stands as a beacon of innovation and effectiveness. Alaska’s supplemental retirement savings plan offers a model that addresses the contemporary challenges of retirement savings much better than Social Security. 

The trust funds that support Social Security are on track to be depleted by 2033. This is not just an abstract future risk; it’s a countdown to a reality where beneficiaries could receive only a portion of their promised Social Security benefits if reforms are not implemented. The root causes of Social Security’s impending insolvency are deeply embedded in demographic trends. An aging population in the U.S., longer life expectancies, and a declining birth rate are converging to create a perfect storm. 

Fewer workers are coming in to support an expanding pool of retirees, a shift that fundamentally undermines the deeply flawed pay-as-you-go funding model of Social Security. This demographic imbalance is like a seismic fault under the foundation of Social Security, threatening to disrupt the retirement plans of millions.

In contrast, the Alaska Supplemental Benefits System Annuity Plan is a plan that’s grounded in the principle of personal control and investment choice. Unlike Social Security, the SBS-AP allows individual employees to have direct control over their retirement investments. Participants can choose how their contributions are invested from a range of options, tailoring their individual investment strategies to their personal risk tolerance and retirement timeline. This level of autonomy is empowering and contrasts starkly with the one-size-fits-all approach of Social Security.

Secondly, the Alaska SBS-AP can provide substantially higher returns on investment than is given to participants of Social Security. Since SBS-AP participants can choose diverse investment portfolios, they can benefit from the higher yields typically associated with equity and other high-risk/high-reward investment options. This feature is particularly relevant in today’s era of longer life expectancies, where the ability to grow retirement savings is crucial. 

In contrast, Social Security benefits are not directly tied to market performance because the assets are invested only in U.S. Treasury securities. These assets often don’t keep pace with inflation, let alone provide significant investment growth potential. 

Exhibit A displays the expected annual benefit provided by Social Security compared to the expected annual annuity from SBS-AP. This example uses a teacher hired in Alaska today at age 30, with a starting salary of $60,000. It also assumes the teacher will begin drawing their Social Security benefit and annuitize their SBS-AP assets at age 67. From Reason Foundation’s calculations, the SBS-AP would provide a new teacher with a retirement income that is 73% greater than Social Security would provide. 

Exhibit A

Moreover, the financial sustainability of the SBS-AP is another significant advantage for workers. The challenges threatening Social Security’s long-term solvency are well-documented, and the strain on the program’s funds is only going to increase. Unlike Social Security, the SBS-AP’s structure as a defined contribution plan means it doesn’t face the same demographic pressures. 

SBS-AP contributions are invested, and benefits are directly tied to these investments, making the system more accountable and financially sustainable in the long run. If an employee leaves Alaska state employment, their SBS-AP assets go along with them as well.

In addition to these financial benefits, the SBS-AP also offers greater transparency and predictability. Participants receive regular statements showing the value of their investments, allowing them to make informed decisions about their retirement planning. In contrast, Social Security’s future benefit levels and the overall health of the trust fund are subjects of political debate and uncertainty, making long-term planning more challenging. 

However, it’s important to acknowledge that the SBS-AP, like any investment-based plan, carries some risks. The value of investments can fluctuate, and poor investment choices can lead to inadequate retirement savings. This risk underscores the importance of financial literacy and access to sound investment advice for participants in the plan. This literacy risk is mostly mitigated by the plan’s default investment options. For example, new entrant contributions are automatically invested in one of the Alaska Target Retirement Trusts or the Alaska Balanced Trust. These trusts function similarly to a target date fund where the mix of assets automatically adjusts to become more conservative as the target retirement date approaches. Having said that, it would be almost impossible, barring a decades-long recession, for an employee in the default SBS-AP plan to earn less on their assets than Social Security earns on its assets.

While Social Security remains a critical component of the retirement landscape in the United States, the Alaska SBS-AP offers a compelling alternative model that addresses many of the limitations of the federal program. Its emphasis on personal control, higher investment returns, financial sustainability, portability, and transparency position SBS-AP as a superior option for ensuring financial security in retirement. 

