By the end of the decade, millions of California workers could be enrolled automatically in a state-run retirement program viewed by proponents as the most significant attempt to address golden-years poverty since the New Deal.
After more than two years of work, the California Secure Choice Retirement Savings Investment Board will vote Monday on a slate of recommendations to the Legislature on what a state-managed plan should look like. Those will be folded into pending legislation by Senate leader Kevin de León, D-Los Angeles, with the goal of putting a bill on Gov. Jerry Brown’s desk this summer.
The proposal puts California at the forefront of an effort championed by state Treasurer John Chiang, the White House and others to respond to what they call a looming retirement crisis as fewer employers sponsor retirement plans and people do not save on their own. Instead, the government would become the sponsor, overseeing the retirement nest eggs of up to 7.5 million Californians estimated to be eligible.
The plan would require $134 million in up-front expenses, to be paid back over time. Participants’ income stream would reflect the stock market’s performance, including recessions of the type that hammered many retirees’ savings in 2008 and 2009.
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There’s hopeful anticipation that we’ll get it done and get it done right.
William Sokul, a Jerry Brown appointee to the California Secure Choice Retirement Savings Investment Board
But proponents say the state’s approach takes advantage of economies of scale. That would reduce costs to workers, many of them in lower-wage jobs, who would be signed up unless they opt out.
Joshua Gotbaum, a retirement expert at The Brookings Institution, called the California effort “a very big deal” that will reverberate nationwide.
“This would be the largest expansion of retirement security since Social Security was established,” he said.
Monday’s meeting is the first since the February release of a consultant’s study that examined whether a California plan would be popular and work financially and legally. The report’s conclusion: It would. In focus groups, most workers and employers like the idea, the study’s authors reported.
Yet disparate groups have raised concerns in recent weeks. Labor unions argue that any account should include a reserve to cushion against market downturns. The financial services industry has voiced concerns about competition from a government program.
Some business groups, meanwhile, worry about employer liability. They note parallels to another government program involving workers and employers: the federal Affordable Care Act. The state’s version of the law’s health exchange, Covered California, has about 1.5 million participants, one-fifth the number estimated to be eligible for Secure Choice.
“We don’t oppose this program,” said Marti Fisher of the California Chamber of Commerce, which wants more analysis before proceeding. “We just want to make sure they move forward in a way that we’re not creating problems and we’re successful for everyone.”
51 Estimated percentage of California workers who have access to an employer-sponsored retirement plan
A little more than half of California workers have access to employer-sponsored retirement plans, according to a January study by The Pew Charitable Trusts, compared to a national average of 58 percent.
The percentage in California and other Western states is lower because more people work for employers with fewer than 50 workers, which are less likely to offer retirement plans of any type, citing cost and regulatory hassles.
Monday’s recommendations on how to turn around those numbers comes almost four years after California lawmakers, voting along party lines, adopted de León’s SB 1234. Initially written to launch a state retirement program, the bill was scaled down to a study, and proponents were required to come up with money to pay for it.
The effort raised $1 million from a mix of politicians, unions, foundations and others. De León himself has arranged about half of that, including $100,000 apiece from the California Teachers Association and Service Employees International Union and $200,000 from the Laura and John Arnold Foundation, according to state filings.
Underpinning California’s proposal is workers’ automatic enrollment. Such an approach, officials say, would ensure that many more of the 7.5 million people not covered by a retirement plan would participate than if the state tried to get workers to sign up under an opt-in model.
The board’s consultant recommended that participants contribute 5 percent of their pay to start, increasing by 1 percent annually to a maximum of 10 percent. That level of contribution, over a full career, would yield about one-fifth of replacement income by the time the person retires, according to the analysis by Overture Financial LLC.
Some experts, though, have suggested that 5 percent would be too much for many lower-income workers living paycheck to paycheck and that it would be better to start with a 3 percent initial rate. The replacement income then would be less.
Overture recommended two options for investing participants’ money: state-managed IRA funds with an investment mix tailored to a person’s retirement date, or a pooled IRA backed by a reserve that would smooth out market downturns and reduce investment losses.
In an interview, de León said he leans toward the first option, at least in the program’s early years. The second model is more complex and likely would require sign-off from agencies such as the U.S. Securities and Exchange Commission.
“For me, it’s not black or white. It’s not option 1 or 2. We’re in the beginning stages and we have an opportunity to be very creative and innovative,” he said. “Right now we can’t let the perfect be the enemy of the good.”
Some of de León’s labor allies have pushed hard for the reserve-backed plan. In a letter to the board, Dave Low of the Labor Coalition said the non-reserve IRA option “too closely resembles the types of proposals put forward by those who are proposing to eliminate public employee pensions.”
“We’re working with what we have,” Low said in an interview. “You can’t provide an employer match. You can’t provide a guarantee. We just want to make sure what does come out of this is good for them.”
An estimated 54 percent of the 7.5 million people eligible for Secure Choice work for employers with fewer than 100 employees.
The financial services industry wants more study before the Legislature acts.
In a long March 10 letter to Chiang, the Association of California Life and Health Insurance Companies noted that no one from the industry participated in the Overture report, which in many areas rests on assumptions that “are simply too simplistic and optimistic in our view.”
Brown, meanwhile, has been publicly silent on the program. To help win the Democrat’s signature on the 2012 bill, it gave him five of the appointments to the nine-member board. Among the governor’s appointees are his top budget aide, Michael Cohen, and longtime adviser Marty Morgenstern.
Oakland attorney William Sokul, another Brown appointee to the panel, said he expects the governor will watch what the board recommends and how lawmakers respond before weighing in on what Sokul called “an idea whose time has come.”
“There’s hopeful anticipation that we’ll get it done and get it done right,” he said.
Retirement plan proposal
The California Secure Choice Retirement Savings Investment Board on Monday will consider acting on a consulting firm’s report on setting up the Secure Choice program.
Among its recommendations:
- Investment option at launch: An IRA with an investment mix that becomes more conservative as a person gets closer to retirement or a pooled IRA with a rainy-day reserve meant to minimize any market drops.
- Default contribution rate: 5 percent
- Auto-escalation: In 1 percent increments, up to 10%
- Access to money before retirement: Limited to hardship withdrawals