More bad news from the Golden State: apparently not content with creating what amounts to a free life-insurance policy for state employees, California legislators are considering creating another open-ended budget commitment. This time, the new commitment will go to private-sector workers rather than public employees.SB1234, a new bill currently working its way through the state legislature, aims at supplementing Social Security savings for private sector workers by effectively creating a secondary, state-run pension system. The Mercury News reports:
De Leon introduced the bill earlier this year in response to what he called the “looming retirement tsunami” as millions of low-wage workers face financial hardship in their retirement years. He says the program would act as a supplement to Social Security by offering private-sector workers a portable savings plan with a guaranteed return.“SB1234 is not a traditional pension,” De Leon said. “It is not a defined benefit plan as we know today where you combine experience or years of service, the employee contribution along with the employer match.”De Leon’s bill would require employers to withhold 3 percent of their workers’ pay. The program would be administered by a seven-member board chaired by the state treasurer.
Administering such a program would clearly be very expensive, and doubly so in a state as large as California. Yet the state may not be the only one on the hook—under current law, employers and business owners may find themselves holding the bag if investment returns fall through:
Even if the state sponsors the plan, opponents say the businesses that employ participating workers could be held financially responsible. That’s because all private-sector defined benefit plans have to meet minimum standards under the federal Employee Retirement Income Security Act, or ERISA.If the federal law applied to the program, which opponents believe it does, employers could be expected to pay some or all of any unfunded liabilities should investment returns fail to cover the guaranteed rate of return and administrative overhead. De Leon acknowledged that regulatory and tax hurdles remain.
The problems with this bill are major, but at least there is some merit in the issue it is trying to address. States do need to put some thought into how to help low income workers establish retirement plans beyond Social Security, especially given that program’s own problems.But while the concept of helping low income workers fund their retirement has merit, we question the prudence of California’s headlong rush toward another massive pension liability. As we’ve amply demonstrated on this blog, California can’t handle the burdens it’s got. Adding to them under the current conditions is utter lunacy.Moreover, once a program like this is put into place, there is a lot of temptation to put on bells and whistles as politicians hunt for votes in future elections—bigger guarantees, more subsidies, and so on. Pensions are especially susceptible to this trend; politicians are likely to make promises today with no intention of making the sacrifices necessary to ensure that their successors can pay tomorrow.California politicians—and their colleagues in DC—need to learn to manage the government they’ve got, pay the bills they have already incurred, fund the pension commitments they have already made before taking on new assignments.Yes, this could mean a delay in programs that could help people who need them, and yes, promoting retirement savings is a good idea. But one of the consequences of feckless policy, bad decisions, and decades of fiscal irresponsibility is that you reduce your ability to do good things because you have behaved so stupidly and squandered so much money and credit in the past. California’s fatal addiction to bad public policy hurts ordinary people in the state, and especially hurts exactly the low income workers the new pension wants to help.California can’t run its schools, sustain its universities, jail its criminals or, much of the time, pay its bills. Unfortunately, it almost certainly can’t manage an expensive new pension program — or impose a new tax without crushing the businesses that hire the poor.