As policymakers and stakeholders grapple with the challenges of providing adequate retirement benefits to public workers in a changing demographic and economic environment, the Alaska SBS-AP serves as a valuable case study in innovative retirement planning.

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Senate Bill 88 (SB 88), sponsored by and passed out by the Alaska Senate Republican Caucus, would reopen the defined benefit (DB) pension plan closed in 2005 for public employees, teachers, and public safety personnel. An opposing proposal, House Bill 302 (HB 302), sponsored by Rep. Ben Carpenter (R-Nikiski), would leave the defined contribution retirement plan (DCRP) open, increase the employer contribution rates for public safety, and—crucially—open access to the Supplemental Benefit System-Annuity Plan (SBS-AP) to teachers. 

The SBS-AP is an Alaska-specific Social Security replacement plan. As we’ve written previously, the current defined contribution (DC) plan is better suited for today’s more mobile workforce because employees can take their accumulated retirement savings with them when they change jobs. Instead of rolling back crucial public pension reforms made to protect Alaska’s budget from runaway costs, state policymakers should look to improve on the DC benefits already being offered to public safety workers and teachers.

As discussed in Reason Foundation’s gold standard series on retirement design, a vital component of a successful defined contribution retirement plan is adequate contributions. The goal of a DC plan should be to replace approximately 80% of a worker’s final salary upon retirement. This means the primary DC plan should target, when combined with Social Security or any supplemental alternative, a contribution amount of 22%-to-27% of pay for public employees and teachers and 30% for public safety employees. 

Under Alaska’s current pension design, Public Employee Retirement System members and public safety members are covered by the DCRP and the SBS-AP, with a total employer and employee contribution of 25.26%. Best practice standards are met for regular PERS members but fall short of the 30% contribution target for public safety members. Alaska’s teachers—whose union chose not to participate in the SBS-AP program when offered the option many years ago and also do not participate in Social Security—have a combined 15% DCRP contribution, which is substantially below the target contribution range.

Under HB 302, public safety employer contributions would be substantially increased from 5% of pay to 9.74% of pay. When combined with SBS-AP contributions, public safety contributions would be at the 30% benchmark. Teacher members of the DCRP would begin participating in the SBS-AP, resulting in a total contribution of 27.26% of pay. With these changes, best practice contribution adequacy standards would be met for both public safety and teacher members. The bill would also make Alaska home to some of the most generous public retirement benefits in the country, all being offered at zero risk of future unfunded liabilities. 

A counterfactual analysis performed last year, when a proposal to reopen the defined benefit public pension system was making its way through the Senate, pointed out how just one year of investment results in 2022 would’ve added $200 million in unfunded liabilities. In other words, had a bill like SB 88 been enacted last legislative session, the plan would have already been $200 million in debt from that decision, and that is only the short-term peril posed by the idea of diving back into defined benefit public pensions. 

In the long term, if investment performance matches what most financial forecasters are expecting, the DB proposal would likely add $9 billion to Alaska’s unfunded liabilities. There was no discussion in the Senate, prior to them passing SB 88 out of the chamber, of looking at the impacts of poor market performance or the real possibility of the state or country experiencing an economic recession over the next 30 years. To date, the Pension Integrity Project’s analysis is still the only actuarial analysis that shows any sort of stress testing on SB 88. 

At the heart of the discourse, the contrasting proposals of SB 88 and HB 302 represent a critical juncture for the state’s approach to public sector retirement benefits. The decision is not merely a technical adjustment of pension plans but a reflection of deeper values concerning fiscal responsibility and the welfare of public employees. SB 88’s proposal to return to a defined benefit system, while appealing for its stated, yet unproven promise of helping the state’s woes with worker recruitment and retention, is overshadowed by the looming threat of adding unfunded liabilities. After all, Alaska closed its DB pension 20 years ago but is still dealing with over $6.7 billion in unfunded liabilities from it.

