California has launched a plan to enable low-wage earners to put aside 3%… (Rich Pedroncelli, Associated…)
It's amazing, and depressing, when political compromise functions only to throw obstacles in the way of ideas that bring the greatest good to the greatest number of people.
Today's example: the long, tortuous road to bringing more retirement security to working-class Californians.
In September, the state launched a plan to enable these workers to put aside about 3% of their wages a year for retirement. As enacted by the Legislature and signed by Gov. Jerry Brown, the program's goals would be modest indeed.
The best thing about the plan is that it would allow workers to build up retirement stakes at low cost and low risk; their contributions would be pooled with other enrollees' for the purpose of making investments, which would cut down on fees. Workers would be signed up automatically, though they could opt out at any time. They'd be protected against the loss of their contributions and guaranteed a modest investment gain — say about 3% over inflation. When they retire, their nest eggs would be turned into annuities designed to last to the end of their lives, presumably at a conversion cost lower than they might incur in the commercial annuity market.
There would be no cost to state taxpayers. Employers with five or more workers would be required to offer the plan to their workforce and to allow contributions to be withheld through their payroll systems, as they do for taxes. They'd be free of any other legal or administrative burdens.
It's a great deal. It's also necessary, given the decades-long assault on employer-sponsored defined-benefit pensions, which were once an important pillar of retirement security for average Americans. "This could be a real model for the nation," Karen Friedman, policy director at the Pension Rights Center in Washington, told me.
But it's going to take at least two more years to get off the ground, which is ridiculous. That's chiefly because the legislation requires that a feasibility study be done first to determine the demand for such a plan and the best way to avoid sticking taxpayers with the costs of an investment guarantee, and a few other details. The kicker is that the feasibility study has to be financed from privately raised funds, and that takes time.
"I'm going door to door in Echo Park to get people to chip in dollars," says the plan's creator, state Sen. Kevin de León (D-Los Angeles). He'll soon widen his appeal to big unions in the hope of more rapidly amassing the $500,000 or more he'll need to finance the study. As it stands now, he hopes to start the study next year and get the program launched in 2015. But he says the privately financed study was the price of securing Brown's support.
You may ask why the state should step in and help workers obtain pensions. The answer is that fewer and fewer employers offer pension plans of any sort. The problem is acute among mid-size and small businesses, and even worse among those with relatively low-paid workforces.
A 2011 conference at Berkeley found that California does poorly by its working class according to this measure. Nearly half of all the state's workers aren't offered retirement plans at work, and only 44% participate even if they have the opportunity.
"If we don't get these people into a retirement savings mode, we are going to have a retirement insecurity tsunami," De Leon says. "Folks are going to retire when their arms, their legs, their shoulders give out, and they'll only have Social Security because they'll have built up no assets over time. There's nothing for working folks."
It's fashionable nowadays to portray retirees as an affluent class, doing much better financially than their offspring currently in the workforce. The goal is to promote the idea that it's OK to hack away at Social Security and Medicaid because our plutocratic seniors can suck up the cuts. This is a dangerous fantasy promulgated by congressmen and Washington pundits who will never have to fear landing on the wrong side of the miscalculation.
The truth is that today's retirees are the last beneficiaries of a bygone world, as Jacob Hacker, a political scientist at Yale University, observed at the Berkeley meeting. A quarter-century ago, 80% of large and mid-size employers offered a defined-benefit pension, the model that imposed the least risk on the worker and supplied the longest-lasting retirement income stream. Today that figure is about 30%. Some of those plans have been replaced by 401(k)-style plans, to which workers contribute out of their wages (sometimes supplemented by the employer) and then cross their fingers that their investment choices will yield decent returns over the decades.