MEASURE WILL HELP PLUG RETIREMENT SAVINGS “GAP”

State legislation to create a retirement savings program for private sector workers took a step forward last week.

On October 15, the New Jersey Assembly Financial Institutions and Insurance Committee approved A-4134, the Secure Choice Savings Program Act, by a vote of  8-to-3, with 2 committee members not voting.

We all know that Social Security, as helpful and necessary as it is, is not enough for seniors to live on. According to figures from AARP (formerly American Association of Retired Persons), the average monthly Social Security retirement benefit in New Jersey is $1,377/month. Just try living on that in this state, where the average monthly rental for a one-bedroom apartment is $1,199 per month, according to the National Low Income Housing Coalition. With utilities, food, clothing, medical expenses and other expenses, the math simply does not add up. 

At the committee hearing, AARP-NJ’s Evelyn Leibman contrasted the roughly $19,000 annual average Social Security benefit in New Jersey with the $23,000 per year the average family spends on food and housing alone. Never mind the higher health costs that most retirees face, even with Medicare, along with utilities, taxes and other expenses.

Yet, in 2012, nearly one in four New Jersey retirees relied on Social Security for nearly 90% of their income, Leibman testified.

Sarah Gill, the senior legislative representative for state government affairs at AARP, testified that retirement savings average only $12,000 and that the risk of financial insecurity during retirement is on the rise.  People are free to set up their own Individual Retirement Accounts but very few do so, she observed.

According to AARP figures, nearly half of the U.S. population will be unable to afford basic requirements in retirement.

As Committee Chair John McKeon remarked, this is one of these instances in which everyone agrees there is a problem but disagrees on what to do about it.

Social Security needs to be strengthened and payments increased but instead, there are constant threats to reduce or eliminate it.

The program, signed into law by President Franklin Delano Roosevelt in 1935, was never intended to be the sole source of income during retirement. It has been widely described as one leg of a three-legged stool, whose other legs are pensions and private savings. Most people do not have pensions and their numbers are shrinking, making the personal savings aspect even more crucial than it once was.

Many companies have 401k plans that make it easier to save for retirement by setting aside and depositing  a certain percentage of each worker’s pre-tax paycheck into a retirement savings account. If the money is withdrawn at retirement age, when income is likely to be lower, it is taxed at a lower rate. In the interim, the funds are invested (with taxation on those gains also deferred) and hopefully grow into a tidy nest egg by the time they are needed.

Many employers will match some part or even all of the employee contribution which not only results in more money at retirement but is an inducement for employees to participate rather than saving (or not) on their own.

Plenty of companies, however, do not provide a 401k plan or any other type of retirement savings program.

The Secure Choice Program  

The Secure Choice bill means to remedy that by requiring companies with at least 25 workers that lack such a program, to facilitate a state-created one by handing out information kits, making employees’ deductions and remitting those sums to the program. Smaller employers would have the option to participate but would not have to do so.

Here is how the program, also known as an auto-IRA, works:

Enrollment is automatic for employees but participation is voluntary and they are free to opt-out at the start or terminate it at any time. For those who go with  the program – and making it opt-out rather than opt-in assures that many more of them will do so—a portion of their salary will be deducted and deposited with the savings program, where it will be invested. The account will follow them if they switch jobs. They just have to give the account number to the new employer to enable the deduction. Likewise, people with multiple jobs can use a single account for all of them.

The default contribution level is three per cent but once a year, during an open enrollment period, employees can change it and can also decide to opt back in if they have opted out. They also will have a choice of up to five investments but there is also a default option if they prefer.

A similar bill in the Senate, S-2891, would set a default contribution rate of six per cent. There also appears to be another, just introduced Senate bill, S-3141, whose text is not yet available, which will likely go with the same 3 per cent default rate as the A-4134.

The New Jersey Secure Choice Savings Board will be formed to implement the program and oversee the fund. Its seven members will be the State Treasurer, Comptroller, and Director of the Office of Management and Budget, as well as two public representatives with expertise in retirement savings plan administration or investment, or both, along with one representative for the participating employers and one for the enrollees.

The Savings Gap

The Secure Choice program is a much-needed solution to the widely acknowledged problem of the retirement savings gap—too many people saving far too little to live on once they retire.

According to information from AARP-NJ,  more than 1.7 million private sector workers in this state, or 53.5%, lack access to an employment-based retirement plan.

That is slightly higher than the national figure, of 48.6%, or 54.9 million people. National demographic data from AARP shows which groups are most affected: minorities, the less educated, the young and those who work for smaller companies and earn less money–in other words, those who already tend to make less and have a harder time saving on their own and whose Social Security checks will be even less than the inadequate average.

Other States

AARP has been a leading proponent of Secure Choice bills around the country. They are a fairly recent idea and the few states that have adopted such programs have only had them a short while or are still setting them up. They include California, Connecticut, Illinois, Maryland and New York State, which approved creation of a program as part of its 2018 budget bill.

Many other states are considering the idea.

At least two states that adopted Secure Choice, California and Oregon, were sued on the ground that the programs violated  ERISA,  the Employee Retirement Income Security Act, a federal law that sets minimum standards for private industry pension and health plans in order to protect the individual beneficiaries.

A regulation adopted by the U.S. Department of Labor in 2016 was meant to facilitate state-run retirement plans by making it clear that they are exempt from ERISA requirements but in early 2017, after Trump took office,  Congress used the Congressional Review Act to override the agency and nullify the regulation.

The intent appears to have been to undermine programs like Secure Choice..

In her October 15 testimony, however, Gill, did not believe there was a problem, stating “we are good to go under federal law.” In her view, the program would not fall under ERISA because of a 1975 regulation that exempts plans that are voluntary and to which the employer does not contribute and has limited involvement. For that reason, the New Jersey law has been drafted to limit the role of employers and, in fact, it prohibits them from matching their employees’ deductions.

Gill is not alone in thinking that there is no ERISA problem. On May 16, 2017, the law firm of K&L Gates wrote an opinion letter to that effect to the State of California, whose Secure Choice legislation made its program contingent on ERISA not applying.

History of NJ Bill

The New Jersey bill was first introduced in March 2015 as A-4275 and it passed both houses on January 7, 2016, two legislative sessions ago. It did not become law then because four days later, it was conditionally vetoed by then Governor Chris Christie, who faulted it as creating an unnecessary burden on small businesses and expanding state bureaucracy.

His conditional veto, which both houses of the Legislature scrambled to enact that same day, essentially rewrote the bill and renamed it the Small Business Retirement Marketplace Act. Signed into law on January 19, 2016, it was supposed to help small businesses set up their own retirement savings plans for employees, much like a program that Washington State has.

But New Jersey never implemented the 2016 law and no marketplace was ever set up. It was only on January 9, 2018, in the final weeks of the Christie Administration, that his Treasury Department issued a Request for Information, seeking “private sector financial services firms to provide investment products for New Jersey’s Small Business Retirement Marketplace to connect eligible employers and employees with qualifying retirement plans.”