Congress could be days away from a vote that would endanger Illinois’s ability to create a state-wide retirement plan for workers whose employers don’t already provide them.
The Illinois plan, known as Secure Choice, was signed into law in 2015 and could begin as early as this year. The state legislation requires all businesses with 25 or more employees (that do not already offer a retirement plan) to automatically enroll their employees in a low-fee, state-administered account, with a default 3 percent contribution. People would be free to change their contribution rate or to opt out of the program entirely.
But lawmakers in D.C. could soon vote down a Department of Labor rule that made it easier for Illinois and a handful of other states to offer such a plan.
It turns out that there’s a reasonable argument to be made that ERISA, a complicated piece of federal legislation which governs much of the way the U.S. handles retirement savings, prevents states from creating their own retirement plans, in exactly the way our state plans to do. But the Obama Department of Labor issued a rule last year saying that it believes these plans are legal under ERISA. If Congress were to strike down that rule, it would open Secure Choice to a legal challenge that could invalidate the state law.
The legislation, which is expected to affect up to 1.2 million Illinois workers when fully implemented in 2018 or 2019, is the legacy of a 2006 paper published by researchers at two D.C. think tanks—the Brookings Institution and the Heritage Foundation—and later endorsed by then-Senators Barack Obama and John McCain alike during the 2008 presidential campaign.
The idea is relatively simple: Although most Americans struggle to save much, if anything at all, for retirement, those who save the most are the approximately 40 percent of Americans who contribute money directly from their paychecks to employer-provided accounts. So, if most businesses in America were required to provide their workers access to retirement plans, it would significantly improve the financial situation of retired people and therefore take some of the burden of Social Security and other elder care costs off the government.
The proposal was initially met with broad bipartisan support. But after Senator Obama was elected President, and actually took steps towards passing a federal version of the plan in Congress, a funny thing happened: Republicans stopped thinking it was a particularly good idea.
And so states stepped in to fill the gap. In 2012, California became the first state to pass a version of the proposal. And in Illinois, State Senator Daniel Biss (D-Evanston), who has made the ”retirement crisis” a key issue in his ongoing campaign for governor, introduced successful legislation to pass an Illinois version. A handful of additional states have since passed their own legislation.
[Disclosure: The author of this article worked as an unpaid intern on Biss’s 2008 campaign. He has not worked for Biss since then and was not involved in the Secure Choice legislation.]
The Illinois plan had—and continues to have—its critics. It passed the state Senate with no Republican votes, and the House with just one: Rep. David McSweeney of Barrington Hills. The main charge leveled against the proposal typically centers on the burden it might pose for employers, who will have to integrate its provisions into their existing payroll systems.
Proponents of the plan generally agree with its critics that burdens on employers should be minimized wherever possible. But the two camps differ substantially in their assessment of the degree to which the plan actually does pose a burden.
“Part of why we shifted to the 25 employee threshold was that we found a survey conducted by NFIB [a small business trade group] that showed that something like 97 percent of firms with 20 or more employees were already using a payroll service,” Biss says. “As someone who has been an employer using an electronic payroll system before, that stuff all happens more or less automatically.”
Richard Thaler, an economist at the University of Chicago’s Booth School of Business, and a leading expert on consumer finance, agrees. “Virtually any employer with more than a few employees has somebody handle their payroll,” he says. “And those guys just add one line of code, and done. So I don’t see this as a big burden, even on a pretty small company.”
Chicago reached out to the Financial Services Roundtable, a trade group that has previously expressed concerns about Secure Choice’s burden on employers, and ADP, a major payroll services provider, for comment on this story, but they did not respond by press time.
There are other, more technical, concerns. Some economists generally in support of automatic retirement savings accounts, like Thaler, quibble with the default 3-percent contribution level in Illinois’s law, which they argue is probably not substantial enough to allow real savings to develop over time, given that fewer than 15 percent of enrollees are expected to opt out or adjust rates.
However, says Thaler, “three is better than zero, and there’s no reason why the legislature couldn’t follow up in a couple years with some kind of automatic escalation.” Indeed, Biss supports pending legislation to allow the program’s board some flexibility in adjusting the rate.
So what happens if Congress passes a law invalidating the Department of Labor’s rule? It doesn’t necessarily mean that Secure Choice plans are dead in Illinois and across the country. It just means that proponents of those plans will have to go to back to court without the support of the Department of Labor’s opinion and make the case that ERISA allows for these plans. They’re ready to do so.
“Let’s be honest,” Biss says, “this is not the best solution to this problem… For instance, you could solve all these problems on the federal level just by expanding Social Security. Which, by the way, you ought to do.”
But he points out that on a state level, this legislation could help workers improve their retirement years without preventing further progress toward a federal goal.
As the possibility of a vote looms, Biss, campaigning to be the Democratic candidate for governor, is confident the fight for Secure Choice in Illinois is worth waging. “We have a crisis here—a human crisis—resulting in people quite literally unsure how to choose between housing, food, and medicine in the last years of their lives. And that means that we have an obligation to do something to help.”