Landmark Legislation Will Help Californians Save for Retirement

By Mark Paul
Senior Scholar
New America Foundation

Once a land of savers, America is now the home of the thriftless. Americans' personal saving rate, in steady decline over the last quarter of century, finally plunged into negative territory this year. No surprise there. In modern America the struggle between debt and saving is a rigged contest. It's never been easier to borrow - credit cards, subprime home mortgages, home equity loans, payday loans. But when it comes to saving, about half of American workers, including more than 8 million Californians, are denied the opportunity to save the way people save best: on the job, through payroll deduction to a retirement plan. That is a critical problem.

Retirement saving is one of the twin pillars, along with homeownership, of household wealth and security. With home equity declining - for the first time ever Americans' equity in their houses has fallen below 50 percent - money tucked away in pensions, 401(k) plans, and individual retirement accounts has become, in aggregate, the largest item on household balance sheets. The retirement savings system works reasonably well for well-paid workers and large businesses. They are likely to have the best pensions, and they receive most of the $100 billion in annual tax subsidies for retirement saving. But for workers in the bottom half, many of them working for small businesses that offer no retirement plan, the news is bleak. Under the current system, more than one-third of the young Americans will reach old age with no retirement savings at all, the Government Accountability Office projects. And because retirement savings also serve households as fail-safe protection against emergencies such as illness, disability, and death, the inability of many workers to save through their jobs leaves them vulnerable throughout their lives.

To tilt the balance back toward saving, the Assembly recently approved, and the state Senate will soon consider, legislation to create Golden Dream Accounts - voluntary, portable, retirement accounts available to every worker not covered by a retirement savings plan on the job.

The bill, AB2940 by Assemblyman Kevin DeLeon, D-Los Angeles, authorizes the California Public Employees Retirement System to offer the accounts, which would be invested in a short menu of low-cost indexed mutual funds. Every worker in California without access to a workplace retirement plan would be able to open an account and contribute to it, including by payroll deduction. The accounts, structured as IRAs, would be owned by the worker and move with her from job to job.

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