Calif. Creates State-Run ‘Opt-Out’ Private Sector Retirement Savings Scheme; AP Cites As Potential ‘National Model’

From the "I thought Social Security was supposed to have solved this decades ago" Dept.: The State of California has just passed a law mandating opt-out pension plan contributions of 3% of earnings for six million workers in the private sector, or roughly half of its private sector workforce.

The targeted population is the cadre of those working at employers of five or more who do not offer a retirement plan. It has the distinct aroma of a bailout, because of who gets to manage the money. Excerpts from a predictably dreadful Associated Press report by Judy Lin follow the jump (bolds and numbered tags are mine):

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Calif. creates state-run private retirement plan

California Gov. Jerry Brown signed legislation Friday that will create the nation's first state-administered retirement savings program for private-sector workers, over the objection of critics who said it creates a new liability for taxpayers.

The bill will establish the California Secure Choice Retirement Savings Program for more than 6 million lower-income, private-sector workers whose employers do not offer retirement plans. [1]

The program directs employers to withhold 3 percent of their workers' pay unless the employee opts out of the savings program, which can be done every two years. [2] It would be administered by a seven-member board chaired by the state treasurer. The board would select a professional fund manager, which could be a private investment firm or the state's public pension system, to maintain the money.

State Sen. Kevin De Leon, D-Los Angeles, introduced the bill earlier this year in response to what he called the "looming retirement tsunami" as millions of lower-wage workers face financial hardship in their retirement years. He said the program will act as a supplement to Social Security by offering private-sector workers a portable savings plan with a guaranteed return. [3]

He said the program is not a pension but rather acts as a savings account, which could be a national model for improving retirement savings. [4]

"This is a major step forward for retirement security in America," De Leon said in a statement. "I am grateful for Gov. Brown's acumen and with his leadership we are setting the path for middle class hard-working Americas to prepare for retirement so they won't be forced into poverty." [5]

State Sen. Mimi Walters, R-Lake Forest, called SB1234 the "worst bill to make its way out of the legislature this year" because it would allow the state's main pension system to invest the money. [6]

Notes (the bill as passed is here):

[1] -- The program is NOT limited to those with lower incomes. In fact, many small businesses with very few employees pay them well. According to Bloomberg, the covered population consists of "About 6.3 million Californians, most of them making less than $46,420 a year." I don't know why Bloomberg's source for that data, the Labor Center of the University of California, Berkeley, used that number, but $46,420 (over $22 an hour with no overtime) is not low-income, even in California.

[2] -- Wow. Read that carefully. Once you have been automatically enrolled, perhaps while not paying very close attention while going through the blizzard of new-hire or other employer paperwork, you can't change your mind for two years, apparently no matter what kind of family or other emergency might arise. Expect a lot of infuriated "participants."

[3] -- "Guaranteed return"? A Sacramento Bee story from February claims that "Unlike public pension funds that can pass on their investment shortfalls to taxpayers, private underwriters would assume any losses by the private sector fund." One would think, as a result, that the "guaranteed" return would have to be pretty low to offset the risk of loss -- or no one will want to take on the risk of investing the money.

[4] -- That slurping sound you hear is that of Washington politicians and bureaucrats salivating at the billions of dollars they might be able to extract if such a scheme becomes a national model, administered by the federal government, naturally.

[5] -- Social Security was supposed to prevent senior poverty, and to an extent it has. What this scheme really betrays is a lack of confidence in Social Security, and a preemptive attempt to keep the government involved in retirement savings even if or when the Social Security system implodes.

[6] -- Oh joy. The state's "main pension system," otherwise known as the "public-sector employees' pension system" (which Ms. Lin should have been so labeled) is the California Public Employees' Retirement System (CalPERS). The obvious question, regardless of whether the state or a contracted firm manages the funds on a day-to-day basis, is where any excess returns above the guaranteed level will go. Will participant accounts get credited for these returns, or will the excess get thrown into the CalPERS pool in an attempt to bail out a pension system which is actuarially in the red to the tune of over $60 billion?

Add this new scheme to the reasons why California companies will continue to leave the state, why new company start-ups will continue to lag, and why many start-up and existing firms will do all they can to avoid taking on a fifth employee -- all of which will hold back potential economic growth.

Graphic was found here.

Cross-posted at BizzyBlog.com.