Congress recently has made efforts to encourage private-sector workers to save for retirement. Legislators in many states now should pay similar attention to public-sector workers.
Public-sector workers need opportunities and encouragement to save more for retirement as much as private-sector workers. Unfortunately, many states have laws that prevent the implementation of a simple tool that has helped boost private-sector saving: automatic enrollment of employees into the appropriate defined contribution plan. These laws, which weren't aimed at governmental DC plans or auto enrollment, have been on the books for years, protecting workers from withholding except for certain items such as defined benefit contributions, taxes, court orders and health-care plan contributions.
A study by the National Association of Government Defined Contribution Administrators found that 28 states prevent government DC plans from offering auto enrollment. Another 12 states allow partial use.
This must change. These state legislatures owe it to their public employees to clear away any legal roadblocks to auto enrollment.
Yes, most public-sector workers participate in defined benefit plans, some of which are fairly generous, while most private-sector workers are offered only defined contribution plans. But private-sector workers also will receive Social Security benefits, which most public-sector workers will not.
In addition, many of the public-sector DB plans are in poor financial shape, so the rate of benefit increase likely will slow in coming years as state and local officials try to bring the liabilities into line with fund assets. Legislators in the 28 non-auto enrollment states should do all in their power to encourage employees to sock more away for retirement to offset the possible erosion of the DB plan benefits.
Some public-sector workers retire as soon as possible, often as early as age 55, and move into the private sector to build Social Security credits — for them a late form of additional retirement saving. But any Social Security benefits earned that way are likely to be low, and could be cut in 2035 as the Social Security trust fund runs dry if Congress takes no remedial action.
Public-sector employees should be offered the same opportunity to save additional amounts for retirement as most private-sector employees have.
Any changes to public employee supplemental savings plans to allow auto enrollment could give employees an opportunity to opt out, and the initial deferral rate could be low and could be increased at intervals, as in many private-sector plans.
Experience in the private sector has shown that most employees do not opt out or object to the initial deferral rate. Inertia often causes employees not to participate in savings plans when offered, but that same inertia leads most employees to remain in plans when auto-enrolled.
Legislators in the 28 states that do not allow auto enrollment should revise their laws to take advantage of this phenomenon and help public workers save more for retirement. Let's make inertia the employee's friend, not his or her enemy.