A well-intentioned bad idea

There’s troubling legislation in Sacramento to open the state’s lucrative public employee retirement system to private employees. Unfortunately, there’s little opposition, which may make the scheme inevitable.

As with so many well-intended government ideas, Assembly Bill 2940 ostensibly would solve a problem. But as is also so often the case, the solution comes with unmentioned risks and costs to taxpayers and to the private sector. AB2940 would provide retirement savings plans for an estimated 6 million private employees whose employers don’t offer pensions or 401-k’s, as many larger employers do.

“Social security payments alone, which average $901 per month in California, will not sustain Californians in their retirement,” according to the bill’s author, Assemblyman Kevin DeLeon, D-Los Angeles.

That’s probably true. But there’s more at work here than government’s benevolence. The California Public Employees’ Retirement System guarantees its pensioners a generous, defined monthly benefit. Private industry increasingly is abandoning such plans because of their cost, replacing them with plans involving employees and employers making pretax contributions, and whose benefits depend on how well investments perform.

DeLeon’s bill would give CalPERS control over management of private workers’ retirement funds, but not provide defined benefits. Instead benefits would be determined by market performance. The bill also would allow employers to contribute to their employees’ funds.

Lawrence McQuillan, Pacific Research Institute’s director of business and economic studies, points out the political subtext. If CalPERS clings to its unsustainable defined-benefit structure for public employees, eventually it will mean the program’s demise for the same reason private firms are abandoning such plans, Mr. McQuillan told us. Opening the system to private workers, however, adds a new lobby to defend CalPERS once public-sector costs threaten its existence.

CalPERS, meanwhile, stands to gain administrative control over another large retirement funding source. For these reasons, Mr. McQuillan believes CalPERS’ board will endorse AB2940, as Gov. Arnold Schwarzenegger already has. The risks and costs, however, in the end must be borne by taxpayers and the private sector.

“Ultimately the taxpayers are on the hook for any deficits” in CalPERS, Mr. McQuillan reminds us.

Plus, some private companies will be tempted to drop retirement plans if the state wants to cover their employees. Some private investment firms that otherwise might capture some of the private workers will lose those customers to the state.

A better option is to provide portable retirement funds for workers whose employers don’t provide them would be to abolish limits on how much tax-deferred money can be invested annually in Individual Retirement Accounts. Current restrictions make them inadequate for substantive retirement savings. Without limits, employees could sock away as much as they can afford in IRAs while retaining control over how their money is invested, even if they change employers.

Nothing contained in this blog is to be construed as necessarily reflecting the views of the Pacific Research Institute or as an attempt to thwart or aid the passage of any legislation.

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