With evidence all around that public pension plans are crunching government budgets, some legislators are proposing to create a new government program to oversee private pensions as well.
Americans should save more for their retirement. Tax benefits make Individual Retirement Accounts an attractive way to save, but too many workers live paycheck to paycheck and don’t prepare for their future.
True to form, some state lawmakers think the answer is a new government program and a new mandate on employers. The state Senate has passed SB 1234 to establish a state-run retirement system for workers in the private sector. Employers would be required to make payroll deductions and send the money to the state.
Failing to address even the most glaring problems in California’s public employee pension systems, legislators are poised to create a similar program for seven million eligible employees – more than four times the number served by CalPERS.
The program promises defined benefits with a guaranteed return on investments – the same flawed model that produced a $500 billion shortfall in California’s state and local public pension systems and trillions in pension debt nationwide.
The numbers just don’t add up. SB 1234 caps administrative costs at one percent, but the insurance required by the federal government alone would cost three times the cap amount. Seven million employees would contribute an estimated $6.6 billion, capping administrative costs at $66 million. Premiums for insurance through the Pension Benefit Guaranty Corporation (PBGC) are $35 per participant or $245 million – and that’s before you add employees, computers and buildings.
CalPERS spends about $350 million a year in administrative costs to serve 1.6 million members – and CalPERS doesn’t have to buy insurance.
It doesn’t stop there. Employers would be subject to ERISA, the Employee Retirement and Insurance Security Act, which would treat every employer as an individual plan sponsor, complete with reporting requirements and fiduciary responsibilities. Employers’ legal obligations under ERISA have been called the highest known to law.
Just what we need: More lawsuits and another reason for businesses to avoid hiring Californians.
If that’s not bad enough, employers and taxpayers can expect billions more in debt if the plan’s investments don’t produce the returns needed to pay the promised benefits. CalPERS was counting on a 7.5 percent return on its investments last year and earned one percent, adding $15 billion in unfunded pension liabilities in just one year.
One can smell politics behind this proposal. With the glare of the spotlight on public retirement debt, public unions want to change the focus and talk about private employees retirement.
SB 1234 highlights an important issue. Californians – like Americans nationwide – are not prepared for retirement. Encouraging employers and workers to take advantage of existing programs would be far more responsible than adding $775 million to the backs of employers and taxpayers at a time when the budget can’t support existing services.
The Assembly Appropriations Committee should reject SB 1234.