Editorial: How to prod workers to save for retirement

As a growing number of Baby Boomers age out of the workforce, they’re confronting one of the downsides of longer lifespans: their failure to save enough for retirement. Nearly half of the workers in California are on a path to the poor house in their dotage, reliant on Social Security checks that may not be large enough to keep them off government assistance. Next week, Senate President Kevin De Leon is expected to offer a bill that will push more lower-income workers to set aside a portion of their take-home pay for the future. His proposal, years in the making, does smack of a Nanny State solution to a problem that people should be solving for themselves. But they aren’t, which is why it makes sense for the state to try to help.

De Leon’s current plan takes a much more cautious approach than an early version of his proposal, which sought to create a state pension with small but guaranteed benefits for lower-income workers in the private sector. Unwilling to take on that risk, the Legislature instead decided in 2012 to authorize a savings plan based on Individual Retirement Accounts, whose payouts would vary according to how well their investments performed. The program targeted the more than 6 million Californians whose employers do not offer a retirement plan. It would not be launched, however, unless a newly created oversight panel, the California Secure Choice Retirement Savings Investment Board, found that it would be sustainable and pose no risk to taxpayers or employers.

In a report issued Monday, the board said that the program could meet the law’s threshold for sustainability and risk. Now it’s up to the Legislature to nail down some crucial details about how much the program will take from workers’ paychecks, how much risk it will allow enrollees to take on and what limits, if any, it will place on how the savings ultimately are spent.

These details are especially important because the program is designed to make deductions from eligible workers’ pay automatically unless they opt out. That’s a more forceful approach than an opt-in system, and is expected to increase participation. But it means lawmakers will have to give workers ample opportunity to change their minds about whether to participate and how much to contribute. And while the investment options should be tailored to match the needs of different age groups, the program must be simple enough for financially unsophisticated people to understand. That means providing fewer, more basic and conservative investment options than you’d find at a major investment firm. Workers with more appetite for risk can always make such investments on their own.

The thorniest question may be whether to limit how quickly participants can withdraw their savings. Given that the goal is to provide an extra cushion in retirement, it’s tempting to place tight annual limits on withdrawals once an enrollee leaves the workforce. Lawmakers should resist that temptation, and trust those willing to make the sacrifices necessary to build up savings to use that money wisely.

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