Dan Walters

Retirement plan for millions of California workers still has issues

When Kevin de León talks about creating retirement funds for low-income workers, he cites his aunt, a housekeeper for many years, as an example.

“My aunt had to keep working until her body physically gave out,” de León said at a news conference earlier this year. “She relies on me as her 401(k) to help her through her retirement.”

De León’s aunt may have inspired him, but the program he wants, dubbed “Secure Choice,” is actually part of a nationwide movement that’s being implemented or proposed in a number of states.

Whether it takes hold in California depends on whether de León’s fellow Democratic politicians enact an embryonic plan that still has many unresolved issues – including the financial risk/reward tradeoffs of any retirement system that’s keyed to investment earnings, and whether the state’s taxpayers might be on the hook for any shortfalls.

De León, president pro tem of the state Senate, will seek approval during the final weeks of the biennial legislative session, relying on assurances of a board that’s been studying the matter for several years and a positive feasibility study by an outside consultant.

If enacted, Secure Choice would compel millions of workers who lack employer-based retirement benefits to divert escalating portions of their paychecks into what amounts to individual retirement accounts, unless they opt out.

A best-case scenario put forth by the consultant is that a worker could divert 5 percent each year into a fund for 42 years, retire at 67 and receive a lifetime income equal to 24 percent of final-year wages.

But that’s a best-case scenario, and with normal work interruptions, early withdrawals and other factors, actual retirement income could easily be much less, according to an analysis by Capitol Matrix Consulting for the program’s critics.

The analysis also dwells on a very tricky aspect of the program and de León’s implementing legislation, Senate Bill 1234, now pending in the Assembly.

When de León carried the original study legislation four years ago, it included a key requirement that insurance or some other backstop would be “in place at all times” to protect the value of individual accounts and guarantee that the state wouldn’t be liable for investment shortfalls.

That provision is removed in the new bill. Instead, it declares, “The state shall not have any liability for the payment of the retirement savings benefit earned by program participants pursuant to this title.”

That sounds fairly firm, but what would happen if the program runs into trouble and millions of Californians are unlikely to receive the retirement funds they had planned on getting after years of contributions?

Wouldn’t politicians be under terrific pressure to bolster the program with taxpayer funds?

Far-fetched? Not really, given the uncertain nature of long-term retirement fund investments. Taxpayers are being hit hard now to shore up public employee pension benefits because investments fell well short of expectations.

Improving retirement security is a worthy goal, but before California plunges into Secure Choice, its politicians had better be sure it really is secure.