Help for the reluctant saver
America being the land of instant gratification, its residents tend to save far less than their foreign counterparts do — when they save anything at all. As a result, millions of people are heading into retirement with little more than their Social Security benefits to sustain them. Fearful that many will wind up dependent on state aid to get by, California Sen. Kevin De Leon (D-Los Angeles) wants to create a state-run but privately insured pension program that prompts more workers to save for their dotage. Business groups are fighting the proposal, arguing that Californians already have plenty of ways to save for retirement. But if they’re not availing themselves of those options, is it better to let them slip into poverty as the consequence of their imprudence, or to come up with a savings plan they will use?
Congress has created generous tax breaks for retirement plans, and the financial industry offers a dizzying variety of investment options. But studies show that the vast majority of American workers don’t set aside any wages for retirement unless their employer encourages or the government compels them to do so. That spells trouble for the millions who work in small companies that don’t offer pensions or 401(k) plans. According to a recent study, up to 8.4 million Californians, most of them lowwage workers, do not participate in a retirement plan beyond Social Security. And Social Security benefits are so limited — they replace about 40% of the average person’s pre-retirement wages — that they leave one out of every 10 recipients in poverty.
The goal of De Leon’s bill, SB 1234, is to give lower-income workers in small companies a way to save for their retirement that’s as convenient as the plans offered by most large companies. To that end, it would create a pension fund for workers at companies that do not offer retirement plans, and require those companies to contribute 3% of each worker’s pay into the new plan unless the worker opted out. In other words, workers who did nothing would automatically sacrifice a small amount of pay in exchange for a modest pension when they retire.
There’s more than a whiff of nanny-statism in the effort to compel people to save for their own good. The point, though, is to help people be less dependent on the state when they retire. The real question is whether the system envisioned by the bill — one that poses no cost or risk to taxpayers — is even possible. The state Department of Finance, for one, is skeptical. Before lawmakers approve the program, the state should study how much it would actually cost, how many workers would participate, and whether companies would abandon their more generous but expensive plans. De Leon’s idea has promise, and it’s worth finding out whether that promise can be fulfilled.