I wanted to explain the way we would talk about this at a kitchen table in Wasilla or Juneau – no fancy math and no 15-page consultant report from a biased source.
You have probably heard some politicians and some of the public employee unions say that Alaska needs to bring back the old Defined Benefit pensions for teachers and state workers to attract and retain workers. They claim this will actually save the state money. That specious claim should make every Alaskan pause. We watched that same system almost bankrupt the state in the 2000s. We watched billions in unfunded promises stack up while our savings accounts and our dividends swirled down a whirlpool. Yet the sales pitch is back again, and it comes with a handful of tricks designed to make the numbers look painless.
Here is the plain English version of the voodoo math being sold to Alaskans.
Trick #1: Pretend the Stock Market will do all the work
The argument goes like this; the pension fund only needs a tiny contribution each year because the stock market will magically turn that small deposit into a mountain of cash. It sounds great until you look at what actually happened the last time we trusted that theory.
Campfire version: Imagine I promise to hand your son $500,000 when he retires in 30 years. Then I only put $50,000 in the bank today and tell you not to worry, because I am counting on an 8% return every single year. If I get lucky, the promise works. If the market grows at 5%, or we hit a couple of bad winters like 2008, I am short hundreds of thousands, and you get the bill. That is exactly what happens with defined benefit pensions. Except the door they knock on for the difference is your Permanent Fund Dividend or a new statewide tax.
Trick #2: Shrink the future with a big discount rate
They will make a promise to pay a teacher $60,000 a year for the rest of her life starting in 2055 and then claim that promise is only worth eight or ten thousand dollars in today’s money. They get there by dividing the cost by a giant number, the same dreamy seven to eight percent return they swear the fund will earn forever.
Fish camp version: It is like me owing you $20,000 payable in 20 years and insisting that today I only owe you three thousand, because I expect my salmon boat to make a fortune in the future. If the fish do not show up, I still owe you the full $20,000. Same with pensions. If the returns do not show up, the Alaska Constitution says that Juneau still owes the full amount, and they pay it with your money – most likely your PFD.
Trick #3: Stretch the payments longer than most mortgages
To hide the full cost, they spread the debt from past mistakes over 30 or 40 years and make the early payments tiny, so the budget looks harmless today. We tried that game already. It is one reason the old system spun out of control and left us with almost a seven-billion-dollar hole in PERS alone.
Kitchen table version: It is like being three $300,000 behind on your mortgage and telling the bank you will start with $500 a month and raise it later. The bank laughs, because the interest grows faster than your payment. That is what happened in Alaska before we closed the old system. The unfunded liability grew every single year even while we were “making payments.”
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Trick #4: Comparing apples to snowmachines
When they compare costs, their pitch sounds like this:
The old pension only costs the state eight to twelve cents on the dollar after the stock market helps, while the newer 401k style plan costs 22% because the state pays a fixed contribution.
What they do not say is that the eight to twelve cents only work if the stock market behaves perfectly for decades. If the market performs at average levels, the real cost jumps to twenty-five to forty cents on the dollar. Suddenly the supposedly cheap old pension becomes far more expensive than the current plan.
Bottom line for Alaskans
Every time someone claims that defined benefits will save money, they are betting your children’s Permanent Fund Dividends, your possible future taxes, or deep cuts to troopers and schools on the hope that the stock market will run hot for the next 50 years. We took that bet once. We lost. When we finally closed the old system to new hires, it carried twelve to fifteen billion dollars in unfunded promises. That financial sinkhole is why your dividend was cut and why the Legislature created SBS and Tier IV.
If someone wants to bring back the old pensions, ask one simple question: “Are you willing to put into law that, if the stock market does not hit your magic number, the retirees take the loss instead of the taxpayer?” Watch how fast the conversation ends.
That is the voodoo math of defined benefits, explained the way you would hear it on a bar stool in Anchorage. Any questions, neighbor.
The views expressed here are those of the author.
