Universal Retirement Coverage Could Help 40 Million Private Sector Workers

The Georgetown University Center for Retirement Initiatives, with the assistance of the Berggruen Institute and ESI Consultant Solutions, has issued a new report, “What Are the Potential Benefits of Universal Access to Retirement Savings?”

The center says there are an estimated 57 million private sector workers, or 46% of the population working in the private sector, who do not have access to a retirement plan through their workplace. This is particularly true for workers at small businesses and among lower-income workers, younger workers, minorities and women.

Many other countries have mandatory universal retirement plan programs, the center says, adding that if American workers were automatically enrolled into such plans, more of them would be able to save for retirement. “At the same time, the economy and gross domestic profit [GDP] benefit from stronger savings, investment and economic growth, and the nation benefits from a reduction in fiscal pressures to support an aging population lacking sufficient retirement income,” the report says.

The center notes that in the past decade, several bills aimed at creating universal retirement coverage have been introduced in Congress, to no avail. “In the absence of national action, some states have started to adopt innovative public-private partnership models to expand access to their workers. A few of these new state programs have adopted and launched an auto-IRA [individual retirement account] model, which requires employers that do not already offer their workers a retirement savings plan to automatically enroll their workers in the state program to begin to save unless the worker opts out. These state programs are currently providing many employers and their employees with new ways to save, and the number of new accounts and assets is now growing at a steady pace.”

However, the center says a national approach is still needed  to “substantially increase participation and savings levels, particularly among low- and middle-income workers.”

Of course, the center says, the ability to boost savings will be affected by the design of the savings option, including whether it’s an IRA and/or 401(k) structure; the employers that are required to participate, since, in some cases, the smallest companies are not required to participate; and the default levels of employee contributions and any employer contributions.

An auto-IRA model with no employer threshold, or what the center calls a baseline auto-IRA, is projected to increase participation by 40 million workers by the year 2040.

However, if companies with fewer than 10 employees or that have been in existence for less than two years were exempted from the baseline auto-IRA, this would increase the participation by only 29 million, according to the center.

Should a 401(k) model be used, it says, it would produce higher average contributions and savings relative to an IRA model. If discretionary employer contributions were included, they, too, would boost savings levels. However, if the plan required contributions from employers, the center says this would inevitably slow wage growth and reduce savings levels. Thus, the center says the best approach is the baseline auto-IRA.

“The baseline auto-IRA that covers all employers has the highest overall level of savings,” the center says. “While per-participant savings are higher under alternative approaches, the expansion of coverage anticipated under the baseline auto-IRA scenario with no employer threshold leads to the largest increase in overall savings among the policy options model. … An IRA model encourages a higher level of participation by presenting the lowest barriers to participation for businesses and savers.”

Under the baseline auto-IRA model, the center estimates that participants would contribute $130 billion a year to their plans by 2040—adding up to a cumulative $1.89 trillion over the analysis period.