State-run mandatory retirement plan?

CaliforniaStaMonicaBeachCalifornia is poised to institute the first state-run mandatory retirement plan for all workers in that state. According to a New York Times article reproduced at MSN Money, the California State Assembly approved the measure on Thursday, August 25 but it must be reconciled with the version passed by the California State Senate in May.

According to this article, the program called “Secure Choice” will likely affect all California businesses with 5 or more employees and be phased in a three year period beginning with the state’s largest employers.

Under the program, workers will have an “opt out” procedure to eliminate an automatic plan to deduct 3% of their paycheck. Lawmakers hope that the “opt out” provision will cause more workers to accept Secure Choice and save more. After the program begins, workers will have the option to increase the rate of payroll deduction if they wish. What has not been worked out is where these funds will be directed. Some are advocating that the investment accounts be managed by CALPERS; the California state employee pension fund. This pension fund is one of the largest collective retirement plans in the world. “On Thursday, the United States Department of Labor issued a final safe-harbor rule, making it possible for California to run its program without conforming with the federal employee benefits law, known as Erisa…”, says the article.

Secure Choice has been developed by a 9 member board that has been working on it since 2012. The bill will also hold employers harmless in the event the plan fails or if the investments in the plan lose money. Originally, some board members wanted a guaranteed return provision (!) but, it seems that after much discussion, the closest they could come to this was a plan investing only in US Treasury bonds, possibly using the new Federal individual saving program called “MyRA”. “Connecticut, Oregon, Maryland and Illinois are moving forward with their own state-run retirement programs and are looking to California as an example are also poised to create their own plans”, says the article.

What seems to be driving this initiative is the belief that there is a need for creating a simple mechanism for working people to save and invest more for their retirement. According to this article, the AARP and many unions (a leader of one of the largest Service Employees International Union locals is a member of the 9 member board) support this endeavor.

What the article does not mention is that a retirement fund with guaranteed benefits and mandatory participation by all employers and employees already exists. Created on the heels of the Great Depression, it sought to address the lack of a financial safety net for disabled or elderly workers. It’s called “Social Security”. It seems it would be a lot easier to do this on the Federal level simply by expanding Social Security. Social Security is a defined benefit program as is the CALPERS.

Social Security does not provide quite sufficient retirement income for American workers. According to this Motley Fool article, as of Feb. 2016, the average retired American worker received $1,340 in retirement benefits from Social Security in the last reported month. Social Security has a sophisticated benefit formula that considers each individual’s 35 year work history. However, roughly speaking, if the median income for American workers age 25 and older is $32,140, or $2,678 per month, then the $1,340 benefit is equal to almost exactly 50% of that. It would take considerable preparation for a person to live on half of their average pre-retirement income.

Social Security (unless it is truly soon to be insolvent) is a very good start for ensuring a more financially secure retirement for many workers in all the states of the union. The lawmakers in these states do not seem to have much faith that it will be there for the public or they would not be busy creating their own.