In summary

Policymakers should consider how to expand access to California’s automatic retirement savings program.

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By Matt Newman

Matt Newman is co-founder of the Blue Sky Consulting Group.

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Pete Manzo, Special to CalMatters

Pete Manzo is president and CEO of United Ways of California.

California’s economy continues to add jobs as the pandemic-induced recession recedes, yet far too many workers still lack access to a retirement plan. But, the state is poised to lead the way in expanding access to retirement savings for all workers. 

California is one of just a handful of states that have launched “Auto-IRAs,” which enable workers at companies without retirement plans to fund their own savings through contributions deducted from their paychecks. 

Auto-IRAs also got a boost from federal policymakers in September when the House Ways and Means Committee endorsed a national automatic savings program as part of the federal reconciliation package. The federal proposal – ultimately removed from the bill as part of ongoing negotiations – would have augmented the California program, which does not include a public or employer contribution, by adding a refundable tax credit to supplement worker contributions.

California’s program – known as CalSavers – and similar programs in Oregon and Illinois are already demonstrating the potential to dramatically increase savings simply by making plans available to workers and enrollment automatic.  Workers who do not want to participate can opt-out. 

As of last month, CalSavers reported more than 200,000 worker accounts with savings of more than $144 million; hundreds of thousands more workers and millions more in assets are expected as the program matures.

California’s experience to date informs how the program can be even more successful here, and serve as a model for other states or the federal government as policymakers consider whether and how to expand access to automatic retirement savings. 

First, outreach to employers and would-be savers is vital. In California, as in the other states with similar programs, helping employers and workers understand the benefits of the program and assisting with sign-ups can significantly increase savings and the economic security and resiliency they provide to low-wage workers.

More can be done in this regard. 

CalSavers was established without a cost to taxpayers, but this limited the resources available for outreach. CalSavers, and programs in other states, could be enhanced by allowing the programs to borrow funds during early years to pay for outreach and public engagement. The funds would be repaid from small fees charged to future savers. This practical mechanism would not cost taxpayers, yet has the potential to significantly accelerate the benefits of retirement savings for low-income workers. 

Second, Auto-IRA program administrators should work with experts and advocates to develop a set of metrics by which to evaluate and document the success of these programs. The traditional measures – number of accounts and assets under management – are critically important, but they tell only part of the story.  

Evaluations of similar programs indicate that savers experience other benefits, such as an improved sense of wellbeing and reduced disruption in employment, since workers have a financial cushion to manage the unexpected – stability that benefits employers as well as workers. 

Some research suggests that Auto-IRA accounts could stimulate even more savings, as workers realize they can make ends meet even with the deductions, and they see their savings grow. Tracking these and other measures can help paint a more complete picture of the programs’ impact. 

Finally, existing Auto-IRA programs provide a foundation for other financial management tools. Employee accounts for CalSavers, for example, are portable and allow employees with more than one job to make contributions from each, and when needed, withdraw funds for emergencies or other non-retirement needs. 

The programs also could be designed to make it easier for employees to manage their savings and could be set up to allow workers to borrow from themselves, repaying these loans with deductions from future paychecks rather than using a high-interest payday lender, a program known as “Salary Finance.” 

Generating personal wealth is fundamental to improving economic security for the millions of hard-working Californians who lack access to an employer-sponsored retirement savings plan. Civic leaders need to work together to help employers and workers understand the benefits of Auto-IRA programs, document those benefits, and augment the programs over time to enable Californians and workers throughout the country to become more financially secure.

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