The States Have No Business Creating Their Own Retirement Accounts

People have lots of ways to save for retirement. Most employers offer some sort of retirement plan, of course, and people whose employers don’t can set up their own retirement account and get the same tax benefits, albeit without any employer contribution.  Low-income workers at a job without a benefit plan can now participate in Treasury’s new MyRA program, which creates a retirement account for the worker and provides a match for their contributions.

And Social Security, which totals to 15.3% of the first $118,500 of a worker’s income, constitutes a big chunk of most people’s retirement income.

Should we do more to help retirees? Given that the poverty rate of senior citizens is well below that of the rest of society it’s sort of hard to say yes to that question, but the states are having none of it.

Several of them are now creating savings programs of their own,  bolstered by recent  Department of Labor regulations that makes it easier for states to do such a thing.

Is this an example of the 50 laboratories of democracy experimenting to come up with a better way to do something? Of course not–it’s akin to each state setting up its own separate post office.

Payroll taxes already constitute 4.5% of GDP, and the government misses out on another $100 billion of tax revenue from the breaks given to encourage retirement saving. Given the enormous effort we already put forth to encourage (or force) people to save for retirement, arguing that we need yet more incentive plans on this front is a tough brief to prosecute, but even if the answer is yes it’s hard to see why the appropriate response would be for this to be done by the states.

The states already run their own college savings programs, and if we go by that record they’re not very good at this.  My wife and I have one of these (two, actually, since the District of Columbia essentially forces each parent to open up their own separate account) and the first few years of parenthood we put a few grand each in these.

Our money is invested in a stock index fund. Index funds are advantageous because they simply follow the aggregate stock market and don’t require any management team to make investment decisions. As a result, the management fee is very low–at places like Vanguard and TIAA-CREF it’s less than .09% of each dollar invested.

In my index fund the management fee is five times higher, at nearly .5%.  Why the difference? Part of it is because the District expropriates .15% to cover their costs of administering the program. The company that has the contract to run the funds for the program has a management fee for my index fund of .31, which is precisely 15 basis points above the management fees on their regular index fund that I could buy with my money that’s not in the college savings fund.  In other words, the city and the investment company are merely splitting surplus fees being charged to the participants.

And if a person who’s not a resident of the District of Columbia wants to open a college savings account with DC, he has a 5% fee up front taken out of his account.  5% is little more than the District fleecing people not paying attention, but the .3% adds up over time as well–over $6,000 for a family that sets aside $10,000 a year for a child’s 18 years before attending college.

The federal government thinks that excess fees are injurious–it recently issued new fiduciary rules governing investment advisers with the express goal of helping investors get into accounts with lower management fees. For it to turn around and sanction the states to get into this game is just nonsensical.

Believing in the precepts of federalism doesn’t mean we should countenance the states creating all sorts of new programs that replicate what the federal government is doing. Things that the government is inherently not good at doing–and I submit that administering savings accounts is one of them–shouldn’t be done by the states, let alone the feds.