Retirement Security Initiatives in the States
Most Americans are not saving enough for retirement. The problem is especially severe among small-business employees, low-income workers and communities of color. On the brink of a national retirement security crisis, state lawmakers are stepping up with a spectrum of innovative solutions.
Retirement planning experts have traditionally used the analogy of a three-legged stool to describe the common sources of retirement income: Social Security, employer-provided pensions and individual savings. But the stool has grown wobbly for many workers, particularly in the private sector. For one thing, fewer employers offer traditional pensions, which puts the onus on workers to save more themselves. Another issue is changing demographics—people are simply living longer and need to save more money as a result. A third concern: Just how secure is Social Security?
As state officials stare down the prospect of mounting costs if their citizens retire into poverty, they’re looking carefully at how to boost retirement savings. Should they create and facilitate new retirement savings programs for private sector workers or encourage participation in existing plans? One important consideration is how to take full advantage of the options the private financial services market already supplies. It’s a balancing act as legislators try to promote employee savings, limit burdens for employers and manage legal and financial risks for their states.
The Scope of a Looming Crisis
According to the AARP, half of American households risk financial insecurity in retirement, leaving them unable to afford basics such as food, medicine and utilities. Many who have remained solidly middle class throughout their working lives may face financial hardship in their senior years.
A new research report finds that the retirement savings levels of working-age Americans remain deeply inadequate despite economic recovery since the Great Recession. An analysis of U.S. Census Bureau data reveals that the median retirement account balance among all working individuals is $0. The data also indicates that 57 percent (more than 100 million) of working-age individuals do not own any retirement account assets in an employer-sponsored 401(k)-type plan, individual account or pension. That leaves Social Security as their main or only source of retirement income. Questions about its long-term solvency aside, Social Security was never designed to serve as a retiree’s sole source of income.
Numerous factors are driving the retirement security crisis, from shifting demographics and structural changes in the American workforce to limited financial literacy.
While retirement ages tick up slowly, they are not keeping pace with increasing life expectancies. As a result, Americans have to finance retirement over a longer period of time. They may invest too conservatively, yielding insufficient returns to guarantee a comfortable retirement. Likewise, consumer debt, large or unanticipated expenses and inflation can all threaten long-term savings. Few workers are sophisticated financial experts; indeed, many lack basic knowledge about personal finance. Even the most determined savers may find the complexities of today’s financial markets difficult to navigate.
Workers are 15 times more likely to save if they have access to a payroll deduction savings plan through their employers. But 68 million Americans don’t have access to a retirement savings program at work, the U.S. Department of Labor estimated in 2015. The likelihood of having a workplace retirement plan varies considerably by geography and employer size, not to mention worker earnings, education, race and ethnicity. Those with lower rates of access to on-the-job savings include small-business employees; part-time, temporary and seasonal employees; members of minority groups; and people with low to moderate incomes. Offering such plans may carry costs or burdens that small employers, in particular, are reluctant or unable to bear.
State, local and federal policymakers want to ensure that, after a lifetime of hard work, retirees can maintain a dignified standard of living. It's also going to cost taxpayers down the road if people reach old age without sufficient resources.
States Expand Access to Retirement Savings for Small Business Employees and Others
Since 2012, 40 states have studied proposals for state-facilitated savings programs or considered or adopted legislation to create them. Ten states have now enacted legislation to expand access to retirement savings for non-governmental workers.
California, Connecticut, Illinois, Maryland and Oregon have all adopted auto IRA models. These state-facilitated retirement savings programs feature IRAs that receive automatic deposits from workers’ paychecks. These “Secure Choice” programs, as they’re sometimes known, require employers of a certain size to offer their employees a way to save for retirement at work. Employers who don’t want to sponsor their own retirement savings plans can use the state IRA. It is voluntary for workers, who decide how much to put away and how to invest it. Employers don’t contribute. Secure Choice programs are run via public-private partnership, and employee funds are pooled and professionally invested by the financial industry. New York adopted a payroll deduction IRA program in 2018, which will be voluntary for both employers and employees.
New Jersey and Washington have adopted “marketplace” arrangements, where small businesses and individuals can comparison-shop for savings plans from financial services providers. These online clearinghouses are voluntary for employers and employees.
Vermont and Massachusetts have adopted Multiple Employer Plans, which involve aggregating employers who elect to participate to offer a 401(k)-style retirement plan. This alternative allows small businesses to jointly offer plans and is subject to ERISA regulation, but can permit higher levels of savings and employer contributions. The Massachusetts arrangement is limited to nonprofit employers with 20 employees or less.
Oregon leads the group in implementation, with its OregonSaves initiative beginning a pilot in 2017 and rolling out in phases over the course of 2018, starting with larger employers. New York adopted a Secure Choice program in its budget in the spring of 2018 that will be voluntary for both employers and employees. Vermont is the most recent adopter of an innovative Multiple Employer Plan (MEP) arrangement.
The various plan structures and features have tradeoffs. A voluntary marketplace, for example, is an attractive option in part because it capitalizes on existing retirement plan products and services and could be less disruptive for providers. But it may not yield enough participation to generate significant increases in coverage to make the plan self-sustaining.
Policymakers face a host of tough questions. What is the best way to reach those on the financial fringes—low-income, minority or gig-economy workers? How can states encourage adequate retirement savings without demanding too much of cash-strapped workers, who have little set aside for emergencies. Could employers drop existing plans to send workers into state-sponsored alternatives? Will employees save less as a result? Will small account balances make plan administration inefficient? What is the right type and number of investment options? How many is too many when it comes to ease of use? And what is the appropriate state role for enhancing financial literacy and general investment education?