Has anyone heard about the proposed national retirement plan that is gaining steam back in Washington? Or how about the recently enacted Secure Choice retirement plan (SB 1234) covering all private sector employees here in California? No?
Let me fill you in. These new government plans would cover all workers in the private sector who are not already covered by a pension plan. When I asked who was promoting this, the answer was counterintuitive: It was the union leadership of the nation's government employees.
I found myself scratching my head and wondering, "Why should government employees care about their private sector counterparts?" That's the other 83 percent of the nation's workers who are not working for a federal, state or local government. I recall the old slogan "Workers of the World, Unite!" -- but this seemed a little extreme.
It turns out that the motive for fashioning a national-defined benefit pension plan is to undercut "pension envy" on the part of the American public. This is the voting public envious of, if not incensed by, the guaranteed pension benefits enjoyed by government workers.
Who wouldn't be envious of pension benefits that require a $400 annual taxpayer contribution for each $1,000 of paid government employee salary? These are the same pension payments that can start, for example, as early as age 49 and continue with inflation-indexed increases for the rest of a retiree's life. It's a formula
Rather than confront the threat to these benefits head-on, the strategy of the public employee officials is to try an end-run by bringing the same government-funded benefit to everybody! If every working American gets a defined benefit pension, then who will complain about public service entitlements? No more pension envy if every voter has something comparable.
Where the money would come from remains sketchy, and the funding guarantees inherent in all promised pension benefits remain a mystery. The starting point for funding sources would be the removal of the tax-deductible treatment of 401(k) and IRA deposits. If not enough, then there's always the tax-deferred treatment of compound earnings on the $6 trillion of combined assets in these plans. (Full disclosure: My business works with 401(k) plan providers, so I could certainly see an impact if these changes happened.)
In the battle to end "pension envy" there is no compunction about trashing the tax incentive aspects of the nation's portable retirement plans enjoyed by more than half of all American workers. The argument for doing this is that the current voluntary plans have benefited mostly upper-income employees. Proponents trot out junk statistics that cite the low average account balances in these plans -- statistics that include all participants, even those just starting to save or at least a long way from retirement.
Meanwhile, our new California Secure Choice plan is a big deal back in Washington. As the camel's nose in the tent, our state law sets the stage for a world in which every American worker is in a defined benefit retirement plan. While the plan now calls for a voluntary employee contribution, the goal is to make the contribution mandatory and use taxpayer dollars to create a guaranteed benefit. The hidden agenda for California's current voluntary plan is to morph it into what will become the nation's compulsory plan.
The California plan looks like it would be just another 401(k) to which employees would have money invested by CalPERS and guaranteed by insurance companies. Some could elect to say, "No thank you," but the sign up is automatic unless employees specifically opt out. An employer who does not sign up an employee (before the latter opts out) pays a $250 fine per employee.
At a recent Washington, D.C., convention, sponsored by the National Conference of Public Employee Retirement Systems, California's new plan was cited as being the first "win" as part of this national campaign. Sen. Tom Harkin, D-Iowa, who retires in 2014, promised to "Get this done." Other speakers talked about providing the kind of pension for everyone "that our parents all enjoyed." The term "pension envy" was actually part of the dialogue.
The pressure to follow through and implement this flawed legislation is not coming from aggrieved employees who claim to have been denied access to a company retirement plan. Instead, this public employee rear-guard action and its effective political pressure on elected representatives has been solely the work of public employee unions. Their officials see this as a last desperate attempt to avoid what promises to be a reining in of benefits through the initiative process.
Stephen J. Butler is CEO of Pension Dynamics. Contact him at 925-956-0506 or email@example.com.