No Social Security? For Alaska teachers, that’s just the way it is

SPONSORED: Like many Alaskans, public school teachers worry about planning for retirement. Unlike most of their neighbors, they won’t have a safety net to fall back on.

In 2003, Jacob Bera and his wife, on a whim, attended a job fair in the Midwest where Alaska school districts were hiring teachers. They thought they’d come, look around, and think about what it might be like to move north.

They left with job offers.

“It was a very serious, quiet kind of ride home,” Bera said.

The young Wisconsin couple decided to go for it. They sold their belongings, packed the car, and headed north.

Sixteen years later, they’re pretty happy with their choice.

“I love my job,” said Bera, who has taught visual arts at Eagle River High School since it opened in 2005. “I’ve got pretty good resources here. I’ve got great students. It gives me an opportunity to work on building character and building community. I love being a part of helping a kid figure out that they could do something that they thought they couldn’t do before.”

He considers himself fortunate in another way, too. Bera and his wife both have pensions -- steady income for life once they’re fully vested in their plans. That matters more to them than it might to some others because as Alaska teachers, they aren’t able to participate in the system that’s been providing Americans with a safety net since 1935: Social Security.

Alaska’s retirement ‘tiers’

Alaska teachers and teacher retirees fall into three “tiers” of retirement benefits. Teachers who began working in Alaska prior to July 1, 2006, belong to Tier I or II. They have a “defined benefit” pension plan, meaning both the teachers and the school district contribute to a pool of shared investments, and retirees receive a percentage of their salary for life, based on how much they earned and how many years they worked.

Bera and his wife belong to Tier II, meaning they’ll be fully vested after 20 years or age 55. Although they weren’t thinking much about retirement benefits when they moved to Alaska, as they got a little bit older, they grew to appreciate the security of having a pension.

“We both came from backgrounds where there wasn’t a lot of stability, so for us it was really important to build a solid foundation,” Bera said.

Once common, defined benefit plans have fallen out of favor in the private sector. By 2018, only 17 percent of private sector workers had access to one, according to the U.S. Bureau of Labor Statistics. The plans are still common in the public sector, although not as common as they used to be.

“A defined benefit plan is a pooled system where everybody is in together,” said Dan Doonan, executive director of the National Institute on Retirement Security, a nonprofit backed by organizations like the AARP, state retirement boards, and labor unions including the National Education Association. “The money is managed by this system and their professionals. The investment mix, all those things are sort of done on a cumulative basis for everybody in the plan.”

Ensuring a defined benefit plan has enough money to pay everything it owes requires making calculated assumptions about factors like how much money will be paid into a fund, when employees will retire, and how long they’ll live. It’s a complicated process, and miscalculations are not uncommon. In 2017, according to The Pew Charitable Trusts, the 50 states collectively had $1.28 trillion in unfunded liability -- a deficit that leaves a pension plan short of what it’s promised to pay to members.

That doesn’t mean defined benefit plans are inherently bad economic bets. Tennessee, South Dakota and Wisconsin all have well-funded pension plans that weathered the recession of the 2000s, due to practices like making conservative assumptions, consistent contributions and adopting risk management options that “share unexpected costs among employers, employees, and retirees,” according to Pew. The states that fall short may do so for any number of reasons; a plan’s investments underperform, payroll projections fall short, mismanagement, a poor economy.

In the early 2000s, Alaska’s public employee retirement funds were hit with a triple whammy of these factors: a stock market decline, soaring retiree healthcare costs, and grave actuarial errors. The result was a multibillion-dollar unfunded liability.

Between 2006 and 2018, the state paid nearly $7 billion to try to make up the deficit, in addition to regular employer contributions, and it will need to pay hundreds of millions of dollars each year to meet its goal of eliminating the unfunded liability by 2039.

A new tier, a new model

To correct course -- and attempt to avoid a similar situation in the future -- the Legislature made a significant change to the teacher and public employee retirement systems, and TRS Tier III was born, along with Tier IV in the Public Employees’ Retirement System.

Tier III has what’s known as a “defined contribution” plan. Instead of a guaranteed percentage of their salary, Tier III teachers put a percentage of their pre-tax pay into a 401(a) retirement fund, to which the state contributes an additional percentage. Individual teachers then choose from a range of investment options. However that investment account has grown (or shrunk) over the years, it provides the teacher’s income when they retire. It’s similar to a 401(k), although 401(k) plans tend to offer more investment options, lower fees, and more rigorous oversight.

Proponents of defined contribution plans prefer them because they carry no risk of unfunded liability; since there’s no guarantee that they’ll pay out a certain amount, these plans can’t come up short.

What these plans don’t offer is security for the employee.

“There’s a lot of evidence that defined contribution plans are not working,” Doonan said. “A lot more people are in defined contribution plans today, but they don’t own assets that you would expect.”

Research indicates even private sector employees generally don’t have enough money in their 401(k)s to adequately fund their retirements. But they do have a safety net that isn’t available to Alaska’s teachers.

