California’s Retirement Program: Imperfect, But a Potential Boon for Women and Low-Income Workers

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Analysis Law and Policy

California’s Retirement Program: Imperfect, But a Potential Boon for Women and Low-Income Workers

Sheila Bapat

California has plans to experiment with a retirement program that could cost the state nothing in taxes but could greatly help many of individuals who rely heavily on Social Security. Unfortunately, it may not cover the growing ranks of freelance workers.

Retirement security has been at the in the news this week, with Obama seeking cuts to Social Security benefits. This comes after a report from the New America Foundation recommended a major expansion of Social Security to help protect Americans who pay into it, particularly women, lower-income workers, and people of color who tend to be most vulnerable to poverty when they age—and are even more so given that 401(k)s were hard hit during the economic crisis.

Meanwhile, California has plans to experiment with a retirement program that, as currently conceived, will cost the state nothing in taxes but could be a boon to many of the individuals who rely heavily on Social Security. Last September, California Gov. Jerry Brown (D) signed into law SB 1234, creating the Secure Choice Retirement Savings Program, which will set up low-risk individual retirement accounts on the private market for an estimated 6.3 million private-sector California workers, most of whom are women, low- and middle-wage workers, and people of color.

There is a major sticking point with California’s Secure Choice program as it is currently written, however. Unlike Social Security, which covers all workers who pay into it, Secure Choice does not yet apply to freelance workers; the program is currently available only to employees at workplaces with five or more employees. The law requires the state to evaluate whether freelancers—a class of workers that has grown in part because of the economic crisis—can feasibly participate, but that’s no guarantee. This is one of many issues that needs to be ironed out in the coming years by an appointed board that will administer the program.

One thing seems clear, however: Providing economic security for the state’s most vulnerable workers was an inspiration for the bill. In talking about the program, State Sen. Kevin de León (D-Los Angeles), the law’s primary champion, has cited his family members, whose work lives have made it untenable to save with mainstream banks and who were not offered retirement accounts through their jobs.

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“Sen. de León’s aunt worked as a house cleaner her entire life, but she still works three days per week though she’s well into her 70s,” Greg Hayes, Sen. de León’s communications director, told Rewire. “And she has nothing, no access to a retirement plan. This program is simply about access and personal responsibility. It serves a population Wall Street has never served and has no intention to serve.”

California’s Secure Choice law is part of a larger national movement to develop retirement investment programs that are publicly sponsored but not publicly funded and serve groups that earn low- and middle-income wages and can’t afford a crushing loss in their 401(k) if Wall Street tanks yet again.

Significantly, these emerging publicly-sponsored plans are typically exempt from the Employee Retirement Income Security Act (ERISA), which sets minimum standards for pension plans in private industry and confers liability on employers. Without an ERISA exemption, it would be extremely challenging to implement a program like this, as the regulatory burden would be too great on small employers. (Some opponents of California’s program still claim it could be covered by ERISA even though California’s law explicitly says the program cannot go forward unless it is exempt.)

Creative solutions for retirement are critical right now, as threats to Social Security persist, and saving in private accounts remains far from a universal practice—rather, it is stratified along gender, class, and race lines. Last month the Transamerica Center for Retirement Studies published a survey showing that women’s retirement planning is woefully inadequate. It found that women’s tendency to earn less than men, take time out of the workforce to be a parent or caregiver, and their longer life expectancy make saving for retirement a challenge. Related to this study, 2010 census data revealed that far more women of retirement age are likely to live in poverty than their male counterparts.

According to the University of California Berkeley Center for Labor Research and Education, access to retirement plans is “worst among low-wage workers (22 percent in the bottom quartile); employees of small firms with less than 100 employees (25 percent); and Latinos (32 percent).”

But what exactly is the barrier to savings? Why can’t these individuals just open an individual retirement account (IRA) with Bank of America or Wells Fargo? According to the Berkeley Center, the administrative costs are very high for IRAs containing relatively small amounts of money, and the risk of losing money can make such accounts a poor option for low- and middle-income earners. (This is particularly relevant for freelancers; a recent Freelancers Union survey showed that 58 percent of freelance workers earn less than $50,000 a year, and 29 percent earn less than $25,000.)

Like California’s retirement programs for public employees, California’s Secure Choice program seeks to mitigate risk for employees in the private sector by restricting investment of participant money to very stable companies, and will have a guaranteed rate of return for participants. According to proponents of the bill in the California senate, “participants would not be exposed on the individual market and vulnerable to the volatility of the unpredictable stock market.”

It’s an option freelance workers need access to as well.

Opponents of this legislation, which include a number of insurance companies and the California Chamber of Commerce, have argued that “legislation is unnecessary as California already has a robust and highly competitive retirement savings market.” Opponents seem fearful of competition to the existing 401(k) market.

Secure Choice and programs like it are still in their infancy and are far from a replacement for Social Security. California is still at least three years out from the program going into effect, as the state must first get confirmation that the program is exempt from ERISA regulations, appoint a public-private board to oversee the program, and raise about half a million dollars in private funding to examine the legislation’s feasibility.

But relying solely on Social Security is untenable, so these innovations in the retirement plan sector through public-private partnerships that expand access and improve retirement security for as many people as possible will interest many workers and their advocates. Now, California needs to figure out if and how freelancers could participate in its Secure Choice program, as this group needs low-risk investment options, too.