Building Assets: What Should California Do Now?

Even in this era of dwindling public resources, California can take significant steps to encourage its residents to save and invest in themselves. The following are a sampling of cost-effective, asset-building policies. Most are from other states, which are ahead of California in this emerging policy area. These recommendations would bolster the economic security of the state and its 35 million residents.

• Create a system of voluntary retirement accounts for businesses and individuals. Only 39 percent of California workers participate in an employment-sponsored retirement plan. Social Security payments alone -- which average $901 per month in California -- will not sustain individuals in their retirement. Many companies do not offer retirement plans because they are too complex and costly. To help companies overcome these barriers, a group of Republican and Democratic Washington state legislators propose to offer Voluntary Retirement Accounts, state-sponsored, universal, 401(k)-style retirement accounts that workers can take job to job. If a company chooses, it could opt into a system that will be administered by the state's retirement system. The Washington group estimates its start-up costs would be $5 to $10 million but the program would eventually be self-sustaining. For relatively small start-up costs, California could create a similar system of accounts that would help millions of Californians save for their futures. Over 80 percent of Washington residents support the Voluntary Retirement Account idea.

• Launch a campaign to encourage all eligible Californians to claim the Earned Income Tax Credit (EITC). The EITC is a federal tax benefit to reward work for Americans earning less than $33,500. Last year, 2.4 million Californians received $4.2 billion in tax credits. The IRS estimates that more than 750,000 Californians who are eligible for the benefit neglected to claim $1.3 billion in EITC refunds last tax season. This money, left in Washington, D.C., instead could be used by Californians to buy homes, go back to school, or spend as consumers. The number of Californians dependent on public services would also be reduced. Other states have launched effective EITC awareness campaigns to bring more of these dollars into their states. In 1999, Washington state spent $316,000 on an EITC awareness campaign that spurred 3,667 additional households to apply for the credit. California should do the same.

• Build the financial literacy of all Californians. Every Californian needs the knowledge and skills to navigate the changing financial services industry to make good choices for themselves and their families. Banks, schools, churches and community groups throughout California conduct ad-hoc financial literacy programs. These disparate efforts should be catalogued, coordinated and strengthened. Financial literacy skills should be integrated into the kindergarten through 12th-grade curriculum. The No Child Left Behind Act calls for innovation in this area, but it has not been funded. Welfare recipients should be able to enroll in financial literacy classes that count toward their work requirements, as they can in Illinois. The state's caseworkers should also be trained to build the financial literacy of their clients, as they do in Illinois. Lastly, a tax incentive could be given to employers to provide financial literacy training to their employees.

• Bring all Californians into the mainstream financial system. At least 10 million U.S. families -- most of them earning less than $25,000 per year -- are "unbanked," meaning they lack checking or savings accounts. Twenty-eight percent of Californians lack a basic transactional account. Without these basic accounts, too many Californians lack the first tool they need to save and build assets. California can change that. The 1.2 million California residents who receive welfare should have their benefits directly deposited into bank accounts. Benefits are currently delivered via smart cards. An electronic account could be added to the card. The state should also encourage banks to accept the Matricula Consular Card, the identification card issued by the Mexican government. An effort in the Midwest to encourage banks to accept the card spurred 50,000 unbanked individuals to open accounts in the past 18 months, with average balances of $2,000. Finally, employers should get a tax credit to provide their employees direct deposit, access to inexpensive accounts and financial literacy training.

• Build a privately funded task force that will study the problem of asset poverty and how it can be remedied. California needs more information about the dimensions of this problem in order to craft effective solutions. The Asset Policy Initiative of California has begun to convene nonprofit, business and government leaders to explore effective politics and build concensus around a comprehensive policy endeavor. State leaders should learn about and engage in this effort.
  Copyright 2005, California Journal