In contrast, HB 302 offers a robust alternative for workers and government agencies. By refining the DCRP by augmenting the contributions for public safety personnel and incorporating teachers into the SBS-AP, the proposal ensures that the retirement system is both generous and financially viable. The increased contributions to employees’ DCRP come with increased costs to the state, but those increases go directly to the retirement of Alaska’s public workers rather than being used to keep afloat an underfunded pension system. This is a retirement plan designed not just for the present but with an eye firmly on the future, avoiding the debt and unsustainable fiscal pitfalls of Alaska’s legacy pension plan.

The analytical evidence tilts strongly in favor of HB 302, presenting it as the safer, more equitable path forward. This approach promises a future where Alaska’s public servants can look forward to their retirement with confidence, supported by a system that is both fair and financially sound. As state lawmakers consider their options, the decisions between House Bill 302 and Senate Bill 88 could well define Alaska’s fiscal landscape for generations to come, either ensuring a legacy of prudent, responsible stewardship of the state’s public sector retirement system or adding billions in debt for future Alaskans to pay.

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A recent report from the National Institute on Retirement Security (NIRS) studied Alaska’s ongoing challenges with recruitment and retention of public employees and concluded that bringing back defined benefit (DB) pensions would help alleviate the problems. Unfortunately, a good part of the analysis uses demographic experiences from as much as 20 years ago, when the job market and employee mobility were much different. This important context could lead policymakers down a very expensive path that, in the end, may not be all that effective.

A more comprehensive, modern perspective suggests that retirement benefits are unlikely to deliver better retention rates among the teachers and public workers Alaska hires, and different approaches are more likely to succeed. To the extent that benefits to Alaska’s current retirement plan are insufficient, lawmakers should consider alternative solutions that take into account workforce mobility.

The evolving environment of public employment

In its study delivered to the Alaska Department of Education, the National Institute on Retirement Security correctly identifies a growing challenge for Alaska’s government employers. Consistent with the trend developing at the national level, retention among public employees hired in the last five to 14 years—the range of years the NIRS study uses to single out Alaska’s defined contribution plan members—is significantly lower than governments experienced decades ago. The modern workforce in Alaska, particularly millennials (ages 25-40) that represent most hires after 2006, are increasingly transient and the most likely generation to switch jobs. They are frequently referred to as a job-hopping generation, as are the working-age members of Gen Z (typically defined as people born between 1996 and 2010). This trend of public workers changing jobs and employers—nationally, not just in Alaska—was pronounced throughout the 2010s and is likely to stay. 

This shift presents several problems for policymakers and those making hiring decisions in the public sector. A high turnover rate among the public workforce increases onboarding and training expenses. This churn also impacts the quality of service provided by public employees as fewer workers stick around to build their skills. There is no doubt that Alaska governments are finding it harder to deliver high-quality, cost-effective services to their constituents.

Where the NIRS report needs expanding, however, is in its analysis of the cause of this growing retention challenge. When examining differences in worker counts between those hired in 2005 (before the switch to a DC plan) and those hired in 2021 (the latest year for which employment data is available), the report finds, as expected, that newly hired teachers are making up less of the total population than they used to. The NIRS analysis also compares differences in retention assumptions between teachers in the defined benefit plan and the more recently hired teachers in the defined contribution plan. These retention assumptions—essentially predictions based on experience—are used by retirement system actuaries to generate standard cost and funding projections. Since actuaries have had to adjust their expectations due to the national shift toward shorter tenures, these results also, as expected, show that DC teachers are expected to remain at lower rates than those who were hired before 2006.

While the NIRS analysis gives some context on this retention challenge, its findings are too narrow to conclude that reverting to a defined benefit retirement plan would reverse a decades-long, national trend. The NIRS study merely identifies the developing retention tendencies among the latest generation of public workers but makes no effort to isolate the specific impact of switching new public workers to defined contribution plans.

For robust and reliable conclusions in social science research, the gold standard approach is to compare a group undergoing a policy intervention with a control group. This control group should mirror the intervention group in all aspects except for the exposure to the intervention itself. A Reason Foundation working paper takes this approach to compare teacher retention rates before and after Alaska’s pension reform and finds that the developing challenges in keeping educators cannot be attributed to the switch to a defined contribution retirement plan for new workers. It is safe to conclude that Alaska’s challenges are related to larger generational trends in employee behavior.

