- It’s about to get easier for millions of California workers to save for retirement
November 27, 2018 - Business Insider
- Secure Choice and higher minimum wage in California benefits retirement income
January 30, 2018 - Alliance for Retirement Income Adequacy
In 2016, the state of California enacted two landmark laws intended to bolster the economic security of private-sector workers in the state. SB 3 incrementally increases the statewide minimum wage to $15 in 2023, from $10 in 2016, and indexes it to inflation thereafter. This is expected to increase wages for 5.26 million workers, or 38% of California’s workforce.2 SB 1234 authorizes implementation of the California Secure Choice Retirement Savings Program (Secure Choice)—an automatic IRA that will be offered to about 7 million private-sector workers in California who are employed in businesses with five or more employees that do not sponsor their own pension or 401(k)-type plan.3 The savings program, currently under development, is intended to provide an additional layer of income to supplement Social Security for workers who are otherwise likely to reach retirement without a real nest egg.
This study examines the separate and combined impacts of the $15 minimum wage policy and Secure Choice on the retirement income of California workers in the bottom half of the income distribution. We first estimate lifetime earnings for a sample of 25-year-old and 45-year-old workers at different income levels within the bottom 50% under two scenarios: one with the $15 minimum wage policy enacted in 2016, and a baseline scenario with the old minimum wage policy. Then we calculate Social Security benefits and potential retirement income from participating in Secure Choice for each worker in each scenario. Finally, we calculate the combined growth in retirement income resulting from the $15 minimum wage and Secure Choice, compared to the Social Security benefit that workers would have earned under the old minimum wage policy. The percentage increase in retirement income in relation to baseline Social Security is significant because most low-income households have few retirement assets outside of Social Security, and even middle-income households are under-saving for retirement.
We find that California’s $15 minimum wage law and the California Secure Choice Retirement Savings Program combined will provide a substantial boost to the retirement incomes of low-income workers, through larger Social Security benefits and increased private retirement income. Secure Choice also has the potential to significantly increase the retirement incomes of middle-income workers who are unaffected by the minimum wage.
1. Increased earnings from California’s $15 minimum wage law and consistent participation in Secure Choice can increase young low- and middle-income workers’ retirement income by about 50% compared to baseline Social Security benefits. (See sidebar for definitions.)
- Young workers in the bottom 50% of their age cohort, by income, can increase their retirement incomes by roughly half (46%-55% depending on income level) under the two policies compared to baseline Social Security.
- A typical 25-year low-income worker in California would have earned $16,060 a year in Social Security benefits under the old minimum wage policy, in today’s inflation-adjusted dollars. He or she is now on track to earn $24,840 a year from Social Security and Secure Choice combined, representing an increase in retirement income of $8,780 (55%). This increase includes $1,720 in extra Social Security from the higher minimum wage and nearly $7,060 from the Secure Choice retirement plan annually.
- Mid-career workers in the bottom 50% of their age cohort, by income, can expect to increase their retirement income by 18%-22% under the two policies compared to baseline Social Security.
2. California’s $15 minimum wage law will substantially increase lifetime earnings among low-income workers.
- A typical 25-year-old low-income worker earning $14,000 a year today will see a 21% increase in lifetime earnings.
- A typical 45-year-old low-income worker earning $23,000 a year will see an 8% increase in total lifetime earnings, and a 16% increase in earnings during their remaining working years.
- By boosting the earnings of low-income workers, the $15 minimum wage policy will enable them to save for retirement through Secure Choice and still see an appreciable increase in disposable income.
3. Increased lifetime earnings from the $15 minimum wage law will result in a significant increase in Social Security benefits for young low-income workers, and a modest increase for mid-career low-income workers.
- A typical 25-year-old low-income worker will see an increase of $1,720 (11%) in annual Social Security benefits in today’s dollars.
- A typical 45-year-old low-income worker will see an increase of $590 (4.5%) in annual Social Security benefits in today’s dollars.
4. The California Secure Choice Retirement Savings Program has the potential to provide a sizable supplement to Social Security for both low- and middle-income workers, a large majority of whom are currently not saving for retirement.
- Currently, the typical US family approaching retirement has only $16,000 saved in retirement accounts, equivalent to just $800-900 per year in retirement income. About 44% of families with heads age 25-64 have no retirement accounts,4 and more than half of private-sector employees do not have access to a workplace retirement plan.5
- With earnings and retirement contributions augmented by the $15 minimum wage policy, a typical 25-year-old low-income worker who contributes a steady 5% of pay to a California Secure Choice retirement savings account can save enough to generate $7,060 a year in retirement income in today’s dollars. A typical 45-year-old low-income worker can expect $2,250 a year.
- Middle-income workers, though mostly unaffected by the minimum wage,6 can expect significant retirement income from consistent participation in Secure Choice for the remainder of their careers: median 25-year-old and 45-year-old workers will see an increase in retirement income of $11,830 and $4,210 a year in inflation-adjusted dollars, respectively.
5. Increased retirement income from the $15 minimum wage law and California Secure Choice Retirement Savings Program can be expected to lead to lower elder poverty rates over the long term than would otherwise exist. However, without additional resources, many low- and middle-income workers will still face a retirement income gap.
- For young low-income workers earning at the 10th and 20th percentiles in their age group, earning higher Social Security benefits as a result of the $15 minimum wage policy and contributing 5% of their pay to Secure Choice will mean retiring above the poverty line, rather than below it.
- However, given the high cost of living in California, many low-income workers will still fall short of full self-sufficiency in retirement unless they receive employer retirement contributions and/or additional wage increases.
- Young middle-income workers, who will need income equal to about three-quarters of their pre-retirement earnings to maintain their standard of living in retirement, can expect to see 55% of their pre-retirement incomes replaced by Social Security and Secure Choice. They will need to replace an additional 20% of earnings from other sources. Home equity can close some of the gap, but workers will need additional liquid assets.
1. The author is grateful to Ian Perry for providing age-earnings tables from the CWED/CLRE minimum wage model that were critical to this study; Annette Bernhardt and Ken Jacobs for their advice; Steven Goss for clarifying Social Security economic assumptions early on in this project; and Dean Baker, Monique Morrissey, and Rowland Davis for their comments on the draft version of this paper. Any errors and omissions are the author’s own.
2. Michael Reich, Sylvia A. Allegretto, and Claire Montialoux, “The Effects of a $15 Minimum Wage by 2023 in California and Fresno,” CWED Policy Brief, January 2017, http://irle.berkeley.edu/files/2017/Effects-of-a-15-Minimum-Wage-in-California-and-Fresno.pdf.
4. Savings data from author’s analysis of 2016 Survey of Consumer Finances Summary File microdata; income estimates from Fidelity Guaranteed Fixed Income Estimator, https://gie.fidelity.com/estimator/gie/gielanding?refann=061, accessed November 21, 2017.
5. Author’s analysis of 2015 CPS ASEC microdata from Sarah Flood, Miriam King, Steven Ruggles, and J. Robert Warren, Integrated Public Use Microdata Series, Current Population Survey: Version 5.0. [dataset], Minneapolis: University of Minnesota, 2017, https://doi.org/10.18128/D030.V5.0.
6. Some middle-income workers have hourly wages at or below the minimum wage but work long hours.