Be wary of govt-sponsored retirement plan for private sector workers

Sen Doug Whitsett

by Sen. Doug Whitsett

It is often said that bad ideas are never truly defeated in the legislative process; they simply remain dormant until being resurrected in a different form for a future Legislature to debate.

House Bill 3436 is one of those very bad ideas. It was introduced and deliberated during the 2013 Legislative session to establish government-sponsored retirement plans for private sector employees.

It was strongly supported by State Treasurer Ted Wheeler as well as by the Service Employees International Union (SEIU) and the American Association of Retired People (AARP).  In fact, Wheeler was presented with the “2014 Legislator of the Year Award” by the National Conference on Public Employee Retirement Systems for his strong advocacy for their policies.

HB 3436 was promoted under the guise of providing private sector employees with opportunities for better retirement security. That concept may certainly appeal to the uninformed who may be anxious about their long-term financial stability.

However, a variety of thriving tax-deferred retirement plans is already available to anyone who wishes to participate. An entire private sector, free-market industry contends to match the best individual plans with each family’s goals. Market competition ensures the most effective retirement outcomes.

In its original form, HB 3436 did not have enough votes to pass in the Senate. For that reason, it was amended into another version that was passed, signed into law and established the Oregon Retirement Security Task Force. The task force was appointed by Gov. John Kitzhaber, spearheaded by Treasurer Wheeler, and charged with making recommendations to the Legislature on ways to enhance retirement security for workers, especially those in the private sector.

The amended version of HB 3436 passed on largely party-line votes. I was among those who voted against it because I strongly believe it is taking Oregon in the wrong direction.

This very flawed idea will undoubtedly return for Oregon’s 2015 legislative session, where Democrats will have firm control of both the House and the Senate.

The actual real-world implementation of this concept almost certainly has underlying motives that are not as altruistic as its proponents suggest. In fact, one might wonder why the largest public employee union in the nation, SEIU, is so deeply concerned with private sector retirement benefits.

In 2012, California Governor Jerry Brown signed into law Senate Bill 1234, otherwise known as the California Secure Choice Retirement Savings Trust Act. That bill will eventually require all businesses that have five or more employees, and that do not already offer a retirement plan, to automatically enroll them in a plan. The plan will be funded by a three-percent payroll deduction paid by the employee. In its current form, employees are able to opt out of the plan.

The funds created by the payroll deductions will be managed and invested by CALPERS, California’s public sector retirement system, or by another unidentified contracted organization.

What could possibly go wrong with this scheme?

For starters, CALPERS has a very poor track record of managing the public employees’ retirement assets. Three California cities–Mammoth Lakes, San Bernardino and Stockton— have already filed for bankruptcy caused by retirement system insolvency.

In fact, huge infusions of cash may be required to maintain the solvency of their entire public sector retirement system. Where better to find the source of that critically needed funding than within the very vibrant and solvent private sector retirement plans?

Comparable proposals with very similar themes have been put forth by SEIU and AARP in several other states. They begin with voluntary automatic payroll deductions that could eventually morph into mandatory participation. The expected next step would be to require matching employer contributions. Strong efforts would be made for management of the funds by existing public sector retirement funds such as CALPERS or Oregon’s Public Employee Retirement System (PERS) to avoid the expense of duplication.

Anyone with enough foresight to be considering their long-term retirement goals already has many options available to make that happen. So why should it become necessary for the state government to get involved? This is especially worrisome, considering the multitude of issues that Oregon has already experienced with both the funding and solvency of PERS.

Is it entirely possible that these issues may be directly related?

The precedence already exists for governments to use both public and private sector retirement plans to offset their sovereign debts. The United States has “borrowed” and spent virtually all of the Social Security reserve funds accumulated from decades of mandatory employee payroll deductions matched by employer contributions. Various European nations, including Poland and Russia, have effectively nationalized private sector retirement plans as well.

It’s no secret that our federal government is deeply in debt, to the tune of $18 trillion. That enormous sum represents only direct sovereign debt. It does not include even greater trillions of dollars in other unfunded liabilities including Medicaid, Medicare and Social Security, as well as debt incurred by myriad public pension funds.

Taxpayers are on the hook to pay for all of that debt incurred through the generations of gratuitous government spending that has taken place throughout various administrations. That debt must eventually be paid and will have to come from somewhere.

We need to make certain that if Treasurer Wheeler is successful in leading our state government into the business of establishing pension plans for private sector employees, it must be done for the right reasons and accompanied by concrete assurances that the funds will not be diverted for other purposes.

Employee contributions must remain voluntary. Employers must never be compelled to match employee contributions. Government-sponsored plans must never be allowed to compete with or replace private sector sponsored plans.

Private sector retirement funds must be constitutionally protected from government repurposing. Specifically, that constitutional protection must include prohibition against borrowing the funds for any purpose. It must forbid redirecting the use of the money to any other purposes, such as providing additional leverage for the sake of bailing out bankrupt public retirement systems.

Accumulated funds must be managed by private sector investors, whose only goals are the secure appreciation of capital to benefit private sector employees. Investments of the private sector retirement funds must not be influenced by the politically motivated social engineering that so often is currently practiced by many public sector investors.

The much better course of action would be for Oregon to simply reject this very bad idea.

