Alaska Lawmakers Debate Changes to Public Workers’ Pension Plan Design

In their 2024 session, Alaska lawmakers debated pension policies for state employees and public school teachers in an effort to boost worker recruitment and retention. The measure under consideration would have reinstated a defined benefit pension plan for these workers 16 years after such a program was closed in favor of a 401(k)-style retirement plan.

The session ended in May, but the legislation could be offered again next year—in part because policymakers know the state still needs to address workforce issues. Alaska once offered a defined benefit plan that guaranteed lifetime payments to workers upon retirement. In 2006, the state switched to a defined contribution plan for new hires in response to mounting unfunded liabilities.

In Alaska’s case, a combination of investments that didn’t meet expectations and a mistake by the plans’ actuary in the early 2000s led to a gap between what was needed to fund state employee and teacher pensions adequately and what had been set aside. That financial pressure led to the switch to a defined contribution plan nearly 20 years ago.

Although states have changed plan types for a variety of reasons, mostly in the hopes of saving money, several have shown that defined benefit pension plans with guaranteed benefits can be offered at affordable and predictable costs.

Defined contribution plans, such as 401(k)s, avoid certain risks to the plans because the states, school districts, or local governments make only fixed contributions to the public employee retirement accounts. The risks then are borne entirely by the employees who need to invest that money effectively and then manage their accounts in retirement. However, Alaska is one of the states where public workers do not participate in Social Security, so state workers and teachers end up with no automatic guaranteed retirement income from their public service.

Now, policymakers are concerned that the current benefit design has harmed the state’s ability to recruit and retain workers. As of the end of May 2024, nearly 20% of available state jobs were vacant, creating challenges for government services and budget pressures. In addition, an analysis by The Pew Charitable Trusts indicates a risk that public employees in Alaska may not receive sufficient replacement income to maintain their quality of life once they leave their jobs. This is of particular concern for teachers who are not eligible for a supplemental benefit designed to replace Social Security for state employees and participating local government workers.

These rules and policies also affect recruitment and retention of workers. Retirement benefits are part of how potential employees consider a new job and how existing workers decide whether to stay. Recent research by Pew and the Rand Corp. suggests that plan design affects worker retention.

How can Alaska ensure that the benefits it provides workers will be sufficient for a comfortable retirement and allow the state to get talent in classrooms, fire stations, and state government? And how can Alaska do that without creating a risk of new unfunded liabilities that could strain public budgets with unexpected costs? Pew’s research shows that there is no one-size-fits-all solution but there are many proven approaches to providing retirement benefits sustainably through adequate funding and tools to manage risk and uncertainty.

If Alaska policymakers continue their plan design conversation to 2025, they will need access to data and information to understand how reforms could affect the fiscal sustainability of the plans. Risk reporting tools such as stress testing can evaluate current policies, monitor early warning signs of fiscal distress, and inform proposed changes.

Putting such tools in place would help policymakers assess whether they have the policies to manage the risks from the existing legacy benefits as well as any additional promised benefits if a traditional pension benefit is reinstated. Measuring retirement security helps policymakers know whether the current benefit allows for a secure retirement for workers in the plan and how alternatives compare. Finally, moving beyond solely considering traditional defined benefit or defined contribution plans would allow Alaska to consider a full range of options. For example, they can build risk-management tools into the defined benefit plan, implement a side-by-side hybrid approach that pairs the two methods, or provide individual retirement accounts with the key protections of a pension plan through a cash balance design.

Alaska’s proposed pension reform reflects a complex interplay of policy decisions, financial challenges, and workforce needs. The debate underscores the importance of comprehensive data analysis, risk assessment, and stakeholder engagement in crafting sustainable retirement solutions. As Alaska and other states grapple with these issues, ensuring the necessary analyses and information are included in the discussion can lead to a collaborative approach that works for Alaska. By delivering stability and sustainability—even amid economic ups and downs—the state plan can better meet public workers’ retirement security needs.

Corryn Hall works on The Pew Charitable Trusts’ state fiscal policy project.