Problems With California’s ‘Secure Choice’ Pension Plan

Editor’s Note: In this article, author Jon Coupal describes most of the problems with California’s “Secure Choice” pension plan for private sector workers, but he omits a big one: The plan is designed using realistic financial assumptions, i.e., relatively high contribution rates and relatively low rate-of-return assumptions, and a very modest retirement benefit formula. Put another way, “Secure Choice” is everything that government employee pensions are not. Unlike public sector pension funds, the Secure Choice fund will generate perennial surpluses. And where will those surpluses go? Perhaps to bail out the government worker pension funds? Here’s the difference in benefits: (1) Public sector: Teachers/Bureaucrats, 30 years work – pension is 75% of final salary. (2) Public sector: Public Safety, 30 years work – pension is 90% of final salary. (3) Private sector: “Secure Choice,” 30 years work – pension is 27.6% of final salary (learn more). Isn’t that special?

California’s “Secure Choice” program sounds harmless enough: A voluntary program — at least for now — that would enroll private sector employees who currently don’t have a retirement plan into a state-run retirement savings account.

When the initial program was announced in 2012 with authorizing legislation, taxpayers were skeptical. Now that the program is even closer to fruition, there is greater reason to be concerned. The good news, however, is that the U.S. Congress is now threatening to pull the plug on this foolish endeavor.

The first question is why is this program even needed? While many public employees don’t pay into Social Security (most receive generous public retirement benefits instead) workers in the private sector do receive Social Security. One might complain that Social Security benefits are inadequate but, because the program is backed by the federal government (which has the power to print money) the benefits promised are almost certain to be forthcoming. Not only that, under federal law, there are many programs to assist private-sector workers whose employers don’t offer 401(k) or other employer-based plans. These include individual retirement accounts, both traditional and Roth IRAs. For workers without an employer retirement plan, there are generous limits on how much can be saved tax deferred.

Given all the existing retirement programs authorized under federal law and managed by the private investment firms, why on earth would California want to adopt a massive new government program? The short answer is that progressives desperately desire to control every aspect of the economy, leaving no room for the private sector. Never mind that investment firms — of which there are thousands to choose from — offer competitive returns and efficient management of retirement accounts. Progressives truly believe that government can do it better.

But better than what? The California Public Employees’ Retirement System, which is carrying an unfunded liability of close to a trillion dollars, has a history of corruption and gross mismanagement.

Progressives also see Secure Choice as a means to crowd out private firms which attempt to maximize returns for their investors while public-sector retirement funds engage in “social engineering,” investing in speculative industries and firms, many of which require government subsidies to survive. At the same time, these public funds eschew well-performing investments such as in the oil industry. This might explain, in part, why the investment returns of California’s public employee retirement funds badly underperform.

Then there is the cost to taxpayers. While the program is ostensibly voluntary, the startup costs of the program exceed $100 million. Taxpayers didn’t have much of a choice in seeing their dollars spent on this questionable program. We suspect that most Californians would prefer that money to go to projects that are truly public in nature such as highway maintenance and fixing dams. Finally, there is the risk to taxpayers in the event Secure Choice goes bankrupt. Defenders claim that this can’t happen but we recall officials in Stockton, Vallejo and San Bernardino saying the same thing.

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.

California has enough problems to deal with. There is no need for it to get into the private retirement plan business.

Jon Coupal is president of the Howard Jarvis Taxpayers Association.