A state pension plan for private industry: How risky?

The state Senate approved a bill this week by Sen. Kevin De Leon (D-Los Angeles) that would create a state-run, privately insured pension plan for workers in companies that don’t offer retirement benefits. The Times’ editorial board endorsed the idea Thursday, on the condition that the plan could live up to the bill’s promise of imposing no costs or risks on taxpayers over the long term.

The editorial skimmed over a couple of important points, though. To maximize participation, the pension plan would be designed as an opt-out (people would be enrolled unless they told their employer not to include them), not an opt-in. But Dan Reeves, De Leon’s chief of staff, said participation wouldn’t be as automatic as the editorial suggested. “The measure requires that employees review an information packet and disclosure form and sign that form to acknowledge they read and understand it before being enrolled in that program,” Reeves said in an email.

The editorial board also said the state should study the feasibility of the proposal before lawmakers agree to put the plan into effect. In particular, the board wanted to ensure that the proposal would not make taxpayers liable for any shortfalls or induce employers to drop their existing retirement benefits.

The bill calls for just such a study, as well as an examination of the potential market. But it would leave the decision about whether the proposal was, in fact, feasible to a new board, not to the Legislature.

Reeves defended that approach, saying that the board’s members included the state treasurer, the state controller and the governor’s finance director, “the three state leaders responsible for the state’s overall solvency.” If the board found the plan feasible and obtained the necessary federal approvals, the Legislature would still have to “enact budget legislation to hire staff and to cover the necessary start-up costs.” Concluded Reeves: “It would be inaccurate to suggest that the program could be launched without rigorous review, oversight and express legislative participation and authority.”

Opponents of the bill don’t believe its assurances that the pensions won’t end up costing taxpayers. For example, a reader who goes by “edwardskizer” likened the plan to a California Public Employee Retirement System for the private sector. “CalPERS current unfunded liabilities: $85 billion and counting. Sacramento can’t manage the money they receive now, and some people want to give them more?”

The crucial difference between CalPERS and De Leon’s pension plan is the size of the pensions being promised. CalPERS seeks to create pensions large enough to sustain career state employees after they retire. To do so, it needs to generate fairly high returns on its investments -- the current target is 7.5% annually. If it doesn’t hit those targets, or if governments don’t pay as much into the fund as they’re supposed to, its liabilities grow.

In contrast, the private employee pensions proposed by De Leon are designed as modest supplements to Social Security benefits. The point is simply to improve the safety net that Social Security provides, keeping more people from relying on state aid.

The plan calls for employees to kick in 3% of their wages, and for the program to deliver the same sort of safe returns as long-term Treasury bonds. Granted, there’s no such thing as guaranteed returns in the financial industry, and the plan may have to invest more aggressively at first just to cover its start-up costs. But by bringing together millions of workers of varying ages, the plan will be far better positioned to ride out market downturns than individual investors are.

That’s not to say that the plan is a sure thing. The Department of Finance, which opposes the bill, issued a report in early May contending that the proposed plan couldn’t do what the bill calls for it to do. That’s one reason The Times’ editorial writers want the Legislature to see the results of a feasibility study before proceeding with the pensions.

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