Albert Einstein famously defined insanity as repeating the same action over and over again and expecting different results. Vague support for the creation of a state-run retirement system for private sector employees as expressed in a recent editorial in the Sacramento Bee “Worker savings plan deserves a close study,” fits this definition nicely.
Senate Bill 1234 requires the state to study a plan for companies that do not provide their own retirement plans which would funnel 3% of employee paycheck into a state run guaranteed benefit system. Demonstrated feasibility of the plan would place the measure before the Legislature for approval.
The state’s track record of managing retirement plans should provide Californians with all of the “study” they need on the matter. The idea would be disastrous for taxpayers and participants alike.
A recent study by the Stanford Institute for Economic Policy Research estimated that, when relying on the risk-free discount rates used by private sector pension funds, California’s three largest public retirement systems face an unfunded liability of nearly $500 billion.
The state uses a combination of unrealistic discount rate assumptions and chronic underfunding to shift the burden of public employee retirement payments onto hardworking taxpayers and families. The management scheme is one that would make Bernie Madoff or an Enron executive blush.
State legislators seem to think that creating a new system essentially modeled on the old will not produce a similar outcome. Benefits under the new system, just like under current public employee plans, would be promised to participants regardless of actual investment returns or economic conditions.
When officials pretend they are making a 7.5% return on investment instead of one closer to the 1% that CalPERS achieved in the most recent fiscal year, taxpayer wallets will be tapped to make up the difference. When legislators, for their own political gain, promise greater benefits without increased sacrifice from members, the money will need to come from somewhere. This plan is just another example of privately benefiting the few while socializing any and all losses.
Non-participating taxpayers would not be the only ones at risk. At some point, legislators will simply run out of other peoples’ money. Participants in the system who chose to rely on it will one day see their benefits threatened.
In the state’s current public pension mess, little realistic choice will eventually remain but to cut the benefits of current employees. Recent reforms in both San Jose and San Diego are evidence of this inevitability. These are employees who have built their lives around the idea of a secure retirement, without realizing that the shortsightedness of politicians and pension managers was undercutting that promise all along. In short, participating private employees would see 3% taken out of each paycheck to fund a promise that the state has little credibility to make.
Rather than doubling down on failed policies, leaders should first end the cycle of insanity by exploring ways to fix the mess that the state’s current pension system finds itself in. They could start by eliminating taxpayer risk and shifting public employees into a defined-contribution plan.
Bob Williams, President of State Budget Solutions, is a former Washington state legislator, gubernatorial candidate and auditor with the Government Accountability Office.