A nationwide retirement program combined with an improved savings credit would really help lower paid workers save for retirement.
The most amazing and wonderful thing has happened. The House Ways and Means Committee included Auto-IRAs in the $ 3.5 trillion health, education and climate bill. Who knows what will end up being enacted, but this addition is a big step on the road to ensuring that all Americans are covered by a workplace pension plan.
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Right now, at any given time, only about half of private sector workers are covered by some sort of employer-sponsored pension plan. This lack of coverage has three implications.
First, a substantial proportion of households – around a third – find themselves without any cover during their working life and must rely exclusively on social security in retirement.
Second, with a median employment tenure of around four years, many employees move in and out of coverage so they end up with inadequate 401 (k) balances.
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Third, households do not have financial reserves to cover emergency expenses.
Since most people without coverage work for small employers, policymakers have tried for decades to solve the problem by introducing simplified pension plans. But these initiatives have not moved the needle. And while the Obama administration has initially Automatic IRAs offered in 2009 to cover the overdraft, Congress has to date adopted no federal legislation.
In the absence of federal action to close the coverage gap, a number of states have passed legislation to implement mandatory self-IRA programs, which extend coverage by requiring employers who don’t no retirement plan offer to automatically enroll their workers in an individual retirement account. (IRA). Auto-IRA programs are now operational in California, Illinois, and Oregon, and these three states (along with others, like Connecticut, Maryland, and Colorado, which have promulgated the legislation and are preparing to launch it) adopted the same basic program design.
As much as I applaud the state’s efforts to launch its own programs, it’s a stupid way to run a railroad. All Americans need an extra layer of protection on top of Social Security. A national problem calls for a federal solution.
The proposed federal program would require employers without a plan to deduct at least 6% of their employees’ paychecks and deposit the funds into an IRA. Employees could opt out or change their savings rate. The proposal would also expand the use of the savings credit, so that the government would deposit up to $ 500 in matching funds in the participant’s account.
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The program, which would take effect on January 1, 2023, would be limited to employers with more than five employees and those who have been in business for two years or more. States that already have or are developing retirement savings plans could continue to manage their own programs. Employers who facilitate self-IRAs under state or federal programs would be eligible for a tax credit of up to $ 500 per year for up to four years. The penalty for non-compliance would be $ 10 per day per employee for a period of up to three months.
This bill would represent an important step forward in extending coverage and by combining Auto-IRAs with a refundable savings loan, would dramatically improve retirement savings for lower-paid workers. I really hope it will pass.