New Legislation Helps Build Retirement Security

Both Senator Jeff Bingaman (D-NM) and Representative Richard Neal (D-MA) have introduced similar bills (S. 3760 in the Senate and HR 6099 in the House) to increase the proportion of workers who have access to a payroll deduction retirement savings account from the current 50 percent to almost 90 percent. Their bills, which are based on a proposal developed by the Retirement Security Project, would allow these employees to save for retirement through automatic payroll deposit IRAs.

The Automatic IRA is designed to benefit both new savers and small business employees who had a 401(k) at a previous job and want to continue to regularly contribute to a retirement account. It is easy for both employers and for employees to use with a very simplified account structure and automatic enrollment, a mechanism that places employees in the account contributing a certain percentage of pay goes into a specific investment unless the worker decides otherwise. Studies by the group Retirement Made Simpler show that well over 80 percent of employees who have been automatically enrolled strongly like the process and that most start to save earlier than they would have otherwise.

Automatic enrollment especially helps those groups who are most likely to under save: women, minorities, younger workers and low-to-moderate income workers. Experience with 401(k) plans shows that these groups move from very low participation rates to about the same mid-eighty percent rate that applies to all workers.

While many focus on the value of the Automatic IRA to a new saver, it would be equally valuable to older workers who change jobs from a company that offers a 401(k) plan into a smaller company that has only the Automatic IRA. Under the proposal, that worker could combine his or her old accounts into an Automatic IRA that allows the worker to continue saving. Data show that most workers change jobs as many as 10 times during a career, and without the ability to continue saving through payroll deduction, many workers will have gaps in their saving history that could endanger their ultimate security.

The Automatic IRA does not impose a burden upon employers. They need do little more than they do now with the income and payroll taxes they now deduct from an employee’s paycheck and send to the IRS. Because an IRA is personal savings, employers would not be required – or even allowed – to match these savings. Employers would also have no liability for determining if employees are eligible for the program or face the complexity of complying with a 401(k)-type plan’s regulatory environment.

One new feature of the new version is a temporary US Treasury bond account that would allow new savers to accumulate up to a certain level without paying administrative costs. Once it reaches that amount, the account would be transferred to private sector management. This eliminates the problem of costly small accounts where a worker’s savings are depleted by administrative costs that exceed the earnings on the account.

The Bingaman bill and a soon-to-come House counterpart by Rep. Richard Neal are practical ways for younger employees to build real retirement security over and above what they will receive from Social Security. This common sense approach was endorsed in 2008 by both the McCain and the Obama campaigns and has attracted support from both National Review‘s Ramesh Ponnuru and the New York Times.