Americans started their descent from frugality into profligacy in the mid-1980s, when the personal savings rate dipped below 10%. The rate has fallen steadily ever since, even dropping into negative territory for parts of 2005 and last year. That means, like the grasshopper in Aesop’s fable, people spent first and considered the consequences later.
With the baby boom generation beginning to retire, it's past time for us to reverse course on savings. We can't expect much help on that front -- fewer employers are providing pensions, and the Social Security program could go broke just providing a subsistence-level safety net. What employers and government can do is make it easier for people to stash a portion of their pay in investment or retirement accounts.
That's why we like a proposal by Assemblyman Kevin de Leon (D-Los Angeles) to have the California Public Employees Retirement System offer individual retirement accounts to workers whose employers don't sponsor a 401(k) or IRA. The bill, AB 2940, would have CalPERS administer the program and pool investments to create efficiencies, but it would leave participants to cover the costs. To encourage people to invest automatically, it would take advantage of the state's payroll tax-collection system to funnel contributions directly from participants' paychecks. The accounts would offer many of the same tax benefits as 401(k)s and could be supplemented by contributions from employers.
The bill is novel -- no other state makes retirement plans available to all workers -- yet its provisions are a good match for California's needs. More than 40% of the private-sector employees in the state work for companies that don't provide retirement plans. These tend to be small businesses with relatively high turnover. But the plans created by the bill would be portable, so workers who switch jobs could transfer their savings into their new employer's plan or another type of retirement account.
The measure is opposed by the securities industry, which doesn’t relish the prospect of competing with CalPERS and its low administrative costs. There would be no need for De Leon's bill if investment firms were serving the entire market, but the fact that millions of workers at small firms don't have retirement plans supports the opposite conclusion. Besides, by promoting a basic plan through small employers and community banks, CalPERS can start workers down a savings path that could put them in the market for more sophisticated plans later. And the more those workers save, the better off everyone will be.