California Gov. Jerry Brown just signed SB 1234, a bill that establishes the California Secure Choice Retirement Savings Trust, a state-run retirement fund for 7.5 million Californians. All firms with more than four employees will be forced to participate unless they already offer a retirement plan. Unless they opt out, private sector employees will see 3 percent of their salaries automatically deducted from their paychecks to be held in trust by a panel of politicians and political appointees.
What could go wrong?
Per section 100004 (c) of the new law: Moneys in the program fund may be invested or reinvested by the treasurer or may be invested in whole or in part under contract with the Board of Administration of the Public Employees’ Retirement System or private money managers, or both, as determined by the board. What is the California Public Employees’ Retirement System or CalPERS for short? It’s America’s largest public pension fund with some 1.8 million current and retired government employees.
But, as with many public retirement systems around the nation, CalPERS is grossly underfunded. Including the California teacher retirement system and smaller local government systems, the unfunded liability for future retirement payouts is about $991 billion, according to the Stanford Institute for Economic Policy Research’s Pension Tracker run by Joe Nation, Ph.D., a former Democratic member of the California State Assembly.
Since cash is amazingly fungible in government hands, dragooning some 7.5 million Californians into a retirement system that supports 1.8 million state government workers by levying what amounts to a 3 percent payroll tax is going to go a long way towards ensuring CalPERS’ short-term solvency while, perhaps more importantly, building public support for bailing out CalPERS’ looming trillion-dollar shortfall.
7.5 million Californians will be made to care about CalPERS fiscal health.
Never letting a crisis go to waste, the Obama administration announced a Department of Labor rule to “encourage” states and local governments to offer government-run retirement plans for non-government workers.
Labor unions love the forced government-run retirement plans as it puts far more financial clout into the hands of their handpicked political allies on the investment boards — leverage that has already been used to pressure firms with public investments to bow to various progressive demands.
Business and financial services firms opposed the bill, with the financial industry particularly vexed by the government going into business to compete with them in the nation’s most populous state. But, being California and all, non-government opposition was crushed.
Critics point out that the new program will only amplify the already huge liabilities in California’s largest public retirement system, particularly if their investments take a hit in the market. But, that’s a feature, not a bug. The proponents want more people in the system.
It’s unknown at this time how a Californian, forced to invest in her state’s pension fund, would be able to withdraw her money if she decided to move to Texas.
With the new program now law, supporters point out that it marks the nation’s largest expansion of the retirement income safety net since the creation of Social Security.
Since 3 percent of payroll may not be enough, California’s retirement board has already helpfully suggested that 5 percent of an employee’s payroll be deducted, rising 1 percent per year to top out at 10 percent. Advocates for the working poor say that’s too much and suggest that 3 percent would be adequate for lower wage workers. This, of course, is the first step in arranging for a surcharge on middleclass wage earners to boost the retirement savings of lower income workers. In California it will likely take the form of a bill entitled, “The Retirement Income Equality Act of 2017.”
With the passage of SB 1234, California joins four other states with similar plans: Connecticut, Illinois, Maryland and Oregon. Massachusetts only covers nonprofit employees, but is looking to expand to all employees. Minnesota is studying the idea and may roll out their own system soon. New Jersey and Washington have voluntary programs that emphasize private retirement plans, with New Jersey Gov. Chris Christie wisely vetoing a plan much like California’s in January of this year.
Not surprisingly, the six states that have forced the general public into their retirement plans rank poorly in terms of unfunded liabilities: Illinois has the nation’s second-highest unfunded liabilities at $77,822 per household; California is third at $77,700; Connecticut is number four at $72,862; Massachusetts clocks in at number six with $60,652; Oregon is number ten at $45,840; Maryland has the 13th-highest liabilities at $44,038 per household; and Minnesota comes in at number 18 with $36,584.
Ask yourself this question: Why is it that the liberal politicians in the states with the worst record of overpromising and underfunding their government employee retirement systems are so eager to force average citizens into a state-run retirement system? Give yourself a point if your answer included the word “Ponzi.”
Chuck DeVore is a vice president with the Texas Public Policy Foundation and served in the California State Assembly from 2004 to 2010.