Are The New State Retirement Plans Worth Defending?

Republicans don’t like the idea of government competing with the private financial services industry.
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The House of Representatives with nearly unanimous Republican support and Democratic opposition passed Joint Resolution 66. If subsequently passed by the Senate and signed by President Trump, it will effectively kill the fledgling effort of states to address the growing retirement crisis by sponsoring public retirement savings programs. Republicans don’t like the idea of government competing with the private financial services industry.

Labor economist Teresa Ghilarducci, one of the major proponents of these plans, stated that the Republicans were trying to “stop the states from giving retirement coverage to 63 million people.”

As an appointed member of the Connecticut Retirement Security Board that designed one of the programs that is now in the Republican crosshairs, one would think that I would be angry and ready to fight to protect what we did.

However, I am not ready to head for the barricades over this issue. While I totally disagree with the Republican motivations for trying to kill the state plans, I don’t think what they are trying to kill is worth an all-out fight to save. It would be a different matter altogether if the state plans would give effective retirement coverage to 63 million people. But they will at best provide token improvements in retirement income. A danger is that they could lull participants into thinking they were more financially prepared for retirement than they were.

When the state plans were first proposed, I thought there would be ways to make them worthwhile, that is, productive of enough retirement income so that retirees could maintain their preretirement standards of living. That would have meant designing them to be social insurance programs as much as possible like Social Security and traditional pensions. That could have been done by pooling individual savings, investing them professionally, and having the accumulations turn automatically into at-cost life annuities, which are similar to Social Security’s pensions. By minimizing costs and pooling risks, social insurance-based retirement plans maximize retiree income.

Instead, for a variety of legal reasons and pressure from the private financial services industry, what we’ve gotten are more like mini-IRAs or 401(k)-lites―minimally funded individual savings and retirement programs. With these, the states would facilitate the collection of savings via payroll deductions that would then placed in individual rather than pooled accounts with individuals in most cases being responsible for investment decisions. To the extent that they result in life annuities upon retirement, which varies according to the different state designs, those annuities would be purchased at very high prices from private life insurance companies.

The problem with the individual savings and investment approach is that, even if administration fees are minimized as the state plans intend, the vast majority of participants will not accumulate enough money to come anywhere close to adequately financing their retirement years, even in combination with Social Security income. According to Federal Reserve data, the average participant in 401(k)-like plans, which have higher savings rates than the 3 percent of salary proposed for most of the state plans, has only enough accumulated to finance about $4,000 of yearly retirement income.

Should Republicans succeed in blocking the new state retirement savings plans, rather than defending them at all cost, it would be better going forward to focus on social insurance approaches—either through concentrating on expanding Social Security at the federal level or designing complementary state-level social insurance retirement plans. Either way would produce significantly more income for retirees than state-sponsored mini-IRA or 401(k)-lite individual savings and investment accounts.

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