California may soon become one of the first states to implement its own retirement savings program for workers without 401(k)s or pensions. Dubbed the Secure Choice Retirement Savings Program, the initiative has recently been promoted by state legislator Keven de Leon, an advocate for lower and middle income retirement security.
The program would automatically deduct 3 percent of pay from workers at companies with at least five employees and no pensions or 401(k)s. These funds would then be pooled and controlled by state-chosen professional investment managers, and participants would receive a modest 3 percent return. At retirement, workers would convert their contributed funds to annuities, which would provide a guaranteed lifelong income stream.
A voluntary but automatic opt-in program, the initiative is primarily aimed at lower income workers who’ve saved little to nothing for retirement, and whose employers don’t offer retirement plans or financial advice of their own. While it can’t completely take the place of personal savings, it would act as a non-volatile supplement to Social Security payouts. It might also ease taxpayer burdens in the future, as a private insurance policy would underwrite the plan.
While the Secure Choice Program has come under fire from the financial industry—and although similar bills have failed at the federal level – many advisers are praising it and other state-level initiatives. “I think it’s a fantastic idea,” says Ashley Murphy, CFP and founder of California-based Arete Wealth Strategists. “For the majority earning under $46,000 per year, they’d be largely dependent on Social Security, anyway.”
Most of the plan’s proponents also vehemently oppose the do-it-yourself mentality towards retirement savings, urging that middle and lower class wage earners need assistance. “People at the lower end of the income spectrum are just not saving enough, and they’re going to be in trouble come retirement,” says Murphy. “I’ve seen it time and time again.”
The decline in pension plans over the last few decades may also explain the program’s appeal to soon-to-be and eventual retirees. “The decrease in pension usage in the 80s and 90s correlated with the Baby Boomers being in their mid-30s to mid-50s, and they’ve missed the boat,” Murphy adds. If the current trends of stagnant wages, rising healthcare costs and longer lifespans continue, generations X and Y will have even more difficulty saving for retirement without that lifelong income stream. Social Security will likely still be available, but as so many advisers tell their clients, Social Security benefits alone cannot maintain a middle class standard of living.
Ultimately, however, the Secure Choice Program may not take effect for years. A state commission must still raise nearly $1 million to study the plan, and the California legislature will need to re-approve it upon completion of that study. While California’s implementation could prompt a nationwide revolution in retirement planning, workers in all income brackets will need to keep saving as much as possible until then.