Letitia James wants to create a pension system for private employees, but she faces a number of challenges.
By Andrew J. Hawkins
and Erik EngquistErik Engquist
Public Advocate Letitia James is renewing her push for a pooled retirement system for pensionless private-sector employees. In recent days, she has testified at a City Council hearing, released a report on New Yorkers being unprepared for retirement, and even pitched Gov. Andrew Cuomo’s staff on the proposal.
Still, she faces an uphill battle. Her bill in the council to create a “retirement security study group” to analyze the feasibility of a pooled retirement system for private employees has only gained six sponsors in the six months since its introduction. City Comptroller Scott Stringer, who helps manage the $160 billion, five-fund pension system for city workers, promised to create his own advisory panel on private workers’ pensions, but that effort is stalled. And Mr. Cuomo has enough on his plate with public pensions.
But Ms. James says she’s optimistic about the bill’s chances.
“Hopefully by working together, we can get in front of this looming crisis,” she said. “We’ve still got some work to do.”
Democratic activist Bill Samuels has been pushing such a pooled pension system through his nonprofit advocacy group, Effective NY. “I don’t see any legislation even surfacing (in New York) until late 2016,” he had predicted to Crain’s in March, incorrectly as it turned out. “We need to build support.”
As Ms. James sees it, this problem is a failure by private employers to provide retirement benefits such as 401(k) plans to their workers. Only 41% of private workers in New York City had access to an employer-sponsored retirement plan in 2011, down from 49% a decade ago, according to a report by the public advocate’s office. Whereas 44% of current retirees receive pension income nationally, only 19% of working-age Americans are due to receive it. Among working New Yorkers aged 25 to 44, only 8% say they have access to a defined-benefit plan.
“The taxpayers will bear the brunt of Baby Boomers who will have to be cared for,” Ms. James said. “It could have a major, adverse impact on our bottom line as a city.”
Details for a solution, though, still need to be worked out, she said. “Who will manage it? What are the fees? What are the opt-out provisions? The default provisions? What businesses will they [include]?”
Private employers have moved away from offering defined-benefit pensions for their workers, but these plans remain common in government—and increasingly expensive: In fiscal year 2016 the city will set aside $8.7 billion, or 11% of its total budget, for pension contributions, straining the city’s ability to pay for services.
Defined-contribution plans are cheaper because they do not guarantee retirement income and can be funded solely by employees. But even if private employers set up a defined-contribution plan for their workers and do not contribute company money to it, there is still an administrative cost to the business. And the smaller the business, the higher the cost per employee.
A pooled system for workers from many businesses, however, would enjoy economies of scale not available to individual businesses administering 401(k) and other such plans.
“Illinois passed a very good version,” Mr. Samuels said. “State action [in New York] is eventually what I’d like to see. We are urging that New York City study this first, as it did for campaign finance reform, then expand it to the state.”
Besides Illinois, two other states have passed legislation enabling a pooled pension for private workers, according to Samuels, who said he began looking at the issue along with state Comptroller Thomas DiNapoli in 2011 or 2012.
Even if employees do have a 401(k) or 403(b) retirement program available to them, many do not participate, or do not contribute enough money, or make bad investment choices because they fall prey to investor psychology: selling stocks when the market falls and buying when it rises. Some even withdraw money before retirement and pay penalties and taxes.
In the pooled system envisioned by Mr. Samuels, as in a public pension fund, the investment choices are made by professional managers and individuals cannot withdraw money prematurely. Accounts would be portable if employees switched jobs, and enrollment would be automatic unless the worker opted out.
Report Retirement Security v.1