Millennials don’t save for enough retirement — but Congress can help

“Young people are not saving enough.”

“They will have to double their savings to retire at a reasonable age.”

These quotes represent the conventional wisdom about our nation’s millennials, the more than 80 million Americans between the ages of 20 and 36. However, the savings picture for millennials has become more complex, according to recent data. This cohort of young people is saving more, though for short-term goals instead of retirement.

To promote retirement savings, Congress should pass the Automatic Individual Retirement Account (IRA) Act, legislation that was introduced in the House in 2015, for millennials and other Americans without a retirement plan at their workplace.

Millennials, especially the younger ones, are now building up their savings to cover emergencies for the first time since the financial crisis. More than 30 percent of Americans ages 18 to 26 have saved enough to cover three to five months of living expenses, according to a survey conducted earlier this year by Princeton Survey Research Associates International.

A spokesman for Bankrate.com, the survey’s sponsor, explained, “Millennials have a savings discipline that the preceding generations lacked.” Despite much lower levels of earnings, millennials save on average 19 percent of their annual income, compared to 14 percent for both generation X (those in their late 30s to early 50s) and baby boomers (those in their late 50s to late 60s).

Similarly, millennials start buying mutual funds earlier than preceding generations, according to the Investment Company Institute. The median age for millennials buying their first mutual fund is 23, compared to 26 for generation X and 32 to 35 for baby boomers.

Yet millennials have a shorter time horizon for their savings’ objectives than preceding generations, according to the recent report by Merrill Lynch. Sixty-three percent of millennials are saving to achieve their desired lifestyle, such as travel or fitness. Only 37 percent are saving to leave the workforce. By contrast, 45 percent of both generation X and baby boomers are saving to support their lifestyle objectives. Fifty-five percent of these two groups are saving to support themselves when they retire.

These more immediate savings goals for millennials are readily understandable. Retirement probably seems like a far-off dream to a 27-year-old starting to climb in his or her career, while it seems like an imminent reality to a worker at ages 47 or 57.

Nevertheless, there is one structural factor strongly disfavoring retirement savings by millennials: roughly half of them do not have a chance to participate in a retirement plan at their workplace. Many young people are part-time employees or independent contractors, while some work for small firms that not have a retirement plan. Although millennials could establish their own IRAs, they rarely get around to finding a financial institution and filling out an application.

So what is the solution? To boost participation in their retirement plans, many firms in the private sector have moved away from an application process to automatic enrollment. Under automatic enrollment, employees start making regular contributions to a 401(k) plan unless they opt out — which they generally do not do. Therefore, policymakers have suggestedthat Congress extend automatic enrollment to firms without retirement plans by enacting the Automatic IRA Act.

Here’s what that would mean. Every small employer with more than 20 or 30 employees would be required to connect its payroll to a retirement plan sponsored by a qualified financial institution. Then the employer would send that plan regular contributions from its employees — unless they opted out. The employer would not be expected to make its own contributions to the plan or match its employees’ contributions.

Congress could go further by allowing an association of independent contractors or part-time workers to choose a retirement plan provider and adopt an automatic IRA. Then any individual member of the association could have contributions automatically sent every month to that plan from his or her bank account or other funding source.

In fact, several states recently tried to establish the automatic IRA for local employers without a retirement plan at work. However, Congress repealed the regulations necessary for such state plans, reportedly because they could lead to conflicting state rules and undue state control of private retirement plans. Neither of these objections would apply to a federal automatic IRA along the lines described above.

It is great news that millennials are saving more. If Congress wants more of those savings to go toward retirement, it needs to establish a convenient mechanism for millennials to contribute to a retirement plan, even though they are not offered a plan at their workplace. A federal automatic IRA would be such a mechanism.

Robert Pozen has been a nonresident senior fellow at Brookings since 2010. In 2015, he generously committed to endow the Director’s Chair for the Urban-Brookings Tax Policy Center. Until 2010, Pozen was executive chairman of MFS Investment Management and, before 2002, served in various positions at Fidelity Investments. He did not receive financial support from any firm or person for this article or from any firm or person with a financial or political interest in this article. He is currently not an officer, director, or board member of any organization with an interest in this article.