At a time when most states and private organizations are trying to shed the liability associated with guaranteed and defined benefit retirement programs, California is moving in the opposition. The plan still has another legislative hurdle, but it appears to have the political support necessary for passage. Under the proposal, an estimated 6 million California residents without retirement plans would have 3% of their wages placed in a retirement unless they opt out. The state would administer the fund and guarantee a minimal return.
There is an upside to the proposal. Individuals without retirement accounts are destined for dependence on Social Security, a program whose long term solvency is questionable and whose retirement payouts are modest at best. If 6 million Californians aren’t saving on their own, they need to start. This having been said, the proposal has serious problems. I’ll address 3 of them here:
1. There is no reason why any government–federal, state, or local–should be in the business of guaranteeing returns. Allegedly private insurance companies will guarantee the returns, but what happens if they fail, or when program advocates begin to complain that the guaranteed rate of return cannot keep pace with inflation? One way or another, taxpayers will share the risk.
2. Although we are told that these retirement contributions will not be mixed with state revenues, this is unlikely over the long run. The existence of the so-called Social Security lockbox hasn’t kept contributions from being “loaned” to the federal government for years. California is already strapped for cash. If these retirement funds are “invested” in state and municipal-backed securities, then they become state-backed by default. It’s unrealistic to assume that state government officials won’t leave these funds alone when state debt continues to grow. And if Washington ever steps in to bailout state pension programs–something Illinois Governor Pat Quinn has already proposed–then U.S. taxpayers will be underwriting the California scheme.
3. Proponents tell us that the plan is limited and optional, but there is little reason to believe that it will stay this way. Social Security was launched with a 2% tax rate. In fact, the maximum tax paid in 1950 was only $60 per individual. Today (not counting the temporary cut), the ceiling is well over $13,000. Targeted, limited, and optional government programs rarely stay that way. Mark my words…as soon as this programs is underway, its defenders will be calling for “employee contributions” to boost returns.
Supporters of this retirement scheme claim that they merely wish to encourage Californians without retirement plans to save on their own. However, the Social Security program already extracts 12.4% of all income up to $110,100 and cannot provide a level of income necessary to sustain a reasonable retirement. We don’t need another government retirement program; we just need to overhaul the one we already have and encourage individuals to save on their own.