The idea has been raised in at least 12 states, according to the National Conference of State Legislatures: California, Connecticut, Illinois, Maryland, Massachusetts, Michigan, Pennsylvania, Rhode Island, Vermont, Virginia, Washington and West Virginia. Wisconsin lawmakers are expected to introduce a proposal in the near future, the (Madison) Capitol Times reported Tuesday.
Massachusetts is the only state so far to pass a policy, although its scope is limited: non-profit workers at firms with 20 employees or fewer. The California Senate approved a much broader bill in May, and it is now working through various Assembly committees.
An important note: these proposals do not ask for taxpayer money to be given to private retirement plans. Rather, the state government (instead of the private employer) is responsible for collecting employee contributions and contracting financial advisers to manage the accounts.
The concept is fairly new. Maryland was the first state to introduce so-called "voluntary accounts" legislation in 2006, according to NCSL. Lawmakers in California, Connecticut, Illinois and Massachusetts have proposed bills this year.
The impetus for these proposals is likely two-fold, Ron Snell, senior fellow at NCSL, tells Governing. The economic downturn gutted existing private retirement plans and hampered the ability of businesses to offer them. A 2011 survey by the AARP found that more than half of Americans over 50 were somewhat or very uncomfortable with their retirement savings. NPR reported in 2010 that the nation’s combined 401K and IRA value had dropped by $2 trillion at the worst point of the recession.
"The concern is the substantial number of private-sector workers who are covered by no retirement plan except Social Security," Snell says. "Because of the expense, private-sector designed plans might not be particularly attractive in a small work environment, even if they could be offered."
In addition to the faltering economy, the idea has also been floated more often in states with a strong union presence. “It's supported in part by public-sector unions,” Snell says, “because I think they see this as a way of assauging some of the sense of deprivation that private-sector workers have related to public-sector pension plans.”
David Adkins, executive director of the Council of State Governments, compares growing state interest in the concept to health-care reform. States are hoping in getting in front of what could become a greater problem. "Some legislators are looking at a variety of factors—we have an aging population, and it is not predicted that Social Security will be viable or properly funded as a safety net," he says. "Therefore, some think this could provide some level of secruity for aging seniors. They're thinking: 'Let's plan now.'"
The proposals do differ, but follow a generally similar structure. Here’s how it will work in Massachusetts: the state treasurer’s office will create a trust that will receive pension contributions from non-profit employers and employees. The plan is a defined-contribution model, and the treasurer’s office will manage it separately from the $5 billion public-employee pension fund. But given the size of the assets that the office already oversees, the relatively small addition of the non-profit accounts is expected to have minimal administrative costs.
Non-profit workers make up about 14 percent of the Massachusetts workforce, according to the Massachusetts Nonprofit Network, which supported the legislation, and only one in five of those workers receive retirement benefits through their employer.
"In too many cases, non-profits simply haven’t had the resources to administer an affordable deferred compensation plan for their employees, resulting in countless people being isolated from a safe and secure retirement,” Massachusetts Treasurer Steven Grossman, a supporter of the bill, said in a statement. “Non-profit workers provide important services that reach underprivileged and struggling segments of our population, and this new law will incent thousands of people to continue that critical work.”
The California bill, which passed the Assembly Committee on Public Employees, Retirement and Social Security last week and was referred to the Appropriations Committee, would institute a broader program. The California Secure Choice Savings Trust would be available to any private employers with five employees or more. Its board would be headed by the State Treasurer. As in Massachusetts, the trust would follow a defined-contribution model, and controls would be in place to ensure that its administration came at minimal cost to the state and that the state would not be liable for paying any benefits to its enrollees.
The legislation's authors cited research by the University of California-Berkeley, which found that nearly 50 percent of state residents retire at or near the poverty line. Another study by UC-Berkeley concluded that 6.3 million Californians currently do not receive retirement benefits through their work.
The bill “addresses this population by providing them a portable and reliable retirement plan that will serve as a modest supplement to Social Security,” State Sen. Kevin de Leòn, one of its primary sponsors, said in a statement. “If we don’t offer this, most of these people will retire into poverty putting a further strain on our already scarce public resources.”
Similar factors have led Wisconsin lawmakers to develop their own proposal in recent weeks, according to the Capitol Times, although no bill has been formally introduced yet. State Sen. Dave Hansen, who has taken an active interest in the issue, told the newspaper that the state investment board has averaged a 10.6 percent return on investment for retirement plans over the last three decades—a record that eclipses many private peers.
A June report by the Pew Center on the States concluded that Wisconsin had the most fiscally healthy public pension system. That finding, Hansen told the Times, has convinced him that the state has something to offer its privately employed constituents.
“This is an opportunity to open it up to other people and have a well-managed, secure fund,” Hansen said. “Fewer people feel confident these days that their retirement money will be there.”
