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Retirement Planning > Saving for Retirement

Will State Auto-IRA Programs Become the Norm?

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What You Need to Know

  • As of June, 19 states have implemented automated retirement savings programs for private-sector workers.
  • A growing body of evidence shows that the development of these programs is already having a positive effect.
  • Even workers who don't start saving until later in their careers can benefit by delaying the age at which they claim Social Security.

The list of states that are facilitating automated retirement savings programs for private sector workers continues to grow at a steady rate, with four significant actions already undertaken in 2023 and more on the horizon.

Specifically, as of late June 2023, laws creating three entirely new programs have been passed by the legislatures in Minnesota, Missouri and Nevada, which brings the total number of state-based retirement savings programs for private-sector workers to 19.

In addition, the state government in Vermont has changed its program from a voluntary multiple employer plan approach to an automatic enrollment individual retirement account system. Minnesota’s and Nevada’s new programs are also based on the auto-IRA approach, while Missouri is launching a voluntary multiple employer plan program.

Experts convened Tuesday for a panel discussion by the Georgetown University Center for Retirement Initiatives, noting that various states also are now actively exploring interstate partnerships, which they say can only help to make these programs even more efficient.

According to the panel, which included lawmakers and treasury officials from the aforementioned states that have taken action this year, the expansion of state-facilitated retirement savings programs coincides with the emergence of a growing body of evidence showing that the development of these programs is already having a positive effect on workers and their ability to save for retirement.

For example, according to a new paper published by the National Bureau of Economic Research, “How Do Firms Respond to State Retirement Plan Mandates?” auto-IRA programs and the adoption of other pro-savings policies — such as outright mandates for mid-sized and large employers to offer their own retirement plans — meaningfully boosts savings rates among private-sector workers.

Growing Evidence of Success

According to the NBER paper, these policies collectively increase the probability that any given individual in a state works for a company with a retirement plan by roughly 3%, while the probability that the individual participates in some kind of savings arrangement jumps by 33%.

As the Georgetown panel emphasized, this is all good news for the U.S. and its aging workforce, because the nation now appears to be heading for more of a retirement “catastrophe” than a retirement “crisis.”

To underscore the point, the experts highlighted one recent analysis from Pew Charitable Trusts that warns the collective cost to states and the federal government stemming from workers’ lack of retirement savings could amount to $1.3 trillion in the coming decades.

This whopping price tag comes from the fact that older Americans without sufficient savings and income from Social Security to meet their basic needs will have to rely on already-strained government safety net programs.

Lawmakers and state treasury officials agreed that such an outcome is both unacceptable and addressable via bold policy actions at the state and the federal levels, and they applauded Congress for its passage of both the original Setting Every Community Up for Retirement Enhancement (Secure) Act of 2019 and the follow-up passage of the Secure 2.0 package late last year.

According to the panel, even a small amount of regular contributions to retirement savings, if allowed to compound over the course of a typical working career, can close much of a given individual’s projected income shortfall, thereby reducing the burden on government safety net programs.

Sizing Up the Problem

The proportion of U.S. private sector workers with access to employer-sponsored payroll deduction retirement savings plans or pensions has remained essentially stagnant for decades, according to Georgetown University data discussed by the panel.

In 1987, about 51% of private sector workers ages 21 to 64 had access to a retirement savings or pension plan through their employer.

The share of the workforce covered by plans rose to 59% by 2000, according to the Georgetown data, but the figure then gradually fell back to 51% as of 2013, and it has only grown marginally since then. Today, some 55 million U.S. wage and salary workers between the ages of 18 and 64 lack access to an employer-related payroll deduction plan.

Workers without such a plan could, in theory, use a private-market IRA to save, but few actually do, especially among those of modest means. For instance, only about one worker in 20 with yearly earnings between $30,000 and $50,000 and no access to a payroll deduction plan contributes to an IRA consistently, according to data published by the Employee Benefit Research Institute.

What is particularly troubling about the data, the panel emphasized, is that the lack of access to savings opportunities is even more acute for women and people of color. As such, they said, state-based programs are likely to be an important part of the effort to close the race- and gender-based retirement savings and general wealth gap plaguing the U.S. workforce.

The Impressive Upside

According to the panel, early data from the states with established auto-IRA programs shows that workers swept into these programs put away about $100 every month on average.

This may sound like a modest figure, but if one starts to save at age 25 and saves for 40 years at this rate, that amounts to about $110,000 of potential contributions. When one considers the power of compound interest and investment returns, a saver could generate as much as $250,000 in total savings throughout their career.

There is even a big potential benefit for older workers who don’t get started saving until fairly late in the game, the panel suggested. Even if an older work can only generate, say, $20,000 or $30,000 in savings, that amount could be crucial in helping them to delay the claiming of Social Security.

As planning experts will know, even delaying Social Security claiming age by one year significantly boosts the benefit, and the longer one is able to defer (through age 70), the greater their lifetime benefit will be.

Credit: Adobe Stock 


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