Who Is Plotting to Steal Your Pension?
A huge pool of money lies just beyond the grasp of government’s itching fingers: private pension funds. Various money-grab schemes have been floated, including a legal requirement that all private pension funds contain a set percentage of Treasury bonds. The most innovative scheme comes from California, which is attempting to do an end run around the most powerful obstacle to a government grab: namely, backlash from existing pension holders.
What is Bill 1234?
California Senate Bill 1234 creates America’s first state-sponsored and state-managed retirement program for private-sector workers. Because the scheme creates new pensions for nonunion workers, however, it escapes the wrath of private unions and powerful corporations who would rebel if government grabbed at existing plans. The bill has already been signed by California Gov. Jerry Brown.
The new system addresses private employers with five or more workers who are not already covered by an employer-sponsored pension plan. Such employers must arrange for an automatic deposit of 3% of the income of “eligible employees” into a government-run retirement plan.
Employers can also make additional deposits on behalf of employees in much the same manner as matching 401(k) contributions. An “eligible employee” is defined as any worker who does not go through the process and paperwork to opt out of the retirement arrangement. Otherwise, the employee is opted in. Over 6.3 million California workers are expected to be eligible.
(Note: The bill allows employers to set up private pensions as an alternative, but this would be costly. Private-sector retirement plans are regulated by the federal Employee Retirement Income Security Act, or ERISA. This subjects employers to strict standards, complicated reporting requirements, and significant penalties. Small employers are highly unlikely to implement the private alternative.)
The new retirement plan will be administered by a board headed by the state treasurer, and it will select either a private investment firm or the state’s public pension system, California Public Employees’ Retirement System (CalPERS), to maintain and manage the new funds.
(Newspapers and other accounts seem to take it for granted as a default position that CalPERS will be at the helm.) The scheme is estimated to add $6.6 billion in the first year to the state funds managed by CalPERS, which is already the biggest U.S. pension fund, with 1.6 million public employees and $233 billion in assets at the end of fiscal 2012.
Why Bill 1234?
CalPERS is in fiscal death throes. Writing in opposition to Bill 1234, state Sen. Mimi Walters declared, “California has amassed a terrible track record when it comes to maintaining its public pension systems; the systems are currently a combined $240-500 billion in debt.” The two paths out of the dilemma are a steady and solid return from investments or a raw infusion of cash. CalPERS returned only 1% on investments last fiscal year. Bill 1234 accomplishes the raw infusion alternative in at least two ways:
1) A category of investment explicitly permitted by the bill is “United States government and government-sponsored entity debt obligations.” The government can use the pension funds to purchase its own debt.
2) 3% of the income of approximately 6.6 million private-sector workers will be suddenly under its management.
Walters noted that the infused money might go directly to public employees because “those public employees are obligated [by law] to be paid first from the pool of investment dollars.” She concluded, “SB 1234 looks like nothing more than a cynical effort to prop up the floundering public employee pension debt with new funds from private investors, sent in by employers who are forced to participate under penalty of law.”
The Patina of Bureaucratic Reassurance
Proponents of Bill 1234 offer reassurance to the skeptical.
The employee enrollment is voluntary, apologists say. And it is true that the automatic enrollment has an opt-out feature… for the moment. But as executive director of the government-watchdog California Common Sense Autumn Carter observes, “Opting out of state-run programs is notoriously difficult and bureaucratic.”
Bloomberg estimates the average income of the new pension “subscribers” at $46,420 and Carter guesses “that many at that income level would want to recapture the automatic $1,400 annual paycheck deduction, but for whatever reason, they will not attempt to do so.” While the bill’s author says the private pensions set up by SB 1234 are voluntary, the bill’s language states that private sector employers “must opt out.”
Moreover, employees must opt out every two years. The bill reads that “at least once every two years, participating employers shall designate an open enrollment period during which eligible employees that previously opted out of the program shall be enrolled in the program unless the employee again elects to opt out…”
The additional employer deposits are voluntary, apologists state. And it is true, they are… for the moment. But the eerily accurate investment adviser Michael Shedlock insists, I “don’t buy it. This would be the first step toward mandated involuntary contributions.” Government programs begin with whatever measures the public will accept, and then they grow from there.
The new retirement accounts will not necessarily be managed by CalPERS, apologists observe. CalPERS will bid against private firms for the asset management, with the state treasurer overseeing the process. In the unlikely event that CalPERS does not become the manager, however, the state of California will still have legal authority over the funds. Bill 1234 creates the California Secure Choice Retirement Savings Trust, which will be administered by the California Secure Choice Retirement Savings Investment Board. Bureaucrats will be in charge.
New retirement accounts will be maintained and managed separately from the CalPERS ones, they vow. Frank Keegan, the editor of Statebudgetsolutions.org, responds, “Anyone who believes this money… will be left sequestered should check how well that promise was kept for Social Security.”
Only one barrier to the implementation of Bill 1234 remains. The bill as it stands may not meet the requirements of the IRS or of the Employee Retirement Income Security Act of 1974. And so another bureaucratic board has been established to determine compliance.
Bill 1234 will not prop up the public employee pension for more than a flicker of time. CalPERS is a Ponzi scheme — a scam that returns money to older investors only by acquiring new ones. Private Ponzi schemes have relatively short life spans, after which the perpetrators are fined or jailed. Public Ponzi schemes are longer lived because laws can force more and more new people into “investing.” But after the Ponzi that is CalPERS goes bust, the bureaucrats will collect their protected pensions and go home.
Bill 1234 may well make California go bust sooner, rather than later. The infusion of cash depends upon the continuing existence of small businesses. Shedlock captured well the impact the bill would have on that sector:
1. Immediate large-scale firings by small businesses. No small business owner in his right mind would have over 4 employees.
2. Any business that could would leave the state.
3. Many businesses that do stay would be destined to go bankrupt.
4. California would end up like Detroit or Greece.
The most ominous aspect of this shortsighted money grab? California is a trendsetter not merely in fashion, but also in politics.
Original article posted on Laissez-Faire Today