The new 2013 budget unveiled by President Obama on Monday again contains the Automatic IRA, which was developed by Brookings' Retirement Security Project in conjunction with The Heritage Foundation. This year's version again includes an important change that will also encourage more employers to offer a 401(k) account to their workers. However, important changes to the Saver's Credit, which had been in previous budgets failed to make it this year.

Nearly half of American workers - an estimated 78 million- currently have no employer-sponsored retirement savings plan. The Automatic IRA is a simple, easy to administer and understand system that is designed to meet the needs of small businesses and their employees. Employers facilitate employee savings without having to sponsor a 401(k)-type plan, make matching contributions or meet complex eligibility rules. Employees are enrolled automatically into an IRA with a simplified system of investment choices and a set automatic savings level. However, they retain complete control over all aspects of the account including how much to save, which investment choice to use, or even to opt out completely. Automatic IRAs also offer savings options for the self-employed, for independent contractors, as well as providing those who are changing jobs the ability to continue their retirement savings.

The new 2013 budget would also double the size of the tax credit that employers receive in return for starting a new 401(k) plan from $500 annually for three years to $1,000 annually for the same period. This increase will ensure that the credit covers more of an employer's costs, and should encourage more employers to offer such a plan. This is a very good move, but the credit could be still further expanded to $1,500 for three years as will be proposed by a new House bill coming from Rep. Richard Neal. As Congress examines the proposal, it will have the opportunity to also expand the smaller credit that would be offered to employers that start an Automatic IRA to ensure that they are fully reimbursed for all expenses connected with starting and operating such an account for their workers.

A disappointing development is the failure to again include proposals to expand and improve the Saver's Credit by making it fully refundable. The Saver's Credit is an incentive for middle-and lower-income taxpayers to save in 401(k)-type accounts or IRAs. Retirement Security Project research found that more than 69 million taxpayers had income that was low enough for them to be eligible for the Saver's Credit in 2007. However, nearly 45 million of these filers actually failed to qualify for the credit because they had no federal tax liability. If the Saver's Credit was made refundable as RSP has proposed and deposited directly into the account as a match for savings, those 45 million taxpayers could have taken advantage of the program and had significantly higher retirement savings.

Editor's Note: this article originally appeared in the 2012 Print Version of AARP: The Journal.

Using one platform to offer a variety of services

Known in the UK under the term “corporate platform” to indicate that it expands options available on the employer’s benefit platform, the development allows employees to use the employer’s retirement savings mechanism to save and invest for additional nonretirement purposes. When the corporate platform is fully implemented, employees will be able to man­age almost all of their investments and savings plans from one location, thus giving them a con­solidated view of their entire financial status. If carried to its full potential, the expanded saving platform will allow employees to shop for sav­ings products, among options that are available on the platform, instead of having to seek them out from individual suppliers—a search that often takes up work hours. Of even greater value, it gives employees one source to go to for indi­vidualized advice or financial literacy training.

The enhancement has special significance in the UK, where by fall 2012, the larger employers that don’t offer any other type of pension or retirement savings plan, must begin to automatically enroll their employees into basic retirement savings accounts. This requirement is causing a great deal of discussion about the future role of employer-provided benefits, as well as recon­sideration of the fees and services included in a traditional package. The platform enhancements allow an employer to differentiate its employee benefit package from the required basic account structure. It also gives younger employees a benefit of more immediate value, than they would have from a retirement savings account that they won’t access for a good 40 years.

Presentations from a variety of service providers at an October 2011 summit hosted by Pensions Insight, a UK trade journal, showed that the platform can be easily customized to meet the special needs of a specific workforce. Using a single computer interface, employees can select from a wide variety of savings and investment options that are appropriate for their income level and stage of life. Thus, an upper income manager who manages his or her own finances could see more sophisticated products, while an entry-level worker sees more basic sav­ings products. Live presentations by financial professionals who explain what is available on the computer platform add to the system’s value and increase its use.

A place to provide choice and to build financial literacy

The platform will have special value for moderate- and lower-income employees. While higher salaried employees may appreciate the opportunity to build their investments, the real value of the platform will be to enable moder­ate- and lower-income workers to find savings opportunities that they might otherwise miss because they don’t know where to go, are uncertain about what is a fair price, or for a variety of other reasons. Because employees tend to believe that services included on the corporate platform are implicitly endorsed by the employer, they usually have greater faith that the services are from legitimate providers at a fair price.

Employees at all levels can also use the site to receive guidance on individual products or basic financial literacy training. Individuals can choose from a range of options, from short videos on a specific topic by experts or fellow employees, to longer connected courses designed to meet the needs of specific age or income groups. Use is increased when employ­ees receive emails or text messages geared to birthdays or other life events, or generated after the employee visits a specific part of the website.

Understanding the value of peer evaluations to motivate others, some providers include a place where employees can post feedback about spe­cific products or savings choices. These postings help to guide other employees’ decisions and build the reputation of the platform as a source of unbiased information. The site can also include links to outside advisors who can answer specific questions, guide employees to another site for more information, or perform other services either online or over the telephone.

Differing age groups can be contacted and guided through different technologies. At the UK platform summit, David Harris, of Tor Financial Consulting, showed that younger employees preferred different communication methods than either older workers or the usual way employers provide information. However, the platform is able to use a wide variety of methods and is equally effective no matter which is used.

The platform’s value to international policy makers

Although the UK’s platform is intended as an enhancement to employer-provided benefits, it can also be used for a wide variety of policy goals, as the basic structure can be easily adapted to meet almost any nation’s specific tax and savings system. In the United States alone, policy experts have proposed dedicated savings accounts for nonretirement purposes ranging from unemployment benefits and retraining, home purchases, health care, and long-term health care coverage, to repaying student loans or building college balances for children or grandchildren. However, if all of these various accounts were established and funded, it is doubtful the employee would have any money left for food, clothing, and shelter.

