On February 15, the U.S. House of Representatives voted 231-193—one Texas Democrat voted for and three Republicans voted against—to take a step backward on retirement security. And, in the first weeks of March, the Senate will take up the question of whether to rescind a late-in-the-game Obama Department of Labor rule—“Savings Arrangements Established by States for Non-Governmental Employees”—that provides legal support to cities and states that enacted or are considering plans to provide retirement accounts to private-sector workers, the majority of whom do not have a retirement plan at work.
If Republicans succeed in rolling back the DOL regulations, they will destroy the best chance 63 million American workers have to get access to a retirement plan. These states took the responsible first step to save their residents from a retirement crisis defined by low coverage and inadequate savings, and protect their taxpayers from the fiscal crisis that would result if millions of elderly Americans became indigent. The 63 million workers without access to employer-based plans include: 23 million people who will lose coverage in the seven states that have enacted plans, including California, Connecticut, Illinois, Maryland, New Jersey, Oregon, and Washington, and about 40 million people who will lose coverage in the 28 states and two cities—New York and Philadelphia—considering similar universal retirement plans.
The city and state plans, also known as Secure Choice Plans, are state-level retirement programs designed to provide retirement savings accounts to private-sector workers who do not have access to such plans at work. Under Secure Choice, designated private-sector employers are required to automatically deduct a percentage of their workers’ pay and forward it to state-sponsored individual retirement accounts (IRAs)—think of them as public option IRAs and 401(k)-type plans. Accounts are individually owned and professionally managed, and administered by independent boards headed by state-appointed trustees. Under these plans, employees would have the right to change their contribution rates or opt out of making contributions.
The Obama administration regulations clarify how states and certain large cities can coordinate their plans with the federal law known as ERISA (the Employee Retirement Income Security Act of 1974). ERISA provides federal protections for workers participating in most retirement and pension plans sponsored by private employers. The regulation helped clear up legal uncertainties that would have prevented states from implementing or enacting their own IRA accounts, which would have competed with the for-profit plans.
Why Are the Republicans Rescinding the Rule?
Some accuse Republicans of opposing these efforts by states and cities in order prevent a low-cost public option. Helping to confirm that view is a celebratory press release put out by the Investment Company Institute—the lobby for the retail money management industry—that states: “These are critical and timely measures to protect American workers by restoring consumer protections under the Employee Retirement Income Security Act (ERISA) and maintaining uniform rules for retirement plans.” The ICI is not a worker protection group; it protects the for-profit retail money management industry. The Republicans also claim they oppose the regulation because workers need federal protections, not the state regulations that mimic the ERISA protections. I am in favor of protection, and I am also in favor of ensuring workers can easily and effectively save through low-cost state managed accounts. The expansion was the key motive for the states and cities, and the Republicans are blocking the expansion.
Why Are Imperfect State Plans Better Than Nothing?
Some of us have been critical of the weak aspects of some state plans, such as the one in Illinois that requires all workers to enroll in a commercial Individual Retirement Plan. I side with Yale professor Ian Ayers, who notes that 401(k)s and IRAs charge such high fees that they don’t help out many low-income savers, who pay the highest fees of all. In fact, the mattress might be a safer place to save than an IRA—since the mattress doesn’t take out huge fees, and it is harder to withdraw from a mattress before retirement than from a checking-account linked IRA.
I also disagree with the opt-out features of the Secure Choice plans. All plans should be universal and top off Social Security. But my point is not the weaknesses, but the strengths. In the face of the retirement crisis that threatens the financial future of families, state and city budgets, and the morality and decency of communities, the states and cities took bold action in unchartered territory to prevent the number of poor and near-poor seniors from doubling by 2042.
According to the Retirement Equity Lab (ReLab), the center I direct at The New School, more than half of the 161 million workers in the United States—54.2 percent, or 87 million workers—do not have access to a retirement plan at work. (These calculations were made using the U.S. Census Bureau’s Community Population Survey.) Our research shows that households need a strengthened Social Security (PAYGO) program, plus a funded second-tier system that efficiently converts savings into a lifetime income in retirement. The funded second tier should incorporate 1) universal access; 2) both employer and employee contributions, made consistently over a working lifetime; 3) an equitably distributed government subsidy; 4) professional investment management in pooled account overseen by independent trustees; 5) prohibition on pre-retirement withdrawals; and 6) payment of benefits in the form of a lifetime income.
And to get to universal access, workers must have access to employer-sponsored plans. Evidence has shown again and again that such plans are the linchpin of retirement security. Without workplace plans, people simply don’t save enough to support themselves in retirement. The breathtaking pace of state efforts to increase coverage reflects the political will to address a need that is not being met in the private market. Few workers without access to an employer-sponsored plan invest in an IRA, many of which come with high fees. In contrast, state plans will default uncovered workers into low-cost, state-administered IRAs.
Monique Morrissey, of the Economic Policy Institute, makes the point via email that state plans are not just helping low and moderate income people, but anyone who has a plan now that charges huge fees. She cited one that charged 1 percent a year to high-income workers. State-sponsored plans would charge much lower fees—many estimates peg these at around 0.3 percent, a rate that saves people tens of thousands of dollars over their working lives.
The state plans are also good for small businesses. Small business plans are much more costly than plans for larger businesses, and the small businesses often don't have Human Resources departments, administrative staff, legal help, or economists to help them set things up.
Expand not Contract
We need to expand state and local initiatives to cover people in individual plans, and we need to expand proposals for universal access to defined benefit pension plan pooled accounts and annuities, and to substantially increase Social Security benefits. Steve Hill, policy director for retirement security for SEIU, has worked many years on these plans, and wrote in an email, “I have yet to come across a worker who says, ‘I don't want access to a (low-fee, professionally managed) retirement savings plan at work.’”
Many states and cities have taken the responsible first steps to help their residents avoid downward mobility in retirement. The curiosity is why the Republicans would want to stymie initiatives that provide residents with greater access to retirement coverage. The only explanation is that some entities in the private sector do not want to compete with a well-designed, low-cost option.