What if every worker in America were automatically enrolled in an Individual Retirement Account?
In an ongoing study, researchers from Princeton University and the Treasury Department have analyzed just such a scenario.
Their conclusion: Not surprisingly, a national retirement savings plan would significantly increase the nation’s savings rate, especially for low-income workers.
If every worker were automatically enrolled in a pension plan, the savings rate among low-income workers would double, from 21% to 40%.
Because fewer lower-income Americans are saving for retirement, a national savings plan could offer a potential solution to this challenge, researchers say. Workers who retire with sufficient savings put less strain on social services.
Few low-income Americans save for retirement
The 401(k) employee retirement plan and its personal savings counterpart, the IRA, offer tax breaks as an incentive for Americans to save.
But the programs are hardly a runaway success. Only about half of American households have retirement accounts, according to the federal Survey of Consumer Finances.
Most wealthy Americans take full advantage of the tax benefits of retirement. In the 50 to 59 age group, the researchers found, more than 90% of high-income households (the top two-fifths of earners) have tax-advantaged retirement accounts.
By contrast, among lower-income Americans of the same age, retirement savings are relatively rare. For those earning the bottom 20% of incomes, only about one in five households has a 401(k) or IRA.
Low-income workers often lack access to retirement savings, experts say. They are more likely to work part-time with no retirement benefits, change jobs frequently, work for companies that do not offer retirement plans, or be unemployed.
Princeton and Treasury researchers calculated how a national “automated savings” retirement plan could affect retirement savings among low-income workers.
Such a plan would nationalize the suite of automated savings programs already in place in some states. These initiatives automatically enroll hundreds of thousands of workers in retirement savings, covering employees whose companies do not offer retirement plans.
Would a national pension plan increase savings rates?
Even with a national retirement plan, the researchers found, the savings rate for low-income workers would reach about 40%. Researchers cite two main reasons: Many low-income workers are in “gig” jobs and other jobs that don’t produce a W-2 form at the end of the year. And many workers would withdraw from an automated savings plan to focus their funds on more pressing needs.
A savings rate of 40% “is still not 100,” said Motohiro Yogo, an economics professor at Princeton. “But doubling from 21 to 40 is still a pretty good gain.”
Yogo and his colleagues, Natalie Cox at Princeton and Andrew Whitten at the Treasury, published preliminary findings in 2023. Their work continues: Yogo said the 40% savings rate is a new, as-yet-unpublished data point.
The study focuses on lower-income workers because higher-income Americans don’t need help saving for retirement: most of them are already doing so.
Auto-IRA programs have helped workers save more than $1 billion
Retirement savings advocates applaud the new automated savings programs that have popped up around the country over the past few years. Collectively, the initiatives have enrolled more than 800,000 workers, who have saved at least $1.5 billion, according to research by the Pew Charitable Trusts and Georgetown University.
Sixteen states have adopted automated retirement savings, according to a tracker maintained by Georgetown. At least eight programs are in operation, in Oregon, Illinois, California, Connecticut, Maryland, Colorado, Virginia and Maine.
But a national retirement program remains a way out.
Rep. Richard Neal, a Democrat from Massachusetts, has repeatedly introduced an automated savings bill that would nationalize the state-led drive. But national legislation has not gained traction.
“And that’s where the focus shifted to the states,” said Catherine Collinson, CEO of the nonprofit Transamerica Center for Retirement Studies.
Southern and conservative states have been slow to adopt automated retirement savings. However, retirement savings legislation “has a long history of being bipartisan,” Collinson said.
Pensioners who lack savings strain social services
State governments have an incentive to help workers save for retirement because pensioners who lack savings put a burden on social services. Pew puts the collective tab at $334 billion over 20 years if savings rates don’t rise.
Researchers studying automated savings in Illinois found that participants tended to be part-time, female, younger and unmarried, with a high school education, hourly paid jobs.
“It could be a young single mom working at a local bakery, or where you get your morning coffee,” said Angela Antonelli, a research professor and executive director of the Center for Retirement Initiatives at Georgetown’s McCourt School of Public Policy. .
Between 1989 and 2022, the share of workers ages 25 to 64 who participated in employer-sponsored retirement plans increased just 2 percentage points, from 51% to 53%, according to the Center for Retirement Research at Boston College .
The lack of savings has prompted some economists to suggest that 401(k)s and IRAs be eliminated, or the benefits be limited, because the tax savings mostly benefit the wealthy. In theory, they reason, Americans could save for retirement with or without a tax loophole as an incentive.
While Congress may not be up for a national retirement plan, lawmakers have worked with the Biden administration to pass several smaller retirement savings initiatives.
The new programs, enacted in 2022 as part of the SECURE Act 2.0, could collectively deliver trillions of dollars in savings, according to industry estimates.
More:Will the government take my 401(k)? Some economists say the accounts aren’t worth it
Here is a summary:
Saver’s match
According to Saver’s Match, starting in 2027, nearly 22 million low- and middle-income workers who contribute to a retirement savings account become eligible for matching funds from the government. The maximum match is $1,000 per person, according to a Pew analysis.
The Saver’s Match replaces the current Saver’s Credit, a nonrefundable tax credit for lower-income taxpayers.
The big difference: The Saver’s Loan only reduces the tax you owe. The Saver’s Match puts dollars into your retirement account.
Self-portability
This initiative encourages workers to “roll over” retirement savings into an IRA if they leave work, where the funds can be automatically transferred to a retirement plan at a new employer.
The automatic portability program applies to accounts valued at $7,000 or less. Research shows that workers often withdraw money from low-value accounts, potentially losing thousands of dollars in compound interest over time.
In 2022, a consortium of private retirement plan providers announced a collaboration to increase the portability of small retirement accounts.
“These things, taken together, are very significant,” said Spencer Williams, CEO of the Retirement Clearinghouse, which is partnering with retirement providers on the portability initiative. “We are talking about trillions of dollars.”
Automatic registration
Starting in 2025, most new 401(k) plans must automatically enroll employees, rather than leaving the decision up to workers.
Currently, many 401(k) plans are voluntary, meaning employees must sign up to participate. Under automatic enrollment, an employee who does nothing opts in.
Auto-enrollment is a powerful tool to save. Vanguard, the investment management company, found that workers with automatic enrollment plans participated at a 93% rate in 2022, compared to 70% enrollment in voluntary plans.
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