Rather than having a host of specific savings programs, employees may be better served by more flexible accounts usable for a variety of purposes, as outside developments or chang­ing needs dictate. The platform concept would allow individuals to choose which purposes they need to save for and how much to save for each. Combined with targeted guidance or education, this structure could expose individuals to pos­sibilities they might not have considered before.

The structure is ideally suited to employment situations, but it could also be used by the self-employed or by consultants at sites aimed specifically at them and sponsored by trade associations, unions, or even government agen­cies. While their circumstances may preclude payroll deductions, the same products could be offered through direct debits to bank accounts.

The added value of nudge

The flexibility of the platform allows it to be used by employees with all levels of financial sophistication, but new participants would benefit from a variation on automatic enroll­ment that places certain amounts, in addition to the retirement savings amount, into a general savings account or similar vehicle. The automatic savings amounts deducted need not be large, and where the law allows, could vary according to employee age, with a larger proportion of the overall deduction going to nonretirement purpose for younger employees and to retirement for older ones.

As with automatic retirement enrollment, the employee would have the ability to vary amounts, divide the total among various accounts, and even stop all future contributions. However, automatic enrollment would offer workers direct experience with the nonretire­ment side of the platform. By varying enrollment in various accounts according to employees’ age, automatic enrollment could encourage them to consider saving for various purposes, such as a first home, college tuition for children, or additional health services.

Improving retirement security

Although the platform is applicable to a wide variety of other uses, its primary purpose is to build retirement security. Before retirement, the platform helps employees understand how to save, what they have, and how much more they need for a comfortable lifestyle. The other savings provide funds that can be used in the event of an emergency, thus helping to reduce leakage from retirement accounts in countries that allow early access to that money. At retire­ment, the platform helps individuals to see what other assets are available, and what loans or other liabilities must be factored in. In the UK, it is also being used to encourage individuals to use annuities and add them to their invest­ments. The UK experience can help to guide US policymakers in their efforts to increase the use of similar products.

The enhanced information and flexibility of the corporate platform should help individuals to better understand their finances and how to meet their goals. It moves retirement savings plans from a minor part of employees’ financial lives, to a central feature that has many more uses than just an event many years in the future. This promotes regular use of the platform, and a fuller understanding of what is necessary for a comfortable retirement.

Event Information

Australia's mandatory Superannuation Guarantee requires its citizens to save at least 9 percent of their income towards retirement. In many Asian nations, economic growth has spurred reexamination of pension systems to meet the needs of rapidly evolving societies. Would a mandatory savings plan be more effective than the current U.S. voluntary system? How have Asian nations have restructured their pension systems to deal with legacy costs? And what can Americans learn from the way Australia uses both employer and employee representatives to shape investment choices?

On September 17, the Retirement Security Project at Brookings and the AARP Public Policy Institute hosted a discussion of what the United States might learn from retirement savings systems in Australia and Asia. Opening speakers included Nick Sherry, who helped shape the Australian system as a cabinet minister and ran a Superannuation fund in the private sector, and Josef Pilger, an advisor on pension reform to both the Malaysian and Hong Kong governments and many industry providers. Steve Utkus, David Harris and Benjamin Harris, retirement experts from both the United States and the United Kingdom, considered how reforms in Australia and Asia can shape the American debate and whether this country should adopt key features from those foreign systems.

Audio

• Retirement Savings in Australia, Asia and Beyond: What are the Lessons for the United States?

Transcript

• Uncorrected Transcript (.pdf)

Event Materials

• 20130917_retirement_savings_transcript

In this year’s State of the Union Address, President Obama announced a new retirement savings account for workers whose employers do not offer any form of pension or savings plan. He also promoted the Automatic IRA, a retirement savings plan that originated at the Retirement Security Project and has been in the Administration’s budget for several years.

Only about half of workers has access to a retirement savings plan at work. Millions of Americans lack the ability to save at work via payroll deductions. And while these individuals could in theory save on their own in an IRA, the best estimate is that only about one in twenty eligible to contribute to an IRA actually do so on a regular basis.

To help solve this problem, the President announced the creation of My Retirement Account, or “MyRA.” Similar to the R-Bond discussed in a recent AARP Public Policy Institute paper written by William Gale, David John and Spencer Smith, MyRA would allow individuals to save in a government bond account similar to the one offered as an option to federal employees through the Thrift Savings Plan. The details are unclear (there’s a WhiteHouse fact sheet here), but MyRA would allow new savers and those with small balances to accumulate retirement savings without either having to pay administrative charges or face market risk. Employers would not administer the plan or have any fiduciary responsibilities related to the accounts. Importantly, too, contributions come from employees, not employers. The plan is meant to build off of existing institutions—payroll deduction, Roth IRAs, the G-fund in federal employees’ thrift saving accounts. And it is meant to supplement, not substitute for, 401(k) and other company-based retirement plans. It accomplishes the latter by only allowing contributions up to the IRA limit, by limiting investment choice, and by having people with more than a set balance move into a regular account.

This approach is a boon to those who can only afford small contributions to retirement accounts. Private sector funds often require minimum contributions that are out of reach of low-income savers or assess high fees to offset their costs.

The key questions are whether employers will participate and whether automatic enrollment (that is, a regular contribution on behalf of all employees who do not opt out) would be allowed for MyRA accounts. Research suggests that automatic enrollment would greatly boost the number of employees who participate.

President Obama also promoted the Automatic IRA, but that would require congressional action, something that has not happened so far. Because the Automatic IRA would require employers with more than 10 employees to offer retirement accounts, it would likely dramatically increase the number of workers who save for retirement. It would also give employees a greater choice of investment options and serve as a permanent retirement savings plan, rather than a starter account like MyRA.

