A Different Kind of Universal Coverage

Blog Post
May 1, 2008

A bill recently introduced in Sacramento, and supported by Governor Schwarzenegger, has the potential to cover almost every California worker. No longer will those unlucky enough to work for an employer who doesn't provide coverage be left vulnerable. No longer will those who seek to buy coverage on their own be priced out of the market. And best of all, it will cost virtually nothing. Interested? Good. But we aren't talking healthcare-we're talking retirement.

Today, more than one-third of today's seniors subsist almost entirely on income from social security - an average payment of just over $1,000. For those workers (most of us) who aren't fortunate enough to be covered by a defined benefit, employer-sponsored pension plan, i.e. checks for life, the only way to prevent retirement of destitution is to start saving now. But unfortunately, many workers lack access to the products and services necessary to begin planning for retirement

The need for action is clear. Every day, six million Californians, or roughly 43% of workers in the state, go to work for an employer that does not provider any type of retirement pension or savings plan. And its not that these companies don't want to. Any business owner will tell you their frustration in trying to offer their employees a retirement savings plan. Investing the time to simply comprehend all options, not to mention the increased cost and liability of offering a plan, has led many businesses to simply stop offering retirement plans altogether.

And employees of small businesses, by far California's greatest employer, are even less likely to be covered by a retirement plan. Why? Simple economies of scale. In order to offer a retirement savings plan (401(k), 403(b), etc.) to workers employers are required to pay a series of fixed costs to the financial services provider. With a relatively low number of accounts, the marginal costs associated with each account are high, meaning small employers aren't getting the same bang for their buck as larger corporations. Its no surprise that less than 2 in 5 small businesses in California provide their employees with some form of retirement pension or savings.

Assemblyman De Leon's proposal calls for the creation of the California Employee Savings Program. The basic idea is quite simple. The state of California will offer a basic IRA to workers who are not already covered by an employer plan. Individuals will open the accounts directly with the state or a designated financial service provider (think Fidelity, Vanguard, etc.); employers are asked to facilitate payroll deductions into the account. By being part of a collective pool of workers, individuals in the California Employee Savers Program will pay significantly less in fees.

Naturally, in proposing a new program in a state facing major deficits, we understand the first question on most everyone's mind is about cost. Well that just may be the best part. The California Employee Savings Program is designed to be entirely self-financing. Participants will be charged fees on their account, just as they would on retirement savings product. These fees will be calibrated to cover the costs associated with operating the program, ultimately at a rate much lower than individuals could find on the private market.

We understand that, as with any grand proposal, the devil is in the details--and the details in this proposal get technical very quickly. New America has been collaborating with some of the best minds around the country to help California successfully develop a way to give more workers access to a retirement savings account. We are exicted about the historic opportunity before us.

We hope that legislators in Sacramento will actively engage this proposal on its merits and that pundits and the public will not render their final verdict until the details have been worked out. Through debate and compromise, there is no reason why the state of California cannot ensure more workers have access to a safe and affordable retirement savings product. We hope the inherent bipartisan nature of this proposal-which seeks to help Americans build retirement security through individual agency, savings and investment-will encourage both sides to work together in good faith.

And perhaps once this endeavor succeeds, a bipartisan Sacramento will be poised to again tackle universal coverage-in healthcare.