I can’t believe this, a Friday Trumpery post about something fairly substantial that intersects with my bloggy interests! Pensions!
It’s not very exciting, and won’t get much press, because it’s one of those things that nobody gets much worked up about, but the goo goos love as an idea, and many other people have been highly skeptical of: State-run “private” pensions.
March 30, 2017
The U.S. Senate today passed by a vote of 50-49 a joint resolution, H.J. Res 67, which if enacted would repeal a U.S. Department of Labor (DOL) final rule that provides municipalities a safe harbor to facilitate government-sponsored individual retirement accounts (IRAs) for private sector employees who do not have access to workplace retirement savings programs. The rule was published in the Federal Register on December 20, 2016. The Congressional Review Act permits Congress to pass disapproval resolutions to block federal agencies from implementing new rules (within certain time periods).
On Feb. 15, the U.S. House of Representatives passed both H.J. Res 67 and H.J. Res 66, a measure to repeal a DOL rule applicable to state plans. The U.S. Senate is expected to vote on H.J. Res 66 although no vote has been scheduled.
The Trump Administration issued a statement in support of both resolutions on March 13.
So I assume it’s on the quick path of becoming official.
Here is the prior rule. (more on that below)
H.J. Res. 67 and 66 – Disapproving the rule submitted by the Department of Labor
March 13, 2017
STATEMENT OF ADMINISTRATION POLICY
The Administration strongly supports Senate passage of H.J. Res. 66 and H.J. Res. 67. These joint resolutions of disapproval would nullify two rules promulgated by the Employee Benefits Security Administration of the Department of Labor: (1) Savings Arrangements Established by States for Non-Governmental Employees, 81 Fed. Reg. 59464 (Aug. 30, 2016); and (2) Savings Arrangements Established by Qualified State Political Subdivisions for Non-Governmental Employees, 81 Fed. Reg. 92639 (Dec. 20, 2016), respectively. The rules allow a new type of State-based retirement plan that would lack important Federal protections, and they would give a competitive advantage to these public plans. These joint resolutions would prevent the Department of Labor from reissuing a rule that is substantially the same as the disapproved rule absent specific future congressional authorization.
If these bills were presented to the President in their current form, his advisors would recommend that he sign them into law.
I assume that will happen. It’s not on this page as I write, as the Senate has to pass the Joint Resolution, but I assume it will be there soon enough.
The Pension Rights Center has a page on this concept of state-run private retirement savings:
State-based retirement plans for the private sector
States around the country are looking into ways of using the efficiencies of public retirement systems to administer new types of pension plans for private-sector workers. Below are brief summaries of plans that have either passed or are being considered. States whose names are highlighed below have introduced or enacted legislation to provide retirement plans for private-sector workers.
In addition to the below summaries, AARP’s Public Policy Institute has established a State Retirement Savings Resource Center, a library of policy papers, key facts, opinion pieces, and studies related to state-based plans for private-sector workers. The Pension Rights Center authored two papers — one on consumer protections in such plans and one on the advantages of pooled accounts.
In September 2015, the Government Accountability Office published a report, Federal Action Could Help State Efforts to Expand Private Sector Coverage, which looks at coverage rates, efforts by states and other countries to expand coverage, and the obstacles states face in implementing new state-based plans.
It looks like the first time I wrote about this on STUMP was July 2015: Government and your money: GIMME GIMME GIMME:
PUBLIC PENSIONS FOR PRIVATE EMPLOYEES?
Back in January , I saw an article about a plan to make some sort of public/private pension in Illinois:
‘Illinois is piloting a “mostly mandatory” Individual Retirement Account (IRA) savings program for private sector workers. Though not a DC in that it doesn’t require employer payments, it requires businesses with 25 or more employees without a retirement program to enroll their workers into an IRA that automatically deducts 3 percent from each paycheck. Workers may increase the contribution or opt out entirely.’
