It’s no great revelation that most Americans are not saving enough for retirement. The problem is getting the average American to do something about it.
As producers are well aware, the typical American consumer does not exactly behave proactively when it comes to making important decisions about purchasing life insurance, long-term care insurance, disability insurance or saving for retirement. They are more likely to actively research the better deal between cable and satellite TV.
We know we’re approaching the precipice of a major retirement funding crisis, as tens of millions of aging Americans will have to postpone retirement – if they can afford to ever retire at all. Or they live in a dream world where “things will all work out.” Recent statistics in The Wall Street Journal reported that half of all U.S. families currently have no retirement savings whatsoever, and among those who do have retirement savings, less than half of those people have saved even $25,000. And the average annual Social Security payout is about $11,000.
Certainly there’s no easy fix, and a number of effective initiatives would need to be implemented to minimize the widespread impact of the impending crisis.
Enter the Automatic IRA Act of 2010, which was formally proposed in Congress last Friday by Sen. Jeff Bingaman, D-N.M. Under provisions of the bill, employers that do not offer a retirement plan and have more than 10 employees would be required to offer an automatic IRA plan through payroll deductions. Employers would not contribute anything to the accounts, but would receive a $250 tax credit in each of the first two years of the plan. Employees would be allowed to opt out of the program, but enrollment would be the default option.
If an employee relies on the default option, 3% of each paycheck would be automatically withdrawn into a Roth IRA. The Treasury Department would develop a Web site to list approved providers, and employees would also have the option to select their own IRA provider. If the employer does not want to select a provider, the employer would be assigned a provider – vetted by the Treasury Department – at random.
The “Auto-IRA” idea is being pushed by the Obama administration and congressional Democrats, and has the support of AARP. Some opponents worry the program would raise employer costs, particularly for small businesses (a claim disputed by Treasury Department senior benefits official J. Mark Iwry, one of the original developers of the Auto-IRA concept) while others worry that participants will not receive adequate fiduciary protection.
If the Auto IRA program becomes a reality, estimates say that 78 million people – about half of all working Americans – would be eligible. Sen. Bingaman said in his speech introducing the bill that the plan could increase personal savings by as much as $15 billion annually, and called on the Senate to include this bill in legislation extending the 2001 and 2003 tax cuts.
Last week more than 60 of you graciously took the time to submit your comments to my blog about the controversy surrounding retained asset accounts creating a very interesting forum on the subject. So I’ll ask again for your thoughts on the Auto IRA.
More blog entries from Brian Anderson.