With surprising speed, state-sponsored private sector retirement programs have assumed an important place in the nation’s public policy agenda. California, a pioneer in many trends, was a pioneer in this area also. The California Secure Choice Retirement Savings Trust Act, adopted in 2012, was the first law authorizing a state-sponsored retirement program for private sector employers, though the California act must be confirmed again by the Golden State’s legislature to take effect.
Illinois has also enacted its version of a state retirement plan for private sector employers. In the meanwhile, the US Department of Labor has proposed regulations encouraging such plans while other states follow California’s and Illinois’ leads. Recently, New York City Mayor Bill DeBlasio proposed that the Big Apple become the first municipality to sponsor a private sector retirement plan.
As debate about state-sponsored retirement plans has unfolded, that discussion has occurred along predictable lines. Advocates of such plans bemoan the low retirement savings rates of employees who work for smaller employers. Many small employers do not sponsor 401(k) or other retirement savings arrangements. These advocates contend that state-sponsored programs will encourage the (often low income) employees of small firms to save for retirement.
Opponents of state-sponsored retirement plans for private sector employers characterize such plans as an undesirable regulatory burden on small employers. Employers who do not maintain their own retirement savings plans will be required to enroll employees in the state-maintained plan and to give employees information about the state plan. Other critics argue that state-sponsored programs constitute unfair competition against commercial providers of retirement savings services.
Were Margaret Thatcher alive, she might have offered a different perspective from either of these. She might have welcomed state-sponsored retirement plans as encouraging low income individuals to invest in the stock market.
Margaret Thatcher would likely have been uncomfortable with a legally-imposed mandate requiring private sector employers to participate in a state-run pension plan. It is also likely that she would have preferred that the state not compete with commercial pension providers – though she might have been mollified by the prospect that part or all of these state programs will be outsourced to private firms.
However, Margaret Thatcher would probably have viewed state-sponsored private sector retirement plans as stimulating stock ownership by low income employees. This she would have strongly supported.
Among her most important achievements during her eleven years as Prime Minister was the devolution of important industries from government ownership. Among the iconic firms shifted to private ownership during Mrs. Thatcher’s tenure as Prime Minister were British Airways, Jaguar, and Rolls-Royce.
These firms, previously owned by the British government, were sold to the public, thereby transforming many British citizens into stock market investors. That transformation was a critical component of the Thatcher revolution which almost quadrupled the percentage of Britain’s adult population who were stockholders in traded firms.
Consider in this context the Illinois private sector retirement plan. As I recently noted in the Illinois Law Review, the Illinois program will establish a Roth IRA for each employee participating in the program. Each such IRA will be invested by the employee among several funds: “a conservative principal protection fund,” “a growth fund,” “a secure return fund,” and “an annuity fund.” If an Illinois employee does not select one or more of these funds for her IRA, “the default investment option” will be “a life-cycle fund with a target date based upon the age of the enrollee.” Such life-cycle funds invest heavily in common stocks when the employee is younger and become more conservative as the employee moves closer to retirement.
It is likely that many participants in the Illinois plan will be relatively low income individuals working for smaller employers. Through the Illinois retirement savings plan, many of these individuals will make their first entry into the stock market, either because they elect to invest their retirement savings in the “growth fund” or because they (deliberately or through inertia) invest in life-cycle funds oriented toward stock ownership.
Owning stock through an IRA or through an investment fund is not quite the same as holding directly the stock of a particular firm. Nevertheless, a state-sponsored retirement plan like the Illinois program will introduce many low-income employees to the stock market.
Margaret Thatcher would have approved this expansion of the “ownership society.”
Featured image: Retirement. (c) Olivier Le Moal via iStock.