The Conversation

The pressing need for security in retirement

Detroit Free Press

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Kevin de León, president pro tem of the California Senate, remembers worrying about his aunt Francesca who didn’t have enough money to get by despite toiling for decades as a waitress, housekeeper and home health care worker.

“I asked myself, ‘How is it possible that a woman who worked all her life, who never asked anyone for anything, can barely make ends meet?’ ” the Los Angeles Democrat told me. When de León visited his aunt, who was in her 70s, he asked why she still got up at 5 a.m., catching a bus and continuing to work long after she could have retired.

“She would get upset with me and tell me ‘I have to work because Social Security isn’t enough to pay for the rent, food, telephone.’ ” So de León gave his aunt money, and he set out to look into what could be done to help Francesca and those in similar straits.

Embarking on this quest, de León tackled what could be one of the biggest social issues facing America in the 21st century – what should government’s role be concerning workers who retire, only to find themselves incapable of paying for basic living expenses?

With Congress mounting no major response on this front, activists in California and several other states are pursuing ways to make retirement more financially secure.

This state of affairs gives California a superb opportunity – to shape a retiree savings program for low- and middle-income people that could become a powerful model for other states.

The challenge is particularly daunting because the retirement security problem is so large – like income inequality or other complex issues – that it is easy to put off shaping a solution until another day.

The need, however, is now. As de León puts it: “In California there are millions of people who worked very hard, only to retire into poverty or to end up working much longer than they’d expected.”

In 2012, de León sponsored legislation, Senate Bill 1234, signed by Gov. Jerry Brown, that requires the state to study the feasibility of giving 6 million-plus private sector employees who don’t have employer-sponsored retirement savings plans access to a savings program.

Under the approach being studied, employees who did not opt out would be automatically enrolled in a Secure Choice retirement savings system if they had no current retirement account. The system would use payroll deductions and would likely invest 3 percent of an employee’s earnings unless the employee specified a different amount.

The program would affect employers who have five or more employees, and the Legislature would have to approve any Secure Choice pension program before it could become law, Deputy State Treasurer Grant Boyken told me.

De León’s legislation was opposed by a formidable coalition of business, insurance and taxpayer groups, which argued that this was not the time for such a program – when California “is already facing a massive unfunded pension liability for its public sector workers.”

This debate over retirement security comes at a crucial time when the U.S. Census Bureau reports that the country’s population aged 65 and older likely will almost double from 43 million in 2012 to more than 83 million in 2050.

“People are, by and large, way behind where they need to be in terms of saving for retirement, and 50 million people have no access to pensions at work,” David Certner, legislative policy director for government affairs at AARP, told me.

Here are a few facts that underscore the gravity of the retirement crisis:

▪  In California, almost half of workers – public and private – are currently facing retirement with incomes lower than the federal poverty level of about $24,000 for a family of four, according to state Treasurer John Chiang’s office.

▪  Retirees will be facing greater financial pressures as people live longer, medical care costs climb faster than retirement benefits, Social Security benefits shrink, and low interest rates limit retirees’ ability to increase their savings.

▪  Almost two-thirds of workers with no retirement plan say they have saved less than $1,000.

What’s to be done about all this, of course, depends on your perspective.

Many private sector employees have seen secure pensions evaporate while public employees have not taken a similar hit. While that understandably creates pension envy among many private sector employees, a solution is needed that protects reasonable pensions for those who have them and creates better retirement security for those who don’t.

Public employees, including teachers, police, firefighters and government workers, typically have had historically “defined benefit” pension plans funded in part by the employer and in part by the employee; such plans guarantee an income after retirement.

Private sector employees are seeing a shift from defined benefit plans to “defined contribution” plans, if they have any plan at all. A defined contribution plan, such as a 401(k), puts into a worker’s account a specified contribution from the employee and sometimes a matching sum from the employer. No retirement income is guaranteed under this type of plan.

In the discussion over how America should confront this issue, the critics of public pensions have a potent weapon: they trot out examples of extremely high pensions that some government workers receive. The critics also repeat this mantra: If you allow pension payouts to continue as they are, key government services will have to be slashed.