With Tuesday night’s mention of both proposals, the president made retirement security a priority. Both proposals would allow workers to build economic security through their own efforts and promote the kind of values and self-reliance that both sides of the political spectrum find attractive.

Thank you for allowing me to testify before you today on the need to improve retirement savings opportunities for employees of private sector small businesses and ways to structure such an effort.

I am David John, a Senior Strategic Policy Advisor in AARP’s Public Policy Institute, AARP’s internal think tank. In addition, I am a Deputy Director of the Retirement Security Project at the Brookings Institution. Before I joined AARP last year, I was a Senior Research Fellow at the Heritage Foundation for almost 15 years.

My testimony this afternoon will focus on three areas: first, that there is a very real and growing retirement security problem in the United States; second, that the existing products and efforts are not resolving this problem; and third, that there are some approaches that Oregon could take that are compatible with existing law and would help future retirees to have a more comfortable retirement. These proposed actions would also help both your state and the country as a whole avoid the high costs of doing nothing. Let me be clear from the start that simply talking about increased education is not enough. This is a problem that will require action to improve.

The Problem Facing Us

Oregon and our nation face a serious problem if a large proportion of our workforce remains unable to save for retirement through an employer-related payroll deduction plan. This situation affects both those approaching retirement and those who are just starting their careers. However, older workers may have much higher access to defined benefit plans, and thus be much better off than younger employees who will have nothing to rely upon other than savings and Social Security.

Social Security is the foundation of retirement security both here and nationwide. In Oregon alone, its benefits keep hundreds of thousands out of poverty, but for most people, Social Security’s average benefit level of about $1,300 a month[1] does not provide enough for a comfortable retirement. That is about $15,600 a year. Economic security requires both Social Security benefits and sufficient additional savings to supplement them.

The lack of savings—and the opportunity to save at work through payroll deduction—is where the problem lies. Various industry groups and columnists have claimed that all is well, and that there really is not a problem. However, on close examination, there are holes in their figures, and they often focus on today’s retirees and those close to retirement, people who are much more likely to have a traditional defined benefit pension plan than younger workers who need to be saving now will have.

Even then, the numbers are not pretty. National data from the non-partisan Employee Benefit Research Institute (EBRI) show that in 2013, 51 percent of workers aged 45–54 had less than $25,000 in total savings and investments.[2] These are people between 10 and 20 years from retirement. Among workers aged 55 and above, those within 10 years of retirement, 43 percent had less than $25,000 in total savings and investments. These household savings numbers exclude home equity and defined benefit pensions (if any). Savings of that amount will not take an individual through one year of retirement, much less the 20 plus years that most healthy 65-year-olds are likely to experience.

Interestingly, the question in 2014 was revised to separate out those with access to an employer-sponsored retirement savings plan or pension and those without.[3] The answers showed once again the value of such a plan and the cost of not having one. About 62 percent of employees with access to a retirement saving plan through their employer had more than $25,000 saved, and 22 percent had $100,000 or more. However, 94 percent of those without access to such a plan had under $25,000 in total savings and investments, and only 3 percent had $100,000 or more.

Just to place these numbers in perspective, any amount of retirement savings is certainly better for a retiree than no retirement savings at all, but it takes a significant amount gradually built over a long period of time to build a significant level of financial security. Retirement savings of $100,000,[4] a sum that only 30 percent of the workers age 45–54 and only 42 percent of those age 55+ in the EBRI survey will equal or exceed, buys additional monthly income of $589 ($7,100 annually) for men at age 65 and $552 a month ($6,600 annually) for women at that age.[5] That would give men with $100,000 in retirement savings and average Social Security benefits a monthly retirement income of about $1,800 ($22,700 annually) and women with the same savings and Social Security benefits a monthly income of $1,750 ($22,200). Neither figure is likely to produce a comfortable retirement, and the EBRI data suggest that even that is out of reach for well over half of all Americans.

Admittedly, these are rough numbers, and many people will receive higher-than-average Social Security benefits. However, many other people will end up receiving much less than average. We know from other research that five groups are most likely to undersave: small business employees, lower-income individuals, women, younger workers, and members of minority groups. However, the problems are not limited to just these five groups. By the way, the recent column by Robert Samuelson[6] that repeats industry assurances that all is well cited the Investment Company Institute (ICI) as saying that the median value of IRA and 401(k) accounts held by people aged 55–64 is $100,000.[7] If that is true, then half of all those with such accounts would have annual retirement incomes equal to or less than the $22,000-plus level I just mentioned if they receive average Social Security benefits.

To make matters worse, when calculating the average amount in such accounts, researchers usually exclude those who have no account at all. In the case of the ICI data Samuelson cites, it appears that approximately 25 percent of households aged 55–64 did not have either a 401(k) or an IRA. They face an even worse future.

How can industry researchers present the existing retirement system as working very well? The answer is by using selective statistics. As an example, the EBRI study includes a question asking how many employees have saved for retirement.[8] The answer for 2013 is 66 percent of all workers and 74 percent of those aged 55 to 64. If one stopped there, the picture would look very good. It is only when one digs in deeper and asks how much they have saved that the true problem becomes evident. Similarly, other studies[9] that show no serious problem focus on today’s retirees, who had much more access to a traditional defined benefit pension than tomorrow’s retirees will. While many of today’s retirees are comfortable, their success does not imply that younger workers will automatically have the same future.

Access to Workplace Savings Is Essential

It is not that people do not want to save or cannot save. They do. The problem is often the lack of access to a convenient savings plan, and the inability to understand the many savings options that exist.

The existence of a workplace retirement savings plan is important. A recent Boston College Center for Retirement Research paper[10] found that access to a workplace retirement savings plan or pension is second only to having a job as the most important factor in assisting moderate- to low-income individuals to build retirement security. A wide variety of research shows that only about half of the U.S. workforce has the ability to save for retirement or has a pension at work. While there are a variety of data sources, each with its own strengths and weaknesses, another Boston College study[11] found that the coverage statistics are comparable between data sources when the same standards are applied. This included a study of IRS records[12] that appeared to show otherwise.

