Turning Social Security Over to the States

Turning Social Security Over to the States

I’ve been pondering an item I saw in the Wall Street Journal the other day about states creating “automatic IRAs” for residents who don’t have a retirement plan at work. So far only three states – California, Illinois, and Oregon – have approved such programs, and none have actually gone into operation as of yet. The general idea is that workers without any other retirement plan would have an automatic payroll deduction into an IRA, but they could opt out if they want.

In general, I like to see the states moving into areas that are thought (incorrectly) to be federal concerns. The federal social security system has no legitimate constitutional basis – it was upheld in the midst of the New Deal by an FDR-friendly majority of the court. Justice Cardozo’s opinion was based mainly on the idea that Social Security was good policy given the “crisis” of the Depression. The policy argument looks a little thin now, with the Social Security Trust Fund facing depletion. That’s not to mention the inherent unfairness of paying into a hypothetical retirement account that your heirs cannot inherit.

Granted, a number of factors make one suspicious of the current state initiatives. First – the fact that California and Illinois are among the early adopters suggest that the legislatures are looking to plunder retirement savings in the manner of the US Congress. Secondly, the Obama Administration itself supports the state initiatives, which is normally a good enough reason for opposition.

But the fact that state retirement programs are blessed by Democrats could be an opening for a conservative policy proposal to shift retirement savings from Uncle Sam to the states. Policy wonks should be able to devise a system in which workers in states with a state-based retirement plan get a full or partial exemption from Social Security taxes, or perhaps a tax credit against Social Security taxes. For younger workers in those states, Social Security could be phased out entirely in favor of the state-based system.

In order to qualify, the state-based system would have to offer privately-managed, fully-portable retirement accounts. That shouldn’t be difficult – isn’t that what state 529 (college savings plans) already do? In New York, for example, the 529 plan offers only funds managed by Vanguard, and the money in those funds is – as far as I know – completely off-limits to the pols in Albany. Basically, state-based retirement accounts should be like 529 plans, except that workers are automatically enrolled and would have to affirmatively opt out if they don’t want to participate.

Granted, some state systems would be poorly designed, but the beauty of federalism is that the competition for businesses and taxpayers would create powerful incentives to get it right. Besides, almost anything would be an improvement over Social Security. I also appreciate the serious intellectual question of whether the government should have any role whatsoever in retirement planning. However, given the political reality, I don’t think we’ll ever get government entirely out of the game, so why not a competitive 50-state market for automatic retirement accounts?

The post Turning Social Security Over to the States appeared first on Ricochet.