California’s Mandatory Savings Proposal

by Reihan Salam

Megan McArdle is skeptical about a new mandatory savings proposal from Kevin de León, a California state legislator. The basic idea is that employees at firms that don’t currently have a 401(k) plan in place would have 3 percent of their salary deducted from their wages, and in return they’d receive a small pension designed to supplement Social Security benefits and other retirement savings. The guaranteed minimum return is a modest 3 percent. Megan writes:

[M]y take is that the guarantee is not doing most of the work here; almost all of the benefit comes simply from the quasi-mandatory saving. In fact, the majority of people would be better off if you took that 3 percent and stuck it in an S&P 500 index fund. Your real return, after taxes and fees and inflation, from 1982 to 2012 would have been about 5.8 percent.

This is roughly what I think we ought to do — transform Social Security into a flat universal defined benefit and impose a mandatory savings requirement at the federal level, as Andrew Biggs has recommended. Though I wouldn’t say De León’s proposal is perfect, it does seem like a measure that would do relatively little harm and that has the potential to do at least some good, if only as an experiment.