A crucial step toward retirement security for the working class
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.
These are a thin reed, however. The vast majority of workers don’t contribute the maximum permitted, or even enough to build up a secure nest egg; the median 401(k) balance for households approaching retirement is only about $60,000, which will barely be enough to flavor the potatoes over an average post-career life span — and that’s among households that have any 401(k) at all (fewer than 70%, according to researchers at Boston College).
Don’t forget that many of today’s seniors cashed in historic gains in asset values before retirement, including their homes and stock portfolios. We haven’t begun to see the full effect of the housing crash and two successive stock market crashes on the wealth profile of newly retiring workers; but we can be sure that it will be ugggggly.
“Since World War II, we’ve never had a cohort that did worse in retirement than the cohort before,” says Teresa Ghilarducci, a retirement expert at the New School for Social Research who participated in the Berkeley meeting. That’s about to change.
The California program is the first gingerly attack on that dismal trend line. De Leon has worked carefully around the possible pitfalls — he’s made several visits to Washington to get the Internal Revenue Service to certify that contributions will be tax-exempt, as are 401(k) contributions. He’s also seeking an agreement from the Labor Department that the plan will be exempt from ERISA, the paperwork-heavy law safeguarding pension plans sponsored by employers. (That’s why California won’t accept employer contributions.) Most experts think the program will get the agency’s green light.
The plan is aimed at low-income workers, the group with the lowest participation rate in 401(k)s and the smallest nest eggs of any kind. The minimum investment guarantee would be set low enough that the pool’s investments could be low-risk and the chances of missing the mark over the course of a career’s contributions would be almost nil. Any residual risk of falling short would be covered by an insurance policy to be purchased by the program’s board, not by the taxpayers. The state’s role would be limited to pooling all the contributions to keep costs down, though every participant would have a claim on his or her individual account.
This won’t make anyone rich. But for many working-class retirees it would be an important supplement to Social Security, which today pays an average retirement stipend of $1,230 a month. It’s the first step toward restoring the retirement security that used to come from defined-benefit pensions, especially for the working class.
“It’s not as good as a good defined-benefit plan,” says Monique Morrissey, an economist at the progressive Economic Policy Institute, a Washington think tank, “but better than what they have now.”
She says government guaranteed programs like California’s are a hot topic in the pension community right now. “Everyone’s trying to figure out something workable.”
Massachusetts is developing a plan to cover employees of small nonprofits, and Oregon and Connecticut are considering their own programs.
De Leon says he’s amazed that his unassuming first step is being hailed in Washington as a breakthrough, even before all the Ts are crossed and the I’s dotted. That speaks volumes about how Congress has ceased even to pretend to care about the American worker.
“When people there tell me I’ve done more to advance this idea than anyone in the nation,” he says, “it’s a little surreal.”
Michael Hiltzik’s column appears Sundays and Wednesdays. Reach him at email@example.com, read past columns at latimes.com/hiltzik, check out facebook.com/hiltzik and follow @latimeshiltzik on Twitter.
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