In June, Bloomberg News had a thought provoking piece, titled "Negative Interest Rates — Less Than Zero," by Jana Randow and Simon Kennedy (see https://www.bloomberg.com/quicktake/negative-interest-rates).
Here’s the introduction:
Imagine a bank that pays negative interest. In this upside-down world, borrowers get paid and savers penalized. Crazy as it sounds, several of Europe’s central banks cut key interest rates below zero in 2014, and now Japan has followed.
By mid-2016, some 500 million people in a quarter of the world economy were living with rates in the red. Unthinkable before the 2008 financial crisis, the idea is to jolt lending, spur inflation and reinvigorate the economy after other options have been exhausted.
It’s an unorthodox move that has distorted financial markets and triggered complaints that the strategy is backfiring. Negative rates will either mark the start of a new era for the world’s central banks, or finally expose the limit of their powers.
Why do I bring this up? Well, if the state of California is initially investing in cash equivalents in order to avoid any risk, then the net yield on its investments could very well be negative. How is that for a scary Halloween story? Those this scheme is intended to help may be better served to just put their money in the proverbial mattress.
I’ve said more than enough on SB 1234, but the Governor signed it anyway. It’s covered in The Wall Street Journal, CalWatchdog, and Fox & Hounds in the three pieces below. The Fox & Hounds pieceis a great closer and casts the appropriate concerns on this "feel good" "government knows what is best for you" strategy.
California Governor Signs Bill to Create State-Sponsored Retirement Plan
Gov. Jerry Brown approves bill that will create California Secure Choice, aimed at resident who don’t have access to retirement plan at work
By ALEJANDRO LAZO and
California Gov. Jerry Brown on Thursday approved a bill creating state-sponsored retirement plans for some 6.8 million Californians who don’t have them through their private employers.
The nation’s most populous state becomes the eighth state to establish such a program.
The AARP estimates some 55 million full- and part-time private-sector workers in the U.S. lack access to retirement-plan coverage through work. States have been filling in that gap by creating such plans.
Charlene Vankeuren, a private security guard in Sacramento, Calif., who spoke at a bill-signing ceremony in the state capitol, said the bill will give her the “ability to lay a solid foundation” for herself, her children and her grandchildren.
Mr. Brown, a Democrat, said the legislation was particularly important since it would allow more Americans to plan for their financial futures.
“In today’s age of spend now, worry about it later, this is save now, and prepare for later,” Mr. Brown said.
The California law requires private-sector companies with five or more employees that are lacking their own plans to deduct contributions from employee paychecks and put them into retirement accounts that are tax-deferred or tax-free.
Employers would automatically enroll employees at 3% of pay, though workers would be free to opt out.
The California Secure Choice program authorizes the state to invest that money in Treasurys and other similar investments until it chooses one or more professional money managers to offer investment options.
Republican State Sen. John M. W. Moorlach, called the bill an “onerous mandate,” adding that the law didn’t have safeguards in place that would keep the program from “drifting from its intended purpose in the future.”
"I believe that encouraging people to save for their future is critical,” Mr. Moorlach said in a statement. “But having a state bureaucracy intervene by requiring certain employers to withdraw funds from employee wages is not a core mission of government.”
Employees can contribute as much as $5,500 a year, and up to $6,500 a year for those employees who are 50 or older, according to the plan.
Maryland, Connecticut, Oregon and Illinois have passed laws requiring many small businesses to offer retirement savings plans. Lawmakers in New Jersey and Washington state have authorized state-run marketplaces to help small companies that want to set up plans.
Some two dozen other states and a few cities have either commissioned studies or are considering similar legislation, according to AARP, which says the first of the programs are likely to open for business in 2017.
Write to Alejandro Lazo at alejandro.lazo and Anne Tergesen at anne.tergesen
Gov. Brown OKs state-run retirement plan
Starting around 2018, most workers in California will be automatically enrolled in a private retirement account run by the state.
Through a legislative measure, signed into law by Gov. Jerry Brown on Thursday, most workers in the state who don’t have access to an employer-provided retirement plan will automatically join the Secure Choice Retirement Savings Trust through their work, although employees can opt out.