Regardless of the exact percentage point used to estimate coverage, the sad fact is that millions of Americans currently lack the ability to save for retirement at work through payroll deduction. This is especially true for small business employees. A recent U.S. Government Accountability Office (GAO) study[13] found that only about 14 percent (one in seven) of businesses with 100 or fewer employees offer their employees such a plan, and that between 51 percent and 71 percent of the roughly 42 million people who work for a small business lack the ability to save for retirement.

PPI research shows that about 642,000 Oregonians between the ages of 18 and 64—about 47.6 percent—are employed by a company that does not offer a pension or retirement savings plan.[14] The Oregon number is slightly better than the 51.1 percent national figure. That translates into 57 million Americans who are employed by the private sector and cannot save for retirement at work. These are not just younger employees who are new to the workforce. They include midcareer individuals who move from a large company that offered a retirement plan to a smaller company that does not. Often, these midcareer workers end up with a gap in their savings history that damages their ability to build economic security.

The Need for Better Coverage Is Widely Acknowledged

AARP is certainly not the only organization to recognize the need to increase the number of people able to save for retirement through a payroll deduction plan or account. Here, in Oregon, the Retirement in Reach Coalition[15] is a broad-based collection of business, professional, labor, and civic groups that have come together to help more Oregonians to save.

Nationally, a number of organizations, including many prominent research institutions, have written about the number of people who lack the ability to save for retirement and the need to improve coverage. Please note that these organizations do not necessarily support any specific solution or, indeed, any solution at all. However, all have written about either the need to expand coverage or how retirement security would be improved through greater coverage. As an example, Putnam Investments CEO Robert L. Reynolds has written about the need to improve the ability to save in a short paper titled “Three Steps that Could Shore up Retirement.”[16] The paper noted that “today—two years since the first boomers turned 65—the Employee Benefit Research Institute estimates that 49% of American workers are still ‘not confident at all’ or ‘not too confident’ about having enough money in retirement, 57% of pre-retirees have less than $25,000 saved for the future, and 32% of all workers do not have access to a retirement saving plan at work.”

The paper’s Step Two was: “Access to workplace savings for all workers. Any worker paying FICA taxes should have access to a retirement savings plan at work.”

Other organizations that have either issued papers or made statements about the number of people who lack an employer-sponsored retirement savings or pension plan include the following: the Brookings Institution’s Retirement Security Project,[17] the New America Foundation,[18] the Aspen Institute,[19] the U.S. Chamber of Commerce,[20] the Heritage Foundation,[21] and the Urban Institute.[22]

Again, this is not to imply that any of these organizations endorse any approach that Oregon might decide to take on retirement savings or that they support any part of my testimony. I mention them solely to show that concern about limited opportunities to save for retirement is widespread.

Those without an Employer-based Plan

In theory, everyone without an employer-based plan could save in an IRA, but EBRI research estimates that only about 1 out of 20 actually does so regularly.[23] In addition, payroll deduction is viewed as very important for encouraging retirement savings by people at every income level[24]. Overall, 61.5 percent of those surveyed in the EBRI 2011 Retirement Confidence Survey said that payroll deduction was very important for encouraging them to save for retirement, and another 27.8 percent said that it was somewhat important. Together, 89.3 percent said that it was either very or somewhat important. Further, the survey also found that a significant number of those currently saving would either stop or reduce their saving if payroll deduction was not available. It is much easier for people to save regularly if their savings are deducted from their paycheck before they receive it. Otherwise, the press of immediate bills tends to crowd out savings for longer-term goals.

Another factor in the extremely low savings rate among those who can use only an IRA is availability and trust. Especially in low-income neighborhoods, there are often no financial institutions nearby other than check-cashing outlets. Low-income individuals are often reluctant to go to financial outlets in other areas as they may feel that they are not welcome or that they will be treated poorly. Another drawback that applies to individuals of all income levels is the fear that they will be taken advantage of. Because financial professionals will know much more about the subject than their potential customers and may use unfamiliar terms, people have a very real fear that they will be talked into something that benefits the financier rather than the saver.

In addition, behavioral research shows that when people are faced with an important decision where they are uncertain what to do, they do nothing. This inertia factor is especially present in financial decisions like retirement savings.

These are reasons why an approach that focuses solely on additional education is extremely unlikely to succeed. Such an approach does nothing to increase the number of local financial outlets or opportunities to save. In addition, such financial literacy training often uses the same complex terms that potential savers find confusing. There is a value to training, but only in addition to expanded access to retirement savings.

On the other hand, when employees are presented with a plan at work that is structured in a way that provides guidance, they take the opportunity to save. This is true at all income levels. The Boston College study on why lower-income people are less likely to save that I mentioned earlier[25] showed very similar take-up rates between income levels. Eighty-six percent of those with incomes under 300 percent of the poverty line participated in a retirement savings system or pension if they were offered one and were eligible, compared to 95 percent of those with higher incomes.

Existing Products Are Not the Solution

Opponents of a state-sponsored retirement savings effort often cite the number and kind of existing products that are currently available to small businesses. A joint IRS/U.S. Department of Labor publication[26] lists seven types of retirement savings plans that are currently available. Unfortunately, most of them are both expensive and complicated or require the employer to make a contribution. Only one that is not widely available really enables small businesses to offer their employees an opportunity to save without saddling them with high costs or requiring savings.

Both the traditional 401(k) and the automatic enrollment 401(k) are excellent solutions for employers who are willing to offer them. However, the GAO found[27] that smaller employers can pay much higher administrative costs than those paid by larger employers. In addition, they can be complicated and require employers to play a more active role than many are willing to do.

