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May
2013
31

CA Could Be First State to Implement Automatic Private Sector IRAs, Firm Up Retirement

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In California, legislation to create a state-run retirement plan is being proposed by State Sen. Kevin de Leon whose aim is to help those likely to face economic hardship upon retirement by.

A recent wave of publicity is bringing the important issue of private sector retirement to the forefront and could result in a brighter future for nearly 6.3 million California workers.

In the 2008 Presidential Election both President Obama and then-candidate John McCain lent their support for the concept of automatic Individual Retirement Accounts (IRAs).  President Obama’s last budget even included a federal version of this concept which was rejected by Congress.  Now, Sen. de Leon wants California to be the first state to adopt the concept.  Similar bills have been introduced in Maryland and inquiries have come from New York, Wisconsin, Oregon, Washington and Illinois as well.

De Leon is traveling the country drumming up support for the issue, according to CalPensions.com:

Appearing at national forums, De Leon has discussed his California Secure Choice Retirement Savings Program at meetings of the National Institute on Retirement Security and the Center for American Progress.

“The findings of this market analysis and resulting program design will serve as a blueprint for other states to implement similar savings programs,” De Leon said in a fund-raising prospectus.

This month National Public Radio and Atlantic magazine had stories about De Leon‘s plan. In March a lengthy story about the bill appeared in Roll Call, a Capitol Hill publication in Washington, D.C.

“De Leon’s measure, the first of its kind in the country, has attracted attention from lawmakers in other states and in Congress and has turned the first-term senator into a rising star,” said the Roll Call story.

One of the originators of the automatic IRA concept, David John of the conservative Heritage Foundation, told a congressional committee last year that the proposal has bipartisan support.

de Leon’s plan, in summary:

The new plan puts the payroll deduction into tax-deferred investments with a guaranteed minimum return, backed by insurance. The state and the employer have no liability.

Employers of five or more workers must offer the automatic IRA or an alternative retirement plan. An employer would not be required to contribute to the plan, and workers can opt out.

According to Roll Call, a federal bill modeled after de Leon’s is now being drafted in the U.S. Senate:

Sen. Tom Harkin, D-Iowa, who has made the retirement savings “crisis” a pet cause, is working on a bill modeled closely on de León’s proposal that would automatically deduct money from workers’ paychecks if they work for employers who do not offer traditional pensions or defined contribution plans. Harkin said last month that he is crafting the bill with Sen. Michael B. Enzi, R-Wyo.

An automatic IRA program would go a long way toward reassuring American workers about retirement. Without action the next generation of American retirees could leave the workforce and quickly descend into poverty:

Social Security is said on average to replace about 40 percent of working income, well short of the 65 to 85 percent experts say is needed to avoid a drop in the standard of living after retirement, a Congressional committee report said last year.

A labor-backed group pushing for a Social Security supplement asked for a study by the Center for Retirement Research at Boston College that found a $6.6 trillion shortfall in what American households need to maintain their standard of living.

In California, three-year data from 2008 to 2010 shows that 45 percent of workers age 25 to 64 are offered an employer-sponsored retirement plan and only 37 percent participate, the UC Berkeley Center for Labor Research and Education said last year.

“An earlier study found that nearly half (47 percent) of California workers — public and private — are currently on track to retire with incomes below 200 percent of federal poverty level (i.e., about $22,000 a year), a widely accepted threshold for serious economic hardship,” said the UC Berkeley Center research brief issued last June.

The recession has forced American workers to make hard choices concerning finances. For many, retirement planning has been the first thing to go. While things are moving slowly for de Leon’s bill, the popularity of the concept is, luckily, doing just the opposite.  

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