The California Pension Plan

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.

7 thoughts on “The California Pension Plan

  1. It’s incredible that a governor is asking the federal government to bailout state pensions. If Obama is reelected, we’re going to see a lot more of this

  2. I’m a conservative but I don’t agree with this post. There’s nothing wrong with requiring everyone to accept personal responsibility. If people save more then they won’t be a burden on society when the retire.


  4. I’m with you ,Jiles. Government is not necessarily evil. It cares of its people and wants to allow them to retire with some dignity. Aren’t we all deserve it?

  5. Aliza, the simple answer is “No”, not everyone deserves it. Only the ones that plan and sacrifice for it now by being responsible and saving deserve to retire with dignity. One only is deserving of the outcomes that their own actions contribute to. I can afford to fulfill my immediate gratifications, but I choose to save for retirement; thus, forgoing the smart phone with every possible technology, a new car every 3 years, a vacation twice a year, name-brand clothing and food, eating out constantly, and, in general, a life style that robs from my future security of retirement. Also, you might want to spend some time really thinking thru the theory that Government cares about its people. Every single instance in history of a large government, without exception, has resulted in tyranny and the oppression of its people; beginning with the Egyptian move to enslave the Jewish people after Joseph and his pharaoh had died. Furthermore, government does not exist to save the people from themselves. If you can’t provide for housing, your children’s education, retirement, food, clothing, etc, it’s not the government’s (and by extension the taxpayer’s) problem.

  6. Gov’t does not care about the person who saves, works hard and doesn’t depend on others/government for sustinence. That person is penalized by taxation of earnings, investmetns and death. That person is also penalized by devaluing the currency to help pay for all the goodies. That person is insulted and ridiculed for “not paying his fair share”. The Forgotten Man…

Leave a Reply

Your email address will not be published. Required fields are marked *