As we’ve been saying for many years, America faces a retirement savings crisis. We think Congress has a good opportunity to address the crisis, which is why we recently sent comments to the House Ways and Means Committee recommending ways to fix the nation’s retirement system. However, we’ll freely admit that there’s more than one way to skin a cat.
Today, the Asset Building Program is releasing a new issue brief about an innovative, state-level response to the retirement savings crisis – the California Secure Choice Retirement Savings Program. Currently, over six million private sector workers in California lack access to a retirement savings account through their employers; nationwide, only about half the private workforce has access to such accounts, and low-income workers have particularly low rates of access. California Secure Choice (“CSC”) would automatically create an account for all private sector workers in the state who lack coverage through their workplace, thus enabling a much broader swath of the population to accumulate essential savings to supplement their Social Security benefits. Below are some key features of the program:
Automatic Enrollment and Contributions
The California program has many elements in common with our recommendations, and capitalizes upon the same identified benefits of automatic saving. A key feature of CSC is that all covered workers would be automatically enrolled, anyone can opt out at any time. Automatic enrollment has been found to significantly increase participation in retirement savings plans while simultaneously reducing both income and racial disparities. Similarly, the program would default participants into automatic contributions of 3% of each paycheck, though workers would have the ability to change their contribution level or withhold contributions at any time.
A second important aspect of CSC is that accounts will be fully portable. Workers can move from job to job while maintaining their accounts, which reduces the likelihood that workers will cash out these accounts and have to start from scratch during a career change.
A unique feature of CSC that sets it apart from other universal account proposals is its guaranteed rate of return, which would be determined on an annual basis by the CSC Investment Board. By utilizing private insurance, CSC would safeguard workers’ contributions from the vagaries of the market. Although the level of the guarantee will be modest, this provision ensures that workers can feel confident that any contributions they make will grow over time.
Finally, CSC is designed to be self-financing and impose no new costs on the state. The pooled account structure reduces administrative costs, which will be funded directly by worker contributions (though these costs cannot exceed 1% of the CSC fund’s total assets each year). Additionally, the only obligations for employers will be to provide information about the program and enable workers to make contributions through their existing payroll systems.
Still, as described in the paper, it is important to recognize that families have a range of short- and long-term savings needs. Promoting flexibility and options to save for purposes other than retirement is key to reducing the high level of “breaches” of retirement accounts that undermine the benefits of automatic enrollment and contributions. Two ideas that may support retirement saving while simultaneously accommodating a broader range of savings needs are the Financial Security Credit and workplace emergency savings programs. These two proposals could effectively supplement programs like CSC to ensure that retirement savings are in fact used for retirement.
For more details about California Secure Choice, next steps for its implementation, and how this initiative fits in to the larger retirement savings landscape, please read the full paper here.