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Retirement has become a distant dream for millions of Americans. Nearly half of American families lack any retirement savings, according to the Economic Policy Institute. Pensions with defined benefits have become a rarity in the private sector and savings in Individual Retirement Accounts (IRAs) have not kept pace with retirement needs.
With California in the forefront, states are beginning to address retirement security. California Gov. Jerry Brown (D) on Sept. 29 signed into law a measure (SB 1234) by Senate president Kevin de Leon (D) that will provide retirement savings to nearly seven million small-business employees who lack workplace coverage. Seven other states have approved retirement savings plans, and since 2012 more than 30 states overall have considered them.
Under the California law, employees without a workplace retirement plan will automatically contribute 3 percent of wages to the California Secure Choice Retirement Savings Trust. Workers can change contribution levels at any time, or choose not to participate. Companies with five or more employees are required to participate. The legislation prohibits the state or employers from incurring any liabilities associated with the new program.
California Secure Choice was made possible by a U.S. Department of Labor ruling, enabling the state to run its program without conforming to the federal employee’s benefits law, known as ERISA. Its passage was hailed as “a watershed moment” by Sarah Mysiewicz Gill of the AARP who said California’s action will spur additional states to go ahead with their own savings plans.
Because of California’s diversity and population — 39 million in the latest estimate — it will be by far the largest state laboratory for experimenting with the retirement savings idea. But it is not the only one. Connecticut, Illinois, Maryland, and Oregon have created retirement plans for private-sector workers that will take effect in 2017 or 2018. Massachusetts provides retirement plans to nonprofit employees and is studying the feasibility of doing so for all private-sector employees. Both Washington and New Jersey are establishing state-run online marketplaces that offer low-cost retirement savings plans to small businesses.
Some critics are skeptical. They observe that public retirement plans in California have huge unfunded liabilities and have not met ambitious investment targets in the marketplace. The Investment Company Institute contends that the California plan makes rosy assumptions about how much money workers would save and how many of them will stay in the plan.
There is also an open question of how trustees of California Secure Choice will invest the savings. Some have suggested a low-risk strategy of investing in long-term U.S. securities. While such a strategy would be unlikely to keep pace with inflation, it would still be a benefit to families without any retirement savings.
Unfortunately, such families amount to 49 percent of U.S. families, according to the findings of the Economic Policy Institute. The average retirement savings of all American families is $95,776, the EPI found, but this number is less impressive than it sounds because the median — the 50th percentile — is only $5,000. The median is lowest for families in the 32 to 37 age range, a dismal $480. For families in the 56 to 61 age range, those nearest retirement, the median is $17,000.
The shortfall in retirement savings has many causes. Foremost is the decline of defined-benefit pensions for workers in the private sector, a decline caused by changes in the economy and a series of laws passed by Congress during the 1980s that discouraged pensions and favored IRAs. Fifty years ago 88 percent of private sector workers had defined-benefit pensions; the percentage now is 30 and falling. The pension falloff has been especially harmful to low-income workers, many of whom do not have alternative retirement plans.
More than 20 million Americans have IRAs invested in the stock market that lost ground during the Great Recession of 2008-09 and in many cases have not fully made up for these losses.
Wage stagnation has also impacted retirement savings. For many Americans, inflation-adjusted figures are about where they were in the 1970s. The combination of wage stagnation and pension decline may have impacted the recent presidential election in which many working-class voters cast ballots for Donald Trump.
Writing in the Washington Post, Rep. Debbie Dingell, a Democrat from Michigan, said: “[These voters] don’t feel better off. Their real wages have not risen in decades, and in fact for many it has dropped. They have less purchasing power; their health care costs more; they don’t trust their pensions to be there...they are frightened that something bad could happen at any time.” Trump won Michigan, home of the auto industry and normally a Democratic stronghold, by a razor-thin 13,107 votes out of 4,785,223 votes cast.
For many retirees Social Security payments, averaging about $1,300 a month, are their sole income. Since 2010, Social Security has been running a deficit, with tax revenues falling short of the benefits being paid out. Unless changes are made, the Social Security fund is expected to run out of funds by 2034, at which point retirees would receive just 80 percent of their benefits. Surveys have found that many millennials do not expect Social Security to be available when they retire.
Social Security was last reformed by a bi-partisan bill signed into law on April 20, 1983 by President Ronald Reagan at a ceremony on the White House south lawn at which House Speaker Thomas P. O’Neill called the measure “a happy day for America.”
Such bi-partisan approaches have been notably lacking in the 21st century. Maya MacGuineas, president of the non-partisan Committee for a Responsible Federal Budget lamented recently that Congress and President Barack Obama shared responsibility for “eight years of lost opportunity to make Social Security structurally sound.” President-elect Trump and a Republican Congress will now have their opportunity.
In this uncertain context, any move to expand retirement savings is welcome, and the nation will be watching as California takes the lead in state-run retirement.
The key to the success of California Secure Choice may be automatic enrollment. Firms that provide IRAs have found that employees are unlikely to enroll unless employers sign them up and provide a payroll deduction. “Having 401(k) auto-enrollment and default contributions is essential in making savings happen,” Harvard public-policy professor Brigitte Madrian, an expert on behavioral finance, told Time magazine.
If these savings do indeed happen in California, look for other states to follow the example of the Golden State.