Senator Doug Whitsett is the Republican state senator representing Senate District 28 – Klamath Falls

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Posted by at 05:00 | Posted in Government Overreach, OR 78th Legislative Session, Oregon Senate, PERS, Public Employee Unions, State Government | 6 Comments |Email This Post Email This Post |Print This Post Print This Post
  • Jack Lord God

    It is hard to see how anybody could support this. There are already innumerable retirement planing professionals, endless mutual funds etc. available to anyone who wants to set aside money for retirement.

    I set aside money for my own retirement as well. In fact, my biggest single chunk of retirement money already goes to a government plan! To a liberal, the plan is ideal. It is compulsory, all money in it can only be spent on frivolous government pursuits, none can be invested in private industry by law.

    That plan is called Social Security. As a self employed person, I have a guaranteed 50% loss. Wow! Why in the world would I not want more of this?

    Government has proven with clarity as clear as an azure sky of deepest summer that it is totally incompetent at this sort of thing. That is, unless the beneficiaries are a block of voters, then it will rip off everyone else to make sure that block gets theirs. We saw what happened with PERS. No thanks.

  • wfecht

    how do I scalp thee let me count the ways. We have abetter Idea lets remove the middleman. lets make it government controlled fromthe beginning. That way we don’t have to go through the embarassement of confiscating private funds and put them into the government coffers. can’t happen here? the Social security system has an approximately 2 trillion deficit owed the the US treasury from money borrowed and spent by our congress. It is a pay as you go system. how much longer does anyone think that it will be before the following happens.

    Argentina 2008 The government of Argentina moved private pension funds into the government social security system.

    Portugal. December, 2010.

    The Portuguese government moved almost 1.8 billion euros ($2.5 billion)
    of pension fund assets of Portugal’s largest phone company (Portugal
    Telecom) into the government social security system.

    Hungary. December, 2010.

    Hungary has a private/public pension system. Citizens are forced to
    contribute 24% of their gross wages into the system, 8% of which goes
    into the private fund, the rest into the government fund. During
    retirement the government would pay 70% of the pension payouts and the
    remaining 30% coming from the private fund. The government would make
    up the difference if the private fund could not payout the 30%. In 2010
    Hungary gave citizens an option: they could move all of the private
    pension funds into the government fund or they would lose the 70%
    pension payout from the government when they retired.

    Portugal. December, 2011.

    The Portuguese government moves assets of the four biggest banks, which
    consists largely of private pension funds, onto the government’s balance
    sheet.

    Poland. September, 2013.

    Half of private pensions are confiscated by the government of Poland in
    order to be able to borrow more money. Bond holdings in the private
    pension fund would be transferred into the state pension system. The
    rest of the assets in the private fund (i.e. equity assets) would be
    transferred into the state system over the next 10 years. The seizure
    was done by the government so the government could reduce its debt to
    GDP ratio. This reduction would allow the government to borrow more
    money.

  • HBguy

    Which of the following investment managers would you chose.
    1. The local Edward Jones office where the investment adviser earns a commission to put your money into a front or back end loaded mutual fund where the fund managers also take fees. The fund invests in bonds or stocks. The Edward Jones guy makes 250,000 and the mutual fund managers make 1.5 million. Your rate of return, if you’re lucky, is the S&P average over the last 40 years 9.8%, minus the fees you paid. So the effective rate of return is less.
    2. You invest in a a state sponsored entity that uses the PERS investment offices. You have no fees to pay. They invest some in publcily traded equities and bonds, but because of the size of their assets under management they are also able to invest in private equity placements and reach rates of return only available to the wealthy investors. Their rate of return over the past 30 years is 10.3%

    That is the reason why the middle class would like to have a public option here. No one should be forced to invest with a state sponsored progam. You can go ahead and chose to use the local bank or financial advisor if you want. But if someone gave me the option of pooling my investment money so I could get into the types of investment opportunities that the investment class has access to….well, I’m all over that. Particularly if my very smart successful investment officer gets paid a public salary of about 65% of what a private financial adviser would want, AND whose salary and compensation isn’t dependent on churning my account or increase if I’m sold highly front loaded funds.

    • Eric Blair

      Very, very nice.

    • Bob Clark

      The rate of return for PERS in the last ten years is not much more than 5%, and this past year it only increased at 50% of the rate of the S&P 500. PERS has been lagging of late because it has invested in hedge funds, which have been under-performing market averages.

      I also note Morning Star rates the Oregon College Savings plan, another state run savings vehicle, as mediocre. For the longest time it has underperformed market average returns, because it has had high management fees.

      Then finally the state’s common school fund trust actually lost money last year when the stock market was up 30%.

      PERS is billions underfunded, and somehow we want more. Count me out. But I know those who love living off imploding social systems, live only for today.

    • MrBill

      The problem with proposals like this are that people, usually politicians like Wheeler, score points today by making promises that their successors have to keep. Makes sense politically, but not so much economically. This kind of thinking has lead to the problems with PERS as well as Social Security and the problems it has looming on the horizon, as well as the problems being faced by CALPERS.

      Individuals have no shortage of options to prepare for retirement. Even if their employer doesn’t offer a 401k, they can still invest in IRA’s and Roth IRA’s. Or the employer can set up a SEP-IRA.

      Investing 10-15% of your annual income each year in a fund like this with an average annual rate of return of 10% throughout your career will allow you to have a very comfortable retirement.

      This is a solution in search of a problem.

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