State-sponsored retirement savings programs could be a lifeline for American workers


For millions of Americans, an unexpected expense or sudden loss of income can have a serious impact on their household balance sheet. In fact, each year more than half of American households experience at least one financial shock, such as a large medical bill, and many are unable to cover these expenses. These financial shocks can be even more difficult for low-income families and households of color, who often have fewer resources to protect against financial adversity. Some people withdraw money from their retirement savings to make up the difference.

Retirement savings, of course, aren’t just important as a last-resort source of income to pay for unexpected expenses: their primary purpose is to help employees prepare for retirement. Yet millions of workers, and at least a third of private sector employees, do not even have access to workplace pensions. An innovative way to solve this problem: the growing number of state-facilitated retirement savings programs.

These programs, known as auto-IRAs, allow employees to automatically contribute their own earnings to an Individual Retirement Account (IRA) through voluntary payroll deductions and can be a vital lifeline for workers. They can also ease a state’s financial burden, which ultimately benefits taxpayers.

Consider Pennsylvania. A 2018 study found that insufficient employee retirement savings led every county in the Keystone State to experience increased public assistance costs, reduced tax revenue, decreased household spending, and lower employment. The price to be paid by Pennsylvania taxpayers for these savings shortfalls? Approximately $15.7 billion over 15 years.

Now, Pennsylvania’s forward-thinking policymakers are working bipartisanly to adopt Keystone Saves, a state-facilitated retirement savings program. If passed, Keystone Saves would give more than 2 million private sector workers access to a self-IRA plan. Participants could withdraw their voluntary contributions at any time, without tax or penalty, which is particularly useful in an emergency.

The cost to employers and small businesses of Keystone Saves? Zero. Employers would provide their employees with this retirement program – free of charge and out-of-pocket – by implementing a simple payroll deduction, a major benefit for companies in a tightening economy and labor market. And the benefit to Pennsylvania taxpayers? Keystone Saves would help reduce the state’s tax burden by $15.7 billion.

Pennsylvania is not alone. Hawaii also plans to implement its own program to prevent $1.7 billion in safety net spending for residents 65 and older over the next 20 years. This new approach to helping private sector workers save for retirement is gaining momentum across the country: Ten states – California, Colorado, Connecticut, Illinois, Maine, Maryland, New Jersey, New York, Oregon and Virginia – have already adopted similar programs. And employers in states that don’t yet offer retirement benefits are embracing these plans, signing up as soon as they get the chance.

Why the request? Research by The Pew Charitable Trusts reveals that many employers want to offer retirement benefits to their employees, but have hesitated due to high start-up costs and limited administrative capacity. Some who hailed the advent of self-IRAs in their state said they saw the offer of retirement benefits as a way to attract and retain workers, and 67% of those who supported self-IRAs simply stated that such a program would help my employees.

Data from Pew shows that these programs are popular with employers, even in states where they have not yet been introduced. For example, in 2017, Pew surveyed small business owners across the country, asking their thoughts on the idea of ​​a self-IRA program. Overall, 87% of those who did not have their own plan were somewhat or strongly supportive of this type of initiative, with 27% saying they would strongly agree. This is a positive signal for the decision-makers who weigh in on such initiatives.

Americans want to build a secure retirement. But this is often not possible if they work for an employer who is unable to offer a pension plan. State-facilitated retirement programs — which states can design to best meet the needs of workers, employers, and taxpayers — are an innovative and practical solution to the challenges employers, especially small businesses, face in this tightening economy, while reducing workers’ reliance on government-funded programs. Most importantly, these programs will help workers with the least room for error weather financial shocks – low-income workers and workers of color.

John Scott is the Director of The Pew Charitable Trusts Retirement Savings Project.


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