Three other plans, the SEP IRA, the SIMPLE IRA, and the safe harbor 401(k), are either totally financed by employer contributions or require employers to make contributions. In addition, another of the seven options—a profit-sharing plan—is both completely financed with employer contributions and doesn’t require regular funding. While this plan does allow for profit sharing in good years, it does not necessarily include regular contributions that an individual can use to finance a retirement income.

The seventh type of retirement savings account available to small businesses is the payroll deduction IRA. It does not require (or allow) any employer contribution, or saddle the employer with complex regulatory burdens or impose significant costs. All the employer has to do is make it available to employees, deduct the contributions from their paychecks, and then send it to the financial provider. Unfortunately, it is not widely available or sold, as it offers financial services companies only limited income potential. Oregon can help to change that situation.

Another type of retirement savings tool, MyRA, was announced in President Obama’s January State of the Union speech. MyRA has some very positive features,[28] but it is not a solution or a substitute for anything Oregon might decide to do to help more people to save for retirement. A key weakness is that an individual can only have a maximum of $30,000 in MyRA. That is not nearly enough for any appreciable improvement in financial security. Second, MyRA savings will be deposited only in government bonds. While that investment is completely safe, it does not allow any real investment growth. An individual with just a MyRA is likely to get little more than the inflation-adjusted amount they contributed.

Why Oregon Should Be Concerned about This Problem

This is a state problem because doing nothing will mean higher state and local taxes for your children and grandchildren. Low-income retirees will need state and local services financed by state and local taxes for health care, housing, senior centers, and a host of other services. As Oregon ages and the baby boomers retire, the demand from this population for additional state government services will only grow. However, there is a simple, low-cost alternative to taxpayer-funded government services.

What Oregon Can Do to Help

The statute that created the Oregon Retirement Savings Task Force includes the limitation that you cannot recommend anything that might be contrary to the federal Employee Retirement Income Security Act (ERISA). Some would have you believe that this limits you to proposing additional employee education. This is not the case.

While ERISA as it is currently written does limit Oregon’s options, there are still avenues open to the state that would help to directly increase the number of Oregonians who can save for retirement at work. Oregon could still sponsor a payroll deduction IRA[29] that could be available at low cost to every resident of the state who is not currently covered by another retirement savings or pension plan. Such an account could be available through either state-managed investments or one or more private sector providers chosen and monitored by a state agency.

The state, the employer, or any private sector provider would not be responsible for the performance of the savings, and there would be no promised retirement benefits. All of the savings would come from and be owned exclusively by the individual saver. It would be up to the saver to monitor his or her eligibility and compliance with contributions rules. The small costs of such a program could be paid out of fees assessed on the accounts, or the start-up costs could be subsidized by the state.

A key fact is that the only liability faced by the employer would be to collect and forward individual contributions to the provider or agency on a timely basis. In theory, such contributions could be forwarded using the same schedule as the state currently uses to collect its income tax revenues. Federal law limits the role of the employer to encourage its employees to save for retirement through providing general information about the payroll deduction IRA program. The employer is also allowed to answer any questions about the program or to refer them to the IRA provider and provide any informational materials written by the IRA provider, as long as no endorsement by the employer is provided. At all times, the employer must remain neutral about the provider.

This is not a perfect plan, and it does not include features that many who support increased access to retirement savings would like to see. However, we believe that such a plan would be legal and, if combined with an educational program, could increase retirement savings among Oregonians. As federal law either changes or is reinterpreted, additional features and services could be added. This would be a starting place, not a final destination.

Automatic Enrollment

At this point, any Oregon plan would probably not require the use of automatic enrollment. However, as both state and federal law evolve, it would be helpful to explore encouraging that feature in any retirement savings plan. Under automatic enrollment, an employee continues to have total control over his or her retirement savings decisions, but unless the employee decides otherwise, he or she is enrolled and saves a set percentage of income in a specific investment choice. Automatic enrollment uses behavioral economics to make inertia work for the employee. These features work. The five groups mentioned earlier that are most likely to undersave (women, younger employees, small business employees, lower-income employees, and minority groups) all see their participation rates climb from very low levels to close to 90 percent.

And employees like automatic enrollment. A 2007 survey[30] of automatically enrolled workers showed that 95 percent found that it made saving easy. Eighty-five percent started to save earlier than they would have without it. Almost all of the employees who were automatically enrolled and remained in the plan said that they were satisfied with the process (97 percent) and were glad their company offered automatic enrollment (98 percent). Even those who were automatically enrolled and decided not to save liked the feature, with 90 percent being satisfied with the process and 79 percent being glad their company offered automatic enrollment.

Conclusion

Again, thank you for allowing me to testify today. Improving the ability to save for retirement through the increased availability of payroll deduction savings would address a real need both here in Oregon and nationwide. From a policy standpoint, an active program that increases the access that small business employees have to payroll deduction retirement savings plans would help the nearly 650,000 Oregonians who don’t currently have such an opportunity. It would enable them to build economic security through their own efforts.

BEST PRACTICES:

• A universally available payroll deduction IRA that is available to any Oregonian who currently lacks an employer-provided retirement savings or pension plan.
• A very short list of available investments that includes both a stable value fund and a balanced or target date fund. New savers would go into a previously designated investment unless they chose otherwise. Savers wishing other investments would be able to find other IRA accounts.
• Regular statements that clearly indicate investments, earnings, fees, and account balance. A number indicating the monthly retirement income that such a plan could produce if the current amount is saved would be very helpful.
• A coordinated statewide education program that explains the accounts and how to use them as well as the value of saving for retirement.
• Financial literacy classes in every school.

