California is First (to Offer State-Managed Pensions for the Private Sector)
California often prides itself on doing things first. Well world, here's another first. Today, Governor Jerry Brown signed a law that would create pensions for 6.3 million pensionless private sector employees. Bloomberg writes:
The law is aimed at businesses with five or more employees that don’t offer pensions or 401(k) savings programs. The law requires companies to contribute 3 percent of a worker’s salary to a retirement account. Workers will be enrolled in the program unless they choose to opt out.
In terms of administration alone, I see two key burdens for small businesses and employees. First, the law would require businesses with at least five employees to participate in the state's program or offer their own. Employers may volunteer contributions to the fund, but they are not required to do so.
Second, automatic enrollment is always worrisome. That is the case for employees whom the state automatically enrolled in its new program. Opting out of state-run programs is notoriously difficult and bureaucratic. Bloomberg notes that the average income of these 6.3 million new members is $46,420. My guess is that many at that income level would want to recapture the automatic $1,400 annual paycheck deduction, but for whatever reason, they will not attempt to do so.
On top of that, private pension management firms will compete with the state's own public employee pension system (CalPERS) to manage these additional assets. CalPERS may be the nation's largest public pension system, but its investments have unquestionably under-performed. From 1982-1998, CalPERS’s averaged a 13.4% average annual rate of return. From 1999-2012, it has averaged only 5.7%. CalPERS returned only 1% on its investments last fiscal year. The Sacramento Bee writes:
Unlike public pension funds that can pass on their investment shortfalls to taxpayers, private underwriters would assume any losses by the private sector fund.
The bidding process between the state's pension system and private management firms must be entirely transparent and above board. If CalPERS does win, it would add the up to 6.3 million private sector members to its existing 1.6 million membership. And it would add up to $6.6 billion to the $242 billion in assets it manages for California's state and local employees.