Pennsylvania State Treasurer Joe Torsella and others want a state-run pension plan where employers would be required to participate and employees would be automatically enrolled unless they proactively opt out.
Although using the harmless-sounding name “voluntary individual retirement accounts,” the proposal is anything but. It would be compulsory for employers with more than five employees to participate in the state pension plan unless they already have their own.
This mandatory program would go to their human resources function except … Oh, wait a minute! They do not have an HR department. For many small businesses, the head of the company is the HR department or they hire a third party, just as many now have a health insurance broker as de facto HR to navigate the untidy world of employee benefits and COBRA compliance.
Small businesses already have their hands full doing everything they can to survive. Although the retirement savings goal is commendable, this proposed solution adds real costs for small businesses.
Consider new administrative cost burdens:
- Mandatory reporting of employees and changes to employee status – always a moving target
- Administrative time and cost from informing employees about the state pension plan and processing enrollments and opt-outs
- Employees are auto-enrolled unless they proactively opt-out. While that default guarantees certain numbers in the state-run pension plan, it also increases an employer’s liability. An employer would have to ask the employee several times to avoid employment practices liability accusations.
- Employers would have new compliance and penalty worries. Was every employee asked? Can you prove it?
- Follow up administrative time with the plan overseers until the system is actually up and running smoothly.
Is freedom free without real choices?
Granted, there is a need for more retirement savings but should the paternalistic hand of government force a solution? The word ‘voluntary’ is used but the employee has to proactively say that he or she chooses not to be part of the state pension system. Technically, that might meet a wordsmith’s definition of freedom of choice but actually the choice is made for you by the state unless you affirmatively opt out. Put another way, the government knows what is best for you and has already made your choice — unless, of course, you have studied the idea and have found it does not meet your needs.
Needless to say, this will weaken true private-sector plan options when the state pension plan gives itself a huge advantage from automatic enrollment. It also hurts other small businesses, those agents, brokers and advisers who try to help businesses with private-sector pension options. The state-run pension plan becomes the “slippery slope” choice for employers and the private sector loses.
How will the state pension plan sustain itself?
Can this state-run pension plan keep its promise to pay when participants retire?
Is that not the basic predicament with the two existing state-run plans? While the state Treasurer’s state-run pension plan is defined contribution instead of defined benefit — and that helps maintain the proposed plan’s solvency — can this new plan escape pitfalls that currently plague the two state-run plans now operating?
A state pension plan is a governmental promise to pay. Taxpayers are on the hook to keep the plan solvent if the state cannot keep it self-sustaining.
Consider these inherent problems:
- Employees closer to retirement would be more inclined to participate so as to get that retirement income without putting enough money in.
- The employee would opt out initially and then enroll for the vesting period before retirement. He or she could receive a 25-30 year return on their 10-year investment.
- Too little coming in and too much going out is a retirement system’s downfall. When a state-run pension plan has an unfunded liability, the taxpayers must bail it out.
- If a state-run pension plan was fully-funded, it would be a honey pot to raid. Sadly, that is reality now. Whenever money is needed somewhere, they take it from somewhere else.
The state’s track record is not great. For example, this year, the state budget proposal calls for taking money out of the dedicated Environmental Stewardship Fund to pay for general operations of the Department of Environmental Protection.
How can a state pension keep its fiduciary promise?
If the state-run pension is not self-sustaining, the options are unpleasant.
- The General Assembly can cut benefits for new hires, creating a two-tier system and one with clear unfairness.
- Option two is to make employees contribute more. If that works, it won’t be for long.
- The third option is to take the word ‘voluntary’ out of the equation and force all employees to enroll in the state-run pension plan. And that is the end of the slippery slope. A forced choice is no choice at all.
Setting up a government-run pension system to solve the retirement issue is a quick fix. A quick fix is a no-fix.
Wayne Campbell is president of the Pennsylvania State Grange, a Harrisburg-based fraternal organization that advocates on agricultural and rural issues.