In his State of the Union address this January, President Obama unveiled a "starter" public retirement savings account called "myRA," a play on the acronym IRA for individual retirement account. He argued it was an essential step toward addressing an enormous issue: Half of American workers (and 75 percent of part-time workers) lack access to employer-sponsored retirement plans.
When these Americans hit retirement age, they won't be tapping nest eggs but public social service programs. “It’s about seeing a change from welfare mom to welfare grandma,” says Lynea Hansen, executive director of the Colorado Coalition for Retirement Security.
MyRA is scheduled to come online at the end of this year. But in the meantime, a dozen or so states are looking for alternative ways to address the problem. Earlier this month, the Connecticut Legislature agreed to set up a retirement security board within the comptroller’s office. The board will suggest ways to create a state-level public IRA plan that would be open to all private-sector workers and would contain such features as default enrollment, portability, default annuitization at retirement and low administrative costs. The $400,000 earmarked for the board is the largest state-level investment yet toward such a plan, according to the national Campaign for Retirement Security.
But what went over well in Connecticut did not fare as well in Colorado. The legislature there rejected -- by one vote -- a bill that would have had a task force analyze, among other things, how much money Colorado would save on public assistance if more people adequately investing in their retirements.
I caught up with Teresa Ghilarducci, the chair of the economics department at the New School for Social Research in New York, last week after her testimony on social security and pensions before the U.S. Senate Finance Committee. I asked her about the kinds of plans state task forces might develop and why. Below is a transcript of our conversation, edited for clarity and length.
How would you define the stakes states and localities have in public retirement security?
Seventy-five percent of Americans nearing retirement age in 2010 had less than $30,000 in their retirement accounts. The specter of downward mobility in retirement is a looming reality for both middle- and higher-income workers. Almost half of middle-class workers will be poor or near poor in retirement, living on a food budget of about $5 a day. It isn’t just a matter of people being able to keep up their standard of living. We’re talking about people who will be old and in a chronic state of deprivation -- with all the attendant dislocation that causes. Cities will suffer a decline in the stability of neighborhoods. Neighborhoods are rich when they have grandmothers who are stable and able to function.
At least five states have passed -- and another handful are debating -- bills to set up task forces to develop a plan. Is this just kicking the can down the road?
What these task forces are going to do is present their legislatures with a full blown, detailed plan. A task force can get all the details right so legislators have their questions answered. It’s a better way to write a bill like this.
One of the big issues is finding a way to keep administrative costs for the plans down. Is there a path you see developing?
State and local governments have had very sound financial infrastructure in place for a long time. It’s built to take in workers’ contributions and pay out benefits. For some states and localities, their systems -- public pension plans -- predate Social Security, IRAs and 401(k)s. It’s an infrastructure they should be proud of and should want to make available to all citizens and all taxpayers in the state. Private-sector workers could deposit money in a separate fund run by the pension plan and then take it out for retirement. The private-sector workers would pay for administrative costs themselves, but the plan’s investment and management experience would be available.
This is what a lot of these task forces are talking about. Some states are considering letting private companies bid with state systems for the business (and some may be able to beat the public system’s cost of administration).
Would a public retirement plan be something totally new for a state to undertake?
The public retirement plan is very similar to the 529 education funds that states are now sponsoring. When you have a public policy interest in people saving, states can provide for those plans when the private sector does not. It’s similar to that.
How does this play out with the myRA program? Why do states still need to do something?
MyRA doesn’t go very far. It’s not mandated and, when these accounts are small, they’re invested in a low-interest, low-risk government plan. When they're bigger, the funds are dumped into the private sector, which serves the 401(k) industry but not the needs of workers to have professional management and an annuity at the end of their work life. By structure and by law, 401(k) and IRA plans are in short-term, liquid investments -— and investors pay a premium for that so that they can take money out of a 401(k) and IRA any time. But most people want their retirement money invested for the long term at higher rates. The goals and motives of savers in 401(k)s and IRAs are mismatched for the assets of a public retirement security account.