California has long prided itself on having an upwardly mobile, egalitarian gestalt, so there’s much irony in its evolution into a two-tiered society.
But there’s also much angst as the relative few in the top tier prosper and the many in the lower tier deal with stagnating incomes and very high living costs, particularly for housing.
One aspect of California’s socio-economic stratification is that more than 60 percent of California’s private-sector workers lack any employer-based retirement plan, either a defined benefit pension or a 401(k) savings/investment plan.
In fact, according to a study by UC Berkeley’s Center for Labor Research and Education, 84 percent of those working for employers with 25 or fewer employees lack such benefits.
It means that millions of Californians, plus their families, will depend on Social Security for retirement incomes – benefits that are marginal at best, and particularly skimpy in a state as expensive as California.
So the need is self-evident. And California, like a number of other states, is trying to fill it with a state-operated retirement savings system that would semiautomatically extract 3 percent from uncovered workers’ paychecks (they would have to specifically opt out to avoid diversions) and invest it to produce retirement income.
The semiautomatic feature is considered vital, because among low- and moderate-income workers, participation in voluntary programs such as 401(k) is very low.
Sen. Kevin de León of Los Angeles, citing retirement struggles in his own family, carried the implementing legislation three years ago, before becoming the Senate’s president pro tem. The Secure Choice Retirement Savings Investment Board, operating out of the state treasurer’s office, is designing the plan.
The program received a big boost last month when the Department of Labor basically gave Secure Choice and other similar state plans an exemption from the federal pension law, which holds employers liable for shortfalls in their workers’ pension plans, similar to the exemption that public employee systems have.
Whether the Department of Labor exemption is legal could be an unsettled issue. But even if it’s legal, it’s just one of many hurdles that the Secure Choice board must clear to create a system that can deliver meaningful benefits to its mostly low- and moderate-income beneficiaries, avoid the investment losses that have plagued public-sector pension plans, and shield employers and taxpayers from liabilities.
Business groups are still skeptical, telling the board that if employers are required to educate their workers about the proposed pension program, it could be an onerous burden that might entail legal liability.
Underlying everything are the economic factors of any retirement investment program, particularly the age-old conflict between risk and reward.
A low-risk program, implied in the legislation, with small contributions from low-wage workers, might not generate enough earnings to have a meaningful impact on their retirement security.
A more aggressive investment strategy, such as those used by public pension systems, would have more upside potential, but also higher risks, as pension fund losses have shown.
Illinois has already adopted a plan, also named Secure Choice, and will begin taking 3 percent bites from workers’ paychecks in 2017. When – and if – California will begin doing the same is still quite uncertain.