Would you trust California with your retirement plan?

California. Land of the gold rush. Home of Hollyweird and Proposition 13. Land of stars, glamor and a bankrupt state government. It was just this past May when the state deficit was projected to hit $16 billion. At that time, Governor Moonbeam — sorry, Governor Jerry Brown said more cuts were needed. This is a crisis that could have been averted with some smart decisions by the state government and some just as smart choices by the electorate.

Now comes news that California has created a state-run private pension plan. Yep, you read that right. California wants to manage your private pension plan if you live there. Now, this isn’t offered to everyone who lives in California. No, it’s offered for those six million or so workers who aren’t offered a pension plan by their private sector employer. Okay, sounds good, right?

Wrong.

First of all, if you meet the requirements for the plan, your employer will automatically withhold 3% of your paycheck UNLESS you opt out. Yep, it’s one of those nasty little programs that require you to act if you do NOT want to be involved instead of following what would seem to be the logical path of letting you opt in if you wanted to be included. If that isn’t bad enough, you have to exercise the option every two years. It isn’t a simple, you’re are opted out unless and until you decide to opt back in.

Now, my next impulse is to wonder where the money is going to come from on the employer level. No, not the 3% of the salary, but the money needed to have that money withdrawn, reported, transferred into the state-run program, monitored, etc. What about making sure the proper paperwork is filed when an employee leaves his position with the company? Or even the adjustment of the amount taken out when there is a change in the employee’s salary level?

Then there is the question of notification. Is the employer going to be required to notify each employee about their rights, especially regarding the right to opt out or is this going to be one of those “it’s the law and you ought to know about it and ignorance is no excuse” sort of things? I’ve been through the employer notification of retirement benefits changing where my mother’s concerned. She retired from a major medical center and the means used to notify the retirees involved was to send a letter through the mails. No confirmation of delivery was required. No emails were sent. The former employer met the minimum legal requirement by mailing to the last known address for the retirees but put such a short period of time for them to opt in or out of the new, vastly decreased benefits (it was either accept the much lower benefit or get nothing) that many of them were left out in the cold. Since this was insurance that was involved, it hurt a number of them.

Or is the state going to send out notice based on the last year state income tax filings? Either way, money has to be spent — either by the state which means taxpayer dollars or by the employer and that means either passing the cost on to the employees by decreasing other benefits or to the customers meaning increased prices. But that’s never really explained by Governor Moonbeam.

But there’s more. The plan can be administered by a professional fund manager — someone who will have to be paid for his services and where does that money come from — or by the state’s public pension system. This is the same system that has had financial issues before. So, suuuuuure I’d want them managing my retirement money.

Okay, there are those who say this really isn’t a retirement plan but more like a savings account. No matter what you call it, it is simply yet one more instance of the government trying to force people to do something they either don’t want to or can’t.

Let’s face it, that 3% salary holdout could very adversely affect a lot of people. How many of them are already living paycheck to paycheck, just in order to keep a roof over their heads? How many of them have already cut their bills to the bone and have no margin of error? Those folks aren’t worrying about what is going to happen in five, ten or fifteen years down the road. No, they are worrying about making sure they have food on the table and roof over their heads right now.

I can hear those of you out there in support of this law saying that those are the ones who can opt out. But what about those who have a change in circumstance? Can you opt out at any time? I hope so. I don’t know. But that same question applies in the reverse. What if someone who has opted out suffers a change in circumstances where they now realize they need to be in the plan? The opted out a month or more ago and now have to wait until the two year period has elapsed before they can change their status.

I understand California is worried about the influx of retirees it will have as its population ages. This is something every state is facing. But I would be seriously worried if I lived there and thought a part of this very broken — and broke — state government might be administering my money, money I am supposed to be able to access when I retire. I’d worry about the possibility of the Peter borrowing from Paul and not paying him back.

Does this mean I think California, or any other state, should just let those without retirement plans rot? No. But there are other ways to assist them now, before they retire. My objection is in implementing a plan that will cost an already cash-strapped state money it doesn’t have. My objection lies in forcing someone to opt out of something instead of into it. My objection is in government taking yet another step toward becoming a full-fledged mommy state.

Edited to add: Welcome to everyone coming over from Insty. Thanks for the link!

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25 Comments

  1. Posted September 29, 2012 at 11:14 pm | Permalink

    Do you trust the Fed with your Social Security? Of course not.
    California will do what the Fed does: force you and your employer to pay into their pension funds. They will keep raising your retirement age. Bottom line is: if you’re lucky, your heirs will collect your burial cost.

    • Posted September 30, 2012 at 8:08 am | Permalink

      If you’re lucky. Considering the state of California’s budget, I’d be running fast away from there or looking for every possible loophole to keep from having them control my pension.

  2. Posted September 29, 2012 at 11:38 pm | Permalink

    Yeah, the trick will now be to keep your small business under 5 employees. The simplest way to do that is to relocate to Nevada.

    • Posted September 30, 2012 at 8:08 am | Permalink

      Yep. Heck, rolling the dice or playing the slots would probably be safer than trusting the state with your pension right now.

  3. Posted September 30, 2012 at 1:40 am | Permalink
  4. Micha Elyi
    Posted September 30, 2012 at 2:40 am | Permalink

    I don’t trust the state of Moonbeam with my earthquake insurance.

    • Posted September 30, 2012 at 8:10 am | Permalink

      Aw, c’mon. Think of the pretty flowers and colors that will paint the sky as they tell you to trust them. How can you not believe in their ability to capably handle your money? (Yes, irony meter is now going off the scale)

  5. jeff
    Posted September 30, 2012 at 5:18 am | Permalink

    I was not sure who is managing the money. Will it be the state or a company? When I read this the first thought that came to mind is that the politicians are doing this not for the “people”, but to funnel more money into the state coffers in order to kick the coming fiscal collapse of the state down the road a little bit farther.

