Coyote has some questions about a sweeping yet underpublicized new California law.
P.S. Josh Barro writes via Twitter (adapted), “I don’t buy this. Worker participation is voluntary, and if it looks like they’re paying into a slush fund, they’ll withdraw. I’d worry more that CALPers will start offering a tax-backed defined benefit to private workers, atop public promises. I think it would be a fine idea to let people participate in the CALPers investment fund, with the participant bearing all risk. Big pension funds do have real administrative cost advantages over 401(k)s. The problem is they get in the risk-shifting business. The bill says California must ‘secure private underwriting and reinsurance to manage risk and insure the retirement savings rate of return.’ I think that means there’s no reliance on a taxpayer guarantee — risk must be borne by a private firm and therefore priced right.”
P.P.S. Scott Shackford at Reason has further analysis, calling attention to “guaranteed return” language as well as to the AP’s description of the program’s must-make-an-effort-to-get-out structure: “The program directs employers to withhold 3 percent of their workers’ pay unless the employee opts out of the savings program, which can be done every two years.”
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What I don’t see in the news reports or even in the bill Brown signed is the terms under which the employee gets access to his money. Most 401k accounts are cashed out when the employee changes jobs, regardless of the taxes and penalties this incurs. That isn’t a heavy expense because most 401k accounts are small, but it defeats the purpose of 401k’s. If California workers are able to cash out these new retirement savings plans when they change jobs, won’t that defeat the purpose of the new law?
The text of the law calls the plan a “cash balance” defined benefit plan. According to the Employee Benefits Security Administration, which is a division of the federal Department of Labor, the employer bears sole financial risk and financial responsibility for paying the benefits(Frequently Asked Questions, http://www.dol.gov/ebsa). Hence, the money must be invested conservatively; both the DOL website and the law refer to the T-bill. According to http://www.treasury.gov, 52-week T-bills are currently paying 0.15% annual interest. That’s scarcely a rate of return to get excited about, especially since U.S. Treasury bonds are no longer rated AAA. It’s also about one-tenth as much as the rise in the Consumer Price Index from Aug 2011 to Aug 2012 (Bureau of Labor Statistics). The sneaky negative option enrollment, which would be an illegal unauthorized transaction if done by a bank or any other financial institution, is bad enough. Tricking people into investing is an encroachment on their liberty, but this law tricks them into buying an investment with a negative real return.