California’s Innovative Response to the Coming Retirement Security Crisis

It’s hardly news that traditional pensions have almost disappeared from the private workforce, personal savings are low, and Social Security benefits face political and actuarial threats. But the story that needs more attention among those concerned with retirement security is how the rise of the 401(k)-type plan as a policy effort is failing in fundamental ways. Half of the workforce does not have an account and many that do still are not contributing enough to meet their expectations. Without further action, the transition to a 401(k)-based system will become a large-scale policy failure.

If we are going to rely on this account-based system of saving for retirement, at a minimum we have to make sure everyone has an account and can make steady contributions throughout their time in the workforce. The Obama administration has proposed creating Auto-IRAs to get most workers an account, but Congress has been slow to act. A number of states are considering moving ahead with their own efforts.

Last fall California took an affirmative step forward with the passage of SB 1234, a bill to create the California Secure Choice Retirement Savings Program (CSC). The law puts into place an innovative process by which California will begin to address their retirement savings crisis.

The Asset Building Program is releasing a new issue brief examining California’s effort. Written by Aleta Sprague, the paper, entitled California Secure Choice Retirement Savings Program: An Innovative Response to the Coming Retirement Security Crisis, describes how the program will create an account for all private sector workers in the state who lack coverage through their workplace. This will create access for more than six million uncovered workers and enable more families to build up the resources to supplement their Social Security benefits.

The program has been designed using insights from behavioral economics and the asset building field. Enrollment is automatic, accounts are portable and not tied to specific employers, and administration is self-financing to minimize the state’s liability. California still faces many important policy choices in implementing the program, and the paper highlights several ways that the effort can maximize its effectiveness. Ideally, federal policy can play a role, particularly by creating meaningful and accessible saving incentives, such as through a Financial Security Credit. 

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. As ever, please feel free to send any comments our way, including by sending tweets to @AssetsNAF and using the hashtag #CalRetire. This conversation is critical, and if Congress doesn’t act, it will have to continue in state houses across the nation.