The Retirement Tangle

Ramesh Ponnuru offers a good overview of the federal-state retirement tangle that began in deep blue state houses but is now getting the attention of federal lawmakers:

The dispute concerns private-sector workers whose employers don’t sponsor retirement-savings plans such as 401(k)s. Several state governments want to run programs for those employees, whose employers would have to automatically enroll them unless the worker opts out.

Almost all retirement plans for private-sector workers are regulated by a 1974 federal law: the Employee Retirement Income Security Act. The law sets accounting standards on such plans, imposes fiduciary obligations on their administrators, and in other ways seeks to prevent abuse.

Pension plans for state government workers, on the other hand, are exempt from the law, known as ERISA, because of concerns about federalism. The state governments that want to establish these new retirement accounts for private-sector workers want them to be exempt from the law, too.

Three points are worth making here: First, Democratic state legislatures are right to try to try to encourage people to save more. As defined-benefit pensions become a thing of the past, governments are right to worry that people are not saving adequately. If nothing is done, as we have noted before, “future budgets will be bloated by the demand of well organized seniors for the government to make up the shortfall in their savings.” So it’s good that this issue is now coming to the fore.

Second, as Ponnuru argues, the way that blue states are trying to tackle this issue leaves much to be desired. The regulatory problem in American governance isn’t just over-regulation of the private sector, which conservatives point to regularly—it’s also the under-regulation of the public sector, which all too often is able to get away with accounting mischief and general incompetence. Any new automatic state-run IRA scheme should be subject to the same (if not more) rigorous accounting standards as those that apply in the private sector. That is not the case with most of the new state plans.

Third, it’s not sufficient for the Republican Congress to simply strike down the Labor Department regulation promulgated by the lame-duck Obama administration to green-light plans in Illinois in California (although it should do that). Legislators should fundamentally rethink how the government can best encourage retirement planning and saving in a 21st century economy defined by job-hopping and gig work, and pass legislation to that end. This could involve funds for training students in financial literacy; new kinds of tax incentives for young people; regulatory changes that ensure that money is managed responsibly and transparently; and federal guidance setting the boundaries for state-level experimentation.

Fortunately, there are stirrings of legislation along these lines among some GOP Senators. We will be keeping an eye on future developments.

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