Reason.com - Free Minds and Free Markets
Reason logo Reason logo
  • Latest
  • Magazine
    • Current Issue
    • Archives
    • Subscribe
    • Crossword
  • Video
  • Podcasts
    • All Shows
    • The Reason Roundtable
    • The Reason Interview With Nick Gillespie
    • The Soho Forum Debates
    • Just Asking Questions
    • The Best of Reason Magazine
    • Why We Can't Have Nice Things
  • Volokh
  • Newsletters
  • Donate
    • Donate Online
    • Donate Crypto
    • Ways To Give To Reason Foundation
    • Torchbearer Society
    • Planned Giving
  • Subscribe
    • Reason Plus Subscription
    • Print Subscription
    • Gift Subscriptions
    • Subscriber Support

Login Form

Create new account
Forgot password

Pensions

California's New Retirement Plan for Private Sector Workers Is a Stunning Display of Hypocrisy

If the program is so good, shouldn't government workers be included, too?

Ed Ring | 4.16.2016 10:00 AM

Share on FacebookShare on XShare on RedditShare by emailPrint friendly versionCopy page URL
Media Contact & Reprint Requests
Large image on homepages | Matthew Benoit | Dreamstime.com
(Matthew Benoit | Dreamstime.com)
Nest Egg
Credit: Matthew Benoit | Dreamstime.com

In a move of breathtaking hypocrisy, California legislators on March 28 introduced a financially sustainable retirement security program for private workers, while keeping financially unsustainable pensions for public workers.

The move raises a question: If the new retirement security scheme—called Secure Choice—is so great, why aren't public employees going to adopt it too?

The answer is simple: Public employees already earn pensions—paid for by state taxpayers—that are far better than those you'd earn through Secure Choice.

To compare them, look at the official recommendations for Secure Choice. A table on page 53 shows "income replacement" based on years paying into the system at various contribution rates.

At a contribution rate of 10 percent, private-sector workers participating in the new system for 30 years can expect a pension of 27.6 percent. For example, if they earned $50,000 per year in their final year of work, they would get state pensions of $13,800 per year.

Teachers and government administrative workers pay a bit less than 10 percent, and public-safety workers pay a bit more. But after 30 years of employment, teachers and government administrators earn pensions equal to 75 percent of final salary. Public-safety workers earn an astonishing 90 percent of final salary.

There are two reasons for this gigantic disparity. First, public employees rarely pay more than 10 percent of their salary toward their pensions via withholding, but public pension funds like CalPERS collect far more than 10 percent for each employee. The employer—the taxpayer—kicks in up to 40 percent more.

Second, public pensions assume returns on the investment of those contributions will earn a "risk-free" return of 7 percent per year. How much will the Secure Choice plan assume? Refer again to the official recommendations, this time page 16:

Senate Bill 1234 will allow the Board to: Establish managed accounts that would be invested in U.S. Treasuries for the first three years of the program….

The 30-year Treasury Bill is currently paying 2.69 percent.

Let's recap: A "risk-free" annual return according to state pension systems is 7.5 percent. A "risk-free" annual return according to Secure Choice is 2.69 percent.

The attentive reader may wonder what will happen after three years—when the recommendations say "investment options" shall be "developed."

This brings us to the second monstrous hypocrisy: Secure Choice 401k funds will be managed by the same private-sector investment firms that defenders of public pension funds routinely demonize.

If 50 percent of California's 6.8 million eligible private-sector workers participate, using the U.S. Census Bureau's median income estimate for California's private sector workers of $45,000 per year, at a contribution rate of 5 percent, you're talking about $7.6 billion per year under management—not much compared to the $30 billion poured into California's state/local government pension systems each year, or the $45 billion per year that those systems actually require to remain solvent. But it's a huge chunk of change. And you can easily imagine the financial interests now gathering around the capitol.

The irony in all this is that Secure Choice has at least one virtue. It's more sustainable than public-sector pensions. With lower-risk investments, modest benefit formulas, and the built-in capacity to adjust benefits to ensure solvency, this system can be offered to all Californians without blowing up.

Concerned citizens may argue about whether the state should offer any sort of retirement security—Social Security, Secure Choice, or whatever. But if the state is going to create these programs, they should be offered to every worker according to the same set of rules and offer the same set of benefits. Government workers should not be getting deals far better than private workers.

So here's the deal, Sacramento:  Require every state and local government worker immediately to begin participating in Social Security and the Secure Choice program, and encourage them to supplement that with individual 401k retirement accounts. Mandate that all retirement benefits they earn from now on are limited to those three programs. Work out the bugs. Then—and only then—sign up the rest of us.

Start your day with Reason. Get a daily brief of the most important stories and trends every weekday morning when you subscribe to Reason Roundup.

This field is for validation purposes and should be left unchanged.

NEXT: Runaway Farm Subsidies and Diet Guideline Fights: Federal Food Policy Is a Mess

Ed Ring is a government financial analyst and president of the California Policy Center.

PensionsRetirement BenefitsGovernment employeesCaliforniaJobs
Share on FacebookShare on XShare on RedditShare by emailPrint friendly versionCopy page URL
Media Contact & Reprint Requests

Show Comments (39)

Latest

The U.K. Trade Deal Screws American Consumers

Eric Boehm | 5.9.2025 4:05 PM

A New Survey Suggests Illicit Opioid Use Is Much More Common Than the Government's Numbers Indicate

Jacob Sullum | 5.9.2025 3:50 PM

Judge Orders Tufts Grad Student Rumeysa Ozturk Be Released on Bail From Immigration Detention

C.J. Ciaramella | 5.9.2025 3:17 PM

Georgia Man Who Spent 6 Weeks in Jail on a Kidnapping Charge Says He Was Helping a Falling Child

Autumn Billings | 5.9.2025 2:05 PM

Newly Released Documents Show What the Feds Knew About the New Jersey Drone Scare

Matthew Petti | 5.9.2025 12:31 PM

Recommended

  • About
  • Browse Topics
  • Events
  • Staff
  • Jobs
  • Donate
  • Advertise
  • Subscribe
  • Contact
  • Media
  • Shop
  • Amazon
Reason Facebook@reason on XReason InstagramReason TikTokReason YoutubeApple PodcastsReason on FlipboardReason RSS

© 2024 Reason Foundation | Accessibility | Privacy Policy | Terms Of Use

This site is protected by reCAPTCHA and the Google Privacy Policy and Terms of Service apply.

r

Do you care about free minds and free markets? Sign up to get the biggest stories from Reason in your inbox every afternoon.

This field is for validation purposes and should be left unchanged.

This modal will close in 10

Reason Plus

Special Offer!

  • Full digital edition access
  • No ads
  • Commenting privileges

Just $25 per year

Join Today!