IS A PRIVATE RETIREMENT SYSTEM POSSIBLE IN WISCONSIN?
Senate Bill 45 is a bill to begin to create a private retirement system in Wisconsin. Chief sponsors are Senator Dave Hansen and Representative Eric Genrich. This bill is an important first step for employees in the private sector who do not have access to a pension.
This bill does NOT create the actual retirement system. It allows for the creation of a private Retirement Security Board which would be enabled to study the creation of such a private system. The WRS (Wisconsin Retirement System might provide a framework for a private sector system, but the two systems would be managed and held separately.
This bill is an important first step for employees in the private sector who do not have access to a pension, and there are tens of thousands of employees and citizens in this category.
Retirement security is declining in America. There are many contributing factors to the crisis: declining wages, exportation of middle class jobs, increasing healthcare costs, inadequate individual savings, and companies defaulting on pension promises.
DEFINED BENEFIT VS.DEFINED CONTRIBUTION
Since 1980, there has been a profound shift in the structure of retirement programs. Guaranteed, defined benefit (DB) company pensions have largely been replaced with individual, defined contribution (DC) retirement savings plans known generally as 401(k)’s. The result is a perilous shift in retirement program management from companies to individual employees.
In a defined contribution plan, the employer’s only responsibility is to make contributions to an employee’s account. Employees are responsible for saving enough, choosing investments, and “managing” their own retirement. DC plans provide no guaranteed retirement income; investment risks and fees are born by individuals.
In a defined benefit plan, the employer is responsible for making contributions AND for managing the retirement program to ensure sufficient funds to pay promised benefits. Risks are more evenly shared, and retirement benefits are guaranteed.
In Wisconsin, 88% of employers offer defined contribution plans compared to just 8% that offer defined benefit plans.
But research shows that individuals who save on their own using defined contribution plans get lower investment returns, pay higher management fees, and have dramatically less at retirement than those with defined benefit retirement plans.
Specifically, 75% of 401(k)’s have an average balance of $60,000 with the median account balance less than $20,000. This means one- third of households will end up with virtually no retirement savings and be entirely dependent on Social Security.
Wisconsin can avoid many of the above concerns by taking lessons from its very successful Wisconsin Retirement System (WRS) for public employees, managed by the Department of Employee Trust Funds (ETF). Rated #1 in the United States, the WRS is a shared risk, defined benefit pension program serving 572,000 active public employees and retirees. The system is fully funded (meaning WRS assets are large enough to cover all expected current and future retirement payments). WRS has provided guaranteed, family-supporting retirement income since 1985.
Pensions are paid with participant contributions and investment earnings, not taxpayer dollars. WRS has never failed to meet an obligation or required a taxpayer bailout. The system is also affordable. Wisconsin state and local government spending for pension contributions was 1.26% of total government spending in 2009.
The WRS can serve as a model to create a private sector, defined benefit retirement program that, over time, could help ensure that all Wisconsin workers, not just public sector workers, have a secure retirement income
A defined benefit system for private sector workers, built on the operating principles and practices of the WRS, could greatly benefit Wisconsin and its thousands of small businesses, 80% of which have fewer than 25 employees. Businesses that are too small to afford quality retirement benefits could now offer them through a state-assisted system. This would enable them to compete more effectively for quality employees.
Such an approach could attract more businesses to Wisconsin, helping to rejuvenate our economy. Retirement for all is a “win-win” for Wisconsin business, workers, retirees, economy, and taxpayers.
Contact Senator David Hansen at Sen.Hansen@legis.wisconsin.gov 608-266-5670.
Contact Rep. Eric Genrich at Rep.Genrich@legis.wisconsin.gov or 608-266-6616
For more information, http://lc.legis.wisconsin.gov/comtmatfiles/sb0045.pdf