Blog: Dermot Cole
Measures to repeal defined contribution retirement plans gain backers in Juneau
Published Saturday, February 7, 2009
Did the state of Alaska make a mistake when it adopted "defined contribution" retirement plans in which new workers bear the risk of losses from bad investments?
A growing number of legislators, both Democrats and Republicans, say "yes."
State employees and teachers hired within the last two-and-a-half years in Alaska saw their retirement accounts take a big hit in 2008, putting them in the same league as most people with names attached to 401Ks.
The stock market collapse stripped about $15 million from public employee retirement accounts that had been valued at about $50 million before the fall.
The much larger holdings that support the traditional state and teachers’ pension plans in Alaska also went down, but state and local governments, not individual employees, bear the burden of those declines.
The heavy losses in both the defined contribution and defined benefit systems will play a major part in the forthcoming debate about whether the state should abandon the former and return to the latter.
Nine of 20 senators and 10 of 40 representatives have endorsed bills to repeal the defined contribution plans, contending the state made a mistake in abandoning the guaranteed pension approach for those who came on the job after July 1, 2006.
In the last six months of 2008, the state retirement systems lost about $3 billion. The holdings in the two largest programs dropped from $15 billion to $12 billion, according to a report from the Alaska Retirement Management Board.
I have more on this in my column at http://newsminer.com/news/dermotcole
For background documents to to http://www.legis.state.ak.us/basis/get_documents.asp?chamber=HFIN&session=26&bill=&date1=20090205&time2=1330
This is the sponsor statement for Senate Bill 23, which has the backing of 9 of 20 senators http://aksenate.org/index.php?bill=SB23
This is the sponsor statement for House Bill 30, which has 10 sponsors and co-sponsors> http://housemajority.org/spon.php?id=26HB30
My question is who pays for the retirement account if it were limited from declining while the markets sank into the abyss? WOudl that burded be passed to the state?
It seems like that is part of the markets, they go up AND down. If you are dependent on your retirement from the markets, my guess is you are in a for a very uncomfortable ride over the coming years.
And just think if they would have passed Bush 2's dream of privatizing Social Security. The folks who were wealthy going into their golden years would be fine regardless, but the less fortunate senior citizen who scraped by, taking hits from downsizing, outsourcing, age discrimination, medical catastrophe etc, would end out their lives in the richest nation on earth dumpster diving for food.
And here is one way to pay the debt that Alaska has already incurred with the defined benefit program:
We end the Permanent Fund Dividend program for at least the next 15 years. No more dividends. That 'savings' would allow the ten billion dollar debt the Defined Benefit system has left us with to be covered.
A ten billion dollar debt, covered by 660,000 Alaskans= $15,151.00 per Alaskan.
What is astonishing is that the legislature and Governor have utterly failed to diversify Alaska's income stream (they've had decades to do so). They've left us entirely dependent on oil revenue through a single pipeline. With oil production declining, and no new revenue sources being presented by legislators, why would we ever want to go back and incur the staggering expense of the defined benefit program?
Any legislator who wants to take us down that road should also sponsor income tax legislation to pay for this defined benefit scheme.
Our deficit is already nearly two billion dollars this year even without the additional burden of a defined benefit program for government bureaucrats.
Is it fair to take every other Alaskan's dividend to pay for those lucky enough to have a State job? NO! The chosen few have the best retirements...the rest get leftovers or nothing.
When an employee is hired, as part of the benefit package, the employer will contribute $XX (or 0.00%) to a retirement fund. The contribution is earmarked for that employee. The value of that contribution is what is available for retirement. Same thing with a 401K but the employee makes the contribution.
Thats how it works in private businesses and if it's good enough for the people of Alaska it should be good enough for those hired to serve the people of Alaska...
If not, I should expect OUR State to recoup my losses during 2008.
...and Tranquility, if $15,000 goes to state employees I expect to receive the same--that fund is owned EQUALLY by ALL Alaskans.
Justchillin- we live in a state where some people are more equal than others...
You are already going to have to pay the ten billion defined benefit debt. The only question is if that money will eventually come out of the Permanent Fund or from new taxes.
Fair? Nope.
Likely? Yep.
The LIO number is 452-4448. Be sure you express your point of view to legislators- particularly those that have no plan to pay for the massive debt already incurred by the defined benefit program and want to return us to that insanity.
Perhaps the state should return employees to the Social Security system. At least that system provides a defined benefit of some kind.
