Americans should be wary about giving governments the authority to manage their retirement savings free from federal protections.
On Thursday, the House passed two resolutions of disapproval that would roll back the Obama administration’s special exemption that allows state and some local governments to run their own retirement savings plans free from federal rules and regulations.
While some conservative policymakers may be tempted to oppose these resolutions out of concerns over federalism and maintaining states’ flexibility or a sincere desire to increase retirement savings, the plans would not accomplish either of these goals.
For starters, the federal government has already asserted its jurisdiction over private sector retirement savings accounts through the Employee Retirement Income Security Act of 1974.
A uniform set of rules and regulations for private sector retirement savings accounts makes it easier for workers to seamlessly maintain their retirement savings plans as they move from job to job and across state lines.
The federal government already grants states the freedom to manage their own public employees’ retirement plans as they see fit (and free from the 1974 law).
The only sensible rationale for extending this freedom for states to manage private sector retirement savings plans would be if state and local governments had a proven track record in preserving and protecting their own employees’ retirement savings.
And unfortunately, they do not.
Across the U.S., state and local governments have promised an estimated $5.6 trillion more in pension benefits than they’ve set aside to pay, and politicians routinely play politics with public employees’ pensions, using government workers’ savings to provide kickbacks to their political supporters, reward industries they like, punish those they don’t, bully corporations, and attempt to boost their local economies.
State and local governments don’t need any more flexibility. All that would do is provide an opportunity for them to mismanage private workers’ savings as they’ve done to their own public workers.
While increased retirement savings is a laudable goal, some workers could end up with less money in their retirement accounts. And even if retirement savings were to rise overall, this is a case where the end does not justify the means.
These plans are not the type of retirement security workers desire.
As specified, state- and local-based retirement plans:
- Strip savers of federal protections that exist to safeguard their retirement security.
- Impose mandates on employers with as few as five employees to offer a retirement plan or enroll their employees in the state- or locally-run plan.
- Cause many workers to lose their current work-based retirement plans by creating a huge competitive advantage for government-run plans.
- Reduce many workers’ savings by prohibiting employer contributions into the accounts.
- Potentially eliminate workers’ rights to access or control their money, and prohibit them from taking their account from one job to another.
- Provide an opportunity for state and local governments to use workers’ retirement savings to shore up their underfunded public pensions.
- Create a huge risk for taxpayers (while the plans lack any official backing, taxpayers will presumably become the de facto guarantors of these accounts).
An exemption from all federal rules is not the only means state and local governments have to make it easier for workers to save.
Indiana proposed a state-based Hoosier Employee Retirement Option (HERO) that would establish portable Roth IRAs on a completely voluntary basis. But this type of plan isn’t allowed under the state-based plans exemption because it doesn’t include an employer mandate.
If the Senate passes these resolutions and President Donald Trump signs them into law, workers, savers, employers, and taxpayers across the country can breathe a deep sigh of relief knowing that they won’t lose their current workplace retirement plans, won’t have their savings controlled by their government, won’t be forced to automatically enroll their employees in government-run savings plans, and won’t carry the risk of having to bail out mismanaged state- and locally-run private retirement plans.