Finance and Assets

How States Can Lead the Way to Retirement Security

October 26, 2015  • John Chiang

It is our generation’s duty to achieve retirement security for those who are otherwise doomed to retire into poverty or labor until the grave.

On average, baby boomers – the generation now moving into retirement – will be 44 percent short of the savings they will need to retire. Younger generations are even less prepared. Americans for the most part are ill-equipped for retirement because they have either invested in 401(k) plans with risky or costly arrangements, they have inadequate savings, or worse yet, they have no retirement coverage at all.

Here in California, nearly half of workers – public and private – are on track to retire with incomes below 200 percent of the federal poverty level. That is an amount barely adequate to cover the cost of living. A generation of Californians sliding into poverty at retirement-age will put enormous pressure on state and local budgets.

In an era where wages are static for the poor and middle class and secure pension plans are an endangered species, it is surely costly and challenging for many Californians to save for retirement. It’s especially hard to start saving early for retirement when it seems so far away. However, as any financial advisor will tell you, starting early is key to building an adequate nest egg.

Once again, California finds itself at the leading edge in forging a solution that will not only provide for stable and secure savings, but will do so in a manner that is sensible for taxpayers and employers. It is certainly a way for California to bridge the gap in the retirement security crisis here.

Senate President pro Tempore Kevin de León (D-Los Angeles) in 2012 introduced legislation that established a foundation for such a savings program. Twenty-six members of Congress urged the White House to take immediate action to expedite efforts by the states to improve retirement security in the private sector. President Obama has stated repeatedly that addressing income inequality and building a stronger middle class is a priority for his administration.

As a result of this work, the California Secure Choice Retirement Savings Investment Board was established. Its charge is to conduct a market analysis and design a program that will enable millions of California employees to save for retirement by contributing a small percentage of their paycheck through an automatic payroll deduction towards a low-risk, low-cost, portable retirement savings plan. The plan would be run by the state, but privately administered, so there would be no cost or liability to the taxpayers.

Studies are clear: the most-effective means of encouraging retirement savings is the opportunity to save through employer-based retirement plans. Unfortunately for many private-sector workers, access to these plans has been decreasing steadily over the years. Today, 7.5 million private sector workers in California lack access to an employer-sponsored retirement plan. More than two-thirds of workers without access to a workplace retirement plan are people of color, including 68 percent of Latino workers and more than half of African American workers. Access is worst among low-wage earners. Only 22 percent of workers in the bottom income quartile have access to an employer-sponsored retirement plan.

I am pleased with the directive President Obama delivered to the US Department of Labor in early July to support states like California in their efforts to construct a solution to the looming retirement crisis. Recently, the Department of Labor sent the Proposed Rules for agency review and we anticipate they will be up for public comment soon. Our hope is that the regulations provide states a safe harbor from the complex administrative requirements currently in place for participating small employers. If the rules do not provide such an exemption, it would be nearly impossible for us to move forward with a program to bridge the retirement gap for low to moderate wage workers in California.

While California is in the beginning stages of this program, exempting existing state-run plans like Secure Choice and others from these federal rules is a vital step to help millions of Californians and Americans across the country start saving for retirement, so they can stay in the middle class when they retire.

Secure Choice is one way to ensure that all California workers have the opportunity to save for retirement. It benefits us all, and provides all Californians with a pathway to self-sufficiency in retirement.