In Alaska, the population under the previous DB pension plan predominantly consists of Generation X (people ages 41-56) and older cohorts. In contrast, the defined contribution plan is primarily made up of millennials and some members of Generation Z. To ensure a more precise comparison between the DB and DC plans, it’s crucial to have comprehensive demographic information on individuals. This allows for the control of variables that could influence the decision to remain in the workforce, such as years of experience, education, and salary.

The NIRS study, however, is a forecast that relies on limited aggregate data on turnover rates. While it does account for age and gender, it lacks other essential characteristics and does not use individual-level data. This limitation impacts the ability to make definitive policy inferences from the report’s findings.

The NIRS paper does acknowledge larger trends among government employers, mentioning that “all states seem to struggle with retention of newly hired teachers.” It also hints at its own weaknesses, observing that the “data does not show that pensions are the only cause for lower retention rates among those in the DC plan,” while nonetheless concluding that the state’s DC plans are the primary driver of retention losses. As a result, the stated policy applications focus entirely on reversing these developments by bringing back a traditional DB pension and do not consider any other causes.

This failure to fully explore the source of the problems could be troublesome for Alaska because adopting these recommendations would be unlikely to effectively address the state’s recruitment and retention challenges and could bring very high public pension costs to future budgets. The costs associated with the defined benefit pension plan that closed in 2005 are much higher today than experts expected they would be, and the legacy pension plan is still billions of dollars in debt. Diving back into guaranteed pension benefits for public workers would likely expose Alaska’s budgets to more of the same runaway costs. A Reason Foundation analysis of a proposal to bring back defined benefit pensions last year revealed that this approach could generate additional costs upward of $9 billion.

Before taking on such a high level of costs and risks, Alaska policymakers should closely examine how likely public workers are to respond to a switch from the current DC structure back to the legacy pension approach.

Defined benefit pensions won’t solve Alaska’s recruitment and retention problems

A closer examination of how teachers and other public workers react to their retirement plans casts some major doubt on the effectiveness of this approach. A few recent academic studies found that pension reform has a negligible effect on worker retention.

One study by scholars from the University of Missouri and Beijing University of Technology found that pension benefit enhancements did not improve teacher recruitment or retention. Another study by the same authors found that enhancements to traditional pension plans actually accelerated the retirement of experienced teachers and reduced average teacher quality, whereas defined contribution plans had the opposite effect, the study found.

Another research paper by Andrew Johnson of the University of California at Merced found that pension reform had a negligible impact on the labor supply of public sector employees in Texas, and worker retention increased by 1-2 percentage points following the state’s pension reforms.

Several surveys reveal that retirement plans may not be a high priority for today’s workers, particularly teachers. A nationally representative survey of over 2,000 teachers in the Economics of Education Review found that early-career teachers were indifferent between traditional and alternative retirement plans. Moreover, teachers’ willingness to pay for traditional pension plans is less than their willingness to negotiate for other compensation elements, including salary growth, health insurance coverage, and Social Security enrollment, the survey found.

Another survey of 102 national service fellowship candidates found that among eight different benefits of public sector employment, retirement benefits ranked the lowest, far behind personal satisfaction, salary and health care benefits. These findings suggest that retirement benefits may not be a strong draw for the recruitment and retention of workers.

Additionally, according to a National Bureau of Economic Research working paper, teachers responded more positively to changes in salaries than to equally sized changes in pensions. The same study also found that higher salaries attracted higher-quality teachers, increased overall teacher quality, and improved student achievement.

A recent study by scholars from the University of Alaska Anchorage found that while salaries have a positive effect on Alaska’s teacher supply, non-wage benefits have a negative effect. Wage adjustments may be more effective for employers and policymakers to influence worker retention.

