Automatic individual retirement accounts (IRAs) could significantly boost retirement savings for millions of low- and moderate-wage workers. A proposal embraced by the Obama administration would require most employers that do not offer retirement plans to establish IRAs for their employees and automatically direct a portion of pay into the accounts, unless employees opt out. Our results, based on the Urban Institute’s microsimulation model, show that automatic IRAs would boost retirement incomes for as many as half of low-income retirees and three-fifths of moderate-income retirees. For both groups, mean age-70 incomes among those who gain would increase by nearly a fifth.
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This brief examines the potential of
automatic IRAs to improve retirement
security for low- and moderate-wage
workers. The results, based on the
Urban Institute’s microsimulation model,
show that automatic IRAs can significantly
increase retirement plan coverage and economic
security for low-income retirees, at little
cost to business or the federal government.
Automatic IRA Proposal
Many Americans fail to save for retirement.
About 40 percent of all wage and salary workers
ages 25 to 59 in 2009 worked in jobs that
didn’t offer retirement plans (Butrica and
Johnson 2010). Another 16 percent of workers
with offers did not participate (Butrica and
Johnson 2010). And many people—particularly
those with limited resources—withdraw
funds from their 401(k)s and IRAs during
their working lives, and even cash them out
completely. Butrica, Zedlewski, and Issa
(2010) find that 8 percent of retirement
account owners made at least one withdrawal
between 2004 and 2005. Withdrawals were
more likely among African Americans, those
without college degrees, and those with little
or no assets.
Many workers eligible for retirement plans
do not participate simply because they never
bother to enroll. Increasingly, employers are
overcoming this inertia by automatically
enrolling new employees. The early results are
promising: many studies document much
higher participation in retirement plans for
which participation is the default rather than an
opt-in choice (Beshears et al. 2009; Choi et al.
2004; Madrian and Shea 2001). But automatic
enrollment does not help workers whose
employers do not offer plans.
The automatic IRA, conceived by Mark
Iwry of the Brookings Institution and David
John of the Heritage Foundation, could boost
retirement savings for millions of workers not
offered employer-sponsored retirement plans
(Iwry and John 2007). The proposal calls for
employers with more than 10 workers that do
not offer retirement plans to set up IRAs for
their employees. Employers would automatically
deduct a percentage of workers’ pay and
deposit it into their IRAs, but employers
would not be required to contribute themselves.
Employees could opt out of this retirement
savings deduction or change the
amount deducted. Automatic IRAs would be
provided by the same private financial institutions
that currently offer IRAs and be subject
to the same contribution limits and regulations
as existing IRAs.
Several bills have been introduced in
Congress to create automatic IRAs. Some
stipulated that workers participating in an
automatic IRA or 401(k) would have their
federal saver’s credit automatically deposited
into their retirement savings account. The
saver’s credit uses federal tax credits to match
low- and moderate-income workers’ contributions
to their retirement savings accounts.
Currently, however, the saver’s credit is nonrefundable,
so low-income people without any
tax liability would not benefit. To address this
shortcoming, some automatic IRA bills
would expand the saver’s credit by making it
The Obama administration has advocated
creating automatic IRAs and expanding the
saver’s credit to help low- and moderateincome
families build retirement savings.
Although the automatic IRA was included in
President Obama’s FY2012 budget request,
the expanded saver’s credit was dropped
(Gale and John 2011).
End of excerpt. The entire brief is available in PDF format.