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“For young low-income workers… earning higher Social Security benefits as a result of the $15 minimum wage policy and contributing five per cent 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.” – Nari Rhee

 

Nari Ree

Nari Rhee

A couple of initiatives launched in California two years ago will not only increase the hourly wage of low-income workers, they will help them save for retirement according to a recent study by the UC Berkeley Center for Labor Research and Education.
The study, authored by the center’s director of the retirement security program Nari Rhee, reviews the minimum-wage increase to $15 an hour by 2023 from $10 hourly in 2016, and the state’s California Secure Choice Retirement Savings Program (Secure Choice) that features an auto-enrol component for workers not currently covered by a workplace retirement scheme.
After the wage hike is fully phased in, it becomes indexed to inflation. The move is expected to increase the wages of 5.26 million Californians, representing 38 per cent of the state’s workforce. It’s the second part, however, the retirement plan, that rolls out the long-term benefits of helping workers save for life after work.
Secure Choice, still under development, is intended to be an auto-enrol Individual Retirement Account (IRA), operated with low fees and pooled assets.
“The savings program … 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,” writes Rhee.
The study considers “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,” she continues.
It looks at two income and age scenarios: a 25-year-old worker and the other 45. For the purposes of the research, both are within the bottom 50 per cent of lifetime earnings and the impact of both lower and higher minimum wage is considered.
“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,” says Rhee.
Combined, the two policies will substantially boost the retirement security of low-income workers by seeing them earn more and having a portion of that income directed towards retirement savings through the auto-enrol program, Secure Choice.
Specifically, the study finds young workers on the low to middle end of the wage spectrum could potentially see a 50 per cent increase in retirement income than what might be accumulated under the old minimum wage, reliant on consistent participation in the auto-enrol program. Workers can opt out of the plan but research shows that once enrolled in such plans, they tend to stay in.
The analysis shows 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,” she continues.
How does that break down in actual retirement income? According to the study, a typical 25 year old could have earned just more than $16,000 Social Security under the old minimum wage. With the higher amount, that jumps to almost $25,000, Social Security and Secure Choice combined.
“Mid-career workers in the bottom 50 per cent of their age cohort, by income, can expect to increase their retirement income by 18-22 per cent under the two policies compared to baseline Social Security,” the study finds.
The higher minimum wage will substantially increase lifetime earnings for low-income workers, with a typical worker of 25 now earning $14,000 a year seeing a lifetime wage bump of 21 per cent. A 45-year-old worker currently making $23,000 yearly will see an eight per cent hike in total lifetime earnings and a 16 per cent increase in earnings during the rest of his/her working years.
Higher lifetime earnings will mean greater Social Security benefits and combined with Secure Choice, retirement income “can be expected to lead to lower elder poverty rates over the long term than would otherwise exist.”
However, Rhee cautions, low- and middle-income workers still face a “retirement income gap” without additional resources.
“For young low-income workers… earning higher Social Security benefits as a result of the $15 minimum wage policy and contributing five per cent 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.”
The study estimates that 44 per cent of American households are not saving for retirement through a retirement account, like a 401 (k) or an IRA. In California, 64 per cent of workers in the private sector lack a retirement plan “of any kind.”
Workers with low incomes, those employed with small businesses, young workers and Latinos “are least likely to be offered a retirement plan at work.”
As currently constituted, Secure Choice will deduct employee contributions at payroll, placing them in portable IRAs that can follow workers from job to job. It will be professional managed with “relatively low fees,” says Rhee. Employers are not required to contribute, but if they have five or more employees and do not offer a retirement plan, they will be mandated to participate in Secure Choice which is scheduled to launch as a pilot project later this year and be fully open in January 2019.
The program will be phased in over three years, with an estimated seven million workers being eligible. About 70 per cent of them are expected to participate.
California is one of a number of states to create Secure Choice-type schemes, building on key components like auto-enrol and mandated participation. Combined with a higher minimum wage, the program will have a positive impact on retirement incomes, Rhee concludes.
“The fact that participating in Secure Choice can augment young and mid-career middle-income workers’ Social Security benefits by 49 per cent and 21 per cent, respectively, represents a meaningful improvement in their retirement security.”

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