Potential retirement-focused solutions that would work for Alaska

Bringing back defined benefit pensions to Alaska would be very expensive and unlikely to improve recruitment and retention amidst the trend of a more mobile and transitory workforce. There are, however, some upgrades to the state’s current public retirement system that could be pursued not necessarily to achieve retention goals but to address the retirement security goals that are the core purpose of these programs.

For example, most members of Alaska’s Public Employee Retirement System (PERS) and Teachers Retirement System (TRS) do not participate in the federal Social Security program. The majority of PERS employers fill this void with the Alaska Supplemental Annuity Plan (SBS-AP), which automatically enrolls workers into a 6.13% contribution plan with an equal 6.13% employer match. While the contributions are similar in size to those of Social Security, retired members of this supplementary DC plan get to enjoy the investment returns that these funds generate during the years leading up to retirement, making it a vastly more appealing option compared to its federal counterpart.

While public safety and other state workers get to take part in SBS-AP, Alaskan teachers enrolled in the TRS system do not currently have this option, creating an uneven benefit design across different cohorts of public employees in Alaska. Consequently, TRS participants rely on either their primary DB or DC plan—depending on when they were hired—and whatever personal savings they have to supplement their own retirement, which puts a great deal of pressure on teachers.

Alaskan lawmakers should consider expanding the SBS-AP so that it is also available to the state’s educators. This would fill in the missing space that exists due to the lack of a Social Security benefit, and it would do so with a benefit that would be more valuable to its members and more affordable to its sponsor than the beleaguered federal program.

Conclusion

It makes sense for policymakers to seek out ways to improve the recruitment and retention of quality teachers and public workers, but the effectiveness and costs of these policies should be thoroughly evaluated. An analysis that does not account for recent shifts in workers’ behavior or employment trends is not a reliable template for reshaping Alaska’s public workforce, especially when the proposed policy changes are packed with major costs for future generations. It is unlikely that a switch back to defined benefit pensions would alleviate the state’s ongoing retention and recruitment challenges. Bringing back Alaska’s defined benefit pension could come with a hefty price tag exceeding $9 billion in new unfunded liabilities over the next 30 years.

Instead of seeing the state’s retirement systems as a way to attract and keep public workers, policymakers should make retirement security for all employees—not just those that stick around for decades—the goal. Rather than a tool to promote retention by dangling crucial retirement benefits behind tenure requirements, these plans should serve to provide adequate retirement savings for all members, no matter how long they remain employed by the state or political subdivision. That means any year spent as a public servant, be it year one or year 33, should be one in which ample retirement progress is made. This approach values individual flexibility and workforce competitiveness over tenure requirements, and it would ensure that the benefits being accrued are enough even for the large group of hires that are not likely to stay their entire career, both of which happen to be one of the advantages of the state’s current DC plan design.

The post Examining calls to bring back Alaska’s defined benefit pensions appeared first on Reason Foundation.

In the piece, Siedle mentions that “flawed 401(k) defined contribution plans” could not produce adequate retirement results. This is based on a poor understanding of what a defined contribution (DC) plan can accomplish, and it is not the case in Alaska. In the corporate world, 401(k) plans were originally intended to be tax-deferred savings plans designed only to supplement existing defined benefit pensions. But when the private sector largely moved away from defined benefit pension plans because of funding risks and a changing workforce, they often replaced them with broader 401(k)-style defined contribution plans that were intended to replace the level of benefits being offered previously.  

Unfortunately, the retirement income focus of the defined benefit pension designs was typically not carried forward in these new 401(k) plans, with wealth accumulation being the default focus. Siedle rightly identifies this as a fault. The typical 401(k) plan does not have the income-focused design necessary to be a true retirement plan. Make no mistake—this is not a fundamental shortcoming of all DC funds. Rather it is an absence of articulated plan objectives that led to plan designs with suboptimal outcomes. The mistake he makes is in stopping there as if no other inquiry should be made. Many DC retirement plans have, and do, focus on income and are excellent designs.

If a proper inquiry is to be made, it should be understood that the ultimate benefit to a participant from a retirement plan is not determined just by whether the plan is DC-based or defined-benefit-based. That over-simplification ignores a large list of other factors, including benefit accrual structures, vesting rules, the level of funding from the employer and employee, the employee’s tenure, age at entry into the plan, investment performance, and work and compensation patterns as major examples. 