Event Information

Seven years ago, New Zealand recognized that if its people did not have sufficient assets as they aged, they would either face economic stress in retirement or place pressure on the government for costly additional benefits, and thus the KiwiSaver program was born. Designed to help citizens build retirement security, it guides individuals with limited financial experience while also giving them complete control of their finances. Benefits of this national automatic enrollment retirement savings plan include a $1,000 kick-start, employer contributions, and an annual tax credit. New Zealand Since its inception in July 2007, KiwiSaver has been deemed a great success, with over half of the eligible population as members, and over 70 percent of 18-24 year olds participating. Although membership continues to grow, it is at a slower rate than that seen in previous years.

Could the success of KiwiSaver mean that a similar program – at either the national or state level – might work here? On July 8^th, Diana Crossan, former Retirement Commissioner for New Zealand, will offer her insights into the KiwiSaver program and its impact on New Zealand saving, retirement security, and financial literacy. Ben Harris and David John, deputy directors of the Retirement Security Project at Brookings, will reflect on the role such a program might play in the U.S.

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Event Information

Longevity annuities—a financial innovation that provides protection against outliving your money late in life—have the potential to reshape the retirement security landscape. Typically bought at retirement, a longevity annuity offers a guaranteed stream of income beginning in ten or 20 years at a markedly lower cost than a conventional annuity that begins paying out immediately. Sales have grown rapidly and it will be even easier to purchase the annuities in the future given new Treasury regulations. While economists have touted the attractiveness of longevity annuities as a way to ensure the ability to maintain one’s living standards late in life, significant barriers to a robust market remain—including lack of consumer awareness, questions about product value, and employer concerns with taking on fiduciary responsibility by offering these products to their employees.

Can longevity annuities overcome these barriers to find widespread popularity among Americans retirees? On November 6, the Retirement Security Project hosted a panel of experts to discuss the potential for these products to contribute to the economic security of older Americans, in addition to policy reforms that could lead to greater take-up by retirement plan sponsors and consumers alike. Following a presentation by Katharine Abraham that laid out the issues, two panels of prominent experts added their insights on the promise and challenges of this burgeoning market.

Video

• Better Financial Security in Old-Age? The Promise of Longevity Annuities
• Understanding Longevity Annuities
• Eliminating Barriers to Market Development
• Longevity Annuities Are Not Necessarily Niche Products
• The Adverse Selection Issue

Audio

• Better Financial Security in Old-Age? The Promise of Longevity Annuities

Transcript

• Uncorrected Transcript (.pdf)

Event Materials

• 06_retirement_longevity_annuities_abraham_harris
• longevity_annuities_presentation_abraham
• 20141106_longevity_annuities_transcript

In the 2015 State of the Union Address, President Obama made retirement security a priority for his Administration by promoting the Automatic IRA, a retirement savings plan that originated at the Retirement Security Project. The proposals would increase the ability of part-time workers to join their employer’s plan and improve tax incentives for businesses that either start an Automatic IRA or other type of retirement plan or add automatic enrollment to an existing plan.  

Only about half of all American workers have access to a payroll deduction retirement savings plan at work. For part-time workers, fewer than four in ten have the opportunity to save at work. And while these individuals could in theory save on their own in an IRA, the best estimate is that only about one in twenty eligible to contribute to an IRA actually do so on a regular basis.

Last year, the President announced the creation of My Retirement Account, or “MyRA.” Similar to the R-Bond discussed in a recent AARP Public Policy Institute paper written by William Gale, David John and Spencer Smith, MyRA would allow individuals to save up to $15,000 in a government bond account similar to the one offered as an option to federal employees through the Thrift Savings Plan.

Now, the White House proposes to build on the MyRA.  Because the Automatic IRA would require employers with more than 10 employees to offer retirement accounts, about 30 million more workers would have the opportunity to save for retirement via payroll deduction. Using automatic enrollment, a mechanism that both works and that employees strongly support, the Automatic IRA would serve as a permanent retirement savings plan, rather than a starter account like MyRA.

To further increase the number of retirement savers, the Obama Administration also proposes to allow part-time employees who have worked for the employer for at least 500 hours a year for the past three years to make voluntary contributions to the employer’s plan.  Currently, employers are allowed to exclude any employee who works less than 1,000 hours per year. 

And to encourage employers to offer retirement plans, the existing tax credits for small employers who start a new retirement plan or pension would be greatly expanded.  Small employers who create an Automatic IRA would be eligible for a $3,000 tax credit, while those who open another type of retirement plan would be eligible for a $4,500 tax credit.  And just adding automatic enrollment to an existing plan would earn a small employer a tax credit of $1,500.

While these proposals would all need the approval of congress, they may well be able to rise above the usual political maneuvering.  For instance, both left and right have made positive comments about the Automatic IRA, and businesses should support the call for expanded tax credits to cover their costs in implementing the plans.

Most important, the president continues to make retirement security a priority with practical solutions that would allow many more Americans to build retirement security through their own efforts.  His proposals promote the kind of values and self-reliance that both sides of the political spectrum find attractive.

American experience strongly suggests that the coming UK pension freedoms sound better in theory than they will work in practice. After nearly a decade where the UK has been the gold standard for retirement savings policy, it is about to take a step that it may regret.

As annuity purchases are not required, very few Americans buy them, feeling that they are spending a great deal of money for a comparatively small monthly income. Even those in traditional DB pension plans usually take a lump sum if they are allowed to do so. As a result, many US retirees spend unwisely, trust the wrong financial advisor, or make other financial mistakes.

Many people greatly overestimate how long their savings will last. Most others assume (often wrongly) that they can manage their own money as well as anyone else or that they can live comfortably on Social Security alone. U.S. Social Security pays a benefit that depends on the retirees’ individual income history. The average annual amount is about $13,000 (GBP 8,700).

One survey found that in West Virginia, a state with a relatively low average income, 78% of those near retirement and 67% of those at retirement would likely outlive their financial assets. Workers with lower incomes are most at risk. A recent national study found that by the 20th year of retirement, more than 81% of Americans with incomes up to $27,000 would run short of money, as would 38% of those earning up to $42,000, and 19% of those with incomes up to $65,000.  Even 8% of those with the highest incomes could not meet their expenses.

