Trust California to make what might seem at first glance to be a good idea – setting up an easy way for private workers to contribute to a retirement fund if their employers don't offer it – and turn it into what has the potential to be yet another disaster.
Gov. Jerry Brown signed into law Friday SB1234, which will create the California Secure Choice Retirement Program, allowing private workers to contribute up to 3 percent of their wages into a retirement fund that will be operated by the state.
Oh, my apologies. I worded that poorly. I forgot about the Nanny State twist: Actually, workers will have the money deducted without their permission unless they opt out. And they'll have to keep opting out every couple of years or else they'll be shoved into it. Judy Lin at the Associated Press provides some details:
The program directs employers to withhold 3 percent of their workers' pay unless the employee opts out of the savings program, which can be done every two years. It would be administered by a seven-member board chaired by the state treasurer. The board would select a professional fund manager, which could be a private investment firm or the state's public pension system, to maintain the money.
State Sen. Kevin De Leon, D-Los Angeles, introduced the bill earlier this year in response to what he called the "looming retirement tsunami" as millions of lower-wage workers face financial hardship in their retirement years. He said the program will act as a supplement to Social Security by offering private-sector workers a portable savings plan with a guaranteed return.
"Guaranteed Return." If pension fund economics were a slasher movie (and who says they aren't?) those words would be the equivalent of "The call came from inside the house, ma'am." Those words tell you exactly how much trouble you're in. I looked through the legislation and couldn't find exactly what sort of guaranteed rate of return the fund is supposed to offer, but then like most financial legislation, half of it reads like another language anyway. But as a reminder, the rate of return target for CalPERS, the state's pension fund for government workers, was 1 percent last year. Its target is 7.5 percent. The state and municipalities are obligated to help fund the gap, thus the pension crisis.
State Senator Mimi Walters, R-33, wrote a lengthy takedown of the bill on the blog Fox & Hounds, not that it mattered:
Quite possibly the worst bill to make its way out of the legislature this year is Senate Bill 1234 (Kevin De Leon, D-Los Angeles). This bill would allow the state government to enter the private pension business under the pretense of "sharing the wealth" of California's public employee pension systems.
But California has amassed a terrible track record when it comes to maintaining its public pension systems; the systems are currently a combined $240-$500 billion in debt. And because those public employees are obligated to be paid first from the pool of investment dollars, SB 1234 looks like nothing more than a cynical effort to prop up the floundering public employee pension debt with new funds from private investors, sent in by employers who are forced to participate under penalty of law.
According to the AP report, the program will not be implemented unless the savings program is projected to be self-sustaining. That would be a relief, except the same limitation was placed on high-speed rail construction and yet the state is moving forward despite evidence that the train will need significant subsidies to operate.