The commentary uses an analysis from the Alaska Division of Retirement and Benefits (DRB) to conclude that the state’s DC plan is providing “significantly smaller benefits than the pension-style system discontinued in 2006.” Again, Siedle takes this as evidence to make a categorical judgment about the evils of DC plans. But he fails to ask a simple question: To whom is this DRB analysis relevant?  

The Alaska Division of Retirement and Benefits comparison was addressing only a narrow cohort of longer-term employees, and it did not purport to say that all employees in all circumstances would be better off under the old pension plan than the new DC plan. If one looks at a broader set of employees with different lengths of service, the result is quite different. 

Pension Integrity Project analysis (Figure 1) compares the defined benefit (DB) pension proposed in a bill being considered in the Alaska legislature and the state’s current defined contribution plan. The analysis projects annuity values for regular public employees (teachers and public safety modeling show slightly different results) with an entry age of 30. The results clearly show that for any employee the DC plan will provide higher lifetime income benefits for the first 20 years of service. It is only the small number of very long-service employees who may be earning a higher benefit amount. For the vast majority of Alaska’s employees, the DC plan can be a more effective way to provide retirement benefits than the DB plan.

Figure 1: Comparing the Value of Alaska’s Defined Contribution Plan to the Proposed Defined Benefit Plan at Different Years of Service

Source: Pension Integrity Project actuarial modeling of Alaska’s existing defined contribution plan benefits compared to the pension benefits being considered in the proposed Senate Bill 88. This analysis displays results for non-teacher, non-public safety employees. The analysis assumes entry age 30, 6% DC investment return, 5% annuity payout rate, and 2.75% annual salary growth, and that DC benefits are not annuitized until normal retirement age.

The reality is that defined contribution plans can and are often used as the foundation for well-designed and effective retirement plans. Just look to Alaska’s higher education system for a local example. In fact, the primarily DC-based national higher education retirement system (for both public and private institutions) is arguably the most successful retirement system the country has ever produced because of adequate contribution rates, portability of benefits, and the flexibility to take retirement benefits as lifetime income, a position validated by a recent survey of higher education institutions.

This key point missing from the article is that it is very rare for employees in any industry to spend a full career with any single employer today. This anachronistic notion is a primary reason defined benefit plans have dwindled, although it remains the basis for defining success in remaining public sector DB plans today. The problem (aside from potential ongoing crippling unfunded liabilities) with most DB plans is that the employee must spend a full career with the same employer to receive a lifestyle-sustaining income in retirement. Public defined benefit plans, like the old Alaska plans, are designed to heap up benefits in later years and are not portable. It is only in the later years nearing retirement that an employee’s benefits would accrue significantly. Those benefits and accrued assets do not travel with the employees as they change employers throughout their careers, they sit in the pension fund until the employee reaches the retirement age set by the plan.

Alaska’s defined contribution plan, however, is designed to be portable and move with employees as their careers span several employers and there is no backloading of benefits. The issue of benefit portability is critical when determining effective retirement plan designs today. In Jan. 2022, median state employee tenure nationally was measured at only 6.3 years. It is clear that most employees in the modern workforce will have a fair number of employers during a 30–40-year career. Another example of this comes from the Pension Integrity Project analysis of the Colorado PERA School Division, which shows that only 37% of hires remain in the system after five years of service. Benefits that are illustrated based on formulas may look adequate on paper, but if only about a third of workers will actually get that level of benefit the illustrations are essentially meaningless.

Siedle also makes the misleading argument that in defined contribution plans Wall Street bankers make money at the expense of retirement plan participants. We retort: Are Wall Street investment firms not involved in managing the hundreds of billions of dollars in state and local governments’ defined benefit pension plans? Of course, they are. Large pools of pension money enjoy the benefit of favorable rate classes of investments. This is true for DB plans and should be for DC plans as well. 

