Are We Headed to Mandatory Retirement Savings Accounts?

The U.S. retirement system of Social Security supplemented by private retirement savings is often thought to be in crisis,  because of questions about the solvency of the former and the adequacy of the latter.

But the U.S. approach is not the only way — Australia and Chile, for example, have high mandatory contribution rates of 9% and 10%, respectively. And while these alternate approaches may seem remote and exotic, a piece of legislation gaining traction in the largest U.S. state may move the U.S. significantly in that direction.

The California Secure Choice Retirement Savings Program, introduced by State Sen. Kevin de Leon, D-Los Angeles, seeks to provide a pension for workers at firms that do not have 401(k) plans but have at least five employees.

The program would deduct 3% of their pay and then, cutting out the financial services industry, invest the funds of these millions of workers in a state-administered investment pool that would guarantee a modest 3% return. The accounts would be underwritten by insurance companies so as to avoid taxpayer risk and upon retirement, workers would receive a pension annuity.

The legislation, introduced last year, has already been through committees and been passed by both Houses of the Legislature and approved by Gov. Jerry Brown. But the plan must be vetted by the Internal Revenue Service and Department of Labor to be sure it does not conflict with federal law, then re-approved by the California Legislature after technical fixes have been made.

Writing in The Guardian’s Money Blog, Helaine Olen, author of a recent book blasting the financial services industry, heralds the arrival of a plan she regards as providing pensions to “people without the luxury of retirement planning, or the access to good financial advice.”