Advice alone is not likely to help. US experience shows that literally every minute that passes after general advice is given reduces the chance that the consumer will act on it – even when they have decided to do so. And even a significant number of those who consult with a financial planner fail to act on that guidance.

What does show promise is income illustration. In a 2014 U.S. survey, 85% of plan participants found estimates of the income they could anticipate from their retirement savings useful, and 35% said that they would save more. Income illustrations change the framing of retirement saving from gross amounts saved to retirement income.  Annuity-like products become insurance against running out of money, something Americans are increasingly concerned about.

Two other potential developments may help. One is longevity insurance, an annuity that provides income only after a set age. Purchasing a policy defines how long one must make retirement savings last, and the retiree is protected against running out of money. Because longevity insurance is deferred, one can receive higher amounts of monthly income for a lower cost.  In 2014, $50,000 would buy $275 a month at age 65 or $1200 a month starting at age 80.

Another idea is an automatic enrollment trial annuity. As developed by several Brookings Institution colleagues and me, new retirees would automatically use part of their savings for a two year annuity unless the retiree refused it. The rest of their savings would be available as a lump sum. After the trial period, the annuity would become permanent if they did nothing or they could cancel it and take the rest of their money as a lump sum.

The many annuity horror stories from the UK show a definite need for change, but the coming reforms go too far. US experience suggests that too many UK retirees are likely to see their savings exhausted all too quickly. There are alternatives that could do a better job of protecting retirees.

In recent weeks, the Obama Administration has taken the two most important steps in nearly a decade to increase access to retirement savings for more than 55 million Americans who currently do not participate in a retirement saving plan.

The Treasury Department's myRA program, launched this month, will help new savers and the self-employed start accounts without risk or fees. And earlier this week, the Department of Labor clarified rules that will make it easier for states to create retirement savings plans for small business employees.

myRA

The new myRAs provide another way for new savers to build small nest eggs. They will also help consultants, contract employees, and part-time workers save for retirement or for emergencies. 

For employees, myRAs are payroll deduction savings accounts designed to meet the needs of new savers and lower income workers.  They have no fees, cost nothing to open, and allow savers to regularly contribute any amount.  Savings are invested in US Treasury bonds, so savers can’t lose principal, an important feature for low-income workers who might otherwise abandon plans if they face early losses.  Those who are not formal employees and thus lack access to an employer-sponsored plan can participate in myRA through direct withdrawals from a checking or other bank account. 

As the growing “gig economy” creates more independent workers, the myRA will be a valuable entry to the private retirement system.  These workers might otherwise retire on little more than Social Security. All workers can build myRA balances by redirecting income tax refunds into their accounts. Because a myRA is a Roth IRA (that is, contributions are made from after-tax income), savers can withdraw their own contributions at any time without penalties or tax liability.  

When a myRA reaches $15,000, it must be rolled into another account, and Treasury may make it possible for workers to transfer these savings into funds managed by one of several pre-approved private providers.  MyRAs won’t replace either state-sponsored plans or employer-related pension or retirement savings plans.  However, they will make it possible for new and lower-income savers as well as the self-employed to build financial security without risk or fees.  

State-Sponsored Retirement Savings Plans

The DOL announcement gave the green light to several state models, including Automatic IRAs, marketplace models, and Multiple Employer Plans.  About two dozen states are considering these plans and, so far, Illinois and Oregon have passed “Secure Choice” plans based on the Automatic IRA, while Washington State has passed a marketplace plan.

DOL’s proposed Automatic IRA rules (open for a 60 day comment period) would let states administer automatic enrollment payroll deduction IRAs provided that the plans meet certain conditions for selecting or managing the investments and consumer protections.  States would also have to require businesses to offer such a plan if they don’t already offer their employees a pension or other retirement savings plan. Companies that are not required to offer an Automatic IRA or other plan, but decide to join the state plan voluntarily could still be subject to ERISA. The Retirement Security Project at the Brookings Institution first designed the Automatic IRA, which was proposed by the Administration before being adopted by some states.

In a separate interpretation, DOL allowed states to offer marketplace plans without being subject to the Employee Retirement Income Security Act (ERISA).  These plans are essentially websites where small businesses may select pre-screened plans that meet certain fee or other criteria.  Under the DOL guidance, these marketplaces may include ERISA plans, but states cannot require employers to offer them.   However, if states sponsor a marketplace model, they could also require employers without other plans to offer Automatic IRAs.

Finally, DOL’s rules let states administer Multiple Employer Plans (MEPs), where individual employers all use the same ERISA-covered model plan.  MEPs are usually simplified 401(k)-type plans. Because the state would be acting on behalf of participating employers, it could assume some functions that would otherwise be the responsibility of the employer. These include handling ERISA compliance, selecting investments, and managing the plan.

The Retirement Security Project has issued a paper and held an event discussing ways states could create small business retirement savings plans. The paper is available here and the event is available here.

Together, the two initiatives—the new MyRA and the state-sponsored plans-- could greatly increase the number of American workers who’ll be able to supplement their Social Security benefits with personal savings.

In many policy-related situations, the states can be useful laboratories to determine the most appropriate federal actions. Variations across states in health care programs, earned income credit rules, minimum wages, and other policies have helped inform debates about federal interventions.

In this paper, we reverse that approach. Many state and local governments currently face difficulties financing future pension obligations for their workers. The federal government, however, faced similar circumstances in the 1980s and successfully implemented a substantial reform. We examine the situation the federal government faced and how it responded to the funding challenge. We present key aspects of the situation facing state governments currently and draw comparisons between them and the federal situation in the 1980s. Our overarching conclusion is that states experiencing distress today about the cost and funding of its pension plans could benefit from following an approach similar to the federal government’s resolution of its pension problems in the 1980s.