While the portable nature of DC plan benefits fits the modern workforce better than traditional DB plans, typical 401(k)-style DC plans do have their own shortcomings. As previously acknowledged, a DC plan design that is focused on wealth accumulation rather than income replacement may be overlooking its primary purpose. The Pension Integrity Project recently introduced a new plan design called the Personal Retirement Optimization Plan (or PRO Plan) that uses existing market-available products and is built on a DC foundation but is focused on income replacement. The PRO Plan further focuses on DB-type lifetime income benefits at the individual participant level—producing previously unavailable customized benefits. 

Whether or not a retirement plan is DB or DC logically has no direct impact on plan effectiveness. While the defined contribution plan in place in Alaska could be enhanced, it is a plan that recognizes the reality of the modern workforce and works to meet employee needs. A theoretical and flawed comparison of defined benefit and defined contribution plans does not shed light on the reality facing public employees and employers in Alaska today. Responsible retirement plan experts should honestly focus on how retirement plan objectives and design, not defined benefits vs. defined contributions, can combine to meet the needs of both employers and employees in the modern environment.

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Despite adjustments to retirement eligibility, this move could realistically add $8.6 billion in additional costs to future state budgets and reintroduce Alaska to significant pension risk— the same risk that generated over $6 billion in state pension debt and spurred the 2005 pension reform that closed Alaska’s defined-benefit pension plan to new hires in the first place.

Senate Bill 88 costs are dependent on a flawed discount rate (DR):

The claim that SB 88’s proposed changes would not require any additional funding relies on the pensions’ current investment return assumption. Alaska’s pension plans would need to achieve overly-optimistic 7.25% annual returns on investments for decades to avoid additional costs to the state.

• Overly-optimistic investment return assumptions were a major contributor to Alaska’s $6.7 billion debt still owed on the legacy pension plans (PERS and TRS).
• Nationally, the average assumed return used by public pension systems is below 7%, so Alaska’s current return rate assumption is rosier than most other states.
• Capital market forecasts by most financial experts suggest pension systems should expect investment returns closer to 5%-6% for the next 10-to-15 years.
• The DR is used when pricing the amount needed from employees to purchase their “past service.” If the plan earns under 7.25% or drops that assumed rate in the near future, tens if not hundreds of millions of dollars in unfunded liabilities will have been added.

SB 88 could cost Alaska an additional $8.6 billion over the status quo:

Actuarial analysis of Alaska PERS and TRS that anticipates realistic market stress and multiple recessions over the next 30 years shows SB 88 likely exposes the state to significant potential costs.

Bottom-Line:

SB 88 would likely cost Alaska more than $8 billion in the coming decades. Since most public employees leave their positions before being able to take advantage of a pension, this could be very costly legislation that only benefits a relatively small group.

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HB 22 and SB 35 costs are dependent on a flawed discount rate

The claim that the proposed changes will not require any additional funding relies on the pension’s current investment return assumption. The Alaska Public Employees’ Retirement System (PERS) would need to achieve overly-optimistic 7.25% annual returns on investments for decades to avoid additional costs to the state.

• Overly-optimistic investment return assumptions were a major contributor to Alaska’s $5.1 billion debt still owed on the legacy pension plan.
• Nationally, the average assumed return used by public pension systems is below 7%, so Alaska’s current return rate assumption is rosier than most other states.
• Capital market forecasts by most financial experts suggest pension systems should expect investment returns closer to 5%-6% for the next 10-to-15 years.
• The DR is used when pricing the amount needed from employees to purchase their “past service.” If the plan earns under 7.25%, or drops that assumed rate in the near future, tens if not hundreds of millions of dollars in unfunded liabilities will have been added.

HB 22/SB 35 could cost the state an additional $800 million

Actuarial analysis of Alaska PERS that anticipates realistic market stress and multiple recessions over the next 30 years shows HB 22/SB 35 likely expose the state to significant potential costs.

Bottom-Line:

HB 22 and SB 35 would likely cost Alaska upwards of $800 million in the coming decades. Since public safety employees make up only about 10% of PERS members, this could be a very costly move that only benefits a relatively small group.

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