Inflation-proofing: the quiet key to the Fund's future
It's the least-understood part of the Permanent Fund — and skipping it is one of the most consequential things the Legislature can do. Here's why it matters to every Alaskan.
What inflation-proofing actually is
Each year, a portion of the Fund's earnings is moved back into the protected Principal so that the Fund keeps its real, spending power — not just a bigger dollar number.
Remember the two accounts (see How It Works): the Principal is permanent and can't be spent, and the Earnings Reserve holds the spendable profits. Inflation-proofing is a transfer from the Earnings Reserve into the Principal, sized to match inflation, so the Principal's purchasing power doesn't shrink over time.
Think of it as topping up a bucket that has a slow leak. The leak is inflation. If you don't top it up every year, the bucket looks full but holds less and less.
A thief in the night
Inflation is a thief who never picks a lock
It doesn't break a window or send a bill. It just quietly makes every dollar you own buy a little less while you sleep — year after year, so slowly you barely notice it's gone.
Left alone, inflation robs everyone who holds dollars: your wages, your savings, and the dividend in your mailbox. A check that felt generous a decade ago buys noticeably less today, even if the number printed on it never changed.
Inflation-proofing is the lock on the Fund's door. Each year it quietly puts back what the thief would otherwise take, keeping the Fund's buying power whole for the people who own it. Skip it, and you leave the door wide open.
Illustrative: buying power = $1,000 ÷ (1 + inflation)years. The dividend's dollar amount changes year to year, but inflation erodes whatever it is.
The hidden tax
How inflation quietly robs every Alaskan
Inflation doesn't send a bill. It just makes each dollar in the Fund worth a little less — and because the Fund belongs to all Alaskans, that loss is everyone's loss.
A bigger number can still be a loss
On July 1, 2022 the Fund held about $77.7 billion. A year later it was $79.2 billion — a larger number. But with roughly 3% inflation, it needed to reach about $80 billion just to hold the same real value. So in buying power, the Fund actually went backward.[2]
Why that's a tax on you
The Fund is shared by every resident. When its real value erodes, so does the real value of the dividend it can pay and the services it can fund — for everyone, every year, forever. No one votes for it and no one sees a charge, but the loss is real. That's why it's often called a hidden tax.
Illustrative, using reported Fund values and ~3% inflation for that period.[2]
Why it's essential — not optional
Skipping inflation-proofing might save a budget headache today, but it quietly costs Alaskans far more over time:
It protects the size of the Fund
The Principal is the engine. If its real value shrinks, the whole Fund's earning power shrinks with it — permanently.
It protects future dividends
Dividends are paid from earnings on the Fund. A smaller real Fund earns less, which means smaller dividends for your children and grandchildren.
It compounds — in both directions
Protected today, the Principal compounds and grows the Fund for decades. Eroded today, that lost ground compounds too — you never get it back.
It keeps the promise of 1976
The whole point of the Fund was to preserve resource wealth for future generations. Letting inflation eat it breaks that promise without anyone formally deciding to.
Who decides whether it happens?
This is the crux. State law (AS 37.13.145(c)) directs the Legislature to inflation-proof the Fund each year.[1] But under the Fund's current two-account structure, the transfer from the Earnings Reserve to the Principal does not happen automatically — it requires a fresh legislative appropriation every single year.[3]
So the answer to "who decides" is: the Alaska Legislature, in the annual budget — with the Governor able to veto appropriations. The APFC trustees can recommend and warn, but they cannot make the transfer themselves. When budgets are tight, inflation-proofing ends up competing head-to-head with the dividend and with services — and it often loses.
Where things stand
What's happened recently
The pattern that worries Fund advocates
Inflation-proofing is supposed to be routine. But in recent budgets it has been treated as optional and set aside — sometimes entirely — to free up cash for the dividend and services in a tight year. Each skipped year lets inflation permanently shave real value off the Principal, weakening the Fund and every future dividend. Because it happens quietly inside the budget, most Alaskans never hear about it.[4]
The long game
What skipping it does to the Fund — and to every future check
A smaller real Fund isn't just a smaller number on a page. Because the state spends a percentage of the Fund each year, a smaller Fund means a smaller payout every single year — for both the dividend and the services it funds. Drag the dials and watch the gap open up.
Our view, plainly
We don't say this lightly: when leaders choose to skip inflation-proofing, it is a quiet theft from Alaskans who haven't been born yet. It trades the future's wealth — its dividends and its services — for the convenience of a single tight budget today. No one votes for it. No one is billed for it. But the next generation pays. Inflation may be the thief; failing to lock the door is a choice.
Illustrative model in today's dollars (return 7.5%, draw 5%). "With" keeps the Fund's real value; "without" loses an extra inflation's worth each year. Yearly payout shown as 5% of the Fund. Not a forecast.
How it could be fixed for good
The deeper problem is structural: as long as inflation-proofing is a separate, optional appropriation, it will always be tempting to skip in a tight year. Reformers point to two fixes:
1. Combine the two accounts. If the Principal and Earnings Reserve become a single fund governed only by the POMV draw, inflation-proofing becomes automatic — there's no separate step to skip. See the reform proposals →
2. Constitutionalize it. A constitutional amendment could require inflation-proofing (and a sustainable draw), putting it out of reach of any single year's budget politics. Why protection matters →