Thursday, May 22, 2008

Zelinsky on State-Administered Retirement Plans for the Private Sector: A Bad Idea

Zelinsky_ed Ed Zelinsky (Cardozo) gives us the heads up on his blog post on states and private retirement systems on the Oxford University Press blog:

Legislators throughout the country are proposing that states start to administer private sector retirement savings plans. While the details of these proposals vary from state to state, they all provide that the states should embark upon the business of managing private sector individual account arrangements.

In Connecticut, for example, the state senate, before recently adjourning, passed S.B. 652 which would have created a state-sponsored “universal 401(k).” This legislation would have mandated the state’s comptroller to establish and administer a state-run “tax-qualified defined contribution retirement program” for the self-employed, the tax-exempt institutions, and the “small employers” of the Nutmeg State.

On the other side of the country, currently pending in the California legislature is AB 2940. If enacted, this legislation would authorize CalPERS, the Golden State’s public pension plan, to accept from California residents payroll deposits for state-administered individual retirement accounts. Similar legislation has been introduced in a variety of other states.

The concern animating all these proposals is well-founded. The defined contribution paradigm has worked well for many American households, in particular, middle- and upper-middle families who save and invest through 401(k) plans and IRAs as well as the employees of large employers which sponsor and typically match such employees’ 401(k) contributions. Despite this success, it is troubling that lower-income workers and smaller employers are severely underrepresented in the individual account system . . . .

There is an important step the states can take if they are serious about encouraging 401(k) and IRA participation among low-income individuals. In particular, the states could, in their own income taxes, match part or all of the federal savers’ tax credit which subsidizes the retirement saving of low-income persons by providing a tax credit if a low-income worker contributes to an IRA or 401(k) account.

However, there is no compelling case for the states to enter the private retirement savings business. Let them put their own pensions on solid financial footings first.

I sound like a broken record whenever I write about Ed's thought, but I agree.  There is bound to be a grand DCP hangover when the next generation has to start to live on their 401(k) accounts and such during retirement.


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