Retirement insecurity looms for millions of American workers. For most of us, Social Security will not be enough. A comfortable retirement, according to most investment professionals, requires an annual income of about 70 percent of pre-retirement earnings -- far more than Social Security provides for most workers.
Yet our nation's personal savings rate -- saving as a percentage of income -- has dropped below zero, and traditional employer-sponsored defined benefit pensions, which have served workers so well for decades, are rapidly eroding.
Even worse, half the U.S. workforce -- more than 71 million moderate- and lower-income workers, employees of smaller businesses, and others -- work for employers that don't offer a retirement plan at all. This continues to be the case even as lengthening life spans -- ours and our children's -- increase the need to build pension savings and a secure retirement.
Research on saving, plus the commonsense lessons of experience, point to a simple and effective way to help this half of our working population save. We call it the "automatic IRA," because it would enable employees who have no employer-sponsored plan to save in an IRA using the powerful automatic payroll deposit mechanism that drives many employers' 401(k) plans. In short, the ultimate goal is to give workers access to retirement savings in every job they hold.
Under our proposal, a business that isn't ready to adopt a 401(k) or other retirement plan would simply offer its employees the chance to contribute to an IRA every payday by direct deposit, in much the same way millions of us have our paychecks deposited directly into our bank accounts. It's easier to save small amounts on a regular basis. And once payroll deposits begin, they continue automatically and accumulate tax-free.
Employees would decide whether to contribute, and employers, if they wished, could make participating in the IRA automatic, so that employees would have an IRA and make regular payroll contributions to it unless they opted out. The power of automatic enrollment to increase participation and improve investments in 401(k) plans has been proven and is winning broad support in industry and government.
Under automatic enrollment, employees can choose whether to save, but those who can't decide or don't respond are automatically enrolled using a pre-set contribution rate and investment. The power of regular payroll deposit, especially with automatic enrollment, is impressive. Today, fewer than one in 10 eligible individuals contribute to an IRA, while about seven in 10 contribute to a 401(k); and more than nine in 10 contribute to a 401(k) when automatic enrollment is used. And participation increases most dramatically among lower-income and minority workers.
Companies that sponsor a retirement plan -- and small businesses just starting up or employing up to 10 workers -- would not be required to offer payroll deposit saving, but every firm that does offer it would receive a temporary tax credit to cover costs. The business itself would not make any contributions or investment decisions and would be protected from potential fiduciary liability. It could choose to send employees' contributions to one or more IRAs currently in the market or to a low-cost group IRA with a simple but sound set of investments similar to the successful 401(k)-type plan that covers Members of Congress and other federal employees. Our proposal also outlines similar strategies to extend more effective saving opportunities to self-employed Americans.
Unless we save more, millions of us soon will retire without adequate resources. This will place an increasing strain on already overburdened federal, state and family budgets. Our proposal to make saving more automatic and universal -- unlike last year's fractious debate over social security reform -- has been endorsed by AARP and is beginning to attract further support from across the political spectrum. Congress can act now to transcend partisan differences and make it easier for 71 million American workers to save for a more secure retirement.
J. Mark Iwry is a Senior Adviser to The Retirement Security Project, a Nonresident Senior Fellow at the Brookings Institution and Research Professor at Georgetown University.
David John is a senior research fellow for Social Security at the Heritage Foundation.
First appeared in the Knight-Ridder Tribune wire