The federal government retained the existing Civil Service Retirement System (CSRS) for existing employees and created a new Federal Employees’ Retirement System (FERS) for new employees. FERS combined a less generous defined benefit plan than CSRS, mandatory enrollment in Social Security, and a new defined contribution plan with extensive employer matching. Although we do not wish to imply that a “one size fits all” solution applies to the very diverse situations that different states face, we nonetheless conclude that the elements of durable, effective, and just reforms for state pension plans will likely include the major elements of the federal reform listed above.

Section II discusses the federal experience with pension reform. Section III discusses the status and recent developments regarding state and local pensions. Section IV discusses the similarities in the two situations and how policy changes structured along the lines of the federal reform could help state and local governments and their employees.

Download "Public Pensions in Flux: Can the Federal Government’s Experiences Inform State Responses?" »

Downloads

• Download "Public Pensions in Flux: Can the Federal Government’s Experiences Inform State Responses?"
• Download the policy brief

When a new drug is approved in the United States, it is virtually impossible to know all of the risks that a population may encounter when using that product. Even though the U.S. Food and Drug Administration (FDA) requires drug manufacturers to meet rigorous standards demonstrating the drug’s safety and effectiveness for its intended use, once approved, drugs can be used by many more patients than were studied in clinical trials. This may include patients with unique clinical conditions, differing health status, ethnicity, age, or other characteristics which were not well-represented before the drug’s approval. Further, the drugs themselves can be used in different ways and in different settings than were studied. Until recently, FDA did not have the necessary tools and data access to rapidly and consistently track the risks of serious side effects of regulated drugs after approval. Recognizing this challenge, FDA has developed a pilot system to make the best use of available electronic health data using a new data and research network capable of evaluating the safety of medical products in the U.S. 

Authorized by the Food and Drug Administration Amendments Act (FDAAA) of 2007, this pilot is known as Mini-Sentinel, and is part of FDA’s larger Sentinel Initiative. Sentinel was envisioned as a national electronic system to track the safety of regulated medical products, through the use of existing health insurance claims and electronic clinical data that are generated as part of routine care. In the four years since its inception, Mini-Sentinel has made tremendous progress toward developing this system. Mini-Sentinel is comprised of insurance claims and clinical data from 18 participating data-partners, including some of the largest private health plans in the United States. In order to best protect patient privacy, the data from each partner is maintained behind each individual health plan fire-wall. This “distributed data” approach allows a single coordinating center to distribute FDA safety questions in the form of “queries,” to each of the participating data partners to be run against their own data. Aggregated summary results are then sent back to the coordinating center for final analysis. This process allows FDA to access data that can help in addressing safety questions in near real-time.  

Through Mini-Sentinel, FDA has the capability to better understand the safety outcomes using electronic health care data of approximately 169 million covered lives. This accumulation of data represents the capture of 382 million person-years of observation time and billions of prescription dispensings.[1] Examples of the types of safety questions that have already been addressed by Mini-Sentinel include the following:

• Safety concerns with drugs used to treat high blood pressure and the incidence of angioedema;
• Safety concerns with a new diabetes treatment and the incidence of heart attacks; and
• Impact of FDA regulatory actions (i.e. drug label changes) intended to mitigate serious risks of drugs.

The Mini-Sentinel pilot has demonstrated substantial progress and has proven to be a very useful tool for FDA, largely due to the strong partnerships developed between FDA, collaborating academic institutions, and private health plans. However, in order to ensure continued progress and long-term sustainability, it will be critical for progress to continue in several key areas. 

First, continued methods development and data understanding will be necessary to ensure FDA has access to the most innovative tools. The field of pharmacoepidemiology and drug safety surveillance is still young and the continued development of better study designs and analytic tools to quantify risks of serious adverse events, while accounting for many confounding factors that are inherent on observational data, will be critical. Further, as health reforms impact that way health care is delivered and financed (e.g., development of accountable care organizations and increased use of bundled payments), the electronic health data will change. It will be important to focus efforts on understanding how these changes will impact data used for safety evaluations. 

Second, it is clear that Sentinel’s contributions may extend well beyond FDA’s medical product assessments. The tools and infrastructure that have been developed by FDA over the last four years could be used as a platform to establish a national resource for a more evidence-based learning health care system. This system will enable a better understanding of not only the risks, but also benefits and best uses, of drugs in the post-market settings. 

FDA has initiated steps to ensure the long-term sustainability and impact of Sentinel infrastructure and tools. Within the next few years, FDA has proposed that Sentinel be transitioned into three main components: the Sentinel Operations Center, the Nation Resource Data Infrastructure, and the Methodological Resource for Medical Product Surveillance using Electronic Healthcare Databases. FDA has indicated that while the Sentinel Operations Center will continue to serve as FDA’s portal to the distributed database, the Nation Resource Data Infrastructure could potentially be used by other groups to support broader evidence generation. Potential groups with interest in improving our understanding of the impact of medical products and who could benefit from this framework include the National Institutes of Health, the Regan-Udall Foundation, the Patient Centered Outcomes Research Institute, and other possible stakeholder groups, such as the private industry. 

Collectively, these components will ensure that FDA continues to have the tools to engage in medical product surveillance, while ensuring the long-term sustainability of the system. In just four years, the Sentinel Initiative has laid the groundwork to transform how FDA, and the nation, benefits from electronic health care data. This network continues to foster a community of stakeholders committed the evidence generation, which will ultimately contribute to a learning health care system.

For more information on these issues, including discussion by leaders from Sentinel stakeholders, please visit the Sentinel Initiative Public Workshop event page. There you will find archived video, presentations, and further reading.

Video

• New Advances in Medical Records Reflects the Realities of the U.S. Healthcare System