The Obama Administration Clears the Way for States to Require Retirement Plans for Private Sector Employees

While it is tempting just to beat up on the Obama labor department and their progressive friends in the Minnesota legislature, allow me to beat up on Congress and the financial industry, too.

Do you remember when President Obama introduced the idea of a MyIRA (or MyRA) account in his State of the Union in 2014? Well some iteration of the idea has arrived and the biggest federal obstacle, Erisa, has been swept aside.

Last fall, I wrote about several states (Oregon, Illinois and California) that had already enacted state-run retirement plans for people in the private sector who do not have a retirement savings plan at work (this is in addition to Social Security, which too many Americans confuse with a retirement plan).

Now the Obama administration has put its Executive stamp of approval on the state retirement plan idea: the Department of Labor waived federal rules under Erisa so that states can require employers to offer an “opt-out” savings plan designed by and managed by the state. Whether this clears other regulatory and judicial thickets, only time will tell.

According to a recent lead editorial in The Wall Street Journal,

(The Labor Department)  is giving states the right-of-way to sponsor and administer so-called “multiple employer plans” (not to be confused with collectively-bargained multi-employer plans) even as it prohibits private employers in disparate industries from teaming up to do the same. Labor claims that states can offer economies of scale and reduce administrative costs.

One goal of these state plans is to drive financial institutions out of the retirement marketplace by offering less expensive plans. Small employers that currently offer plans would have an incentive to drop their employees on the new public options, which will be underwritten by state taxpayers.

To summarize: The Obama Administration is trying to socialize the private retirement investment business by creating subsidized public competition that will be another long-run entitlement burden on taxpayers. The Obama crowd may have only 14 months left in office, but the damage it seems determined to do will be considerable.

This was entirely predictable not just because we have entered the first phase of a the Baby Boomer retirements tsunami that, if left unchecked, will drain state coffers, and a slow reckoning with the fact that Social Security is not a substitute for personal savings, but also because the so-called Progressives have been insisting for over a century that everyone (except rich people) should get an “old age pension” along with health and other benefits from the government. Even if they did not pay for it.

Add all that to the fact that people are living much longer and that Americans now feel entitled to retire at our pre-retirement life-style for decades while consuming lots of top-notch health care services, and you have an engraved invitation to the Left to further expand entitlements and the welfare state.

Minnesota and other states are studying the idea, waiting to see how other states design their plans. It is possible Minnesota would have enacted this legislation if the House had not flipped to the GOP in 2014. The idea was introduced as part of a comprehensive “progressive” package in Minnesota and across the nation as the “Women’s Economic Security Act.”  With lots of support from public sector unions like Education Minnesota, SEIU and AFSCME, parts of the legislative package passed under the DFL dominated legislature in 2014 with Dayton signing the bill on Mother’s Day. (You can read a summary by the labor law firm Seaton Peters and Revnew here.)

We saw other parts of that “economic security” deal in Minneapolis recently with demands for a $15 dollar minimum wage, controls on shift scheduling, paid sick and childcare leave, and other workplace rules and benefits.

If there is any silver lining, it is that states will be the laboratories for this new experiment, assuming the federal government stays out of offering IRAs or other retirement products. And maybe it will kick-start a much-needed national conversation about savings.

This is, however, a significant further blurring of the lines between the private and the public sphere of life, not to mention the duties and powers of the Executive and the Legislative. Justice Clarence Thomas is the chief critic of this unconstitutional slide toward an all-powerful administrative state (read more by George Will here).

Congress should have seen this one coming, and the financial services industry should have lobbied hard (or harder to give some credit where due) so that saving for retirement is not only much, much easier for individuals but also strongly encouraged and rewarded to overcome that very human tendency to procrastinate, obfuscate or do anything to skip eating your vegetables and saving a lot for retirement.

I have to believe that there is a mutually beneficial way, no matter how modest the amounts involved, for individuals to save– and the financial industry to manage and grow– personal savings.  That is a lot to ask in this weird zero interest environment but there has to be a market solution.

Why hasn’t Obama or Congress cleared the way for employers to band together to achieve economies of scale?

Since people will not stop procrastinating anytime soon (witness the number of people who do not take full advantage of an employer 401k match), Congress should find ways, pronto, to make it more affordable and easy for the self-employed and private sector employers to set aside employee funds.  Congress needs to get ahead of this Blue State trend before it becomes the norm.

This probably entails giving up some tax revenues, or diverting Social Security payments, to sweeten the incentive for low income wage earners or really stubborn procrastinators (“I will save money next month, or maybe next year….”) but if it results in greater personal savings, it may well represent big savings for taxpayers down the road if people are less dependent on the government in their old age. I would settle for a break-even deal because the benefits of a savings and thrift culture, would be huge.

I thought you’d never ask how this relates to my favorite topic: public pensions.  Aside from the obvious philosophical objections to the state stepping in as Big Brother for private sector employees, the experienced cynic in me worries that this new revenue stream will be used to prop up public pension plans. Minnesota’s pension debt exceeds $17 billion and there is no plan to fundamentally reform the plans or lower benefits, so the state needs to figure out how to get more cash into the system.

I will bet my next paycheck that the pension plans in Minnesota have already met with representatives from the legislature and the public unions to estimate how much revenue this would bring into state coffers, and how it might help “stabilize” the existing funds. Or met with MMB or the State Board of Investment to find out what it would take to guarantee a modest rate of return to these private sector employees, if the state adopts this idea.

It is widely reported that over half of private sector employees do not have access to a job-based retirement plan. If the state takes 3% off the top of the paychecks of half the people in Minnesota, you had better believe that tomorrow the state will guarantee a certain return on that money, and probably a hedge against inflation, no matter how much is actually in the account. Just like a public pension.

The initial legislation may say otherwise to get it passed but over time, the shift is inevitable. People will be bored by the details, just as they are bored by public pensions.

Retirement policy is not a proper matter for the labor department. Congress and the states should aggressively update the policies around savings to encourage private sector solutions that reward Americans at all income levels to save for retirement. By not doing so, Congress left an opening for the progressive bureaucrats in the Obama administration.

Note: In case you missed it, Obama’s labor department also issued new rules that essentially require private pensions to divest their funds of stocks that the Obama administration would deem inconsistent with his “green” politics, er, policies. That means no energy, utilities or industrials which make up about 20% of the market. Read Andy Kessler here.