THE PROBLEM WITH PUBLIC FUNDS
However, if the funds are government-run, there are two big problems:
1. Opportunities for corruption — politicians could interfere with fund management and require kickbacks, etc. This has happened in the public fund space for public pensions, and just imagine the level of corruption that could occur when you’ve got so many more people in the system.
This is a huge reason I’m against Social Security privatization (at least the versions I’ve seen). The bigger the pot of money directly controlled by government, the more enticement to corruption.
2. Ease of grabbing assets — mind you, we can see funds being frozen in private banks in Greece right now, and a “bail-in” occurring. But when the government controls the funds, how much easier it is for them to just take the cash away.
And if you object, why they’ll say what did you expect when the government is running the funds?
Also, it’s not really your money, you see. It’s the government’s money.
Again, why I’m against Social Security privatization. You may say it gives personal ownership of funds, but it seems to me the government will argue strongly that the funds are owned by them. After all, they control it.
We’ve seen the shenanigans politicians get up to with public funds, and there’s no reason to think they’d be any more on the up-and-up here.
THE ATTEMPT TO HAVE ‘PRIVATE’ PENSIONS RUN BY THE STATES
This idea has been around for a while. I haven’t covered it much, other than noting the silly attempt in Illinois. The Illinois attempt won’t get anywhere, because they don’t have enough money to administer it. (I will get to Illinois in a minute.)
California has caught this bright idea:
‘Instead of addressing the estimated $600 billion in unfunded liabilities in California’s beleaguered public-employee pension system, Democrats in Sacramento have instead decided to “solve” a growing pension crisis in the private sector. In 2012, Governor Jerry Brown signed a measure that created an investment board and authorized a “feasibility study” of various options for a state-backed private-pension system. That study came out last month, and the legislature is now vetting bills that would put its recommendations into action.
‘The state’s public-sector unions backed Brown’s bill. As it turns out, union-friendly politicians hatched the private-sector pension plan a few years ago as a way to deflect attention from the public system’s massive unfunded liabilities. The idea was to give private-sector workers some modest benefit as a way to dampen public support for pension reforms.’
I really don’t see that working.
Yeah, that’s not going to work.
If you’re a Californian with your taxes going up due to the need to cover higher Calpers/Calstrs contributions, you’re not going to be that happy with a certain percentage also being taken out of your paycheck for a mandatory forced retirement savings, being managed by the same state that got the public pensions in a mess.
What GAO Found
About half of private sector workers in the United States—especially those who are low-income or employed by small firms—lack coverage from a workplace retirement savings program primarily because they do not have access. According to GAO’s analysis of 2012 Survey of Income and Program Participation (SIPP) data, about 45 percent of private sector U.S. workers participated in a workplace retirement savings program—an estimate that is consistent with prior GAO work and other research. Using tax data to correct for under-reporting raised the share of workers participating to 54 percent, but still indicates many workers lack coverage. Among those not participating, the vast majority—84 percent—lacked access because they either worked for employers that did not offer programs or were not eligible for the programs that were offered, for example, because they were new employees or in specific jobs that were excluded from the program. In particular, lower-income workers and those employed by smaller firms were much less likely to have access to programs. However, among those who had access, the majority of these workers participated.
Key strategies to expand private sector coverage identified in the states and countries GAO reviewed include encouraging or requiring workplace access, automatic enrollment, financial incentives, and program simplification. For example, pending implementation, programs in two of the states GAO studied—California and Illinois—would require certain employers to automatically enroll workers in a state-run program, though workers could choose to opt-out. In the countries GAO studied, combining workplace access with automatic enrollment and financial incentives—tax preferences or employer contributions—has helped increase participation. Moreover, states and countries have tried to simplify program designs to (1) limit the responsibility and cost for employers and (2) reduce complexity, cost, and risk for workers. For example, some states intend to not only reduce burdens for employers by selecting and monitoring providers, but also reduce complexity for workers by limiting the number of investment options.
