February 18, 2016


The Policy in the New Federal Budget Proposal That Would Make Saving for Retirement Automatic : Congress and the White House are once again engaged in their annual budgetary dance, but there's one part of the proposal that should make them speed things up. (REID CRAMER, 2/17/16, Pacific Standard)

A recent study from the Pew Charitable Trusts reports that one in three American families has no savings on hand and this lack of savings tops the list of their financial worries. Pervasive economic insecurity partly explains the disgruntled electorate both parties are encountering in their respective primary campaigns. For those families that do save, the place where it happens is often at the workplace. Unfortunately, roughly half of workers employed by small firms (with fewer than 50 employees) don't have access to workplace retirement savings plans. That's terrible benefits coverage, especially in a 401(k) policy world in which we expect workers to be able to supplement their Social Security benefits. It is hard to argue that this isn't a problem worth solving.

The AutoIRA can be--and should be--a solution attractive to both sides of the partisan divide. We already know that workers without access to such plans rarely save--fewer than 10 percent of workers without access to a workplace plan contribute on their own, and employers have not adequately filled the gap. Yet with the AutoIRA, the "ask" for employers is pretty light; they just need to click a few extra keys when setting up their payroll. Employers don't need to run the plans and they don't have any extra fiduciary responsibility. Even if they don't raise wages, this is something they can do which will help their employees financially over the long term.

How does it work? Implementation of the AutoIRA mostly hinges on a mechanism to make deposits to a third-party provider who can recoup administrative costs through modest fees. And this year the administration is proposing to include a tax credit which employers can use to offset the small costs they might incur to modify their payroll systems. Another advantage of this approach is that it moves us toward a system of portable benefits, which will allow workers--even those working part-time and for multiple employers--to access benefits and protections regardless of where they work or how they earn their income.

This follows up on the administration's new savings option, called a myRA (my retirement account), which was rolled out in the fall and did not require congressional approval. With a myRA, a person can access a simple, safe, low-cost, and interest earning account that they can use flexibly under current Roth IRA rules. It allows for tax-free earnings for qualified uses of homeownership, education, and retirement as well as the ability to flexibly withdraw deposits without penalty, but most notably it carries an interest rate that is almost 10 times the average savings account. The myRA policy fills an important gap in providing access to a savings vehicle many workers currently lack. But because it is not automatic like the AutoIRA, it will have a much lower take-up rate.

In the absence of federal action, states have stepped in. 

Posted by at February 18, 2016 12:48 PM


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