It received a brief mention in President Barack Obama’s State of the Union address earlier this week, but Connecticut union officials and the Working Families Party want to take the idea of creating retirement savings accounts for all Connecticut residents even further.
On Wednesday while visiting a steel mill in Pennsylvania, Obama signed a presidential memorandum that directs U.S. Treasury Secretary Jack Lew to create a new type of savings bond that can be set up without legislation. The individual retirement account is being called MyRA.
“MyRA guarantees a decent return with no risk of losing what you put in,” Obama said Tuesday.
Sal Luciano, executive director of AFSCME Council 4, said it’s a “small first step, but it’s the only thing he can get done with a divided Congress.”
Luciano is urging Connecticut lawmakers to go much further by creating a public retirement plan that’s held in a trust and managed by the state Treasurer and a board of trustees. The trust would be separate from other trusts the state holds like the trust for the state employee pension and it would be a defined benefit plan, rather than a 401k type savings account.
A similar piece of legislation died last year in the state Senate before it could be raised for debate. That bill required the trust to offer individual retirement accounts to all Connecticut residents. Enrollment in the plan would be automatic with an option to opt out.
The General Assembly’s Labor and Public Employees Committee is expected to introduce it as a concept next week at its first meeting.
“By creating a public retirement plan, Connecticut would take a giant leap forward in fixing our state’s retirement crisis, and become a national model in providing workers a secure retirement,” Luciano said. “A public retirement option like this would provide employers and workers with a low-risk alternative to plans offered by the insurance industry, and would not require the employer to become a fiduciary or take on any liability.”
He said most people don’t have a professional money manager handling their retirement account and they are getting a low rate of return as a result. He said the retirement account the state would offer will be professionally managed and as a result it’s expected to get a little higher rate of return.
Opponents of the legislation last year didn’t like the idea that it would be a defined benefit plan, which is a type of pension plan that promises a specified monthly benefit upon retirement. A handful of people also testified that it wouldn’t have to comply with the Employee Retirement Income Security Act of 1974, which is a federal law that sets minimum standards for pension plans in private industry.
Michael Callahan of the American Society of Pension Professionals and Actuaries testified that the intent of the bill is good, but it would be a nightmare in practice.
“Federal law does not permit salary reduction contributions to a defined benefit plan for non-government employees, so their contributions would be subject to income tax,” Callahan testified.
Luciano knows there is opposition to the idea, but believes he’s built a coalition that will support it.
If they’re successful this year Connecticut will only be the second state to adopt such a plan. California did last year.
The bill is being supported by Senate Majority Leader Martin Looney. Last year, Looney testified that the program was designed to be self-sustaining and low risk based on the modest rate of return and long investment horizon.
Why advocates say it’s needed
The percentage of private sector employers offering retirement plans has fallen from 68 percent in 2001 to 58 percent in 2012.
According to a study done last year by the Schwartz Center for Economic Policy Analysis, an estimated 740,000 Connecticut residents were not participating in an employer-provided retirement plan.
“The increase in the number of individuals without retirement accounts poses a danger to the broader economy, which will suffer the destabilizing effects of the mass downward mobility of seniors,” Teresa Ghilarducci, author of the study, said. “Now is the time for Connecticut and other states to take a lead in providing an option for all workers to participate in a retirement savings plan at work.”