Senate President Pro Tempore Kevin de León, who championed the bill, argued that while anyone already has the option of enrolling in a private account, many are not.
“With today’s action, California is providing workers a new chance to achieve better retirement security,” the Los Angeles Democrat said in a statement. “Secure Choice will empower younger generations, working families, and the women who lead them, and help provide the financial security they have earned for the later years of their life.”
Workers will be able to contribute to their account as much of their salaries as they choose, although the default will be 3 percent initially. The accounts will be held in mostly low-risk investments, like treasury bills, with a focus on long-term financial growth.
The legislation also has provisions to block the state and employers from incurring any liabilities associated with the new program. However, critics are unconvinced that enough safeguards are in place.
“You can anticipate that this ‘secure’ investment has the potential to morph into a massive boondoggle and may become more expensive in meeting investor expectations during the inevitable next economic downturn,” said Sen. John Moorlach, R-Costa Mesa, a certified public accountant and certified financial planner. “SB1234 has no provision from using taxpayer funds to go towards a bail out.”
The program would be administered by a nine-member California Secure Choice Retirement Savings Investment Board, which is chaired by the state treasurer.
According to a treasurer spokesman, the program will begin being phased in in three years, depending on the number of employees a business has, starting sometime in 2018.
By Joel FoxEditor of Fox & Hounds and President of the Small Business Action Committee
Gov. Jerry Brown signed SB 1234 to establish a state supervised retirement fund called Secure Choice for private workers. One wonders if at some future time this action will be remembered much like Gov. Gray Davis’s signature on SB 400 of 1999, which put taxpayers on edge by driving public pensions into deep debt.
The bill Davis signed expanded public employee pension benefits putting in place an investment scheme that has not met the demands of pension liabilities. Many of the local taxes on November ballots will see revenue used to satisfy pension obligations, with local pensions increased along the lines of SB 400. SB 1234 by Senate Pro Tem Kevin de Leon has no provision for taxpayer involvement. However, skeptics believe, with good reason, that because of the state’s involvement, taxpayers will be backstop if the system falters.
Brown’s signature ended a four-year quest to establish a private worker retirement fund. There is no argument workers must save more for retirement. The question is should government oversee such a venture. SB 1234 would require employers to take a small percentage out of worker’s checks and deposit into a retirement fund unless the worker opts out. It is estimated than 7 million California workers would be covered by the plan.
The business community objected to the legislation until some late amendments were added to shield employers from liability and administrative burdens while making it clear that the employer is not the sponsor of the retirement plan. The California Chamber of Commerce and some local chambers pulled opposition and, in the end, stood neutral on the measure. Business will still have the obligation of enrolling workers into the system.
Still, taxpayers should be wary considering the history of promises made about the public pension system that expanded under SB 400. Supporters of that bill declared public pensions would be easily funded by investment revenue, even with employees taking retirement at earlier ages. It has not played out that way, with the state looking at billions in public employee pension debt.
As State Senator and financial expert, John Moorlach, commented after the governor signed SB 1234, “You can anticipate that this ‘secure’ investment has the potential to morph into a massive boondoggle.”
While a couple of other states are looking at a similar private worker retirement system, it should be noted that the drive for state controlled private sector pension programs might have a political connection to public pensions.
The term “pension envy” has been used to describe private workers distaste for the public employees superior benefit packages. Private workers have to save for their own retirement while funding the guaranteed public pensions through their taxes. While the creation of a system to establish a private worker fund would help those private workers in retirement, public unions hope to establish a connection between private workers and public pensions, making voters more sympathetic to the public workers if reformers attempt to reel in public pensions.
As I wrote on this site when SB 1234 first surfaced four years ago, “With the glare of the spotlight on public retirement debt, public unions want to change the focus and talk about private employees retirement.”
Thanks to the governor’s signature, Secure Choice is now in place. It will probably take a couple of years to get started. We’ll see a decade from now if echoes of the SB 400 criticism attaches to SB 1234.
This e-mail has been sent by California State Senator John M. W. Moorlach, 37th District.
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