Filed Under:Life Insurance, Life Products

California Bill to Create State Pension Program

Anathema to life industry, nears passage

Sailing towards a silver tsunami (AP Photos/Kike Calvo)
Sailing towards a silver tsunami (AP Photos/Kike Calvo)

The American Council of Life Insurers (ACLI) and others in the insurance industry are culminating a long battle against a California bill that is now eligible to be heard on the California Assembly floor, which is expected sometime next week. From there it would go to the governor’s office.

SB 1234 would create a state-run pension or retirement savings plan for private-sector workers in California as a way to address what sponsor Sen. Kevin de Leon, D-Los Angeles calls the “looming retirement tsunami.”

“When retirement benefits are guaranteed, taxpayers are on the hook for shortfalls in public systems while private pension shortfalls are the responsibility of employers,” the ACLI has stated regarding the California Secure Choice Retirement Savings Program. 

However, issues pertaining to the Employee Retirement Income Security Act (ERISA) and any preemption were the key matters that were discussed earlier this month in a key Assembly committee before the bill came to the Assembly floor. 

“SB 1234 seeks to eliminate an employer's potential federal liability and responsibility but opponents do not believe that a state bill has that authority under federal law (ERISA or the Internal Revenue Code),” noted Insurance Agents & Brokers of the West (IBA West) when the bill passed the Assembly Labor & Employment Committee.

The bill would require the board to ensure that an insurance, annuity, or other funding mechanism is in place at all times that protects the value of individuals accounts and protects, indemnifies, and holds the state harmless at all times against any and all liability in connection with funding retirement benefits pursuant to these provisions.

The bill would prohibit the board from implementing the program if the IRA arrangements offered fail to qualify for the favorable federal income tax treatment ordinarily accorded to IRAs under the Internal Revenue Code, or if it is determined that the program is an employee benefit plan under ERISA.

The ACLI and the Association of California Life & Health Insurance Companies teamed together to oppose the bill, along with the California Small Business Association.

The ACLI member companies are big suppliers in defined contribution (DC) plans where participants choose from a variety of investment options. The amount of retirement savings will depend on the market performance of the investments selected and neither the employer nor plan administrator is responsible for the investment outcome. Gains are tax-deferred. Life insurers are also suppliers in defined benefit (DB) plans. The ACLI supports proposals that create more flexibility than a mandate would allow in giving choices for employers and workers, encourage participation in workplace-based plans and IRAs, and promote increased use of annuities to guarantee lifetime income. 

They also warned that one employer could jeopardize the multiple employer pension plan’s tax status because, under current guidance, the IRS could disqualify the entire plan due to a compliance failure on the part of one employer.

But de Leon also mentioned the burden to taxpayers if there is nothing done, due to the retirement shortfall and the cost of no social safety net. 

de Leon’s thus-far--successful legislation is designed to be a supplement to social security, which he called “subsistence living at best.” He spoke of the $6.6 trillion retirement income deficit between what Americans have saved and what they must save . In California, he said, this shortfall is $600 billion.

“California threatens to become home to a sea of discarded senior citizens unless we wake up and address the looming retirement tsunami,” the state senator said when introducing this bill. He referenced his 74 year-old aunt, who still scrubs floors of wealthy patrons in Sand Diego to make ends meet. 

“We are correcting a crisis on immediate horizon. Fifty percent of middle income (middle class) Californians will retire at or near the poverty level,” de Leon stated in a speech on the then-new bill early this year.

In a study commissioned by the ACLI, Milliman pointed to the significant administrative costs and regulatory compliance costs of state-run plans.

Milliman, in its white paper, stated that a low estimate of the per participant administrative cost for a state run defined benefit (DB) plan for private employers is $100 per participant, plus Pension Benefit Guaranty Corporation (PBGC). “However, the administrative costs could easily exceed this amount since DB plans for private employers are subject to additional ERISA and IRC requirements that don’t apply to governmental employers,” Milliman stated. 

It noted that the administrative costs for CalPERS, which covers about 1.6 million state and local government members is about $350 million per year, or $218 per member. 

The administrative costs for CalSTRS, which covers about 850,000 teachers is about $110 million per year, or $129 per member. CalPERS and CalSTRS are both governmental plans exempt from PBGC premiums and many of the requirements of ERISA and the IRC.

PBGC a federal government agency that guarantees benefits provided by defined benefit plans premiums.

 

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