Automatic Enrollment in IRAs: Costs and Benefits

The nonpartisan Urban Institute publishes studies, reports, and books on timely topics worthy of public consideration. The views expressed are those of the authors and should not be attributed to the Urban Institute, its trustees, or its funders.

Reprinted with permission of Tax Analysts.

The complete article with the table is available in PDF format.

Abstract

To encourage better retirement saving, President Obama recently proposed policies that would require firms without retirement savings plans to automatically enroll their workers in IRAs. In addition, the president proposed an expansion of the Saver's Credit to be fully refundable and available to middle-income taxpayers. This report estimates the revenue costs and distributional effects of the president's proposals.

Introduction

This report analyzes the revenue and distributional effects of a proposal in the Obama administration's 2010 budget to require firms without a retirement savings plan to automatically enroll their workers in IRAs. The proposal, called the Automatic IRA, is an extension of an effort to encourage firms with defined contribution plans -such as 401(k)s - to automatically enroll workers in the company plan.

Although automatic enrollment in 401(k)s is not required by law, it is becoming increasingly popular; the proportion of defined contribution plans offering automatic enrollment jumped from 26 percent in 2006 to 44 percent in 2007. Automatic enrollment has proven effective in bringing more workers into retirement saving programs. One study found that automatic enrollment in a specific firm plan boosted initial enrollment in the plan from 37 percent to 86 percent (Madrian and Shea 2001). Other studies have noted the policy's ability to increase aggregate saving (Iwry, Gale, and Orszag 2006), improve retirement preparedness (Gale, Iwry, and Orszag 2005), and increase tax progressivity (Geissler and Harris 2009).

(End of text. The complete article with the table is available in PDF format.

The nonpartisan Urban Institute publishes studies, reports, and books on timely topics worthy of public consideration. The views expressed are those of the authors and should not be attributed to the Urban Institute, its trustees, or its funders.

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