Government-Sponsored Retirement Plans for Private-Sector Workers Fall Short
State and local governments are stepping in to help ordinary Americans save for their retirement as corporations continue to abandon their responsibility to help and the Trump administration takes steps to undermine the ability of workers to save.
But the initiatives–while laudable examples of the positive role government can play in our society–fall short of fully addressing the country’s looming retirement crisis.
The new retirement plans for private-sector workers don’t come close to matching the richness of traditional retirement plans once common in companies willing–or forced by unions–to invest enough to ensure their workers have a dignified retirement.
What’s more, these government-promoted plans let employers completely off the hook and put the entire burden of retirement savings and investment management on workers. Such cost shifting to employees mirrors what employers are doing with their health benefits, where workers no longer make modest contributions but are stuck with a typical tab of $6,000 for a family plan that costs $20,000.
The Sad Death of Traditional Pensions
Today, public-sector workers are basically the only class of workers who are guaranteed a steady retirement income based on their years of services and salary. Thus, while the new model constitutes a positive modest step to address the country’s retirement crisis, it nevertheless puts another nail in the coffin of traditional—or defined benefit—pensions enjoyed only by public employees and a lucky few in the private sector.
In September, New York City unveiled its plan to help private-sector workers save for their retirement years. The plan requires participating workers to put aside 3 percent of their salary toward their retirement.
Officials, including Mayor Bill de Blasio, gleefully pointed out that the plan would have no cost for employers, whose only obligation would be to offer their employees an opportunity to participate.
The city would assume the estimated $1 million to $3 million in start-up costs during the first few years. The program would then be self-sustaining, relying on the investments returns of workers. The proposal is now in the hands of the Democratic-controlled City Council, which is widely expected to approve the legislation.
In 2017, Oregon became the first state in the county to address the retirement crisis. That year, it introduced the pilot program for its OregonSaves program. Some 7,500 people were enrolled by the first quarter of 2018.
Under the state-sponsored retirement program, participants agree to an automatic 5 percent deduction from their paycheck, and they are charged a maintenance fee of 1 percent of their assets each year. They are permitted to increase the percentage of their paycheck deduction.
All employers with at least 50 employees must register for the plan by 2021. Other employers can register voluntarily.
In recent years, over 30 states have considered legislation that would establish a state-run retirement plan. So far, Oregon, California, Illinois, Connecticut, Maryland and Massachusetts are the only states that have enacted legislation establishing a state-run plan program.
With the modest employee contribution rates, though, these plans unfortunately will fall short of matching the benefit typically provided by traditional retirement plans, which require substantial contributions from employers. Defined-benefit plans require funding obligations as high as 20 percent of the value of payroll. Some financial analysts say that workers need to save that percentage of their pay to be able to maintain their lifestyle when they retire.
The Financial Squeeze
Putting aside the structure of retirement plans, a key issue here is, of course, affordability.
Simply put, coping with decades of stagnant wages resulting from the loss of their share of productivity gains, millions of American workers are too financially squeezed to be able to accumulate sufficient savings for their retirement.
The Federal Reserve Bank’s annual study on the economic well-being of U.S. households in 2018 offers a bleak picture of the financial health of the typical American family, and it suggests why millions of people are not saving enough (if anything) for their retirement.
The study reports that, if faced with an unexpected expense of $400, 27 percent of Americans would borrow or sell something to pay for the expense, and 12 percent would not be able to cover the expense at all.
Nearly half of Americans approaching retirement have less than $25,000 in savings, according to a survey by the Employee Benefit Research Institute. One out of four workers do not even have $1,000 socked away.
More than two-thirds of Latino workers don’t have retirement accounts, according to the National Institute on Retirement Security. Sixty-percent of blacks don’t.
Nearly 25 percent of workers say they expert they won’t be able to retire. Thirty-six percent of Americans don’t feel they will be able to enjoy a comfortable retirement, according to a Gallup poll.
“I don’t want work until I die,” said Onza Lynch, a truck driver who works for a company that collects carton waste from businesses, at the Sept. 23 rally and press conference in which de Blasio announced New York City’s plan. The Bronx resident, who has six children, said he lacks retirement savings even though he has worked for 30 years, starting out as a teenager.
“We need a new law like this for people like me,” Lynch said.
Social Security to the Rescue?
Probably the easiest way to address the retirement crisis would be to expand Social Security. The American public generally loves the program, and using it to fix the retirement crisis would make the need to create a new program—one run by the government or a public-private partnership—unnecessary.
Fifty-four million depend on Social Security – one out of every six people, according to the advocacy group Strengthen Social Security. About two out of three seniors depend on Social Security for most of their income, and one-third of seniors rely on it for at least 90 percent of their income.
Social Security’s benefits are modest, but vital, Strengthen Social Security points out. The average benefit is about $13,000 a year—less than full-time, minimum-wage work.
Supported by 200 Democrats, the Social Security 2100 Act would be a very positive step forward to address the retirement crisis.
The proposal would increase the contribution rate to 7.4 percent from 6.2 percent and would be gradually phased in from 2020 to 2043. For the average worker, this would cost an estimated 50 cents more per week every year.
The average benefit would be boosted by 2 percent. The increase would be funded by raising the cap on payroll taxes on wages to $400,000. Currently, the cap is only $132,900.
The leading three Democratic presidential candidates—Joe Biden, Bernie Sanders, and Elizabeth Warren—call for expanding the benefit by making the wealthy contribute more.
Meanwhile, we can’t count on the Trump administration to do anything significant to start to deal with the retirement crisis. Trump's Treasury Department shut down a program established by the Obama administration—myRA—to help people who did not have access to a workplace savings plan.
What’s troublesome is that many Republicans would still love to resurrect President George W. Bush’s failed proposal to privatize Social Security.
Will the spread of government-sponsored individual retirement accounts serve as ammunition for conservatives to push again for the privatization of Social Security?
That certainly would lead Chilean dictator Gen. Augusto Pinochet
to smile in his grave.
His government was the pioneer of a global movement to privatize social security. But that hasn’t worked out well for Chilean retirees.
They were promised their investment accounts would give them a benefit worth 70 percent of their pre-retirement income while in fact they typically have a monthly benefit of $400, with many workers getting only between $160 and $260.
Here in the United States, the government-sponsored plans would appear more likely to match the investment returns of the Chilean model rather than the benefits of the nearly extinct defined-benefit pensions. Our retirement crisis demands a better solution.