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California: Its Fatal Addiction to Bad Policy Hurts the Poor

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.

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  • Nenad Sarapa

    Another risk with this supposedly guaranteed-return pension is that its “lock box” could very soon be raided to pay for other unfunded promises that California had made. Why would this new state pension be any more secure from greedy politicians than the Social Security was? California could borrow more money each year to paper over the gap in the “lock box” and the silly government accounting standards would conveniently be met.

  • Michael K

    What is stopping these workers from putting 3% into a IRA? I am so glad I got out of that state.

  • Alex Scipio

    I continue hoping – vainly thus far – that pundits discussing our futures will cease what seems a belief in an equal amount of concern for that future among the Left and Right. Demographics absolutely do not support this view. The Right cares about the future and normally votes accordingly to increase freedom and stop spending money we borrow from that future. The Left does not care about the future and only votes to increase their own welfare today: larger entitlements for the voters, more power to the pols.


    Only three Red states as below a total fertility rate of 2.1, or replacement. Only three Blue states are above 2.1, and they are not populous states: NM, NV, HI.

    Democrats don’t believe in the future enough to populate it. The continued lack of acknowledgement of this, the continued false foundational assumption that everyone wants a better, wealthier future is just false.

  • cheato

    This seems more to me like another way to kick the pension can down the road. If they run this program like they ran social security, then the state gets a bunch of money up front to use for their current retirement woes and then can turn around and upset the next set of retirees 30 years down the road. These people will be much easier to handle, since they’re just John Q. Public, not John Q. Public Sector.

  • thibaud

    Mead’s going off the rails now.

    “California can’t run its schools, sustain its universities, jail its criminals”

    Oh please. “Can’t run its schools”? “Sustain its universities”?

    Mead really needs to chill a bit, leave aside his over-the-top, reductionist mantra and do some basic RESEARCH.

    CA schools do not have a problem with the teachers, or the curriculum, or their funding structures. They have a problem with that 51% (and rising) of the public school population that does not give a [darn] about education.

    Mead should try noodling around a bit with the data, or have one of his more numerate interns doit for him, and see if he can spot the pattern.

    Also, a second-tier academic at a second-tier school should show a bit more class than to make drive-by potshots at the best university system on the planet. Envy is an ugly thing.

  • gary hemminger

    California’s problems (I am a CA native) are that one party has run the state forever and will continue to do so forever. People always vote democrat and until this changes (and the Republican’s start moderating) this behavior of driving the state into the ground will continue.

  • Don

    Thibaud is far better than Mead. Why isn’t he writing this column?

  • MarkJ

    The apparatchiks in the CA Democrat establishment who think they’ll be in charge forever should be forced to watch this video over and over again:

  • thibaud

    Clue: schools are funded and run locally – not by the state.

    Stockton or Vallejo’s problems have zero – zip, nada – to do with Cupertino or Fremont or any other local school district in the state.

  • Paul Z

    Thibaud, I’ve been in a competitive private sector business for the last 25 years and have been tempted countless times to blame my problems on the customer. So I understand your line of thinking, but do you really think the education system shouldn’t adjust to the realities on the ground? You may have a point if we compare California with other states that don’t have as much to deal with, but I don’t think CA has a choice. I’d much prefer CA to create an education system that works for everyone.

  • Eurydice

    @Alex – you seem awfully fixated on people’s fertility rates.

    @thibaud – Prof. Mead and his team do hyperventilate a lot, but they’re not making up the stories about the problems with California’s jails, or how the state has had to pay its bills with scrip, or how its pension funds are in crisis or how its cities are going bankrupt. California’s newspapers are filled with articles about the state’s inability to meet its obligations – so, it’s not unreasonable to question the state’s choices in creating new obligations. BTW, nowhere in this VM article does it say anything about the quality of California schools and universities, its teachers or curricula, or even its “funding structure”, whatever that means – all it questions is the state’s ability to pay for them.

  • thibaud

    Repeat after me: K-12 public education in America is managed locally. Not by the state.

    When it comes to K-12 education, there are two Californias:

    – the California that consists of communities of hardworking families who care about raising their kids well, who fund the schools properly, and

    – the California that’s made up of communities that have been overrun by transients from south of the border who do not care about raising their kids well and whose elderly citizens are adamant about not funding the schools properly.

    Lumping them together in one ignorant long sneer at “California” is not accurate or helpful.

    It ignores the real problem and diminishes support for the public schools that are succeeding – despite the tidal wave of an imported underclass.

  • thibaud

    Eurydice, Paul Z – please spend some time with the STAR test data.

    This whole discussion is founded on a misconception, that one can somehow have first-world performance from a school population that is heavily weighted toward families whose culture is hostile toward educational achievement.

