Yet Another Nutty Annapolis Idea: Mandating a State Pension Plan for Private Employees
Real problems have a way of generating bad ideas. A case in point is the “solution” being offered to the US’s low retirement savings rate, mandating a state run pension plan for private-sector employees. Yet again, the ‘more government crowd’ wants to use the coercive power of the state to force others to bend to their wishes.
Former Maryland Lt. Gov. Kathleen Kennedy Townsend, and Democratic Senators Rosapepe and Madaleno want to require that every private-sector employer in the state with at least five workers and no retirement benefits, to mandate their employees participate in a state-run pension program.1 Unless they specifically opted out, every employee would automatically have money deducted from their pay, going to the state-run retirement program. So far three states have passed similar legislation, Massachusetts, California and Illinois, although none of these plans a have received IRS approval.
Where to begin?
For starters, Maryland public employee pension is already underfunded by nearly $20 billion. This is the equivalent of an extra credit card balance of $3,500 for every Maryland state resident.
That Illinois, the state with one of worst funded public pension systems in the country has earlier this year adopted their own similar “private employer” mandated system, the “Illinois Secure Choice Savings Program,” seems ironic. Their unfunded public pension liability for various state and local plans tops $100 billion and could well trigger municipal bankruptcies in the very near future.
Proponents claim that the state should incur no liability for the private employee pensions. The Maryland legislature’s track record for reversing itself on its pension “commitments” provides little comfort.
Only a week ago Speaker Busch indicated that the Assembly was considering a proposal to cut payments to the state employee pension system by as $60 million in order to fund other
spending. Democratic State Comptroller Peter Franchot, who also serves as vice chairman of the state pension board, said the idea is a “breach of trust” with state employees, who were required to contribute another 2% of their pay to the pension system as a result of 2011 reform legislation. Franchot said the proposed formula changes, while saving the state nearly $2 billion over the next 10 years, would increase costs to taxpayers by $4.5 billion over the following dozen years.
The very knowledgeable public pension observer, Jeff Hooke, writing for the Maryland Public Policy Institute, has calculated that the Maryland’s Pension System recently paid $221 million in Wall Street money management fees in a single year. This represents a proportionate rate of 7/10th of 1% of fund assets, nearly twice what other state systems pay on average. The draft legislation limits “total administrative costs” to an even higher rate of “0.75% of “total assets held in the trust.” However pension management “administrative fees” and “investment fees” generally pay for two distinct sets of services. So unless these two categories are consolidated together, the proposal would generate even more Wall Street income from the state.
Each year Maryland’s general fund benefits from about $90 million in unclaimed property funds. This money typically comes from abandoned accounts in financial institutions and goes to the state. If private employees are forced to contribute to this proposed new state pension plan, but fail to reclaim their funds when they change jobs, then the state coffers could experience a windfall from a new gusher of unclaimed funds. Not so helpful for a higher retirement savings rate.
Again, it is certainly true that Marylanders would benefit from a higher savings rate and better preparation for retirement. As a result, conservatives have advanced a number of ideas to simplify retirement savings. But a “solution” of more government intervention in the form of a mandated state run pension system is entirely the wrong approach.