A California plan to give private-sector workers a state-run retirement savings plan is nearing $1 million in contributions, the goal set to pay for a market analysis to help design the program.
Although the California plan is still in the formative stage, last week the Illinois legislature approved a plan based on the California model, even using the same name, “Secure Choice.”
Legislation for similar programs named “Secure Choice” has been introduced in three other states: Maryland, Minnesota and Ohio. A variety of plans to aid workers without retirement plans has been introduced in 17state legislatures.
Half of private-sector workers have no employer retirement plan beyond Social Security and may face a bleak financial future. Baby Boom retirements, dwindling private pensions and 401(k) investment losses during the recession are heating up the issue.
President Obama issued an executive order last January creating “MyRA,” a paycheck-deduction bond program. The U.S. Treasury department, reportedly preparing to begin the plan with a number of large employers, declined to comment last week.
Sen. Marco Rubio of Florida, a potential Republican candidate for president,advocated in May that the federal Thrift Savings Plan be opened to all Americans. The plan for civil servants and the military has several stock and bond investment options.
In California, Senate President Pro Tempore Kevin de Leon, D-Los Angeles, sworn in as the new Senate leader in October, tried for four years before obtaining legislation two years ago for the Secure Choice RetirementSavings Program.
Employees of firms with five or more workers that provide no retirement plan would be given the option of an automatic deduction from their paycheck, probably around 3 percent, that goes into a tax-deferred savings plan.
Saving is believed to be more likely with a deduction that removes the decision from daily spending pressure. Whether the plan guarantees a minimum return or seeks riskier higher returns is yet to be determined, but insurance would prevent losses.
The “automatic IRA” (SB 1234 in 2012) got little Republican support and was opposed by insurance, financial planner, employer and taxpayer groups. Among their concerns: competition, paperwork, state liability and doubt about the need for the plan.
The legislation created a nine-member board to oversee administration of the plan through the state treasurer’s office and also imposed tight controls. A board plan for the program developed after the market analysis must go to the Legislature for approval.
Employers and the state can have no liability for the plan. Approval must be obtained for an IRS tax deferral and an exemption from federal (ERISA) labor benefit rules. And the retirement savings plan must be self-funded.
Now a drive to raise $1 million for the market analysis is nearly complete. A $500,000 matching grant is coming from the Laura and John Arnold Foundation, financed by a Texas hedge fund billionaire vilified by labor for backing pension reform.
SEIU state labor council, California Teachers Association and Ford Foundation are each contributing $100,000; AARP $60,000; California Endowment and state Sen. Ted Lieu each $50,000; Steve Westly $1,000 and “not yet identified” $39,000.
The program staff is expected to recommend the hiring of a law firm, K&L Gates, at a board meeting Dec. 18. Proposals to do the marketing analysis are due early next month, and the two finalists may be interviewed by the board Jan. 26.
The marketing analysis is expected to be based on a combination of existing data and a sampling of eligible employers and employees. When delivered to the board, the study will include feasibility and program design.
“That will start the process of the board doing the heavy lifting of coming up with what recommendations they are going to make to the Legislature,” said Grant Boyken, Secure Choice acting executive director.
California ranks at the bottom among the 50 states in a “Financial Security Scorecard” for future retirees issued last March by the National Institute on Retirement Security.
The scorecard uses eight measures of three key financial security factors: anticipated income, major costs such as housing and health care, and labor market conditions for older workers.
On a scale of 1 to 10, California had an overall score of 3, tied at the bottom with South Carolina and Florida in 2012. In the data for 2000, California also had a score of 3 and was tied at the bottom with Mississippi, which moved up to score 5 in 2012.
In the eight measurements used for the score, California ranked 44 among the states for the share of private-sector workers in an employer retirement plan, 40.21 percent. Ranked 50 was Florida, 33.97 percent. Iowa ranked first, 54.08 percent.
In average defined contribution [401(k)-style individual investments] retirement account balances, California ranked 45 among the states, $23,381. Ranked 50 was South Carolina, $20,630. Wisconsin ranked first, $45,641.
For De Leon, the statistics have a personal meaning. He told National Public Radio last year that the inspiration for his automatic IRA bill is his aunt, Francisca, who is 74.
“She’s my second mother. She’s the woman who made me dinner and breakfast, and she’s still a housekeeper in one of the wealthiest enclaves in America,” said de Leon, who grew up in San Diego.
“I send her a check on a monthly basis, and she receives her Social Security check. But it’s simply not enough for her to pay the rent, to put the food on the table, to pay for her medication.”
The first version of de Leon’s automatic IRA bill in 2008 would have directed the California Public Employees Retirement System to offer the savings plan to private-sector workers who have no employer retirement plan.
In debates over pension reform, particularly switching to 401(k)-style plans, unions and other public pension supporters sometimes argue that the solution is retirement security for everyone, not taking it away from those who have it.
One of the 11 points in “Pension Beliefs” adopted by the CalPERS board last May: “Inadequate financial preparation for retirement is a growing national concern; therefore, all employees should have effective means to pursue retirement security.”
Another belief: “As a leader, CalPERS should advocate for retirement security for America’s workers and for the value of defined benefit (pension) plans.”
CalPERS had no position on the final version of de Leon’s bill. But if the Secure Choice plan is found to be workable and approved by the Legislature, would CalPERS become an advocate and administrator for the program?
“As you point out, retirement security is important to us and one of our fundamental beliefs,” Brad Pacheco, CalPERS spokesman, said via e-mail. “We have and look forward to continuing to provide technical assistance and expertise as the plan advances. That being said, it’s too early in the process to be more definitive until more details about the plan and feasibility are available.”