Work­ers be­ware: Here come state-based re­tire­ment plans

The Washington Times Daily - - POLITICS - BY RACHEL GRESZLER AND ME­LANIE BEAULAC ● Rachel Greszler is a se­nior pol­icy an­a­lyst for eco­nomics and en­ti­tle­ments in the Her­itage Foun­da­tion’s Cen­ter for Data Anal­y­sis. Me­lanie Beaulac is a mem­ber of Her­itage’s Young Lead­ers Pro­gram.

Un­der the Af­ford­able Care Act, mil­lions of Amer­i­cans lost the health in­sur­ance they liked. Now, the same could hap­pen with their re­tire­ment sav­ings. In Au­gust, the U.S. Depart­ment of La­bor is­sued a lit­tle-known rule that al­lows states to set up re­tire­ment plans for pri­vate sec­tor work­ers. States that do so must also re­quire em­ploy­ers — typ­i­cally those with five or more em­ploy­ees — that don’t offer their own re­tire­ment plan to offer the state-based op­tion.

Em­ploy­ers who pro­vide their own re­tire­ment plan in­cur ad­min­is­tra­tive costs as well as a fidu­ciary re­spon­si­bil­ity. To save money and avoid risk, most small and new busi­nesses — and even some large com­pa­nies — will forgo of­fer­ing their own re­tire­ment plans and opt in­stead to offer the state-based op­tion.

But a shift to state-based re­tire­ment plans will be bad news for work­ers and tax­pay­ers.

State-based plans will lack im­por­tant saver pro­tec­tions be­cause they are not sub­ject to the Em­ployee Re­tire­ment In­come Se­cu­rity Act of 1974. Ac­cord­ing to the Depart­ment of La­bor, ERISA reg­u­la­tions en­sure plans are “es­tab­lished and main­tained in a fair and fi­nan­cially sound man­ner” and that “em­ploy­ers have an obli­ga­tion to pro­vide promised ben­e­fits.” Yet, the Depart­ment of La­bor’s rule could shift a sig­nif­i­cant por­tion of Amer­i­cans’ re­tire­ment sav­ings into plans that are ex­plic­itly ex­empt from such re­quire­ments.

More­over, em­ploy­ers are for­bid­den from con­tribut­ing to state-based plans. Work­ers en­rolled in th­ese plans will lose out on the av­er­age $2,640 per year con­tri­bu­tion em­ploy­ers make to each worker’s pri­vate re­tire­ment fund. Even if em­ploy­ers make up for lost re­tire­ment con­tri­bu­tions through higher pay, that pay will be tax­able whereas re­tire­ment con­tri­bu­tions are tax-free.

Worse, the new rule pro­hibits work­ers from ac­cess­ing or con­trol­ling their state-run ac­counts if the state opts to set up a de­fined ben­e­fit plan. Since many states will re­quire, or at least au­tho­rize, com­pa­nies to au­to­mat­i­cally en­roll new em­ploy­ees into state-based plans, work­ers could un­in­ten­tion­ally have money taken out of their pay­checks and put into ac­counts that they can nei­ther ac­cess nor con­trol.

States don’t have a very good record when it comes to man­ag­ing re­tire­ment funds. State and lo­cal gov­ern­ments have racked up nearly $5.6 tril­lion in un­funded pen­sion obli­ga­tions — and that’s a prob­lem for tax­pay­ers. For ex­am­ple, the re­tire­ment fund for Chicago’s pub­lic school teach­ers has an un­funded li­a­bil­ity of $9 bil­lion. As a re­sult, for the last seven years, 89 cents of ev­ery new dol­lar for ed­u­ca­tion in Chicago has gone to fund teach­ers’ pen­sions — leav­ing only 11 cents for ac­tual ed­u­ca­tion.

The Depart­ment of La­bor’s new rule would al­low states to cre­ate the same type of reck­lessly man­aged pen­sions for pri­vate sec­tor work­ers, while leav­ing tax­pay­ers on the hook for the short­fall.

Politi­cians will find the prospect of es­tab­lish­ing state-run pri­vate sec­tor pen­sions in­cred­i­bly en­tic­ing. Af­ter all, since work­ers can’t ac­cess or con­trol their con­tri­bu­tions, politi­cians could be free to use them to help fi­nance states’ pub­lic sec­tor un­funded li­a­bil­i­ties. More­over, politi­cians use pri­vate pen­sion plans as a way to buy votes, promis­ing ex­ces­sive ben­e­fits to work­ers and re­tirees in state-based plans and then re­ly­ing on fu­ture tax­pay­ers to pick up the tab.

Amer­i­cans need to save more on their own for re­tire­ment, and there is noth­ing wrong with states help­ing to fa­cil­i­tate greater pri­vate re­tire­ment sav­ings. But there are se­ri­ous prob­lems with the new, gov­ern­ment-knows-best so­lu­tion that re­lies on reg­u­la­tory fa­voritism and em­ployer man­dates, strips savers of im­por­tant pro­tec­tions, pro­hibits em­ployer con­tri­bu­tions, elim­i­nates work­ers’ ac­cess to and con­trol over their sav­ings, and al­lows the pri­vate-sec­tor equiv­a­lent of pub­lic plans that have short­changed work­ers and tax­pay­ers by promis­ing far more in ben­e­fits than they can af­ford to pay.

A bet­ter so­lu­tion would be to al­low the cre­ation of en­tirely op­tional, state-based IRA ac­counts such as In­di­ana’s pro­posed Hoosier Em­ployee Re­tire­ment Op­tion. In­di­ana’s HERO plan would set up por­ta­ble Roth IRAs on a com­pletely op­tional ba­sis. But since the plan does not in­clude an em­ployer man­date, it is not al­lowed un­der the Depart­ment of La­bor’s new rule.

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