Don't Believe the Fibs About California As a National Retirement Model

Gov. Jerry Brown looks ready to sign into law a massive new retirement program for 6.8 million Californians who work in the private sector. Called "Secure Choice," the bill has already passed the state Senate and Assembly, and has received the blessing of government unions and the endorsement of the Los Angeles Times and New York Times.

When Brown signs the bill, as he seems likely to do in the next few days, the New York Times says, "Californians will gain more security - and the rest of the nation will gain a national model for promoting retirement savings."

But if the model is so great, why aren't California's public employees rushing to adopt it, too?

The answer is simple: The pensions that government workers already receive - paid for by taxpayers - are far, far better than those proposed for non-government workers under Secure Choice.

Take a look at the California Legislature's official recommendations for Secure Choice. Employees paying 10% into the Secure Choice pension system for 30 years can expect income replacement in retirement of 27.6%. That is, if they earn $100,000 in their final year of work, they will earn a state pension of $27,600 per year.

For public-sector workers retiring after a full career, the numbers are at least three times that amount. Teachers and administrative workers get 75% of their final salary. Public-safety workers, the aristocrats of California's government workers, receive 90% of final salary.

There are two reasons for this gigantic disparity.

First, public pension funds collect much more than 10% of employee salary. While the employee rarely pays more than 10% through withholding, taxpayers kick in upwards of four times that much for every public employee.

Second, public pension funds assume a "risk-free" rate of return of up to 7.5% per year. Acknowledging that a 7.5% return has been nearly unachievable for decades, Secure Choice would link investment return projections to the much lower U.S. Treasury rate - now 2.69%.

Inexplicably, the New York Times and other Secure Choice advocates see such risk reduction as the program's only real shortcoming. It's not merely prudent or safe, but "supersafe," the Times says. Eventually, the Times hopes, Secure Choice will be allowed to follow the pattern of public pensions, investing private individual contributions in what the newspaper generously calls "a more complete menu of investment options."

That would indeed make Secure Choice like California's public pensions in every way - including financially disastrous.

The Secure Choice program has the virtue of being far more financially sustainable than public-sector pensions. With lower-risk investments, modest benefit formulas, and the built-in capacity to adjust benefits to ensure solvency, this pooled 401k - which could also be termed an adjustable defined benefit - is a system that can be offered to all citizens without blowing up.

Concerned citizens may argue endlessly about whether states should offer any sort of retirement security - Social Security, Secure Choice, or whatever. But if California is going to offer these programs, they should be offered to every worker according to the same rules and offer the same benefits. Government workers should not be getting deals far better than private workers.

So here's the deal, Gov. Brown: Mandate that every state and local government worker in California, effective immediately, begin participating in Social Security and the Secure Choice program, and encourage them to supplement that with individual 401k retirement accounts. Mandate that all retirement benefits they earn from now on are limited to those three programs. Work out the bugs. Then, and only then, sign us up.