The following is the first of 12 articles by noted New School professors and lecturers in anticipation of the opening of their new building on 5th Avenue when it will double in size and academic importance.
The number of New York workers with access to a retirement plan at work has plummeted. A recent study by The New School’s Schwartz Center for Economic Policy Analysis (SCEPA) shows that in 2009, 48% of New York’s workers did not have access to an employer-provided retirement plan – representing a 7.2% drop in pension coverage over the past decade. Further, in a study we released earlier this year with New York City Comptroller John Liu, SCEPA found that one third of New Yorkers cannot afford retirement.
These dire new numbers underscore the need for Albany to take action. The legislature must open state pension funds to individuals working in the private sector. This is a fair and low-cost action that would ensure all New Yorkers have access to the retirement security they deserve.
My plan seeks to give private sector employees the same retirement security non-government employees enjoy by allowing voluntary access to state-managed pension funds. Private sector workers or employers would have the ability to open an account in a state-level public retirement fund such as the New York State Common Retirement Fund, and/or employers can then choose to contribute a percentage of pay into an account, with a guaranteed rate of return. At retirement, workers would have the option to convert their savings into an annuity, a guaranteed stream of income for life.
This proposal takes advantage of existing state pension infrastructure to invest private sector funds. States, through their employee pension plans, sponsor not-for-profit financial institutions that consistently receive the highest returns for the least cost. Since they pool longevity risk, can offer a well-diversified portfolio over time, and are professionally managed, these defined benefit (DB) plans can deliver the same level of benefits as 401(k)s and other defined contribution (DC) plans – but at a cost that is 43% less. These funds are able to use their bargaining power to lower fees and public pension fund traders have a longer-term view, which stabilizes markets and protects individuals from short-term swings in asset prices.
To ensure secure and fair administration, my proposal calls for an independent board of trustees to manage these funds, similar to the structure of TIAA-CREF, the pension plan for university professors or the Thrift Savings Plan for federal employees. Pension contributions would be pooled and invested professionally with an emphasis on prudent and low-risk, long-term gains. This would effectively shield workers from the high fees and poor investment choices they face when left to fend for themselves in the retail 401k market. Most importantly, these accounts would be portable, allowing a worker to continue investing in the account as they move from job to job.
Many across the country realize this is the time to act. Indeed, in February, the California State Senate passed legislation inspired by this proposal, entitled The California Retirement Savings Act – an act that was praised by California State Treasurer Bill Lockyear as “a meaningful retirement security option for California private-sector workers.”
Effective retirement reform must focus not on cutting some benefits, but expanding access for everyone. Without comprehensive reform, our future retirees face a real threat of downward mobility in their so-called ‘golden’ years. Private-sector workers have been, and will continue to be, battered by the double jeopardy of increasing market risk in their 401(k)s and decreasing employer coverage. Opening a window for private sector workers in high performing public pension funds provides a practical blueprint to stave off an impending retirement crisis.
Teresa Ghilarducci holds the Bernard L. and Irene Schwartz Chair in economic policy analysis at The New School for Social Research and is the Director of the Schwartz
Center for Economic Policy Analysis at The New School for Social Research