The National Institute on Retirement Security released a new series of case studies entitled, “Enduring Challenges: Examining the Experiences of States that Closed Pension Plans.” The studies examine four states, Alaska, Kentucky, Michigan, and West Virginia, that have all closed their pension plans and moved newly hired public employees into defined contribution, hybrid, or cash balance retirement systems. NIRS’ findings confirm that closing pension plans and moving new employees to alternative retirement plans worsens funding of pension plans, provides a less secure retirement for public employees, and hurts recruitment and retention efforts.
In 2005, Alaska lawmakers closed off two of their pension plans for newly hired teachers and public employees, moving them to a less secure 401(k) plan. The report notes that at the time of the closure of the plans, collectively they faced an unfunded liability of $4.1 billion. This is due to state lawmakers underfunding the plans for years as well as inaccurate projections from the state’s actuary. Since the closure of the plans, Alaska’s recruitment efforts for new educators has faced significant pressure. We wrote about this issue in 2017 when the University of Alaska Anchorage calculated that recruitment efforts cost the state nearly $20,500 per teacher, which came at an annual cost of $20 million. Re-opening the pension plans would improve their funding status and the state’s recruitment and retention efforts.
Over the last decade, Kentucky Retirement Systems (KRS) has faced its fair share of funding problems. Of the five different pension systems that are within KRS, the Kentucky Employees Retirement System (KERS) Non-Hazardous plan is in the worst shape. With a funding ratio of 23.15 percent, in 2013, lawmakers created a new tier of retirement benefits that created a cash balance retirement plan for newly hired public employees participating in KRS. Since moving newly hired public employees participating in KRS into the cash balance plan, the overall funding of KRS has dropped sharply. The report found that since 2013, KERS Non-Hazardous’ funding ratio has dropped to 13 percent. Last month, lawmakers made the situation worse when they passed HB1, which incentivizes quasi-government agencies participating in KERS Non-Hazardous to leave the pension plan altogether. This has forced Moody’s to issue a statement saying HB1 was a “credit negative” move.
Michigan faces a similar predicament with their State Employees’ Retirement System (SERS). In 1997, lawmakers closed the plan to newly hired public employees even though SERS’ funding status was 109 percent – at the time, one of the best funded pension plans in the country. At of the end of 2017, the plans unfunded liabilities have increased to 66.5 percent. Although the state has increased funding to the plan in the last decade, the report states: “The balance between active and retired members has shifted dramatically in the two decades since the plan has been closed. In 1997 there were 55,434 active members and 36,123 retirees and beneficiaries, or 1.5 active workers for each retiree. By 2018, there were 9,473 active members compared to 60,010 retirees and beneficiaries.” The state didn’t learn from their mistakes because in 2017, lawmakers closed the Michigan Public School Employees Retirement System (MPSERS) to newly hired public employees as well.
If Michigan wants to get serious about their funding their pension systems, they should take note from West Virginia, who re-opened their closed plan in 2005 to much success. After years of underfunding by lawmakers, West Virginia closed their teachers pension system in 1991 and moved all newly hired teachers into a defined contribution 401(k) plan. After the change, funding status of the plan drop to 25 percent. The state commissioned a study and found that the pension plan is half the cost of the 401(k) plan. In 2006, the state re-opened the plan to all teachers and as the report notes, “by 2008, the plan had already improved its funding status to 50 percent. In 2018, the plan was 70 percent funded.” Also mentioned in the report is that when “the state allowed teachers in the defined contribution plan to switch to the reopened pension plan; more than 78 percent did.”
After closing their plans, each state suffered their own set of challenges, but all of them encountered the same theme: closing the plans made their states’ situation worse. Lawmakers across the country should learn from the mistakes of these four states, instead of pursuing failed policies.