In the past two decades, several states have closed their defined benefit (DB) pension plans to state and local government employees and moved those workers to defined contribution (DC) plans like 401(k)s instead. But some of those states are now considering reversing course as they recognize the value of DB plans in recruiting and retaining qualified workers.
Alaska closed its DB plan to new state employees in 2006 over concerns about the plan’s unfunded liability. Since then, the state has struggled to hire and keep teachers, state troopers and other public employees. Those workers often receive their training and then leave for other states that offer better retirement benefits, according to officials. And that frequent turnover can have a high cost: It costs nearly $200,000 to recruit, train and certify a single state trooper, according to a report from the Alaska Department of Public Safety.
Alaska’s lawmakers are now considering legislation that would reopen the DB plan and thereby reduce the high costs associated with turnover and constantly hiring and training new employees.
It’s a similar situation in Oklahoma, which shifted some of its state employees to a DC plan in 2014. Its legislature is also considering reversing course and putting those workers back on a DB plan.
Pensions have long been seen as a valuable tool to help hire and keep teachers, state employees and other government workers, since most private employers do not offer DB plans and the reliable source of retirement income that comes with them. Research also shows that amid widespread concerns about retirement security, Americans from every generation value defined benefit pensions and believe every worker should have access to one.
States like Colorado provide strong evidence that defined benefit plans continue to help attract and retain teachers and other public employees. According to research from the National Institute on Retirement Security, 65 percent of teachers in Connecticut, Colorado, Georgia, Kentucky, Missouri and Texas — all of which offer DB plans — serve for at least 20 years.
Colorado’s commitment to PERA
Over the past decade-plus, Colorado lawmakers have indicated they remain committed to strengthening PERA so the state’s public workers can continue to rely on a defined benefit pension for retirement security.
In 2010, the Colorado General Assembly passed Senate Bill 10-001, which contained a number of reforms to improve PERA’s funded status and sustainability, with a focus on preserving the defined benefit Plan. Five years after SB10-001, the state commissioned a study to compare PERA with other plan types, such as defined contribution plans. That study concluded PERA’s hybrid defined benefit plan was the most cost-effective, efficient plan available, and provides more income at retirement than the alternative plan designs for all ages and career paths. Another package of reforms then followed in 2018 with Senate Bill 18-200.
Changes resulting from those two pieces of legislation include increased member and employer contributions, reductions in the Annual Increase paid to benefit recipients, introduction of the Automatic Adjustment Provision and a direct distribution from the State budget of $225 million, to be paid to PERA annually. While the legislature opted to forgo 2020’s payment due to unprecedented pandemic-related budget cuts, efforts are underway to make up that payment.
While the changes to member and employer contributions and Annual Increases haven’t been easy, they ensure that PERA’s defined benefit Plan will be able to continue providing reliable retirement income that retirees can’t outlive.
Ensuring that PERA is sustainable allows school districts, local governments, public safety departments and other government agencies to continue to attract highly qualified, skilled employees and retain their expertise for years to come.
Unfunded liabilityThe difference between the projected amount of money needed to pay benefits earned to date and the amount of money currently available to pay those benefits.Defined benefitA mandatory retirement savings plan in which a participant’s future benefits are known or can be calculated, but contributions are subject to adjustments. Defined contributionA voluntary plan in which participants can save pre-tax income for retirement. Contributions are “defined” by the employee, but the future benefit is not guaranteed. Automatic adjustment provisionAn automatic change to PERA contributions (employer, employee, state direct distribution) or the Annual Increase based on funding levels.