Are State Managed Retirement Plans an Option for Individuals and Small Businesses

Friday, August, 03 2012

After several years of under-performing investments, many employer sponsored retirement plans as well as individual retirement savings accounts, have lost value or are returning meager gains. This has necessitated increased contributions into those plans in order to maintain solvency for employers and to meet retirement targets for individuals. Increased contributions in these continuing difficult times is challenging for both small businesses and individuals.

A Wisconsin legislator, Sen. Dave Hansen, D-Green Bay, has offered a solution; a state managed retirement plan for “non-government workers like small business owners and farmers to buy into”. Senator Hansen raised this idea after the Pew Center on the States named Wisconsin's pension system the most solvent in the country. Hansen’s model would allow the state to offer individuals and small businesses participation in a state managed retirement plan built on the archetype of Wisconsin's pension system, which reportedly has had an average annual return of over 10% for the 29 years. This arrangement, while far from being a reality, would seem to place the State of Wisconsin in direct competition with private financial instructions.

Small businesses and individuals struggle with retirement savings plans. While federally tax favored retirements plans are available to small businesses, they can be relatively complicated. Simplified Employee Pension Plan (SEP) provide a basic method for small businesses to make contributions to a retirement plan for the business owner and their employees. Savings Incentive Match Plan for Employees of Small Employers (SIMPLE) IRA’s plan provides owners and employees with a less complicated way to contribute toward retirement plans. However, it is designed for employers with 100 or fewer employees, who currently do not have another retirement plan.

Options for individuals are somewhat limited, traditional Individual Retirement Accounts, (IRA’s), allow pre-tax contributions but are limited to $5,000 for taxpayers under age 50 and taxpayers cannot be an active employee-participant in an employer sponsored retirement plan. An after-tax version of the traditional IRA, the Roth IRA, is also available.

State managed retirement plans such as that conceived by Senator Hansen places such arrangements in direct competition with private financial plan managers and would expose states to additional risk. In addition, such plans could come under strong political pressure if investment returns were less than desirable or even negative. While Wisconsin's pension system may have enjoyed over two decades of respectable growth, a parallel but private system might not fare as well. Furthermore, if Wisconsin's pension system was easily duplicated, why have not other public and private retirement plans done so?