State and national stakeholders reported potential challenges with uncertainty created by the Employee Retirement Income Security Act of 1974 (ERISA) and agency regulations that could delay or deter state efforts to expand coverage. Generally, ERISA preempts, or invalidates, any state law relating to “employee benefit plans” for private sector workers, but different areas of uncertainty arise based on the details of each state effort. For example, four of the six states GAO reviewed intend to create payroll deduction individual retirement account (IRA) programs that would not be considered employee benefit plans. However, due to uncertainty created by ERISA, it is unclear whether a state can offer such programs or whether some of the program features would lead a court to find that they are, or relate to, employee benefit plans. Stakeholders also noted uncertainty caused by regulations from the Departments of Labor (DOL) and the Treasury meant to assist workers and employers. For example, DOL’s regulation on payroll deduction IRAs was written before these state efforts were proposed and omits detail that, if included, could help reduce uncertainty. Given these uncertainties, states may face litigation and stakeholders noted that state programs could lose tax preferences if they were ruled preempted by ERISA.
Yeah, well, that’s gone now.
OBAMA ADMINISTRATION RULES: GONE, SO SAD
Oh, poor plans, … and Obama waited til August 2016 to do anything about it:
U.S. Nudges States to Help Private-Sector Workers Save for Retirement
Obama administration wants Americans to build nest eggs to supplement social security
WASHINGTON—The Obama administration on Thursday finalized a new regulation to encourage states to set up retirement savings plans with automatic enrollment features for private-sector employees, part of its push to promote Americans to build their own nest eggs to supplement social security.
The rule, announced by Labor Secretary Thomas Perez and the White House, gives states a road map for establishing the retirement plans.
Several states already have passed legislation to create their own vehicles to enroll workers who don’t have access to pension or retirement savings plans in the workplace. The California State Assembly on Thursday cleared a plan that could potentially enroll some 6.8 million people. Maryland and Connecticut took action in recent months.
Opponents have said such plans crowd out competition from the private sector. Congress has blocked the Obama administration’s attempts to create similar plans at the federal level.
The Labor Department also unveiled a proposal on Thursday to enable large cities—defined as those with populations larger than Wyoming, the least populous state with 586,000 people in 2015—to create similar plans.
The Treasury Department last year launched a basic retirement savings program called “myRA” for middle- and lower-income workers. The Labor Department, meanwhile, has rolled out a rule to impose stricter standards on financial advisers working on retirement plans, a step aimed at lowering fees and improving returns for savers and which is opposed fiercely by the financial industry.
Oh look. Thomas Perez. The Thomas Perez who currently runs the DNC.
Too bad Congress actually passed a law that pre-empts the DOL rule put in place. Funny how it happens when something not particularly controversial among Republicans, and they run both houses of Congress as well as Presidency, can “make rules” the old-fashioned way: by passing laws.
OTHER REACTIONS TO OBAMA DOL RULES
Chuck DeVore thought that these funds were intended to bail out public pensions, and my reaction was that it was a bit overwrought.
I think these state-run plans are a bad idea, mainly because the money will be a political football. I have little trust that these DC plans would have been well run at all.And all the divestment crap and other asset shenanigans would come into play, as well as rewarding cronies by giving them a piece of the pie for managing the funds.
Please Bail Out Our Mess
Money in government hands is flexible. Forcing private-sector employees to be part of state retirement systems will open up a flood of cash, delaying retirement system insolvency. Further, making millions of voters part of a state-run retirement system will force them to care about the financial health of those systems, potentially increasing public support for tax increases to boost their weak balance sheets.
Government pension boards are notoriously political. CalPERS, with $300 billion in assets, holds tremendous sway with the companies in which they are invested, as is also the case with California’s blue state counterparts. This financial clout is used to promote the liberal elite’s political priorities, bending corporations to their will at the risk of losing investments. Adding billions more in assets from millions of additional workers will only strengthen this unseen and poorly understood politically correct muscle.