Alaska teachers don’t get Social Security

According to a 2018 Stanford University report, only about half of Americans have a retirement plan provided by their employer, and the majority of adults are not saving enough for retirement. Having any kind of retirement plan puts Alaska teachers ahead of the game relative to the general population.

But there’s one big difference: Alaska is one of 15 states that opted out of Social Security for government employees in the 1950s.

How much do Americans rely on Social Security? The Social Security Administration reports that 50 percent of retired couples, and 70 percent of single retirees, get at least half of their income from Social Security benefits. For 21 percent of married retirees, Social Security is at least 90 percent of their income; among single retirees, that share jumps to 45 percent.

But spend your entire career teaching in the 49th state and you’ll end up among the 3 percent of Americans who receive zero Social Security benefits. Even Alaska teachers who have earned Social Security benefits through work in the private sector will see those benefits reduced under a law called the Windfall Elimination Provision, which is designed to prevent pensioned workers from double-dipping.

As long as the defined benefit plan is solvent, teachers in Tier I and Tier II likely don’t have much reason to worry. But Tier III employees are in a unique -- and precarious -- situation, according to Doonan. Alaska is now the only state that doesn’t have some form of open defined benefit pension plan.

“On top of not having access to (defined benefit) in Alaska, they don’t have access to Social Security,” Doonan said. “It becomes, frankly, a more dangerous combination.”

It’s likely that most Tier III teachers won’t have enough to live on in retirement. An analysis prepared by the Alaska Department of Revenue projects that teachers enrolled in the current plan have only a 31 percent chance of successfully funding a 30-year retirement -- a length that is increasingly realistic.

“Right now, financial advisers generally recommend saving 12 to 15 percent of pay for people that have Social Security,” Doonan said. “Teachers have 15 percent going in (to their plans) and they don’t have Social Security.”

“That’s a concept that’s so hard to understand -- the idea that somebody can outlive their money and end up in a position where they will have zero income, for someone who’s worked 40 years,” said NEA-Alaska President Tim Parker.

To guard against poverty in retirement, NEA-Alaska recommends its members meet with a financial advisor to consider setting aside additional money into a retirement savings account. Members who have gone through this process have reported that they are being told to save an additional 10 to 25 percent of their salaries. Parker admits it’s a pretty significant share to sock away, particularly for young teachers who may be carrying a heavy student debt load.

“Is it remotely possible?” Parker asked. “Not really. Not unless you have four roommates or a rich spouse. It’s unrealistic to expect somebody making $55,000 a year to put away an extra 25 percent.”

Bera concurred. He opened a Roth IRA to supplement his pension, but he knows that isn’t realistic for many recent college graduates.

“When I graduated in 2003, college debt wasn’t like it is now,” Bera said. “I walked away from college with, like, $33,000 in student loans. You can swallow that. That is not the case now.”

Districts, teachers could opt in

At their delegate assembly last January, NEA-Alaska members voted to direct Parker to research what it would take to get them into Social Security. What he learned is that the process would need to begin with a vote by a local school board.

“Any single district can allow a vote to opt back into Social Security,” Parker said. “That option is right there in front of us.” From there, teachers in the district would decide the matter, either a straight up-or-down vote or an opt-in vote that would allow in those who wished to join, while other positions would be phased into Social Security as employees left and were replaced.

But, he added, a school district that wanted to opt in to Social Security would have to be prepared to pay for it.

“They’re on the hook for 6.2 percent for every one of their employees, every year,” Parker said. “The employee is also on the hook for 6.2 percent. These things all happen in addition to the numbers that are going in on the defined contribution side.”

At a time when state funding is tight, he acknowledged that might be a tough sale.

“Where do you find an extra 6.2 percent?” Parker asked. “It’s not an easy thing. Our budgets are very tight.”

Still, Parker said he wouldn’t be surprised to see some of the state’s smaller districts, where teacher turnover is especially high, opt in to Social Security as a way to attract candidates.

The recruitment and retention power could be significant, agreed Bera, particularly combined with all the usual things that draw new people to Alaska.

“My gosh, we love the outdoors and the fishing, and there’s so many positives in the state,” Bera said. “I think we could attract some great teachers.”

As for Bera himself, he’s planning to make his life in Alaska. He knows he’s in a good spot -- now he’d like to help find a solution that will give his colleagues in Tier III the same certainty that he has.

“You’re kind of putting all your eggs in one basket, but at least it’s a pension,” Bera said. “The longer we stay, the more of our eggs are in this basket.”

CORRECTION: An earlier version of this story incorrectly reported that TRS Tier III participants are enrolled in a 403(b) retirement fund. The 403(b) plan is an annuity to which teachers may opt to make additional pretax contributions; the state does not contribute any funds to those plans.

Presented by NEA-Alaska, an organization of 13,000+ members who work in Alaska’s schools. NEA-Alaska exists to be an advocate for an excellent public education for each child in Alaska and to advance the interests of public school employees.

This story was produced by the creative services department of the Anchorage Daily News in collaboration with the Sponsor. The ADN newsroom was not involved in its production.