Saving for Retirement – Is a State-Run Program a Feasible Option?
According to findings released last fall by the Oregon Retirement Savings Task Force, more than half of Oregonians had saved $25,000 or less for retirement.
While the amount of money needed to comfortably retire varies by person, common estimates suggest savings of at least eight times a retiree’s last annual income. $25,000 is far below that level, meaning that many Oregonians are left woefully unprepared for their future financial realities.
A number of Oregon legislators are pushing a bill they say would help people expand their retirement savings. HB 2960 would establish a state-run retirement savings program; employers would be mandated to automatically enroll any employee without an existing, employer provided plan, into the program, at a default contribution percentage through a paycheck deduction.
Employers would not be required to contribute separately to their employees’ state-run retirement savings accounts, but they would have to bear the administrative burden of enrolling and updating their employees. Assuming an employer’s own private plan met specifications outlined by the State of Oregon, it would not be required to auto-enroll its employees in the state plan. Through an additional process, employees could opt out of the program or change their default contribution amount.
While HB 2960 could increase retirement savings, it comes with a high price tag and concerns that people will continue to save too little for retirement.
The private sector already offers thousands of retirement savings plan options for workers to choose from, whether through their employer or individually. But, workers are not choosing to participate in these plans. A 2012 survey by the Oregon Employment Department found that only 61% of eligible employees were enrolled in their companies’ retirement benefit plans.
Even the incentive of contribution matching was not enough to sway many employees into participating; even though 63% of employers with retirement plans offered to match employee contributions on some level, many employees still did not participate.
Additionally, the administrative fees for a state-run program are very high: a 2009 State Department study in Washington estimated that startup costs for their proposed state-run retirement plan would be almost $2 million, with an additional $1.4 million in costs each year. With Oregon’s huge unfunded liabilities in PERS, spending more money on a public retirement program is very hard to justify.
While California passed a bill similar to Oregon’s HB 2960 in 2012 when it established its own state-run retirement savings program, called “Secure Choice,” there is no data to show if the program is a success. That’s because the program has yet to be fully implemented – a task force is still designing the program and figuring out how it may work. However carefully Oregon’s Legislature designs HB 2960, there are serious concerns about its effectiveness and cost because there are no proven models in other states.
And, a U.S. Supreme Court ruling in Tibble v. Edison International this week raises even more concerns about HB 2960; the Court ruled unanimously that employees have the right to sue if they are offered imprudent retirement savings options. That places new liabilities on both employers – who would be required to sign all their employees up for the plan and would thus be considered fiduciaries – and the State of Oregon in the event that the plan did not represent the best interests of the enrollees. That’s a huge risk for both businesses and government.
Oregon cannot afford to spend its tax dollars administering, managing, and overseeing a state program that would replicate the retirement savings options that the private market is already providing. Further, the legal burden of liability if the plan fails is steep. As the Oregon Legislature looks further at HB 2960, establishing a state-run plan may not be the most cost-effective and feasible option to expand Oregonians’ savings for retirement.