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State-Run Retirement Plan For Private Sector Workers A Bad Idea

  • Mar 17, 2014
  • Ben Zimmer & Helen Fang

The Connecticut General Assembly is considering a bill that would establish a state-run retirement plan for private sector workers and require any business without a retirement plan to set up direct-deposit and payroll-contribution systems for the state plan.  The mandate would apply to businesses with five or more employees.

Proponents of the bill have relied on a misleading claim from the AARP that “more than 600,000 workers in Connecticut have no access to a retirement plan” beyond Social Security.  It is true that many Connecticut residents do not have access to employer-provided retirement plans, but any employed Connecticut resident can set up a tax-preferred Individual Retirement Account (IRA) through one of many private financial companies.  For instance, Charles Schwab offers an IRA with no annual fee, a minimum account balance of $1,000, and an option to automatically transfer funds each month from a checking account.

In addition to being unnecessary, this bill would have several adverse impacts.  For example, the costs of managing the state-run plan would fall on taxpayers as Connecticut faces ongoing deficits averaging more than $1B per year beginning in July 2015.  And the fees associated with mandatory payroll-contributions to the state plan would add to Connecticut’s already unfriendly small business climate, stifling job growth.

Connecticut’s government has shown little ability to design and manage effective retirement plans for its own employees.  As the charts below show, Connecticut’s unfunded public pension liabilities have grown by 65% since 2006 and are among the highest per capita in the country.  Fixing this should be the state’s retirement security priority.