A key source of the growing retirement crisis is that employers of over half of private sector workers do not provide retirement plans beyond mandatory Social Security, which was not designed to proved full retirement security. In response, twenty-five states are developing retirement savings plans to which the affected workers could contribute.
Those plans, even in combination with Social Security, will not be enough to resolve the retirement crisis, but they could be helpful if designed as true public options to the retirement savings vehicles available from the private financial services industry.
Private retirement savings plans do a good job of providing profitable revenue for the financial services industry but at the expense of future retirement income for participants.
Public option plans, on the other hand, without profit needs could be designed to maximize retirement income for participants. Doing so would require patching the two major sources of profit leakage: corporate profiting from administration and investment of retirement savings plans; and profiting from the sale, administration, and control of retirement annuities.
State plans such as Washington's, which simply provide access to existing products from the private financial services industry, do not provide true public options.
The first step for true public option plans would require designing the program so that savings go into a professionally managed and invested common fund rather than establishing individual accounts, such as 529s, where participants make their own investment decisions. When it comes to investing, most people have neither the inclination nor the required skill.
A state retirement savings plan should match the simplicity appeal of Social Security where workers make their contributions automatically through payroll deductions and then don't have to think about them.
Participants still would have different account balances since they made different contribution amounts.
Managing and investing of participant common savings could be done by a dedicated state agency or through establishing a state-regulated nonprofit entity. To avoid excess profit taking at the expense of
participants' accumulations, it should not be outsourced to private companies.
The second step should be converting worker savings into life annuities upon retirement, as does Social Security. A life annuity provides guaranteed regular income until death. Lump sum withdrawals should be prohibited, or at the least discouraged. The goal of the programs should be to create retirement income security, not private wealth.
The programs should operate like cash balances pension plans where the size of the savings account determines the amount of annuitized retirement income.
Worker annuities should be paid out of the plan's common trust fund rather than purchased from private insurance companies, the main providers of commercial annuities. Creating these as self financed nonprofit annuities will maximize participant retirement incomes by avoiding considerable losses to the profit and advertizing needs of private insurance companies.
If these steps are followed by the states in designing retirement savings programs, participants will be able to have confidence that their savings are being dedicated to providing maximum retirement incomes rather than new profitable business for the financial services industry.