First they took your health care. Now they’re coming for your retirement.
Progressive activists are in the early stages of attempting to create a retirement security crisis. Using the health care playbook, they claim that people lack access to “adequate retirement security.” The lack of access is said to impose large costs on everyone else because people without “retirement security” consume more public assistance payments. Government must “solve” the problem because only government can provide secure retirement investment options for all by mandating that people purchase them.
This year, Colorado missed joining the crisis by one state senate vote. House Bill 1377 sought to establish a “Retirement Security Task Force” that no doubt would have worked hard to foster a crisis mentality.
In a country where anyone can open an individual retirement account, HB 1377 charged its task force to examine the “barriers to retirement that individuals face,” determine what individuals have saved, assess whether individuals are saving enough, and outline a “Colorado secure retirement plan for employees of private sector employers.” Along the way the task force would have “analyze(ed) the potential state savings in public assistance expenditures that would result from the adoption of the plan.”
Together, the Bell Policy Center and a heavily union coalition called Secure PERA say they will continue to pursue “retirement security” next year. Various measures, including employer mandates, already have passed in California, Oregon, Massachusetts and Maryland. Though supporters pretend that retirement security is a local grassroots effort, the real movers and shakers are national groups like the Service Employees International Union .
Cynics might observe that the state of Colorado already has a retirement plan: the Public Employees Retirement Association, PERA. Whether PERA is secure is debatable. It has far more liabilities than assets. If government can’t competently manage the retirement of state and local public employees, what makes anyone think it could do any better with the retirement security of the rest of us?
In 2013, Moody’s named PERA one of the 10 worst funded state retirement plans in the country, with an adjusted net pension liability equal to 117.5 percent of state revenues. The previous year, Bloomberg ranked Colorado’s retirement plan as the 13th most underfunded. Independence Institute analyst Joshua Sharf estimates that PERA’s unfunded obligations approach $57 billion.
With annual state tax revenue of just $10.2 billion, one way to stave off a Detroit-style PERA funding crisis would be to confiscate private funds by mandating private sector employer contributions.
Unlike PERA, and other government-run plans, private retirement plans are required to protect their contributors. One way they fulfill this responsibility is to use realistic rate of return assumptions. Milliman reports that the average large private pension fund assumed a median rate of return of 4.02 percent in 2012, down from 7.63 percent at the end of 1999. Reducing the assumed rate of return from 4.78 percent to 4.02 percent in 2012 generated an instant 8.5 percent increase in pension obligations.
Such a reduction causes a lot of financial pain, especially during a recession. Even though invested funds earned 11.7 percent in 2012, firms had to divert $61.5 billion in corporate earnings to their pension funds to compensate for the lower assumed return.
In contrast, PERA managers celebrate d when they decreased their assumed rate of return from 8 percent to 7.5 percent in 2013.
This sort of management shows why Americans are better off with defined contribution retirement funds than with government pensions. Defined contributions let people invest their retirement funds in a variety of assets out of the reach of free-spending politicians, lazy fund managers, and companies that go bankrupt.
The basics of retirement security are simple. Live in a country and state that protects savings by protecting private property, staying out of private transactions, and limiting the amount it takes from the private sector. Get a job. Save. Accumulate assets.
And perhaps take steps to ensure future legislators understand they have no business mandating retirement savings, even if does seem like a good way to bail out PERA.
Linda Gorman is an economist at the Independence Institute, a free market think tank in Denver.
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