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Brown OKs state-run pensions for private workers

The road ahead upon retirement. (Photo illustration: Gustavo Frazao, via Shutterstock.)

Gov. Brown has signed historic legislation to set up California’s first state-run pension plan for private-sector workers, allowing millions of employees to continuously build a retirement nest egg regardless of where they work.

The governor’s decision means California joins seven other states that offer similar programs, although California’s plan, called Secure Choice, will automatically enroll about 6.8 million workers and will be the largest in the nation by far.

“The economic recovery has been a spectator sport for too many, leaving many workers in need of assistance to save for retirement.” — Gavin Newsom

“The creation of Secure Choice represents a turning point in a several-decades-long race to the bottom in retirement security for private-sector workers,” said Chris Hoene, executive director of the California Budget and Policy Center.

“The widespread elimination and reduction of pensions and other retirement benefits in the private sector leaves a growing number of California workers, especially younger, low-income, and female workers, facing economic hardship when they reach retirement and increasingly reliant on public assistance to help make ends meet,” he said.

Democratic Lt. Gov. Gavin Newsom, a candidate for governor in 2018, also applauded Brown’s move.

“The economic recovery has been a spectator sport for too many, leaving many workers in need of assistance to save for retirement. This bill does just that,” Newsom said.

The new plan, in which employees initially invest 2 percent to 5 percent of their pay in a low-risk retirement account, is intended to resolve what many experts describe as an impending crisis in workers’ savings.

The pensions would be administered by a nine-person board that includes the state treasurer and controller, as well as small-business representatives, employers, employees and financial services experts.

Figures from the Secure Choice feasibility study estimate that programs where employees ‘opt-in’ see participation rates of about 15 percent.

The bill is SB 1234, by Senate Leader Kevin de León, D-San Diego. As a member of the Assembly in 2008, he introduced the first legislation dealing with the issue, making him one of the first legislators in the nation to attempt a state-supervised retirement program. That bill died in a Senate committee.

Four years later, De León – now in the Senate — sponsored the first version of SB 1234, which established the Secure Choice board, chaired by Treasurer John Chiang.

The 2012 bill ensured that the state would not be liable for any costs associated with the program, including the feasibility study. It took two years for the board to raise the $1 million needed to research the program’s costs and impact.

According to AARP, about 7.5 million Californians currently work for employers that do not offer a retirement plan and about 6.8 million would be eligible for the state-run program.

There were a total of about 19.2 million workers in the civilian labor force as of July, according to the state.

Figures from the Secure Choice feasibility study estimate that programs where employees ‘opt-in’ see participation rates of about 15 percent.

Employees would have the opportunity to initially invest up to 5 percent of their paycheck in a low-risk retirement fund, and the amount could increase to 8 percent over time, at the worker’s request.

The program covers employers with more than five employees that don’t already offer retirement programs.

The workers’ contributions would be “low-risk and low-fee choices, representing the industry’s best practices for a sound retirement,” said state Treasurer John Chiang. “The Board will be required to maintain a balanced investment portfolio that provides assurance that no single investment or class of investments will have a disproportionate impact on the total portfolio.”

Not everyone was pleased with state-run system.

“While people should save for their post-employment years, government should not be in the business of mandating retirement savings,” state Sen. John Moorlach, an Orange County Republican, said earlier before the governor’s action.

“How will this proposal lead to long-term savings and “secure choice” when it is neither? While it is technically not a “pension” or a defined benefit program, it has been sold as a guaranteed return program with a defined benefit for private workers.”

But some concerns were eased when the U.S. Department of Labor said state-run plans would remain in a “safe harbor.”

It was that decision in late August that helped get the De Leon bill through the Assembly. In addition, lawmakers included amendments that specified that employers would not give employees financial advice and would not be financially liable for employee retirement accounts.

“We have done all that we could think of to limit employer liability,” said Marti Fisher, a policy advocate for the California Chamber of Commerce. She added that although the Chamber has dropped its opposition, it still is not in favor of the bill. The California Manufacturers and Technology Association likewise dropped its opposition for the same reasons, according to spokesman Gino DiCaro.

The other states that have passed similar legislation are Connecticut, Illinois, Maryland, New Jersey, Oregon, Massachusetts, and Washington – and the California version is viewed as one of the most comprehensive.

 


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