SACRAMENTO, Calif. (AP) — California Gov. Jerry Brown signed legislation Friday that will create the nation's first state-administered retirement savings program for private-sector workers, over the objection of critics who said it creates a new liability for taxpayers.
The bill will establish the California Secure Choice Retirement Savings Program for more than 6 million lower-income, private-sector workers whose employers do not offer retirement plans.
The program directs employers to withhold 3 percent of their workers' pay unless the employee opts out of the savings program, which can be done every two years. It would be administered by a seven-member board chaired by the state treasurer. The board would select a professional fund manager, which could be a private investment firm or the state's public pension system, to maintain the money.
State Sen. Kevin De Leon, D-Los Angeles, introduced the bill earlier this year in response to what he called the "looming retirement tsunami" as millions of lower-wage workers face financial hardship in their retirement years. He said the program will act as a supplement to Social Security by offering private-sector workers a portable savings plan with a guaranteed return.
He said the program is not a pension but rather acts as a savings account, which could be a national model for improving retirement savings.
"This is a major step forward for retirement security in America," De Leon said in a statement. "I am grateful for Gov. Brown's acumen and with his leadership we are setting the path for middle class hard-working Americas to prepare for retirement so they won't be forced into poverty."
State Sen. Mimi Walters, R-Lake Forest, called SB1234 the "worst bill to make its way out of the legislature this year" because it would allow the state's main pension system to invest the money.
Walters noted that the California Public Employees' Retirement System is running a shortfall and that the savings program will be controlled by a group of "career politicians."
"SB1234 looks like nothing more than a cynical effort to prop up the floundering public employee pension debt with new funds from private investors," Walters wrote in a blog ahead of the bill signing.
Many cities and counties already pool their contributions along with the state in the public pension system, but taxpayers are on the hook to cover public employee benefits if investment projections fall short.
It's too soon to say what would happen if CalPERS managed the new retirement program, said pension fund's spokesman, Brad Pacheco. CalPERS could create a separate account for private-sector workers, although it's more likely to pool investments with public employees.
CalPERS' fund posted an annual return of just 1 percent last year, missing its own long-term annual target of 7.5 percent. It currently has an estimated long-term unfunded liability of $100 billion.
Democratic lawmakers said the program gives workers more savings options, particularly women working low-paying jobs. Supporters say it will not cost the state money because it will be backed by underwriters and reinsured to protect returns. De Leon noted that the money would be placed into low-risk investments with interest guaranteed at a low rate tied to long-term Treasury bond yields.
Participants would also have to sign a liability waiver stating that California would not be liable for losses.
The bill would not be implemented unless the savings program is projected to be self-sustaining and exempt from federal rules that cover private-sector defined benefit plans. Such plans have to meet minimum standards under the federal Employee Retirement Income Security Act.
The bill also requires the board to submit an annual audit. It was initially opposed by businesses, insurance companies and financial services firms. Business groups such as the California Chamber of Commerce dropped opposition after changes were made to the bill, according to De Leon's staff.
The governor also signed companion legislation under SB923.
Republican lawmakers who opposed the program when it was moving through the Legislature said low-income workers might be better off financially if they put after-tax earnings into a Roth IRA, which would allow them to take their contributions tax-free in retirement.
They also said there were too many unanswered questions about the program. GOP lawmakers said if the underwriter fails to meet investment targets, taxpayers and employers could be held responsible for covering losses and administrative overhead.