Do we really need new vehicles for retirement savings, especially ones that give new powers to state governments to coerce workers to save? Several states—most notably Illinois—are creating their own state-sponsored savings plans. The idea is to make retirement saving “easy” for workers (perhaps even by making it mandatory). The Obama administration is supporting the effort, with the Department of Labor recently altering regulations to make it easier for states to create their own retirement savings programs.
Of course, the federal government already makes saving for retirement mandatory: Hefty payroll taxes fund Social Security. The government also provides generous tax breaks to encourage retirement savings. (If it weren’t for the breaks, the Treasury might collect an extra $100 billion in taxes each year.) Nearly all companies with 50 employees or more offer retirement benefits of some sort. Governments and a few businesses still offer defined-benefit pension plans, but these days most companies provide employees tax-preferred 401(k) accounts. New federal regulations encourage firms with 401(k) plans to enroll new employees into company retirement programs automatically to boost participation.
The self-employed can set up their own tax-preferred IRA savings accounts, whether with banks or fund providers such as Fidelity or TIAA-CREF. Anyone with a bank account and a computer can set up an IRA and arrange for regular contributions. For low-income workers without a company retirement plan, the Treasury Department recently created the MyRA program providing no-fee, starter retirement accounts.
No doubt, the current system has its problems: An employer-based system can lead, as one changes jobs, to a jumble of different accounts. Unless one is vigilant about consolidating them, multiple retirement accounts can be difficult to keep track of and costly for fund providers to administer. But is adding state-run savings accounts to the mix more likely to solve this problem or just make it worse? For instance, in the last 20 years I’ve worked in five different states. Does anyone believe that the states would make it easy for people like me to consolidate various state retirement moneys into one state’s account? They certainly don’t do so for college savings accounts.
The record for such state-based savings funds isn’t particularly encouraging. The states, of course, administer their own college savings accounts, and to say that these are investor-friendly would be a stretch. Most states and the District of Columbia offer various funds in their college investment programs; the costs for those government-provided funds can be compared with the same funds offered on the private market. Take the S&P 500 Index Fund run by State Street Global Advisors: On the private market, the fund’s management fee (known as the “expense ratio”) is 0.157 percent. Over at the D.C. College Savings Plan, by contrast, the expense ratio is a hefty 0.46 percent—triple the cost of fees outside the college fund. The costs are higher in part because the District imposes a 0.15 percent fee for “expenses,” a fee shared with the investment company managing the program (in the case of D.C., this is Calvert Investment Management).
Such plan “expenses” have in some places been rather loosely defined: In Illinois the state treasurer famously used such funds to purchase an SUV.
For people investing in the D.C. college fund who don’t actually reside in the District (the technical term for them is “suckers”), the city also imposes a sales charge of nearly 5 percent, which makes it an incredibly foolish investment. Why Elizabeth Warren isn’t up in arms over this is beyond me. Or rather, it would be beyond me if it weren’t perfectly clear why—the champions of big government don’t seem to be so worried about investors getting fleeced when it is big government doing the fleecing.
And then there’s the risk of corruption: When states are in the savings-fund business, whether for college or retirement, there are tremendous pressures to put in the fix. In January, the Securities and Exchange Commission alleged that a State Street Corp. executive, “through bribes and campaign donations” in 2010 and 2011, paid off Ohio’s deputy treasurer to win state pension contracts. The SEC announced that State Street has agreed to a $12 million penalty “to settle charges that it conducted a pay-to-play scheme.”
If the federal government wants to do more to encourage retirement planning, it can try to entice more savings via tax breaks, nudge people to save with other incentives, or even shove them into saving more in their current retirement accounts with some sort of mandate. Bad as some of these might sound, an entirely new system of state-based savings accounts would be even worse.
Ike Brannon is a fellow at the Cato Institute and president of Capital Policy Analytics, a consulting firm in Washington, D.C.
