Can Connecticut Solve the U.S. Retirement Crisis?

The Nutmeg State is the latest local government to try to tackle Americans’ inability to save for old age.

National Journal
Nancy Cook
May 30, 2014, 7:06 a.m.

Con­necti­c­ut may be best known for its col­leges, sea­side com­munit­ies, aging in­dus­tri­al cit­ies, and easy ac­cess to New York City. Now, the state also wants to be known as the place try­ing to solve the coun­try’s im­pend­ing re­tire­ment crisis, sparked by mil­lions of Amer­ic­ans who have not saved enough cash to sus­tain them in their old age.

This spring, state law­makers set aside roughly $400,000 to look in­to the pos­sib­il­ity of cre­at­ing a state-run re­tire­ment plan for private-sec­tor work­ers. Con­necti­c­ut is the first state to com­mit money to such an en­deavor. Cur­rently, about 740,000 state work­ers can­not sign up for a re­tire­ment plan through their com­pany. That’s about one in four work­ers, ac­cord­ing to an ana­lys­is done by the New School’s Schwartz Cen­ter for Eco­nom­ic Policy Ana­lys­is.

For ad­voc­ates, the goal is to lay the ground­work to start a re­tire­ment plan for non­gov­ern­ment em­ploy­ees that would auto­mat­ic­ally de­duct money from paychecks in­to re­tire­ment ac­counts, man­aged for a low fee and with a guar­an­teed rate of re­turn. It would be one way for the state to help people save — es­pe­cially small-busi­ness own­ers and low-in­come res­id­ents — apart from simply ask­ing them to rely on So­cial Se­cur­ity.

Op­pon­ents of the plan, in­clud­ing Re­pub­lic­an state law­makers and the fin­an­cial-ser­vices sec­tor, worry that the state’s ac­tions could con­flict with fed­er­al laws, or ul­ti­mately put tax­pay­ers on the hook for se­cur­ing work­ers’ re­tire­ment.

“There is a huge gap in re­tire­ment sav­ings in this coun­try, and it’s im­port­ant to get to the bot­tom of why that is,” says Kev­in Lembo, the Con­necti­c­ut state comp­troller who sup­ports the study. “States and the fed­er­al gov­ern­ment have a ves­ted in­terest in try­ing to fig­ure out this prob­lem. As a pub­lic en­tity, states and fed­er­al gov­ern­ment are the back­stop if older people do not have the re­sources to live.”

Con­necti­c­ut is the just latest state to tip­toe to­ward the cre­ation of a state-run re­tire­ment plan. Cali­for­nia passed le­gis­la­tion to cre­ate this type of pro­gram in 2012, al­though law­makers and ad­voc­ates need to raise cash to first study the is­sue. Cali­for­nia law­makers hope to have a plan in place by 2016 to serve about 7.4 mil­lion of its private-sec­tor em­ploy­ees.

Illinois, Mary­land, and Wash­ing­ton state have also ex­plored sim­il­ar ideas in re­sponse to the worry that Amer­ic­an work­ers either can­not af­ford to re­tire, or if they do, that they’ll find them­selves poorer in their golden years than they were as work­ers. “There’s nev­er been any dis­agree­ment about the wor­thi­ness of this ob­ject­ive,” says Dal­las Salis­bury, pres­id­ent and CEO of the Em­ploy­ee Be­ne­fit Re­search In­sti­tute. “What al­ways ends up get­ting in the way of im­ple­ment­a­tion is the ques­tion of wheth­er this type of pro­gram can pay its own way, or if it will need sub­sidies.”

Con­necti­c­ut first began to ex­plore the idea of start­ing a state-run re­tire­ment plan in 2009. Yet, not un­til 2014 were state law­makers able to agree on a bill to fund the study and to cre­ate a task force on re­tire­ment se­cur­ity. One of the Con­necti­c­ut plan’s best pro­posed fea­tures would auto­mat­ic­ally de­duct money from work­ers’ paychecks and place it in­to re­tire­ment ac­counts; study after study shows this is the ideal way to nudge work­ers to save by for­cing them to par­ti­cip­ate, un­less they act­ively chose to opt out.

Sev­er­al hurdles still re­main, though. Chief among them is the fact that the state only agreed to study the is­sue, not cre­ate an ac­tu­al plan. The state comp­troller won­ders if the com­mit­ment of $400,000 will be enough to pay for a com­pre­hens­ive study. (Cali­for­nia es­tim­ated that it would cost at least $1 mil­lion). Fi­nally, one out­stand­ing ques­tion is how the state can guar­an­tee a rate of re­turn on re­tire­ment ac­counts when the le­gis­la­tion says that a plan can­not put the state in debt or make it li­able for private-work­ers’ re­tire­ment.

Re­gard­less of wheth­er Con­necti­c­ut moves ahead with a state-run re­tire­ment plan, however, the need still ex­ists for poli­cy­makers to think through re­tire­ment. Just 18 per­cent of Amer­ic­ans feel very con­fid­ent that they’ll have enough money to live com­fort­ably after they stop work­ing, ac­cord­ing to re­cent re­search from the Em­ploy­ee Be­ne­fit Re­search In­sti­tute. And, any in­crease in con­fid­ence in re­cent years comes from rich­er house­holds who’ve over­whelm­ingly be­nefited from gains in the stock mar­ket and a rise in home prices.

This winter, the Obama ad­min­is­tra­tion pro­posed the cre­ation of a new re­tire­ment sav­ings plan for lower-in­come people. Oth­er than that pro­pos­al, the fed­er­al gov­ern­ment has not ac­ted. “It would be nicer if we saw some ac­tion at the fed­er­al level,” says Alicia H. Mun­nell, dir­ect­or of the Cen­ter for Re­tire­ment Re­search at Bo­ston Col­lege. “But, it’s also won­der­ful to have ex­per­i­ments at the state level and have some labor­at­or­ies where people can test out what works.”

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