Should the state of California create a state-administered retirement savings plan for private-sector workers funded with an automatic 3 percent payroll deduction?
Senate Bill 1234 by state Sen. Kevin de León, D-Los Angeles, would require the state to study the feasibility of such a plan. Should the study show that the idea is feasible, a companion measure, Senate Bill 923, would require that the concept go back before the Legislature for final approval.
This subject is getting national attention. The Wall Street Journal editorial board called the idea "one more pension scheme the state can't afford." The New York Times editorial board called it a "path to greater economic security." Given such wildly divergent opinions, "unaffordable scheme" or "path to economic security," more study is clearly in order. Because SB 1234 is a study bill and nothing more, the governor should sign it.
The problem de León seeks to address is real. Employer-provided guaranteed pensions and even 401(k)-type retirement plans are fast disappearing from the American workplace. Unless they save for retirement themselves and too many workers don't many private-sector employees will be forced to rely on inadequate Social Security payments to support them in their old age.
While the problem of inadequate retirement savings is particularly acute for low-wage workers, more than half of middle-income workers are also underprepared for retirement.
The plan envisioned in SB 1234 would require private employers who don't offer retirement plans to automatically enroll their workers in the state's retirement savings plan and to deduct 3 percent of pay from those workers who choose to participate. The plan is voluntary. Workers can opt out. But the proceeds from those who do participate would be pooled in a state-administered savings fund that would be professionally and conservatively managed and invested. Upon retirement, participating workers would receive guaranteed payments based on the amount they had contributed plus a rate of return determined annually by the state board overseeing the fund.
Business leaders who at first strongly opposed the measure went neutral after it was turned into a study bill. Nonetheless, they and some government fiscal watchdogs remain skeptical.
Representatives for the financial industry note that there are plenty of retirement investment products on the market now. They worry this bill has been drafted in a way that intentionally steers management of the fund to the California Public Employees' Retirement System, CalPERS. And they don't want to compete with government.
Others are concerned that the very fact that payments to participants are "guaranteed" creates a potential liability for the state. They fear that taxpayers, should the market slip, would be on the hook to pay participants what they are owed.
The goal of de León's bill is laudable, but implementation will be difficult. That's partly why so many other states that considered similar proposals ultimately stepped away. A study is appropriate, but California cannot afford to commit to a high-risk retirement plan without absolute assurance the state won't be left with a serious liability if the fund goes belly up.