The Breakdown

Explaining Southern California's economy

California tackles the looming retirement crisis — but will it be enough?

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There's no debate that Americans aren't saving enough for retirement. The average nest egg for 65-year-olds is just over $65,000. Saving enough for retirement has become more difficult as old-school pension plans have given way to 401(k)-type plans that shift the burden of risk to employees. But California has come up with a way to address this problem.

For 6.3 million Californians.

Gov. Brown just signed into law SB 1234, the "California Secure Choice Retirement Savings Trust." The bill was co-sponsored by state Sen. Kevin de Léon (D-Los Angeles) and Senate President Pro Tem Darrell Steinberg. It creates a private-sector retirement plan for the aforementioned 6.3 million private-sector workers who currently don't have access to a retirement plan through their jobs.

"I'm ecstatic," de Léon said. "Much of the middle class is shut out of retirement security, and the signing of this bill shows that retirement security isn't just for the elite."

He added that the legislation was a "victory over Wall Street."

The finance industry opposed the plan, an action that de Léon said bewildered him.

"Why did they fight so ferociously to kill it? They don't compete for this market today. It's only competition if you're fighting for the same market share. The last time I checked, I didn't see any Wall Street firm selling any annuities in South L.A."

Here's how the plan will ultimately work. Employees, mostly middle- and lower-income workers, will be automatically enrolled in a plan that deducts an proposed 3 percent of their pay (this isn't set in stone yet, according to de Léon). They can opt out if they choose. The money will then be pooled and managed, at presumably low cost, by large private entities as well as, potentially, CalPERS, the giant state employees pension fund.

Potential managers would have to bid on the fund, which gives the state the opportunity to keep costs down. Accounts would be portable. Workers could change jobs without losing access to the plan.

This isn't happening right away. First, a board of directors has to be assembled and the feasibility of different investment vehicles needs to be researched. Nothing meaningful will happen until next year, and then the plan will have to pass a subsequent authorization vote.

The plan, although supported by the likes of the New York Times editorial board, isn't without risk, even though low-risk is one of its chief selling points.

De Léon said only a modest rate of return would be expected, likely tied to the 30-year U.S. Treasury rate. That's currently less than 3 percent, which beats the rate of inflation at the moment. But historically inflation has run higher than that. And inflation is the enemy when it comes to long-term investing. However, the 30-year had yielded much higher returns in the past.

"We're going to need a conservative return," de Léon said. "This is the population most vulnerable to wild fluctuations in the market."

He insisted that the goal is to create a culture of savers rather than spenders — a culture of people who look at a quarterly account statement and see that compound interest is enabling them to grow the money that they put away.

Of course, deducting only 3 percent from workers' pay pretty much guarantees a modest payoff at retirement. But then again, this plan is only designed to provide a decent amount of additional income in retirement, to go along with Social Security, which de Léon's office argues, rightly, isn't enough to sustain the average retiree.

Saving something is better than saving nothing. And that's what the trust amounts to: an automatic savings plan, for those who need to save the most.

Follow Matthew DeBord and the DeBord Report on Twitter. And ask Matt questions at Quora.

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