In an ambitious and controversial effort to address growing problem of retirement insecurity in the private sector, the State of California will automatically withdraw a share of workers’ paychecks and deposit it in a state-run retirement savings account. Governing magazine reports:
The law requires all California companies with at least five employees to enroll their workers in the new California Secure Choice Retirement Savings Program if they do not offer their own retirement savings plan.
This program—and others like it being developed in (mostly liberal) states across the country—represents an effort to help smooth the transition away from the blue social model, where most middle-class workers could depend on long-term employment at a single firm and a defined-benefit pension upon retirement, to the more dynamic, but less secure, labor market of the 21st century. California’s retirement plans are portable, so workers are not punished for job-hopping; private, so their solvency does not depend on the health of their employer; and voluntary, so people can opt out at any time.
There are three principal right-wing concerns about this approach. The first is that it is a cynical effort to increase public buy-in for the state’s emphatically unsustainable public-sector, defined-benefit pension plans. The second is that the plan is the beginning of a slippery-slope toward a new state-guaranteed entitlement that will put even greater strain on the California budget. The third is that the state retirement board will invest the money irresponsibly—perhaps to support politically-favored firms and projects.
The first concern seems misplaced. While unionized public sector workers enjoy defined-benefit pensions untethered from the amount they contributed, the Secure Choice program is essentially a personalized savings plan with government guidance. Pension-reforming politicians should be able to explain the difference between Secure Choice and California’s runaway union-controlled public pensions.
The second concern, like all slippery-slope arguments, is harder to assess. Under the statute, the State bears no responsibility for the performance of the retirement plans, but critics are right that it’s not inconceivable that voters will demand some sort of guarantee in the future. However, as we’ve noted before, persistent retirement insecurity itself creates pressure for high-tax, big-government solutions. If politicians don’t offer any solutions, voters might be pushed toward reckless welfare expansions. It may be that programs like Secure Choice represent a fiscally responsible middle-ground between laissez-faire and a total state takeover.
The third concern—that the state pension board will invest incompetently—is perhaps the most worrisome, especially given the thorough politicization of CalPERS, the state’s public employee pension investment fund. However, the risks for Secure Choice seem substantially less great, for three reasons. First, workers retain much more control over their finances than do CalPERS beneficiaries. Not only will Secure Choice offer a menu of different investment options with varying levels of risk, but workers can withdraw from the program altogether. Second, while CalPERS is increasingly in the grips of far-left union activists, the Secure Choice Investment Board is designed to more closely represent the public’s interests. Third, the legislation commands the board to “minimize participant fees” and provide “maximum possible” risk-adjusted returns.
With the right oversight, in other words, Secure Choice just might turn out to be a limited, responsible program that makes a dignified retirement more attainable for a new generation of workers. Like policymakers in state capitals across the country, we will be watching closely.