If you are looking for examples of behavioral finance at the state level, look no further than the Commonwealth of Pennsylvania, where Treasurer Joseph Torsella is implementing several initiatives intended to help Pennsylvanians save more.
The Keystone state, which figures to be a key battleground in the 2020 presidential election, has no shortage of financial challenges to address.
Consider:
- It has an unfunded pension problem, ranking among the bottom 10 states as of 2017, according to Pew Charitable Trusts, with a 55.3% funded ratio compared to the national average of 69%.
- In 2018, Torsella issued a first-of-its-kind report, “The Impact of Insufficient Retirement Savings on the Commonwealth of Pennsylvania,” which found 2.1 million Pennsylvanians don’t have access to an employer-sponsored retirement plan.
- The same report found residents without enough retirement savings cost the state $700 million in 2015, and at current rates will cost the state $1.1 billion per year by 2030.
- Pennsylvania has the highest student loan debt in the nation, with the average debt per borrower at $35,988, which is a more than $12,000 increase since 2007.
The state with the sixth-largest economy in the nation clearly has some sizable financial problems, but as CNBC points out, Torsella, a Democrat elected Treasurer in 2016, is employing many of the tenets of behavioral finance in taking steps to address them.
“Treasurer Torsella has exhibited unique leadership on retirement security by not just campaigning on the issue but following through with a task force and working with legislators on possible solutions,” John Scott, director of Pew’s retirement savings project, told CNBC. “Even more remarkable is the fact that from the start he has included both political parties as well as labor and industry throughout the process.”
Here’s a closer look at a few of the possible solutions, plus a look at how Torsella is making waves on a pair of other fronts, including Facebook and Wall Street:
Keystone Scholars Program
Recently, Torsella’s office announced it is depositing a $100 scholarship grant in an account managed by the state to every child born or adopted in Pennsylvania after Jan. 1, 2019.
“The idea behind this program is a simple yet truly powerful one. It is about jumpstarting the future for every child born or adopted in Pennsylvania starting the very day he or she is born,” Torsella said in a tweet about the new Keystone Scholars Program.
While behavioral science will tell you that only a very small percentage of parents will start a 529 plan on their own for their child at birth, having the state “jumpstart” a college fund makes it much more likely that child will have significant savings for higher education down the road.
CNBC notes research from Washington University in St. Louis shows that having any account at all increases the chances fourfold that a child from a low-income family will attend college. The theory is that people who feel the government has an interest in their success are motivated to push themselves.
Torsella noted in another tweet that if families continue to contribute $25 a month, the child could have $10,000 in the account by the time they are 18.
So far about 2,700 Pennsylvanians have registered in the program, which is similar to previously launched programs in Nevada, Rhode Island and Maine (which offers a $500 grant).
State-Run Auto-IRA Initiative
Torsella again turns to behavioral finance when making the argument for why Pennsylvania needs an auto-IRA program. Per a Torsella speech posted July 9 on Twitter about it:
“Right now there are 2.1 million working Pennsylvanians who don’t have access to a retirement savings plan through their employer. And without an easy ‘set it and forget it’ way of saving in the place that you work, truth is you will probably never save. Studies show that only one in 20 workers will open an account on their own. And those who do have access to retirement options where they work are 15 times more likely to begin and continue saving.”
Torsella expects legislation regarding the state-run IRA program to be introduced this fall. The proposal would likely require employers with more than 10 employees who don’t already offer a retirement plan to enroll their employees in the state-run plan.
You may remember California’s “CalSavers” state-run, auto-enrolled plan officially launched on July 1, on the heels of programs in Oregon and Illinois.
Critics of state-run IRA programs, including the Investment Company Institute, say they are costly compared to private plans, lack ERISA protections, and are likely to make smaller employers drop their more effective 401k plans and SIMPLE IRAs in favor of the state option.
While the ICI says “state-run auto-IRA programs are not the right approach to increasing coverage and savings rates,” and that “Congress should implement targeted reforms at a national level that will enable the private-sector retirement system to reach more workers under the protective umbrella of ERISA,” Torsella wants action now.
With the uncertainty surrounding potential federal retirement savings reform (such as the SECURE Act and RESA), Torsella told CNBC he doesn’t want to wait for federal action and wants to act now to help Pennsylvanians save more.
Wants Zuckerberg out as Facebook Chairman
Torsella has also been a vocal advocate for the removal of Facebook’s Mark Zuckerberg from his “too powerful” position as Chairman of the Board, joining five other state treasurers in requesting Facebook’s board of directors make the role of Chairman an independent position.
Torsella, as the manager of the Pennsylvania’s $33.6 billion investment portfolio, told the Pittsburgh CityPaper on June 26 that Facebook is too large and carries too much influence to continue without checks and balances in its governance structure. Pointing out that Pennsylvania taxpayers own 28,706 Facebook shares, he says it is ultimately a financial recommendation to ensure that Pennsylvania’s investment maintains growth.
“We have a higher obligation to engage to produce better results with companies that we think are going down the wrong road,” Torsella said, adding that Pennsylvanians are especially impacted by Facebook, not just because the state invests more than $5 million in the company, but because of privacy concerns and how other countries have attempted to target Pennsylvanians in order to sway their votes during the 2016 election.
Suing Wall Street banks for rigging bond prices
In late May, Torsella was appointed lead plaintiff in a lawsuit alleging that 15 Wall Street banks and trading desks conspired to fix bond prices, cheating investors such as pension funds and retirees out of millions of dollars.
Per the Philadelphia Inquirer, the class action suit filed in federal court in New York alleges that bonds of Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac”) were regularly overpriced for purchase and underpriced for sale between 2009 and 2016.
Pennsylvania bought and sold roughly $63 billion worth of Fannie Mae and Freddie Mac bonds during that period, the suit claims.
“Wall Street banks must be held accountable when they take advantage of investors by market manipulation,” Torsella said.
Among banks named in the suit are Barclays, Bank of America/Merrill Lynch, Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, BNP Paribas, First Tennessee, TD Securities, Morgan Stanley, Nomura, JPMorgan, Cantor Fitzgerald, UBS, and HSBC.
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Veteran financial services industry journalist Brian Anderson joined 401(k) Specialist as Managing Editor in January 2019. He has led editorial content for a variety of well-known properties including Insurance Forums, Life Insurance Selling, National Underwriter Life & Health, and Senior Market Advisor. He has always maintained a focus on providing readers with timely, useful information intended to help them build their business.