The States Wade into Retirement Security for Private Sector Employees

I am attending a conference this week at State Policy Network (SPN) in the wonderful city of Grand Rapids, Michigan.  During the Q&A on a panel about how to reach Millenials, someone asked the panelists about the nation’s unfunded entitlements and other debt. One man answered, “My generation is screwed. Until the Treasury breaks, Congress is not going to fix the problem. It is going to take a crisis.”

I’d still like to try to avoid that crisis which is why I am looking forward to hearing Senator Tom Coburn on October 13 at Orchestra Hall for our 2015 Fall Briefing. (Quick plug: do you have your tickets?)

In addition to describing the enormity of the obligations sitting squarely on the shoulders of our citizenry, Coburn will offer some concrete ideas about what we can do to responsibly clean up the mess before the next generation of taxpayers comes of age. Maybe we can change their opinion about us and our form of government before it is too late.

As anyone who has climbed out of a financial hole knows, the first thing you do is stop taking on debt. Next, you get your spending lined up with your income and obligations, hopefully including debt repayment.

It is with these basic rules in mind that I bring to your attention a new development on the horizon at the state level. It is the latest “progressive” idea sweeping the nation. And it has the full support of the Obama administration. Minnesota and other states are thinking about, or in a few cases enacted, a new retirement program for people who work in the private sector but are not eligible for a retirement plan.

As reported in the Wall Street Journal, Oregon followed California and Illinois in creating a new program that automatically deposits money in state managed accounts. These three states have an “opt out” approach with an automatic withdrawal of three percent (3%). That means the state has decided for these people that their paycheck is going down 3% unless they go through some bureaucratic process to “opt out.” And they have added to the burden employers face when processing payroll. The details vary as to what size employer must comply.

Minnesota flirted with the idea a few years ago, and decided to study the proposal with an eye toward enactment when the study was done. It was part of a slick package deal being touted under the “Women’s Economic Security Act.” If the Minnesota House had not flipped in 2014, I think it would be law today.

Of course all Americans should be saving for a secure retirement, and stop thinking that Social Security is a retirement plan. Soon enough, Americans will get reacquainted with savings and thrift because they will not have a choice. But creating an intrusive, opt-out program that gives 3% of lower income workers’ paychecks to the government, especially debtor states like Illinois and California, cannot turn out well.

Aside from the obvious objections to the state stepping as big brother for private sector employees, the cynic in me worries about these new assets being used to prop up underfunded public pension plans. As I have told you many times, Minnesota’s debt exceeds $17 billion. The story is much worse in Illinois and California.

I also worry that this modest program is just a foot in the door for creating taxpayer guaranteed government pensions for private citizens and making us more dependent rather than less dependent on government. Many people in the private sector are not eligible for a 401k so the potential revenue for the state is quite large.

Today, the state takes 3% of paychecks, tomorrow the state guarantees a certain return on that deposit, and probably a hedge against inflation, no matter how much is actually in the account. Just like a public pension.

The irony about this program is that state wants to overcome a lack of retirement savings and security for people in the private sector by adding to the nation’s already burdened fiscal status.

Wouldn’t it make more sense to focus on reducing the cost of doing business for employers so they can pay employees more, and offering even more generous tax incentives to save for retirement, so Americans will save more?