I recently met Daniel Biss, a Democratic state senator from Illinois, at a conference on financial security organized by the Aspen Institute. He is intelligent, politically savvy and courageous and wonderfully self-effacing — exactly the sort of person, in other words, that you’d want to go into politics.
A Harvard and MIT-trained mathematician, Biss was on the tenure track at the University of Chicago when he decided to throw it all over and run for the legislature, motivated by what he said had become an obsession to fix a dysfunctional political process. It took two tries to win the senate seat from Evanston, where he lived with his wife, a PhD candidate in history, and two young children. His colleagues and parents thought he was nuts.
With a good head for numbers, Biss has been in the thick of crafting a financial rescue for Illinois’s criminally underfunded and overgenerous pension system. And more recently, he shepherded through the Senate (without a vote to spare) a law requiring all but the smallest employers in Illinois to automatically enroll employees in an Individual Retirement Account if they do not offer a pension or some other retirement savings plan. Employees can opt out of the program, or reduce the standard contribution of 3 percent of wages and salaries, but experience shows that few actually do.
This concept goes by the name of “Automatic IRA.” It was first proposed in 2006 by two respected policy wonks, David John, then of the conservative Heritage Foundation (now at AARP), and Mark Iwry, then at the more liberal Brookings Institution (now at the Obama Treasury). It quickly won support from Democrats and Republican sponsors on Capitol Hill. In the 2008 presidential campaign, both John McCain and Barack Obama endorsed it.
For a time, Auto IRAs were widely viewed as an effective, bipartisan solution to the problem of inadequate retirement savings in a country where less than half of workers have a serious pension or retirement savings plan by the time they turn 45 — and of those who do, the median savings is less than $25,000.
Given that at least 60 million Americans have no access to retirement savings options at work, and given studies that show that automatic enrollment yields participation rates of 85 percent or more, you’d have thought that the financial services industry would have rushed to support it. But you’d be wrong.
In fact, the industry that would administer all those tens of millions of new accounts and manage the hundreds of billions of dollars in extra savings is leading the fight against it in Illinois and more than a dozen other states. And therein lies a case study of how dysfunctional our political process has become.
Let me acknowledge here that the “retirement savings crisis,” much like the “student loan crisis,” has almost surely been overblown in the recent public conversation. I won’t go into all the eye-glazing disputes over the statistics and the analytical constructs except to say that, in the end, what really matters is the total financial resources, including Social Security and home equity, that middle- and working-class households have available to maintain their standard of living during retirements likely to last 20 years or more. By that criteria, we’re looking at a significant shortfall in what would be required — at least 25 percent, but perhaps as much as 40 percent. Perhaps that’s why the latest Gallup Poll finds that “not having enough money for retirement” is the top financial worry of Americans.
So why is the financial services industry opposed to a proposal that would significantly expand its market?
The public rationale begins with the assertion that there is no systemic retirement finance problem and that the market is already well served by a variety of competing, cost-effective products. As for the Auto IRAs, the industry is also deeply troubled by the added burden forced on small businesses that will have to chose a company to manage the accounts and forward the payroll deductions.
In other words, the industry is not motivated by self interest — no way — but by concern for the well-being of its customers. It’s the oldest trick in the lobbyist’s playbook, and it’s a reliable tipoff that something else is going on here.
Industry officials are also of the opinion that state initiatives like the one in Illinois would likely violate federal pension laws that protect consumers from employer abuses and ensure a uniform set of rules across the country. But, of course, that argument also rings hollow once you learn that the industry also opposes President Obama’s proposal for a federal Auto IRA that confronts no such problem.
Having poked around a bit, what I’ve discovered is that the industry’s real concern is that there will be little or no profit to be made by setting up and managing millions of new small-dollar accounts. Their fee structures are based on expectations that higher-income workers and employers will make significant and consistent annual contributions to larger and more complex 401(k) accounts. And while there is nothing in the proposals that will require any company to serve this new market if they don’t want to, they are afraid of opening the door to new low-cost, high-volume competitors that might develop relationships with people who later graduate to more profitable products.
In other words, they don’t want to offer accounts to lower-income workers, but they don’t want anyone else to, either — particularly if, in the process, some of the tax incentives now offered to high-income savers are shifted to low-income ones, as both the president and the Republican chairman of the House tax-writing committee have proposed.
Of even greater concern to the industry is the role that government will play in the Automatic IRAs. The proposals vary in their details, but one common feature is that employers can either chose a private company to manage employee IRAs and receive the monthly payroll deductions — or they can make no choice, in which case employees will be automatically enrolled in a government-managed program that lets them choose from among a small number of safe, simple account options run by mutual funds and insurance companies selected on the basis of competitive bidding. State and federal governments already do this for their employees. With Auto IRAs, they would set up a parallel system for a pooled group of private-sector workers.
And for the industry, that’s the rub. Industry executives fear that allowing the government to set up the “public option” will be the first step on a slippery slope toward greater regulation of the products they can offer, as has happened in the insurance exchanges under Obamacare. Just as significantly, they fear that government-managed programs will set in motion a competitive dynamic that will expose — and ultimately drive down — the significant profits they now make from retirement products.
Those are legitimate reasons for an industry to be concerned about a legislature proposal and to oppose it strongly enough to force compromises to make it more palatable. But in the new political environment, compromise is a dirty word, even for legislation of obvious public benefit. In Illinois, Biss reports that “it was difficult even to get them to talk with me.” For muscular trade associations pumped up on the steroids of political partisanship, the 1950s-era ethic that what’s good for America is good for Allstate no longer applies. The new corporate ethic is that anything that’s bad for Allstate must be bad for America.
To be fair, some firms have broken ranks. Mutual funds Putnam, Legg Mason and Ariel Investments have voiced support, as has Prudential Insurance. So, too, has the AARP and the American Society of Pension Professionals and Actuaries, whose members ought to know a thing or two about retirement issues.
At this point, there’s not much the industry has to do to block consideration of Auto IRAs at the federal level. Since passage of Obamacare, Republicans reflexively dismiss anything that involves an employer mandate or government-run marketplace — even those who once supported the idea. But even the Democratically controlled Senate has declined to take up the issue. Swing-state Democrats are loath to further alienate the small business lobby, which reflexively opposes all employer mandates and regulation, while the more liberal wing of the party has begun to coalesce around the idea that the best way to guarantee retirement security is to increase Social Security benefits.
With no prospect of passage of federal legislation, the onus has fallen to people like Biss, who faces an uphill battle in the Illinois House. In states such as California, proponents have been forced to accept studies of the concept rather than actual enactment.
Meanwhile, here in Washington, the Obama administration has been forced to fall back on a laughably weak alternative in which the Treasury will offer small “myRA” accounts to willing workers at willing firms, with the money invested in Treasury bonds. As you might suspect, the financial services industry is eager to be seen as supporting that idea.