Fixing California's Retirement Crisis

In the past decade the number of California workers with access to a retirement plan at work has plummeted. A recent study by The New School’s Schwartz Center for Economic Policy Analysis (SCEPA) shows that in 2009, 52.3 percent of California’s workers did not have access to an employer-provided retirement plan—representing a 6.5 percent rise over the previous decade in workers without pension access.

This increase poses a danger to the broader economy, which will suffer the destabilizing effects of mass retirement insecurity. Legislators can address this looming crisis with a fair, low-cost solution: opening existing, well-managed retirement systems to private sector employees.

SCEPA’s new statistics underscore the need for the California state legislature to once again take action on legislation based on my proposal. Titled The California Retirement Savings Act, the bill was introduced by State Senator Kevin DeLeon and passed the state senate in February. In addition, this plan has been praised by California State Treasurer Bill Lockyer as “a meaningful retirement security option for California private sector workers.”

Workers from the private sector [would have] voluntary access to state managed pension funds. Private sector workers or employers would have the ability to open an account in a state-level public retirement fund such as CalPERS or CalSTRS, and/or employers can then choose to contribute a percentage of pay into an account, with a guaranteed rate of return. At retirement, workers would have the option to convert their savings into an annuity, a guaranteed stream of income for life.

Effective retirement reform is not about how to scale back options for some employees, such as public workers, but how to expand access for everyone. Without comprehensive reform, our future retirees face a real threat of downward mobility in their so-called ‘golden’ years. Private-sector workers have been, and will continue to be, battered by the double jeopardy of increasing market risk in their 401(k)s and decreasing employer coverage. Opening a window for private sector workers in high performing public pension funds provides a practical blueprint to stave off an impending retirement crisis.

The proposal takes advantage of existing state pension infrastructure to invest private sector funds. States, through their employee pension plans, sponsor not-for-profit financial institutions that consistently receive the highest returns for the least cost. Because they pool longevity risk, can offer a well-diversified portfolio over time, and are professionally managed, DB plans can deliver the same level of benefits as DC plans at a cost that is 43 percent less. These funds are able to use their bargaining power to lower fees, and public pension fund traders have a longer-term view, which stabilizes markets and protects individuals from short-term swings in asset prices.

My proposal calls for an independent board of trustees to administer these funds, similar to the structure of TIAA-CREF, the pension plan for university professors, or the Thrift Savings Plan for federal employees. Pension contributions would be pooled and invested professionally with an emphasis on prudent and low-risk, long-term gains. This would effectively shield workers from the high fees and poor investment choices they face when left to fend for themselves in the retail 401(k) market. Most importantly, these accounts would be portable, allowing a worker to continue investing in the account as they move from job to job.

Teresa Ghilarducci is the Director of the Schwartz Center for Economic Policy Analysis at The New School for Social Research. Her op-ed piece, “Our Ridiculous Approach to Retirement,” appeared in in the New York Times July 21.

(Note: This post first appeared on California Progress Report.)