In poll after poll, citizens rank retirement as one of their top economic concerns – and with good reason. The median, working-age American household has saved just $2,500 for retirement, and Social Security provides an average of just $1,300 per month.
Unfortunately, the federal government has done little to ease the burden for those most in need. While the tax code subsidizes retirement savings to the tune of $172 billion a year – over 80% of these benefits go to individuals with incomes of at least $100,000 a year and serve largely as windfalls for people who shift money they would be saving anyway into tax-preferred retirement accounts.
A growing number of states, however, are stepping into the void to boost Americans’ retirement security. New efforts popping up in California, Connecticut, Maryland, Illinois, and Oregon aim to help more Americans gain access to workplace savings plans.
The initiatives being launched in these states – which follow a similar model and are typically known as “Secure Choice” plans – will greatly expand the number of private sector workers automatically enrolled into a retirement plan (which means they will start saving unless they choose to opt out).
With the launch of these new efforts over the next two years, states will have a golden opportunity to help solve the retirement crisis. Indeed, if these first programs are successful, many more states – including more conservative ones – will likely follow their lead.
These new state options are promising for several reasons. First, their primary goal is to expand the ability of workers to save at work, which evidence shows is the most effective way to help workers save for retirement. In Oregon, for example, roughly 400,000 residents are expected to gain access to workplace retirement savings as a result of the new Oregon Retirement Savings Program. Under the program, businesses would have the option to offer their own savings plan or enroll their workers in a state-sponsored plan. Programs like these will be a particular boon for workers in smaller firms, which are much less likely to offer a retirement savings benefit. Indeed, 90% of today’s private sector employees working for large companies (those with 500 workers or more) are offered retirement benefits, whereas only 47% of those working for smaller ones (those with fewer than 50 workers) have the option.
A second benefit of the Secure Choice plans is automatic enrollment. Even among workers who are offered a plan through work, many do not sign up – not because they’ve made a conscious choice to neglect their retirement, but because they, like most people, are apt to procrastinate and not sign up for a savings plan. The new state-sponsored plans have adopted best industry practice by offering participants the chance to opt out (versus opt in), a change that studies show can more than double participation rates. Moreover, savers are defaulted into safe, low-cost investment options. In Illinois, for example, the default investment option must be either a target-date fund or a secure return fund, and administrative fees may not exceed 0.75% of total assets.
Another benefit of the state-sponsored plans will be to allow more workers to benefit from the Saver’s Credit, a federal tax credit that goes to low- and moderate-income Americans who contribute to a retirement account. Under this credit, savers are eligible to receive up to $1,000 in what’s essentially a savings match. The National Institute on Retirement Security and the Aspen Institute estimates that nearly five million people living in the Secure Choice states could become eligible for the credit as a result of being enrolled in their state’s new plan. And if Congress ever decides to make the Saver’s Credit refundable, a move many policy experts and advocates endorse, the credit’s reach – and boost to savings – would be even larger.
State-sponsored savings plans are not without their opponents. Several financial industry associations are strongly opposed, arguing that current products can be tweaked to reach underserved markets without state involvement. But the consistently limited access that workers have had to workplace retirement plans over the last thirty years – never reaching more than 62% of the private sector workforce – belies this critique. Some small business owners are also resisting the requirement to enroll their workers, claiming it is an undue burden. But in fact employer responsibility is limited to setting up the payroll deduction, which is a simple task for those with electronic payroll systems. Employers are spared the legal or administrative burdens that come with setting up a typical retirement plan. Moreover, the few businesses that don’t use automated systems can – and will – be exempted. In Maryland, for example, the program only applies to firms that have been in business for at least the last two years and that use a payroll system or service to pay their workers.
The first of the Secure Choice plans – in Illinois and Oregon – will begin enrolling participants over the next two years, and their progress will no doubt be eagerly monitored by other states and the federal government.
The success of these efforts carries a potential dual prize: the ability of millions of hard-working Americans to save in their own retirement accounts for the very first time, and a potentially valuable model for how government can help solve the retirement crisis.