In this day and age there is no security anywhere. Ultimately I doubt the state will back up the state pension plans because it will be broke along with the rest of the country. In the USA where the wealthiest 1% of the nations population owns 40% of the countries wealth, there are going to be a lot of old people left to fend for themselves with broken pension plans, 401k's and broken promises. Alaska could have had a sound financial footing after supplying a enormous amount of oil to the rest of the country over the past 30 years, but we bought the company line that low taxes would keep jobs here and fear that the oil industry would pull out completely kept us from making sound decisions. Oh yeah, political corruption had a hand in that as well.
As I recall the reason the law changed in 2006 was because we (the citizens of Alaska) had to make up a pension short fall of millions of dollars. I say the employer should pay the benefits directly to the employee or to his/her agent (union) and be done with it. That's the way it’s done in construction. If the employee or their agent make bad investment decisions well too bad. Live with it just like the rest of us. This bailout mentality has to stop.
I wonder how many people have really thought this one out. Think of this: you are a teacher in this district, or any Alaska district. You spend 30 some years teaching and have a "defined contribution" pension plan, and no social security. I believe you need to accumulate at least $500,000 to have adequate interest on which to live. (I've worked 25 years and only have about $160,000 accumulated so go figure that $500,000 amount!) So, the market tanks prior to retirement, just as it has done in the past two months. You, then, are unable to retire. So, at age 70 or 75, what do you do? Do you retire and go to work at Fred's? Or, do you stay on in the classroom? I'm pretty sure I know what I would do -- stay on in the classroom and do the best job I can, no matter my condition. That would be better than working any minimum wage job. So, do we want our classrooms full of 70 and 80 year old teachers? Granted some would be very good; but let's face it, many would clearly be a bit tired. Plus, school districts up here will be full of teachers at the very top of the salary scale who will never retire. Thiink about how much THAT will cost districts. So, do we force teachers and other public employees to retire and construct some sort of "poor house" for them? Someone said it here a few weeks ago -- Alaska went from the best public employees retirement system to the worst. At the very least we need to belong to the Social Security system.
In the interest of 'trasparancey', Mr. Cole and other proponents of providing a defined benefits program for government employees, should state very clearly that the risk of future funding shortfalls falls to the people of Alaska - not the 'government'. To be completely honest, he should point out that people who aren't old enough to vote will bare the greatest burden.
The government is merely the agent of the people. It isn't some magical entity that comes up with money out of thin air.
As 'tranquilitybase' pointed out we are already faced with a multi-billion short fall that was caused by under funding the program (so more funding appeared to be available to spend to buy votes for the next election).
A defined benefit pension program is deceptive at the very best. We already know that the social security system, which is the biggest defined benefit program, is guarenteed to be bankrupt in the foreseeable future. All defined benefit programs will eventually become unaffordable to the working population of the future. It raises the question of how will we avoid an intergenerational war, because the 'retired population' will have more political power than the 'working population'. The working population would seam to have no option but to revolt. I wouldn't want to be on the receiving end of that revolt, nor would I want to impose that decision on my children.
justliberty, well put, thanks for saving me alot of typing...
Justliberty- great points.
I firmly believe that the stock market is the best place to invest over the long haul. My husband has worked for a private university for more than 20 years, his retirement plan being a defined contribution 403-b; much of this money is in stocks.
Despite the current recession, his retirement account enjoys an amazing return over the past couple of decades -- far higher than it would if the money had been invested in so-called "safe" financial instruments.
Justliberty is on point.
Actually, prior to the 2000 stock market collapse, both PERS & TERS were well over-funded. Neither program ever recovered from that collapse.
Stating that both programs were ever under-funded (implying employees and/or employers were not contributing enough) is a completely and totally erroneous statement.
I don't know the current status of Anchorage's employee retirement program (defined benefit), but as of 1.5 years ago, that retirement system was completely over-funded. So much so that Anchorage employees who are a part of it were not having to contribute at the time.
There have been numerous studies conducted by private organizations as well as State Governments around the country, and what these studies reveal is that very few people have the time or expertise to manage their own retirement accounts in a manner that will leave those accounts capable of sustaining them during retirement. PBS has a two hour show they've played several times that goes in depth on this very subject. It's titled something to the effect of: "Can I Afford to Retire".
What this whole thing basically boils down to is who is getting the money. And during these market collapses, all of that invested wealth certainly is not staying in the investment portfolios of working men and women.
I am not an advocate of Joe or Jane Smith having to make up the PERS/TERS deficits through taxes. But at the same time I do not believe defined contribution retirement plans are in anyones best interest.
