Originally posted at www.calpensions.com

A new state law drawing national attention could give most of the estimated 6.3 million California workers with no employer retirement plan an “automatic IRA,” a paycheck deduction that goes into tax-deferred investments.

Retirement savings would get a big boost, some experts say, if a small part of pay, perhaps 3 percent, is diverted before workers face the hard choice between daily spending pressures and providing for the future.

Social Security falls short. Nearly two-thirds of California private-sector workers have no employer retirement plan, and nearly half of all workers are on track to retire with “serious economic hardship,” said a UC Berkeley labor center study.

The new plan puts the payroll deduction into tax-deferred investments with a guaranteed minimum return, backed by insurance. The state and the employer have no liability.

Employers of five or more workers must offer the automatic IRA or an alternative retirement plan. An employer would not be required to contribute to the plan, and workers can opt out.

That’s an ideal version of the plan Sen. Kevin De Leon, D-Los Angeles, pushed through the Legislature after years of trying. The bill Gov. Brown signed last September, SB 1234, is only the first step toward a final plan.

De Leon wants to raise $1 million for a required market analysis to design a workable self-sustaining plan. Federal approval is needed on tax and labor issues. Then comes final legislative approval, giving opponents another shot at the plan.

The new law gave the program a seven-member board, including the state treasure, controller and finance director. In an apparent lack of urgency if not enthusiasm, the governor, senate and assembly have not yet made their appointments.

The view that many Americans are headed for a much lower standard of living in retirement, or hardship and reliance on the government safety net, is reflected in President Obama’s federal budget proposals for an automatic IRA, ignored or rejected by Congress.

De Leon’s bill is attracting attention as an innovative state attempt to create an automatic IRA. His office said a similar bill has been introduced in Maryland and inquiries have come from New York, Wisconsin, Oregon, Washington and Illinois.

Appearing at national forums, De Leon has discussed his California Secure Choice Retirement Savings Program at meetings of the National Institute on Retirement Security and the Center for American Progress.

“The findings of this market analysis and resulting program design will serve as a blueprint for other states to implement similar savings programs,” De Leon said in a fund-raising prospectus.

This month National Public Radio and Atlantic magazine had stories about De Leon‘s plan. In March a lengthy story about the bill appeared in Roll Call, a Capitol Hill publication in Washington, D.C.

“De Leon’s measure, the first of its kind in the country, has attracted attention from lawmakers in other states and in Congress and has turned the first-term senator into a rising star,” said the Roll Call story.

One of the originators of the automatic IRA concept, David John of the conservative Heritage Foundation, told a congressional committee last year that the proposal has bipartisan support.

“This is not a partisan or ideological proposal,” said John. “In 2008, the automatic IRA won the endorsement of both the Obama and McCain campaigns, and it has continued to enjoy support from all sides of the ideological spectrum.”

John said the automatic IRA concept he developed with Mark Iwry of the Brookings Institution was influenced by the “stunningly good” results of automatic payroll deductions for employer-sponsored 401(k) individual investment plans.

In the California Legislature, however, there was a partisan split. De Leon’s bill got little or no Republican support. Some Democrats welcomed the shift of focus from reducing public employee pensions to boosting private-sector retirement plans.

Opposition listed on a legislative analysis of the bill came from employer, insurer, financial planner and taxpayer groups. Support came from public and private-sector unions and retirement groups.

Some opposition arguments: A state-run plan replaces a free market for retirement services. The state and employers will be liable for losses or shortfalls under federal law. The state has mismanaged other retirement plans, public pensions, and is deep in debt.

Insuring a minimum investment return is likely to be too costly. Administrative costs may be higher than expected. Employers will be burdened with distributing forms, answering questions, collecting opt-out forms and transferring contributions.

While opponents are not persuaded an automatic IRA is workable or needed, advocates can point to a number of studies showing that, without change, many Americans will have a sharply lower standard of living during retirement.

Social Security is said on average to replace about 40 percent of working income, well short of the 65 to 85 percent experts say is needed to avoid a drop in the standard of living after retirement, a Congressional committee report said last year.

A labor-backed group pushing for a Social Security supplement asked for a study by the Center for Retirement Research at Boston College that found a $6.6 trillion shortfall in what American households need to maintain their standard of living.

In California, three-year data from 2008 to 2010 shows that 45 percent of workers age 25 to 64 are offered an employer-sponsored retirement plan and only 37 percent participate, the UC Berkeley Center for Labor Research and Education said last year.

“An earlier study found that nearly half (47 percent) of California workers — public and private — are currently on track to retire with incomes below 200 percent of federal poverty level (i.e., about $22,000 a year), a widely accepted threshold for serious economic hardship,” said the UC Berkeley Center research brief issued last June.

The legislation De Leon pushed through the Legislature requires a market analysis to show that the plan is workable and self-sustaining. But state funds can’t be used for the analysis.

De Leon’s prospectus said the program board should be established by late spring of this year. The board will ask for proposals for a marketing analysis, with the goal of awarding a contract by end of the year for completion by the middle of next year.

“To adequately fund all of the components of the market analysis, program design and feasibility study, the goal is to raise $1,000,000 by fall 2013,” said the prospectus. “To reach this goal, a broad spectrum of sources including foundations, nonprofits, labor organizations and private sector businesses are being asked to contribute.”