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
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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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