ADF- You are factually incorrect about how the retirement accounts came to be underfunded. I'll spare you all the gory details- but it happened when Tony Knowles decided to hire a contractor to determine what the contribution rates should be. If one determines that all State employees will die at 58, then one does not have a funding problem one keeps contribution rates low until the next governor comes on board and has to deal with reality.
By ignoring the true cost of the defined benefit program by concealing how long people really live, and what their health costs are, then your union pals are happy because inevitable, and needed, reform (defined contribution) is delayed.
T_B: What year did former Governor Knowles hire that contractor? Or better yet, what year did that contractor issues their report?
The legislature is hiding one fact from the people, you may not get a permanent fund check this year. They are talking about a special session in May to issue checks from the savings fund because of the losses the PFD has taken has not left enough for checks to be issued via the APF interest fund.
Juneau is not at all transparent about this issue. This would mean a loss of about 8% of the State's income. Just another reason why people need to keep on top of what they are doing, saving themselves and their own at everyone else's expense.
ADF- It might have been about the mid- 90's. It was not a single report, but advice about what the contribution rates should be. The contractor jiggered the contribution rates way too low based on false actuarial assumptions. When oil was very cheap, phony contribution rates was welcome (intentionally welcome) news.
Dermont Cole, give Michael Carey or Gregg Erikson a call about what is going on with the PFD checks this upcoming year, it may make a good report for you. Anchorage Edition had a good report on it. I am sure people would like to hear about the problem it may be facing.
The less state employees the less our burden. Each year we add new employees for unnecessary state programs or through grants from the Federal government.
We would have less of a problem if we had less employees in the PERS, TERS system. It seems that when Alaska has a good year in revenue to the state coffers it turns into more laws, more worthless programs and more long term debt.
This deficit/surplus system we experience will never change under the existing investment norms. The solution is less burdensome if the burden is lessened in the solution.
Stop hiring.
Darfur- you raise a very interesting question about the Permanent Fund. The fund has lost so much money that the principle is down to only 28.3 billion- less than the total deposits made into the Fund, that the constitution does not allow a dividend to be paid.
Only an opinion issued by the now discredited AG- Renkes- justifies the allowance of a payment of a dividend under these circumstances.
Here's the question: If the Alaska Constitution says that the principle of the Fund shall be protected, then how could a dividend be paid when the Fund has less in the principle than the total deposits to that principle?
The Fund will not be Permanent if we apply such logic with accumulating losses.
Here's what the Constitution says:
15. Alaska Permanent Fund
At least twenty-five per cent of all mineral lease rentals, royalties, royalty sale proceeds, federal mineral revenue sharing payments and bonuses received by the State shall be placed in a permanent fund, the principal of which shall be used only for those income-producing investments specifically designated by law as eligible for permanent fund investments. All income from the permanent fund shall be deposited in the general fund unless otherwise provided by law. [Amended 1976]
Here is the key sentence:
"...the principal of which shall be used only for those income-producing investments specifically designated by law as eligible for permanent fund investments."
So unless they play games (reinterpret the Constitution), or the market rebounds, there will be no dividend this year.
Ok, so now everything is complete. We've bailed out everyone else so we're now going to bail out so to speak the state employees who didn't invest their money wisely? Look, my wife works for the state, so its not like I am against state employees. But to go around changing things because some people failed to invest their contributions wisely, and burden the state with pensions to be paid out in the future doesn't sit well with me. It's the same old thing we see more and more of. People not taking responsibility for themselves, expecting the government to take care of them when they mess up. Yes, a lot of people lost a great deal of money and I really am sorry for them. But at the same time a lot of people kept track of what was going on in the world and transferred their money into safer investments and lost little or nothing. People, I hate to break the news to you but having a secure retirement isn't a benefit of being born here. It is something you have to earn by working hard, not going into debt, saving, and making wise choices with your money. But, apparently some people including our President and legislators don't see it that way.
Agreed aklion....Any Legislator who votes to reinstate, given our current economic situation is crazy. How dare they even bring it up. If anything, State workers who currently have the guarantee of pension should have those benefits temporarily suspended.
Just because mistakes were made for State employees in years past because of a strong economy, doesn't mean it should go to infinity and beyond. Nothing against State workers, but that's insanity.
Please read "The Screwing of the Average Man". There is an entire chapter on Wall Street. The PFD could turn to $0.
Maybe it already has. We just don't know it yet.
I think we should NOT continue to invest in the stock market. The formulas we used in the past no longer apply. We're in a much more volatile world economy.
Precious metals, guaranteed savings...anything but
this high-stakes gambling with paper.
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