Having a way to save for retirement should not depend on where you live and whom you work for, yet 46% of private sector workers — 57.3 million people — lack access to this critical tool for accumulating savings and generating income when they retire.
Recent research by the Georgetown University Center for Retirement Initiatives (CRI) suggests that as many as 40 million more workers would save for retirement by 2040 if there were national universal access to retirement savings options. Our study looked at options for auto-enrolling workers into different types of accounts (Roth IRAs and Roth 401(k)s) with different scenarios for employer participation and contributions made by employees and employers. The findings show that millions of additional workers would begin to save for retirement over the next 20 years, with the potential for their savings to grow over time and generate meaningful additional retirement income to supplement Social Security.
Most of us have heard the mantra about the value of compounding returns and the importance of starting to save early for any goal, including retirement. But what does that mean for savers at different ages? We examined how access to a retirement savings account might affect a younger worker, a mid-career individual, and an older saver.
For a young employee earning $35,000 per year who follows the default options of a typical savings program over the course of 40 years, it is possible to accumulate more than $260,000 in assets that would generate as much as $14,320 in annual retirement income. Even an older worker with similar earnings who might start saving at age 45 could still save enough over 20 years to generate an additional $4,400 annually in retirement — hardly insignificant for a low- to moderate-income worker.
If policymakers were to make the complex and underused Saver’s Tax Credit easier to claim and refundable, this scenario has the potential to boost these retirement income estimates by as much as 50%.
Such additional retirement income could be critical for helping many individuals supplement Social Security benefits, which today average about $18,000 per year per person. Indeed, 23% of elderly households in the U.S. already relied on Social Security for more than 90% of their income in 2019, and in some states, more than one in three elderly households relied primarily on Social Security.
States Take Action
Because the federal government and the private sector have failed to make significant progress in closing the retirement savings access gap to date, several states have adopted the equivalent of state-level universal access auto-IRAs and other types of retirement savings programs for their own residents. In just a few short years, the auto-IRA programs in Oregon, California, and Illinois have accumulated more than $188 million in new savings in more than 302,000 funded accounts supported by more than 32,000 employers who are facilitating this saving effort. Each of these and other programs are still in the early stages of implementation, with at least four other states, including Connecticut, Colorado, and Maryland with auto-IRAs and Vermont with its MEP, set to launch in 2021, all of which will create even more new savers in the years to come.
During the 2021 legislative sessions, several states introduced new program bills and the Commonwealth of Virginia’s legislature recently passed and sent a bill to the Governor to establish a new auto-IRA program. If the Governor signs the bill, that will make Virginia the 13th state to enact a new retirement savings program.
In the last few years, at least 45 states have acted to implement new programs, study program options, or consider legislation to establish state-facilitated retirement savings programs. In addition to recognizing the clear benefits these plans have for individual workers and their families, states have an eye on the potential to reduce the fiscal and economic pressures of supporting an aging population that lacks sufficient retirement income.
These state programs have been a success and prove that universal access can be accomplished cost-effectively — without placing an undue burden on employers. Workers already have demonstrated that they welcome the ability to set aside funds for their own futures by putting hundreds of millions of dollars into their own retirement savings accounts.
A Roadmap For National Action
Such state-level programs also offer a roadmap for the new Congress to consider as it looks to find broader solutions. While the states should be applauded for their efforts to date and those innovations should continue to be encouraged, a national approach to universal access would do the most to close the significant retirement savings access gap and improve the retirement income outlook for millions of Americans.
The findings of our study, coupled with the experience of the states, provides a framework to help as national policy choices are made. The ability to close the access gap and boost savings will be affected by the design of the savings option. The type of retirement savings accounts (Roth IRA and/or Roth 401(k) structure), the employers required to participate, and the default levels of employee contributions and any employer contributions over time are all factors that will drive access, savings, asset growth, and retirement income. One of the most-important factors for consideration will be which employers would be exempt from participation.
Regardless of the national model selected, what is clear is that the benefits to savers, retirees, and the nation’s fiscal and economic well-being can be enormous. Based on the models we considered, total retirement savings in the United States could grow by between $1.4 trillion and $1.9 trillion by the year 2040. Universal access to retirement savings plans does more than just help individuals prepare better for their own golden years. The benefits to the overall economy could be quite significant as well, with the study estimating that between $72 billion and $96 billion would be added to U.S. GDP in the year 2040.
At a time when more than one-half of Americans are concerned about their financial security in retirement and governments at all levels face an unprecedented fiscal crisis due to the pandemic and its economic impact, expanding access to ways to save should be an important economic priority. Closing the retirement savings gap will help millions of Americans enjoy their golden years while improving the strength of the economy. The states are already demonstrating the benefits of expanding access. With more than 57 million private sector workers left out of employer-based retirement savings solutions and the importance of starting sooner and saving longer to build retirement income, the need for action is both clear and urgent.