Here’s an update from The Mobility Agenda’s Research Assistant, Jonny Finity.
The California legislature appears poised to create a new Universal Voluntary Account initiative. If approved, employees and employers alike in the nation’s most populous state will definitely have something to cheer about. The proposed bill would allow thousands of workers without employer-sponsored retirement investment plans or options to invest for retirement using the state-run California Public Employees’ Retirement System (CalPERS).
When it comes to retirement benefits, employees of small businesses have traditionally been left out; small business owners are often unable to meet the high costs of managing a company pension system. According to director Dean Baker of the Center for Economic and Policy Research (CEPR), a state-sponsored universal retirement account initiative would virtually eliminate small-holder risk and administrative costs associated with employer-sponsored plans, allowing small businesses to compete in the global marketplace. The increase in operational fees incurred by the investing agency (such as CalPERS) would be covered by new users through account holder fees or investment interest and would not have to be paid for by the state.
Employees without access to employer-sponsored retirement plans, forced to act independently on financial investment matters, often act too late; that affects all of us. In a 2006 paper Baker points out that in 2004 “53 percent of near retirement age workers (ages 45-54) had accumulated less than $48,000 in financial assets.” That is a dismal number at a time when the New York Post warns that soon-to-be New York retirees will require about $548,000 in order to retire. Social Security will likely be going strong for another 40 years or so, according to Baker, but additional sources of retirement income are still necessary.
Fifty years ago, many retirees had a defined-benefit pension to rely on in addition to their Social Security income; today defined-benefit pensions have all but dried up (The “gold watch” pension is an example; a defined-benefit pension is any retirement package where the benefits are defined). Universal retirement accounts bridge this gap; they have become necessary to bring our jobs and our economy up to date and in line with contemporary needs like flexibility and increased mobility. Workers whose employers do not offer investment accounts will become retirees without savings, who can place a great strain on the economy. It is better for all of us that everyone has access to – and uses – investment opportunities available. And since the proposed California bill would also allow employers to match employee contributions, maximizing investment leverage, the likelihood of economic security in retirement will only increase under this initiative.
One of the major job market changes in the last several decades has been in workforce mobility. Older generations expected the job chosen in their 20’s to be a lifetime career – usually with the same company! Today’s jobs are less rigid, and workers change jobs much more frequently. As defined-benefit pensions go the way of lifetime employment, investment options need the same kind of mobility that today’s workers have. Universal retirement accounts can offer mobility the way defined-benefit pensions and the 401(k) never could – with the flexibility to take your retirement pension with you from job to job.
While several states have been tossing around the idea of offering state-sponsored universal retirement accounts, California would become the first to enact legislation to actually create one. For California this could mean a stronger, more competitive job market with better jobs to attract out-of-state workers – which could spell danger for job markets and employers in neighboring states that don’t offer the same opportunity.
Finally, universal retirement accounts are voluntary. Offering workers options such as universal retirement accounts does not automatically turn a bad job into a good one, but California’s legislation is a positive step towards better jobs. Better jobs mean healthier communities and a stronger economy. That is something we can all cheer about.