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Dreaming of Retirement Savings, California Style

Kevin de León, a California state senator, likes to tell the story of a 74-year-old San Diego woman who takes two buses to the wealthy enclave of Coronado to clean houses several days a week. Despite a lifetime of hard work, her Social Security check does not cover her living expenses, he says, forcing her to put off retirement.

That woman, his aunt, motivated de León to push for an automatic retirement program for California workers whose employers do not offer 401(k)s or other retirement plans.

“She’s worked all her life,” he said. “She hasn’t asked the state or the federal government for a single penny in terms of any type of assistance, and she’s not had the opportunity to build up any assets over the course of time.”

After years of trying, de León, a Democrat representing the Los Angeles area, was able to muscle a bill through the Democratic-run Legislature creating a statewide dedicated retirement account for private-sector workers. Democratic Gov. Jerry Brown signed the bill into law on Oct. 1.

De León’s measure, the first of its kind in the country, has attracted attention from lawmakers in other states and in Congress and has turned the first-term senator into a rising star. Retirement savings have taken a hit in the recession, just as baby boomers are getting ready to leave the workforce.

President Barack Obama has included proposals in his budget requests to enroll workers with no retirement coverage into automatic individual retirement accounts, but the idea has gone nowhere in Congress.

Sen. Tom Harkin, D-Iowa, who has made the retirement savings “crisis” a pet cause, is working on a bill modeled closely on de León’s proposal that would automatically deduct money from workers’ paychecks if they work for employers who do not offer traditional pensions or defined contribution plans. Harkin said last month that he is crafting the bill with Sen. Michael B. Enzi, R-Wyo.

Lawmakers in Maryland, Oregon, Washington, Connecticut and elsewhere have introduced similar legislation in the past few months.

The California law requires employers with at least five employees and who do not offer their own retirement plans to automatically deduct 3 percent of workers’ salaries for the program. Employers do not have to match the deductions, which are pooled into an account overseen by a state board. Workers would get an annuity upon retirement. Ultimately, however, the employee would bear the risk for the plan, although de León said he hopes the plan will be able to buy some form of insurance to protect the principal and guarantee a steady return.

Policy analysts and advocates have been eagerly watching the progress of the California measure. If it proves successful, they hope to see it replicated in other states and, ultimately, at the federal level.

“It’s very promising because the biggest problem is lack of coverage,” said Teresa Ghilarducci, an economist at the New School in New York. “It’s never been worse, and the decline is steady.”

Others, however, question whether the state is well equipped to manage billions of dollars of retirement money when its own public pension funds are underfunded by $165 billion. And there is also concern about employer liability. Even if employers are not responsible for investments or for matching funds, some could still find themselves targeted should the market crash and employees lose their savings.

“Employers are concerned about being sued,” said Aliya Wong, executive director of retirement policy at the U.S. Chamber of Commerce, which did not take a position on the California measure. “Even if [employers] are able to win the lawsuit, you’ve pretty much lost by the time they bring the lawsuit due to the cost of litigating, and it’s really hard to legislate against that.”

About 53 percent of all private-sector employers now offer some kind of retirement plan, Ghilarducci said, down from 61 percent in 2001. In California, only 47 percent of employers offered retirement coverage in 2010, down from 53 percent in 2000. The recession forced many employers to drop their plans, she said, but workers have also lost some of their bargaining power, making them less likely to demand a 401(k) or a pension.

Two-thirds of households say they have saved some money for their retirement, according to a survey by the Employee Benefits Research Institute, but only 45 percent say they take part in a workplace retirement program. And even if they have saved some money, many do not have anywhere near enough to keep them afloat in retirement. About half of the respondents in the survey said they had less than $10,000 in savings.

Such findings have scared policymakers and analysts who worry about a wave of destitute elderly people relying on Social Security just as the program is facing financial pressures.

“People run out of money when they get old,” said Harkin, who chairs the Senate Health, Education, Labor and Pensions Committee. “They see their living standards decline, they lean more and more on the social safety net, squeezing government cost again at all levels. So it comes back on taxpayers again. We need to do more to help American families cope with this looming crisis.”

The California program is still a year or two away from implementation. To pacify skeptical lawmakers and opposing lobbyists, de León agreed to raise money for a feasibility study that would assess whether the program could be self-sustaining. Once that study is completed, the state will also have to ask the Treasury and the Labor departments whether there are tax implications to the program and whether the program is subject to the 1974 Employee Retirement Income Security Act (PL 93-406), which imposes strict rules on employers who offer retirement plans.

If regulators find that ERISA does apply, the California proposal would be too cumbersome to operate, de León said, and would doom his measure. But since there is no employer match, de León is confident the government will find the state’s program looks more like an IRA than an employer-sponsored plan, exempting it from the federal requirements.

He said employers “are not on the hook for any financial advice, they’re not on the hook for making any matching financial contribution that would subject them to ERISA.” Once the program is set up, de León will have to win the legislature’s support once more to get it running.

The law has split the financial-services sector and the business community, with some concerned that the state would compete against private financial companies while others prefer to focus on the prospect of tapping into a huge new market of savers.

“There is already a very strong and very competitive retirement savings market out there,” said Kim Chamberlain, a state lobbyist for the Securities Industry and Financial Markets Association. A better course of action, she added, would be for the state and the private sector to come together to “educate small employers and individuals about the benefits of these types of plans.”

But Brian Graff, CEO of the American Association of Pension Professionals and Actuaries, prefers to focus on the fact that state programs like California’s would provide new customers for financial firms.

“We are very focused on trying to expand coverage,” he said. “When people are covered by a workplace plan, they are 15 times more likely to save for retirement.”

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