    With the massive shortfalls of local, state, and SS system, I expect more of this to happen. Why bother saving for retirement, when it will be either taken by the State or gradually eroded away by low interest rates. I think the low rates as a result of infinite QE and the effect on retirement savings and plans may be a “feature” in that in the future, the powers that be will try to “help” us and there goes our IRAs and 401ks. All to kick the can down the road. At some point there will be a cliff…..

    • Posted September 30, 2012 at 8:15 am | Permalink

      Jeff, if I understand it correctly, the state can administer it or they can appoint a manager for it. In either case, the state is still ultimately responsible. The first option, state management, is scary enough. But the second, letting them hire someone to do it is even more worrisome because they get to choose who that person or company is and then that entity has to be paid. So the employees will be doubly hit. And yes, I think you are right about more of this happening and, frankly, that scares me. After all, government has such a wonderful — not — track record on fiscal responsibility.

  6. mark c
    Posted September 30, 2012 at 8:08 am | Permalink

    does the term Social Security “lockbox” ring a bell? this money will be buying toilet paper, trash bags and toner in Sacramento the minute it hits the bank and payout will be in dollars worth 25 cents. the only saving grace is that they are screwing Cali residents that deserve it.

    • Posted September 30, 2012 at 8:16 am | Permalink

      Well, I wouldn’t say all the residents who’d be impacted deserve it, but my sympathies for most Cali voters isn’t great. But then I’m just a redneck from Texas who happens to believe in things like personal liberty, etc.

    • Posted September 30, 2012 at 9:24 am | Permalink

      There are millions of great people in CA, there are just more liberal idiots. I feel for the good people there and hope they can flee CA soon.

      • Posted September 30, 2012 at 5:10 pm | Permalink

        Agreed. Either that or Colorado and Oregon/Washington need to worry about the influx of CA liberals moving there and propagating their idiocy.

    • Patrick
      Posted September 30, 2012 at 10:35 am | Permalink

      That’s what I was thinking. This strikes me as a 3% tax on people who don’t have a retirement plan. Not unlike, oh, say, a tax on people who don’t have health insurance.

      • Posted September 30, 2012 at 5:12 pm | Permalink

        Yep. And what does government do with your tax dollars, especially if it is California? It wastes them.

  7. Posted September 30, 2012 at 9:21 am | Permalink

    I would trust the federal gov’t in a second before I trusted CA. CA will set up fees, etc to funnel money into CA pension obligation to bail CA out.

    • Posted September 30, 2012 at 5:13 pm | Permalink

      What amazes me is that Governor Moonbeam doesn’t seem to get that most folks will think this and will be watching what happens very closely, ready to pounce in the media — at least social media and blogs — to expose it all when it happens.

  8. Posted September 30, 2012 at 9:32 am | Permalink

    I’m a 20 year California financial advisor, now thankfully retired. I haven’t read the whole thing, but I can’t begin to tell you what a nightmare this is not only for the clients (the employer and emplees) but also for the “plan administrators”. I used to set up and administer DBPs for doctors, lawyers and closely held businesses IMHO the ONLY businesses that should have those plans I also set up and administered 401K’s for small to medium sized (50 to 100 employee) businesses.

    IF, the employers are allowed to opt for a standard 401K with a reputable local firm that will give the employees hands on advice and the employees are given the ability to opt out (standard for 401ks now) then it wouldn’t be a big deal. HOWEVER, I expect this to be a giant slush fund to bail out Cal Pers and a big fat gift to the big guy investment firms. I see desperation, graft, corruption and cronyism written all over this abomination.

    The people need to somehow get this monstrosity repealed. Otherwise no good will come of this. People will keep their staff at the minimum levels, move their companies out of the State and like everything else done in Sacramento, the unintended consequences will always come as a big surprise. It is easy to be surprised when you are stupid.

    Every day I thank my lucky stars I retired from this industry when I did.

    • Patrick
      Posted September 30, 2012 at 10:45 am | Permalink

      I doubt that the unintended consequences have any meaning to the politicians. Blue state government is like a Ponzi scheme. Everyone knows it will crash eventually. So the object is to stave off the crash by getting more suckers (taxpayers) in, and bailing before the crash occurs.

    • Posted September 30, 2012 at 5:15 pm | Permalink

      And can’t you just imagine what the next step will be? Cali will raise the percentage and will require participation, whether you want to or not, because it will be “for your own good”. GAH

  9. Posted September 30, 2012 at 9:35 am | Permalink

    The state managing the money could easily translate into the state investing that money exclusively in state bonds. This is similar to what Treasury does with Social Security – which is why the SS trust funds are part of the national debt – with the major exception that the US can print money to redeem those bonds while California cannot. In the event of a GM style bankruptcy, the obligations to public employee retirement plans would be place ahead of those bond holders.

    This sounds like just another bookkeeping scheme to try to push the eventual bankruptcy of California a little further into the future.

    • Posted September 30, 2012 at 5:16 pm | Permalink

      Of course it is and the only ones who will be hurt are those being forced to take part in this sham of a scheme.

  10. Mulder
    Posted September 30, 2012 at 11:31 am | Permalink

    Rather than meeting a real need – 3% of salary is a horribly low contribution rate if one wants to have livable income in retirement – this law feels like a gift of new cash flow that CalPERS can use to paper over its incredibly under-funded liabilities, assuming that’s the route many employers will take.

    • Posted September 30, 2012 at 5:17 pm | Permalink

      Agreed. But then, it is exactly what I’d expect from Governor Moonbeam and his crew.

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