Will State Auto-IRA Programs Become the Norm?

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.

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