Undeniably, there are some public employees’ pensions that are fat enough to anger even left-leaning citizens who ordinarily would be sympathetic with government workers, and pension critics tap into this resentment.

“Politicians have shown themselves to be totally incapable of dealing with this problem,” former San Diego City Councilman Carl DeMaio told me.

DeMaio and former San Jose Mayor Chuck Reed are backing a proposed 2016 ballot measure aimed at reining in public pensions and plan to start collecting signatures in two months. DeMaio says, “The number of state employees drawing pensions of $100,000 or more for life continues to grow. The public wants pension reform, but the politicians don’t want to give up the campaign cash that the unions dole out.”

Another vocal public pension critic is Mark Bucher, president of the Orange County-based California Public Policy Center. Last year the center unveiled TransparentCalifornia.com, a database of state and local government employee pensions; it announced that 31,500 people in 2012 “collected over $100,000 each in total pensions, which includes benefits.”

For its part, labor pledges to kill any pension-cutting ballot measure.

Dave Low, leader of Californians for Retirement Security – a coalition of 1.5 million public employees – argues that critics present a twisted picture of the size of public employee pensions.

“The number of people making $100,000 pensions in the public employee unions is about 2 percent,” Low told me. “The other 98 percent make substantially less than that: the vast majority are getting pensions in the $30,000 range.”

During the last five to six years, he added, unions in California have negotiated some 300 new contracts – many involving benefit rollbacks for new employees and/or higher contributions for new and current employees, as well as rollbacks of retiree health benefits.

As Low sees it, much of the pension controversy stems from the financial crisis of 2008-2009 when the stock market tanked, inflicting a multibillion-dollar hit on pension funds: “The federal government comes in and bails out the Wall Street banks, and the banks are now making more than ever while the pension funds have yet to recover from the huge drop during the recession.”

Low, who is executive director of the California School Employees Association, added, “Rather than engage in a race to the bottom where people engage in pension envy and want the few with pension benefits to lose theirs, we should be trying to build a system where working class people get fairly paid and can have some security in retirement.”

So what have been the political responses?

In California, backers of the Secure Choice program hope the study evaluating it is completed by December and legislation establishing the program wins final approval in 2016.

In another development, Brown signed the California Public Employees’ Pension Reform Act of 2013, which scaled back benefits for new employees and required public employees to pay half the cost of their pensions.

Meanwhile, in Washington, D.C., the U.S. Labor Department has proposed a rule aimed at increasing protections for private-sector retirement by ensuring that all investment advisers dealing with retirement funds must act in the client’s best interest. The department will review public comments before forming the final rule.

Barbara Roper, director of investor protection for the Consumer Federation of America, told me that foes “assumed they would be able to kill the rule outright, and then President Obama got interested, and things changed. I think industry was quite shocked they weren’t able to kill the rule.”

Roper said that the rule offers needed protections because “as a matter of policy, we have chosen as a nation to develop a retirement system that relies on individuals to make their own investment decisions – despite the fact that the typical retiree lacks the financial sophistication to understand their investment options.”

This rule is needed, but much more must be done.

Jacob Hacker, a Yale University political science professor who has studied pensions, said it is important to understand that “when we look at today’s retirees, we are looking at the past – they have retired on the most generous Social Security benefits offered to date and have had access” to traditional, employer-guaranteed pensions.

Those pensions are largely vanishing, Hacker noted, and Social Security’s future payouts have been shaved by Congress. “So just think what you face in 20 to 30 years with smaller Social Security and no traditional pensions. You can see how bad the future could be.”

“The simplest remedy is expand Social Security for low- and middle-income people,” Hacker told me. “People are shocked when they hear this because Social Security already needs a significant infusion of funds. But given how consistently the traditional pension system has eroded, I am becoming more and more inclined to favor boosting Social Security.

“We need a national conversation about this and a real commitment to addressing this issue.”

Hacker’s call for action reflects the stark urgency of the situation. As California has done before in other vital arenas such as the environment, it must lead the way here, showing other states the road to follow.

Susan Sward is a freelance writer who lives in San Francisco.

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