Can CalPERS aid private sector retirement?

An estimated six million California workers in the private sector, most with low incomes, have little or nothing in the way of retirement plans beyond federal Social Security.

Some want to use two state agencies, CalPERS and EDD, to give workers who do not have an employer-sponsored retirement plan the option of creating a retirement savings account that could move with them from job to job.

Money would be automatically deducted from paychecks, regarded as a key to getting people to save. Expert investment choices would be provided. The large pool of tax-sheltered accounts would lower administration costs.

The startup costs are estimated to be relatively low, several million dollars. Once the program is running, operation costs would be paid by fees on the savings account, costing taxpayers nothing.

“This legislation will help make businesses more competitive, without costing them anything, and will help employees save for their retirement, without costing taxpayers anything either,” Gov. Arnold Schwarzenegger said in a statement last year.

“It is a great example of doing ‘more with less’ to help California business and hard-working employees,” he said. “This really is a win-win for everyone, and it will make our small businesses and our employees financially stronger.”

The bill to create the California Employee Savings Program, AB 2940, by Assemblyman Kevin De Leon, D-Los Angeles, cleared the Assembly on a party-line vote, with Republicans opposed, before dying in a Senate committee.

Now De Leon is back this year with a similar bill, AB 125, that faces another difficult challenge.

Opposition came from the financial industry, as represented by the Securities Industry and Financial Markets Association, when the bill moved out of the Assembly retirement committee this month.

A lobbyist for the association, Joanne Bettencourt, said the private sector provides a wide range of tax-sheltered retirement accounts, some with low fees and the option of payroll deduction.

Bettencourt said SIFMA would support a tax incentive for small businesses to offer retirement plans and would be “pleased to assist lawmakers and state agencies in a broad campaign to educate employers on the programs that are already out there.”

A tougher obstacle may be the startup cost, even though several million dollars might have been called “budget dust” by legislative aides in past years. Now the state is in a severe budget crisis for the second year in a row, despite painful cuts and tax increases.

Worthy bills are being held for lack of funding. As chairman of the appropriations committee, De Leon may once again be able to move his bill out of the Assembly. But it could take some horse trading to clear the Senate.

A spokeswoman for Schwarzenegger, Rachel Cameron, said the governor continues to support the concept of an employees savings program, but has not taken a position on De Leon’s bill this year.

The sponsors of the bill, the New America Foundation and the AARP (formerly the American Association of Retired Persons) are not special-interest groups that make campaign contributions.

Another potential problem for the bill is being “bigfooted” by the largest brogans in the land. President Obama supported an “automatic IRA” or individual retirement account during his campaign and included one in his new budget proposal.

Legislators looking for a rationale for opposing De Leon’s bill could say, “Let’s wait for the feds to enact a standard program for all states.” Supporters of the bill say Obama has a full plate, and California traditionally leads and shapes programs.

An automatic IRA, similar to the De Leon bill, was proposed three years ago by two men from liberal and conservative think tanks — J. Mark Iwry of the Brookings Institution and David John of the Heritage Foundation.

An automatic IRA bill failed in Congress two years ago. The president’s new proposal is reportedly causing concern among small business groups about administrative headaches and legal liability.

The financial industry is said to be worried about whether the retirement savings accounts, many with very small amounts, will generate enough management fees to avoid losses.

The De Leon bill would authorize CalPERS, the California Public Employees Retirement System, to determine whether to administer the program itself or contract with private firms.

The payroll deductions would be handled through the state Employment Development Department, which collects personal income tax withholdings and unemployment and disability insurance fees.

Politically, would a CalPERS move into the private sector to aid currently unserved workers broaden its public support, perhaps even somehow easing resentment in the private sector about generous and guaranteed public employee pensions?

Hard to know, but probably not significantly. A CalPERS staff analysis of De Leon’s bill last year concluded that it’s good public policy but has “potential risks” for CalPERS.

The CalPERS board chose to remain neutral on the bill last year. The CalPERS board has not yet taken a position on the new De Leon bill this year, which is said to be virtually identical.

A few of the concerns in the CalPERS analysis of last year’s bill: employers face added administrative duties and legal liabilities, enrollment and contributions may need limits to control costs, and CalPERS could be placed under the federal law regulating private sector pensions.

Backers of the bill think CalPERS has the expertise to negotiate the minefield. The bill would allow a grant from a foundation or other sources to cover the startup cost, if one could be found.

A model for the savings account plan, say backers of the De Leon bill, is the ScholarShare plan run out of the state treasurer’s office with management by Fidelity Investments.

The state general fund has been repaid for a $1.3 million startup cost. The tax-sheltered savings account for college expenses is now self-supporting through accountholder fees.

De Leon made brief but impassioned remarks to the Assembly retirement committee earlier this month. He said California needs to be “innovative” and on the “cutting edge” to provide a retirement supplement for the millions of workers who have none.

“My mother, who had a very strong work ethos — when she passed away, she didn’t have a single penny to show for it,” De Leon said.

Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at Posted 16 Apr 09

5 Responses to “Can CalPERS aid private sector retirement?”

  1. Jeff Says:

    CalPers has been subject to politically-driven investment decisions designed to benefit Democratic Party interests and agendas. Why should it be designated the manager of private sector employees when it has shown through the government employee pensions its real disregard for all those private sector burdened with paying for those pensions? Let the private sector or some non-profit bid on providing management services for this retirement fund, and hold that management accountable in some way for the job they do.

  2. muck Says:

    This is what 401(k) accounts and IRAs were created for. Employees can already save for their retirement without the need for a new government program with “startup costs” and “fees on the savings account.”

  3. Hanrod Says:

    Private sector employers have, since 1980, not only done away with the only reasonable pension plans for employees, i.e. defined benefit plans (covered employees down from more than 40% covered to less than 20% covered since 1980); but results of the 401K defined contribution plans they provided in the years since have now left all but the a few of the very highest earners with little or nothing but Social Security for their “golden” years, which now look much more like “brass”.

    These private employers have also mismanaged, raided and reneged on the few older plans they did provide to their employees; and the Federal Pension Benefit Guarantee Fund is now picking up the pieces of defaulted private employer plans, at considerable taxpayer expense. Thus, again permitting private employers to “privatize gains while socializing the losses”, just as with the current economic “bailout” being provided to many of them.

    Some form of universal, mandatory, Federal defined benefit plan, perhaps even an expanded and enhanced Social Security, funded by both employer and employee contributions, is essential for the stability and political and economic health of our Country. This is not rocket science — let’s just get the silly idealolgues out of the way. Ask a few of your private sector retiree friends, 65+ what they think of Social Security.

  4. Twyla Matsuzaki Says:

    Spain has always been the most popular country for Britons to retire.

  5. Capping big pensions: How much is too much? Says:

    […] to the wide gap between retirement security for government workers and the private sector, where an estimated six million California workers have little or nothing in retirement plans beyond federal Social […]

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