Will Congress Undermine Retirement Coverage, Too?
Lost in the current debates over health care is the fact that over the next few weeks, Congress may end up denying retirement coverage to 55,000,000 Americans. And it will do so by overriding states’ rights and expanding federal regulation of small businesses.
Why in the world would Congress do that? And is it legal?
Normally, one would expect a Republican Congress to support state efforts to protect their taxpayers and roll back regulation of small businesses by the U.S. Department of Labor (DOL). Yet, several weeks ago — over the objections of both Republican and Democratic state treasurers and against the wishes of small businesses, advocates for seniors, and policy wonks — the House of Representatives voted along party lines to do just the opposite. The House voted against an idea — the automatic IRA — that was created by the Heritage Foundation (along with the Brookings Institution). And, in a legally surprising move, Republicans used the Congressional Review Act — a law designed to stop regulatory overreach — to disapprove the DOL’s admission that it couldn’t regulate state IRA programs.
At issue is whether the federal Employee Retirement Income Security Act (ERISA) should apply to small businesses that do not offer pensions or 401(k)s — which are covered by ERISA — but, instead, allow their employees to enroll automatically and contribute their own money toward individual retirement accounts (IRA), which generally are not covered. We’ve learned from 40 years of experience that if retirement benefits are covered by ERISA, most small businesses won’t go near them. As a result, about half the people working full time have no opportunity for payroll retirement savings at all — that’s 55 million people. Few, if any, manage to save on their own.
Enter the states, who know that people without retirement savings tend to end up on the taxpayer dole, via Medicaid and other social programs. Five states have enacted requirements or incentives for small businesses to enroll their employees automatically in retirement savings unless they choose to opt out. Those states are also setting up “Secure Choice” programs for those savings to be invested at low cost by private firms. (Full disclosure: I chair the board implementing this program, enacted on a bipartisan basis, in Maryland.) A recent study by an actuarial firm estimated that a nationwide automatic savings program would save state taxpayers some $5 billion over 10 years.
The states, knowing how suspicious small businesses are of federal regulation, wanted confirmation that ERISA didn’t apply. So they went to the place in the federal government least likely to say there are limits on ERISA: the Department of Labor, which enforces the law. DOL responded to the states in a regulation by admitting that ERISA doesn’t apply to small business IRAs if state law required the business to offer them and the business doesn’t do anything more than comply with the law.
This may be one of the few times in history a federal regulatory agency said it wouldn’t try to regulate.
So what does it even mean for the Congressional Review Act to “disapprove” of the DOL “regulation” in this context? And why are conservative members of Congress — who are normally respectful of states’ rights and small business and cheer limits on DOL regulation — suddenly trying to undo the DOL “safe harbor” and impose ERISA on small businesses? Is it simply a desire to undo anything associated with the previous administration? Or, as some suggest, is it because financial firms and financial advisers would like 55 million more customers, but don’t want a state looking over their shoulders and asking them to do it at much lower fees?
Of course, no one can publicly oppose retirement savings, so opposition rhetoric is based on a trumped-up claim that people who participate in these plans won’t be “protected by ERISA.” This ignores the inconvenient fact that, as a matter of law, the vast majority of current IRAs don’t get ERISA protections anyway. (Although funded by withdrawals from ERISA-protected pensions or 401(k)s, most IRAs are not themselves covered by ERISA). Under the state programs, by contrast, savers have plenty of protection: The federal tax code requires IRAs be run for the “exclusive benefit” of participants; and every state auto-IRA law puts in place ERISA-like safeguards that apply both to state and private investment firms receiving the IRA money.
Another scare tactic is the fraudulent claim that state governments will use the money or invest it, themselves. In fact, each state has already committed to get competitive bids and to invest all money through private investment firms. And that may be the problem: Investment firms are happy to take and invest people’s money — but they don’t want to admit they can do it for the low fees the states are requesting.
This should not be a partisan issue. In Maryland, our program had bipartisan support and was signed by a governor from a different party than the legislative majority. The National Association of State Treasurers, looking for ways to avoid higher Medicaid costs on state taxpayers, has both Republican and Democratic treasurers opposing the resolution.
Now that the House has acted, the U.S. Senate will decide the issue. Will there be enough votes in Congress to allow states to protect their own taxpayers, to reduce regulation on small business, and to help the 55 million Americans heading towards retirement without a retirement nest egg? Stay tuned.
Hon. Joshua Gotbaum is a guest scholar in Economic Studies at the Brookings Institution. He directed the U.S. Pension Benefit Guaranty Corporation from 2010–14 and currently chairs the Maryland Small Business Retirement Savings Board.