Alaska’s bold solution to its pension crisis
Illinois has the nation’s worst-funded pensions. Each Illinois household can expect to pay more than $40,000 in additional taxes to cover the pension shortfall if no reforms are passed. The size of the pension crisis demands that state lawmakers pass the boldest reforms in the country. Fortunately, Illinois lawmakers can look to the examples other states have...
Illinois has the nation’s worst-funded pensions. Each Illinois household can expect to pay more than $40,000 in additional taxes to cover the pension shortfall if no reforms are passed. The size of the pension crisis demands that state lawmakers pass the boldest reforms in the country.
Fortunately, Illinois lawmakers can look to the examples other states have set to see what’s working. Many other states have adopted 401(k)-style retirement plans because of the freedom of choice and portability they offer workers.
In 2005, Alaska had a $5.7 billion shortfall in its pension system. On a per capita basis, Alaska’s pension crisis was in worse shape than Illinois’ system is today. In response, Alaska put all new workers on 401(k)-style plans beginning in 2006. Michigan did the same in 1997. Other states, including Rhode Island and Utah, adopted a combination of defined benefit and defined contribution plans.
These states chose to follow the bold reforms that the private sector has already been making for more than a decade. Nearly 85 percent of the private sector has abandoned defined benefit plans in favor of 401(k)-style retirement plans.
The solution to Illinois’ crisis — moving workers to 401(k)-style plans — is a common sense policy. A 401(k)-style retirement plan would give state workers control over their own retirements, stabilize the state’s budget and end the cycle of taxpayer-funded pension bailouts.
Alaska empowers workers through choice
Alaska’s pension reform ended the defined benefit plan for all employees hired after 2006. New employees now contribute a portion of their salary into retirement accounts that they own.
The state matches a portion of those contributions and places the funds directly into each employee’s account. For example, a teacher in Alaska contributes 8 percent of his or her income to a retirement fund, and the state contributes 7 percent. This fund is controlled by the employee and grows over time through contributions and investment returns.
Illinois already runs a program very similar to Alaska’s. Workers in the State Universities Retirement System, or SURS, are able to choose a 401(k)-style option called a self-managed plan, or SMP. SURS has offered this program for close to 20 years, and more than 20,000 university workers have chosen this retirement option. These Illinois workers have gained the freedom, choice and security that come with personal retirement accounts. Other Illinois workers should be able to do the same.
With 401(k)s, funds travel with the worker even if they change jobs
The member’s contributions and any earnings he or she generates vest immediately. This means the funds are portable and state workers can take their retirement funds with them whenever they change jobs.
In Alaska specifically, the employer’s contributions vest over a five-year period. Twenty-five percent of the employer’s contribution vests after two years, with an additional 25 percent vesting each year thereafter. These retirement funds become fully portable after five years.
What if the workers aren’t sure how to invest their money?
Investing in a 401(k)-style plan is flexible and manageable. Private workers have invested their own money for decades. There are options for all types of investors, and there are dozens of reputable companies, such as Fidelity, that can walk workers through responsible and intelligent investing.
Why would a worker want to invest his or her own money?
State governments, like Illinois’, have woefully mismanaged state workers retirement funds. The head of the Illinois Teachers’ Retirement System, Dick Ingram, noted that the fund is likely to become insolvent over the next 16 years without major changes.
Teachers and other public workers deserve to be able to control their own finances and make the responsible decisions that bureaucrats and politicians cannot and should not make.
What Illinois can learn from Alaska
While the budgetary benefits of Alaska’s pension reform will only be felt over time (since older workers on a defined benefit system still greatly outnumber the new workers on the defined contribution system), the benefits of portability and employee freedom are being felt today.
While Illinois continues to wait on real reform, Alaska implemented such reform in 2006. Illinois and public sector workers would do well to learn from Alaska’s reform.
Learn more about HB 3303 and SB 2026 here. Help bring choice and fiscal responsibility to Illinois today.