Today, the Asset Building Program is releasing a new paper outlining some key policy considerations for California Secure Choice, the state’s new retirement program for the 6.3 million private sector workers who lack access to an account through their employers. The paper is based on a response we submitted to a recent Request for Information from the California Secure Choice Investment Savings Board, seeking input about the program’s structure and design before the state moves forward with a feasibility analysis.
There is a wide range of policy and design decisions that the Board must address before workers can begin enrolling in Secure Choice in 2016 – including the basic plan structure, investment options, costs and fees, and methods for protecting against early withdrawals. Our own responses to some of the RFI’s questions were guided in part by the following principles:
We’ve learned from behavioral economics that workers benefit from default and automatic policies that make it easy to save. As envisioned, Secure Choice will automatically enroll all private sector workers without access to a plan (with an opt-out), which
should facilitate broad participation. In addition, there are three distinct features of the California plan for which default policies will be particularly important: initial contributions, escalation of contributions, and disbursement of savings upon retirement. As we describe in the paper, these structures should be set up to enable workers to gradually, simply and sustainably build an adequate retirement savings balance, while remaining mindful of their need for liquidity. Further, Secure Choice should encourage workers to opt for a lifelong income stream rather than a lump sum, while taking into account
evidence about near-retirees’ discomfort with complete annuitization or “now or never” decisions.
One of the most important objectives of Secure Choice is that it will reduce the gap in retirement plan coverage between higher- and lower-income workers. The median annual earnings of a California worker without a retirement plan are
$26,000. However, as a result, many of these workers’ accounts will have a low balance, at least initially. To keep costs low and promote administrative efficiency, Secure Choice should pool the accounts for collective management, which would maximize group purchasing power and reduce fees.
- Workers have a range of savings needs
Lastly, it’s important to recognize that although retirement is a particularly important savings objective, workers also need sufficient resources to address more immediate and short-term needs. This is a point I emphasize in a
new piece in Zócalo Public Square. During the 16-day government shutdown, over 8,200 federal workers withdrew funds from their retirement accounts just to make ends meet. This example underscores how woefully underprepared most Americans are to financially cope with an emergency – and without addressing this foundational problem, it’s virtually guaranteed that high rates of early withdrawals will persist, undermining well-intentioned efforts like Secure Choice. To address this issue, California’s program could use a singular infrastructure to support workers to develop both retirement savings and a pool of flexible use savings, a model that has proven successful
in the U.K.
Secure Choice is poised to introduce an innovative new model of retirement savings, and other states are looking to California to provide an example of how to get it right. For our perspective on some of the issues at stake, please take a look at the
full paper.