Seeing an opportunity to increase progressive power, the Obama administration recently announced a new labor rule to nudge states and local governments into offering government-run retirement plans for private-sector workers.
Again, that’s gone for now. It could come back, but it may take actual legislation in Congress to bring it back. And I don’t think it is foremost in the minds of many.
Here is something more reasonable from Jon Coupal at California Policy Center. From the conclusion:
The good news is that the days of Secure Choice may be numbered because of the political sea change in Washington. It is important to understand that the program would not even be legal were it not for regulations issued by the Obama administration. State programs such as Secure Choice were never authorized by Congress. Rep. Tim Walberg, R-Mich., chairman of the subcommittee on Health, Employment, Labor and Pensions, sponsored a resolution that most believe nullifies the Obama administration’s regulations. Just last week, that resolution passed on a party line vote meaning that Secure Choice and other similar state programs are now on life support.
And it’s passed now. So sad, California.
BUT WAIT, WHAT’S THIS?
After I posted this, I was sent the following piece:
California’s grand plan to extend retirement security to millions of workers, a cornerstone of the economic agenda put forward by state Democrats, is looking a little bit less secure.
That’s because Republicans in the U.S. Senate voted on Thursday to roll back a little-known Obama administration regulation, putting California’s “Secure Choice Retirement Savings Program” in jeopardy.
“We’re not going to throw in the towel,” Treasurer spokesperson, Marc Lifsher, said before the Thursday vote. “We’re going to press ahead—even if the Senate goes south on us and the whole thing probably ends up with the courts.”
That outcome is looking increasingly likely. Secure Choice has long been in the cross hairs of the financial services industry, which considers it an unwelcome intrusion of government into their business. Reversing the Obama-era rule that provided regulatory cover for the program makes an ultimate legal challenge all the more likely.
As devised by Senate President Pro Tem Kevin de León, California’s Secure Choice program would automatically enroll the approximately 6.8 million eligible workers into individual retirement accounts. Participating employees would see 3 percent of each paycheck placed into a state-wide coffer, which would be overseen by a board chaired by the State Treasurer, but managed by a private investment manager. Eligible workers will have the option to bow out of the program. But by placing all eligible participants into the program by default from the get-go, the program’s designers hope to provide the California workforce with a helpful nudge toward financial prudence.
ERISA (rhymes with “Marissa”) is meant to prevent employers from “using the pension plan as a cookie jar,” explains Bruce Wolk, a professor emeritus at the UC Davis School of Law and an expert on pension law. Thus, the law saddles employers with strict reporting requirements and places them on the legal and financial hook if anything should go wrong with the plan.
To get around ERISA—and the objections of business groups like the Chamber of Commerce—Sen. de León structured Secure Choice to ensure that federal regulators would not consider it an “employer pension benefit plan.” Namely, employers would not be asked to contribute to, accept money from, or endorse Secure Choice plans in anyway. Likewise, employee participation would be “completely voluntary.”
Under the Secure Choice program, eligible workers are automatically enrolled into the system, but given the option to opt out. It’s an idea that harnesses the widely-observed human tendency to go with the flow: Researchers have found that simply switching from a savings program that requires workers to proactively opt in to one where participation is set as the default can double the share of workers socking money away. Still, auto-enrollment is an ERISA red flag.
“What does ‘completely voluntary’ mean? Nobody knows,” says Wolk. “That was one of the reasons that everyone wanted the Department of Labor to issue a ruling.”
I guess California doesn’t care if it gets sued over this.
After all, they’ve not run out of Other People’s Money yet.
California’s Pension Hubris, by Steven Greenhut, April 18, 2016.
Escheatment: Looking for change in the couch cushions
Amassing Predictions for 2016
Friday Trumpery: DOL pick, take two