Retirement Security for All

Georgetown-Brookings project works toward retirement security

The Retirement Security Project, a joint undertaking of Georgetown University and the Brookings Institution, has set itself the goal of taking retirement savings in America to the next frontier, which means enabling a greater number of American workers--especially those in the middle- and lower-income brackets--to benefit from the security that 401(k) plans, IRAs, and other retirement accounts can offer.

It is an ambitious goal, but necessary, say David John and Mark Iwry, principals of the Project.

"Last year's Pension Protection Act (PPA) was mainly directed toward employers and employees that have a retirement plan," says Iwry, who between 1995 and 2001 served as benefits tax counsel to the Treasury Department. "But about 75 million working Americans--half the workforce--have no plan at all. Our aim is therefore to address the needs of the 'other half,' those the PPA does not help."

"The portion of the American workforce that has worked for a company with a retirement plan has remained constant for decades," adds John, who is senior research fellow at the Heritage Foundation, a Washington-based conservative think tank. "We want to break through that barrier and get more companies to provide plans, and to get a greater number of employees to avail themselves of those plans."

Despite a more widespread participation in company retirement plans, it is still a challenge to get companies that don't have these yet to put them in place, says Iwry. To that end, one of the key undertakings of the Retirement Security Project is the Automatic IRA. This proposal calls upon employers to allow employees to contribute to their own IRAs by regular automatic payroll deposit. Employees would deduct and transfer a portion of their wages to their own IRAs, thereby making it much easier for individuals who don't have a company retirement plan to have at least some retirement savings.

The idea of the Automatic IRA has been met with great enthusiasm in the retirement finance space, and, both Democrats and Republicans have lauded it, Iwry says. Indeed, a bill entitled "The Automatic IRA Act of 2007," which was introduced in the Senate on April 18 (a companion bill is expected to soon be introduced in the House of Representatives) would give tens of millions of Americans this more effective employment-based method of saving for retirement. But beyond this, the automatic IRA is also likely to pave the way for more companies to sponsor retirement plans, says Iwry.

"If employers provide access to Automatic IRAs, they will see it actually makes sense to sponsor retirement plans for their employees, which allow much larger tax-favored contributions as well as employer matching," he says. "We're hoping, therefore, that the Automatic IRA will whet the savings appetites of many workers and companies, leading them to adopt 401(k) or other retirement plans."

For those companies that already have retirement plans in place, the Project works to foster higher adoption rates of automatic features. IRS rulings issued under Iwry's supervision while at the Treasury Department in the 1990s and recent legislation have encouraged the rapid spread of automatic enrollment, automatic investment, and increased participation, says Iwry. In fact, many companies are moving toward "second-generation automatic 401(k)s," he says, which go beyond a minimal level of auto-enrollment of new hires into principal-preserving investments, so that the plan also automatically enrolls existing employees who hadn't been participating at higher and increasing contribution rates, with asset-allocated investments. Extending these features further, particularly among small- and medium-sized businesses, is a key goal of the Project, Iwry says.

But the Retirement Security Project's overriding aim is to increase the number of people who can save for their retirement. This means providing financial incentives to people to encourage them to save, and also getting employers to offer savings programs that are structured in an easy-to-understand way, John says. Middle- to lower-income workers typically do not have extra money to put away for savings--they are likely to live up to the edge of their paycheck, and so there must be some incentives to encourage them to save, he says. The Retirement Security Project is therefore also working on trying to expand the Saver's Credit, which is targeted to promoting tax-qualified retirement savings for moderate- and lower-income workers. Established in 2001 and made permanent in the PPA, the Retirement Security Project is looking at ways in which the Saver's Credit can be strengthened, either by making the credit refundable, making it permanent, or expanding it to provide larger incentives for middle-class households.

"Our aim is to ensure that an average worker who is not a financial wizard can have a favorable outcome in retirement," John says. The Retirement Security Project publishes research papers on many topics and is in constant dialogue with various parties about its initiatives. The Project was launched about two and a half years ago under the directorship of Peter Orszag, who now heads up the Congressional Budget Office. William Gale, a senior fellow at the Brookings Institution, is the Project's current director.

The Retirement Security Project is financed by the Pew Charitable Trusts. Its Web site is www.retirementsecurityproject.org.

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