    That population is increasing by a percentage point each year. It is foolish and irresponsible to pretend that this is not, overwhelmingly, the problem that CA K-12 schools face.

    The same is true of prison overcrowding. Mead is as usual mangling this issue.

  • thibaud

    Eurydice – no one questions that this state, like every American state, is badly run. We have a huge governance problem in America.

    But Mead’s one-sided, inch-deep Tea Party tirades against his bugbears – the NY Times, California, France, nordics, Democrats generally – aren’t helpful.

    Both the NY Times that Mead resents so much, and plenty of Democratic reformers like Andrew Cuomo in NY and plenty of Democrats across the nation, have said loudly and repeatedly that a part of the problem here is greedy and corrupt public sector unions.

    But an equally large large part of the mess in California, as with the fiscal cliff we’re facing now at the federal level, derives from some really stupid tax policies that were championed by the loons that Mead never talks about: Howard Jarvis’s dumb property tax “reform” in CA and the Norquist/TPer obstructionism at the federal level.

    If we want to move forward in this country, there needs to be less noise and more signal. More willingness to criticize OurSide and less hysterical drive-by potshots at OtherSide.

  • Nathan

    Thibaud, you are (as usual) missing the point. Mead didn’t comment on the quality of education outcomes at all, which seems to be what you are obsessing over.

    This is about money, and the inevitability of the funding trends in California, as well as the seeming inability of the political class (of all stripes) to head off further problems.

    A quick google search shows us the official budget summary document for California, 2012-2013:

    There, we can see on figure SUM-04 that a LOT of California’s budget goes toward K-12 education. My quickie figures (that might be missing something) estimate 41% of the total budget is K-12 education related.

    That itself isn’t a problem, but it means that K-12 eduction is part of the discussion when we’re talking about California’s financial train wreck.

    Your linked page about student testing scores is irrelevant to the blog post. It’s OK if you want to go off on your own unrelated tirade, but don’t blame Mead for not blogging about your comments in advance.

  • Eurydice

    thibaud – Whenever the VM folks write an article about K-12 education and the deficiencies of California’s school population, then maybe I’ll bother to look at the STAR test data (whatever that might be). In the meantime, I’ll try to confine my nitpicking to things Prof. Mead has actually said.

  • thibaud

    Eury- Mead summed up his post by saying, among other things, that “California can’t run its schools.”

    Again, K-12 schools are not “run” by the state of California.

    As is so often the case when he strays from discussing Asian international relations, Mead does not know what he’s talking about.

  • Tom Holsinger

    cheato, this is not a Ponzi scheme to prop up California public employee pensions. That implies some degree of deception. This is a straight ripoff of the public in general, not of mere taxpayers, and there is nothing concealed about it.


    You err. Public K-12 education in California is run by the State. I watched the change happen. My father was then the #3 in California K-12 education, as Deputy Superindendent of Public Instruction for Governmental Affairs.

    The mechanism is a familiar one – he who pays the piper calls the tune. Funding is centralized at the state level, and control comes with that.

  • Mick The Reactionary


    “Clue: schools are funded and run locally – not by the state.”

    So many words, so little knowledge.
    What’s wrong with the kids today?
    So high in self-esteem, so pathetic in performance.

    TB is a total ignoramus about CA school funding and interworkings.

    Like in no idea what he is talking about.

    As Tom Holsinger well said above, state pays for schools, state severely limits what local school districts can do.

    I had my kids in CA public schools from elementary to High School. From time a few years after Prop 13 was passed to the time when dust has settled and CA K-12 became what it is today.

    But it is largely beside the point.
    Quality of Education outputs depends on quality of students and their families (97%), quality of teachers (2%) and money (1%).

    That’s why Palo Alto (base of Stanford U) and Cupertino (Apple) school districts are arguably among the top in the world, just 2 miles away East Palo Alto is in competition with Detroit and Yemen.

    And no rearrangement of chairs or notebooks in classroom will change that.

  • Sam L.

    “Don says:
    August 10, 2012 at 11:17 am

    Thibaud is far better than Mead. Why isn’t he writing this column?”

    Tb should start his own blog. Go, Tb.

    Oregon, about 20 years ago, passed Measure 5 which centralized school funding in Salem. It was sold to the public as a good thing (rich districts and poor districts no more; all equal henceforth and and ever after, Amen). There were many who thought it bogus, but were outvoted. You will be undoubtedly surprised to hear this has not turned out as well as we were told it would.

  • Mick The Reactionary


    “Thibaud is far better than Mead. Why isn’t he writing this column?”

    There is got be smiley face somewhere.
    Did Komment Kontrol eat your smiley?

  • George P

    Not one comment addressed the suggestion that the Employer be directed by state statute to contribute to an IRA in the name of the employee. Not to the state, not paid later by the state, not administered by the state, completely portable and with yearly reporting so the employee knows what they have.

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