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PENNSYLVANIA LAWMAKERS are weighing legislation that would automatically enroll workers in a retirement savings program – a move that supporters in the state legislature hope will bolster residents’ savings while easing the anticipated budgetary burdens generated by the state’s aging population.
A bipartisan bill, teased in a co-sponsorship memorandum last month by Democratic Sen. Art Haywood and Republican Sen. Patrick Browne, would implement a statewide auto-individual retirement account system, which would require certain employers that don’t already provide access to 401(k)s and other savings options to connect workers with financial services companies to set up their own plans.
Pennsylvania Treasurer Joe Torsella says employees would be automatically enrolled, it would come at no cost to employers and the program would eventually be self-funding for the state after it pays initial start-up costs.
“A lot of what’s happening in Pennsylvania will be echoed in the other states. But it’s magnified here, because our state is among the oldest. We punch above our weight when it comes to aging,” Torsella says. “If we actually want to do something about this, the common-ground, common-sense way to do this would be to implement an auto-IRA.”
Torsella, who has been meeting with state lawmakers and Pennsylvania stakeholders in recent weeks to discuss the legislation, in 2017 commissioned a task force to examine Pennsylvania’s aging population and determine whether legislation might help mitigate expected social assistance costs for financially struggling retirees in the decades to come. That task force, whose findings were published in a report earlier this year, determined that more than 2 million Pennsylvanians work for an employer that does not provide access to a retirement savings plan. That’s almost a third of the nearly 6.5 million Pennsylvanians in the state’s civilian workforce in September.
The group projected that financially unprepared retirees would foist an additional $14 billion on the state budget between 2015 and 2030 in the form of social assistance costs, which include Pennsylvania’s state-backed prescription drug program for seniors, free and reduced transit fares and Medicaid costs. Providing more secure avenues to retirement savings, Torsella says, could help mitigate some of those expenses.
“Sometimes, on first blush, people think, ‘Oh, the state’s starting a new pension.’ But there’s no liability to the state. This is an IRA. This is the participant’s money that follows them around for the rest of their lives,” he says. “I hope, if you circle back to me in three or four months, we will have enacted this and be well on our way to solving this problem.”
Pennsylvania is not the only state to explore additional retirement savings options for its citizens in recent years. Ten states and Seattle have already approved state- or city-mandated retirement savings programs for private sector workers, including California, Connecticut, Illinois, Maryland, Massachusetts, New Jersey, New York, Oregon, Vermont and Washington. And more than 40 state legislatures have explored the idea by considering or enacting legislation or forming task forces to look into retirement security concerns.
“We see a bipartisan effort across the country, and state legislatures – where the rubber hits the road, in terms of funding – are going to have to fund social safety net programs down the line when people retire into poverty,” says Sarah Mysiewicz Gill, a senior legislative representative with AARP’s government affairs department.
Gill says each of the 10 states with finalized plans has adopted slightly different retirement savings models, but many have turned to some variation of an auto-IRA. In Illinois, for example, companies that are at least two years old and employ at least 25 workers are required to connect employees with a savings plan, whether that’s a traditional 401(k) or a state-mandated IRA.
The state doesn’t actually handle the money, she says. Rather, a private-sector investment company such as Fidelity or Vanguard manages the accounts, with the state essentially bridging the gap between employees and plan providers. Gill also notes that workers are able to opt out of the savings plan, though they would be automatically enrolled otherwise.
“The employee will start at, generally states have picked 5% as the default contribution rate. But the employee is the one who has the control,” Gill says. “They control where they want to invest their money and if they want to invest at all, and they can change that at any time.”
The state-mandated retirement savings model is still relatively new, so experts note that few states have collected much substantive data to measure success rates. But among early adopting states such as Oregon, employees do appear to be utilizing the program.
As of Aug. 1, more than 7,400 employers had registered for the OregonSaves auto-IRA program, with more than 104,000 employees enrolling for the plans, which equates to roughly 71% of all eligible workers. Nearly 49,000 have begun making contributions, and employees are on average contributing about $100 per month. Collectively, the program has helped Oregon workers save more than $25 million.
“It’s thrilling to see, in states like Oregon, with the OregonSaves program, there are tens of thousands of workers saving today who were not saving for retirement just 18 months ago,” says Angela Antonelli, a research professor and executive director at the Center for Retirement Initiatives at Georgetown University. “Many employers are using the state-facilitated program, largely because, by design, it’s meant to be very simple and very low-cost.”
But not everyone has been blown away by the participation rates and general setup of the state auto-IRA model.
“These plans are basically well-intentioned, and they will accomplish some good for people. I don’t want to act as if this is all negative. But there are definitely downsides that the states didn’t think very carefully about,” says Andrew Biggs, a resident scholar at the American Enterprise Institute.
For one, Biggs notes that there is a financial literacy issue to consider among individuals who have never saved money with an IRA or similar program before. Early withdrawal fees can be steep and leave savers with less money than they’d expect, he says.
He also questions the necessity of excess retirement savings for low-income workers, pointing to a Congressional Budget Office report that suggests the poorest 20% of the retired population receives Social Security benefits that, depending on when the benefits are initially claimed, are close to equivalent to their pre-retirement earnings.
Most importantly, however, he notes that some of these auto-IRA programs could disqualify certain savers from social assistance programs as they build assets. A minimum-wage worker who is contributing to this plan would theoretically have less disposable income to work with from month to month, so they wouldn’t immediately be better off. And if the savings in their IRA grows considerably over a number of years, they may end up disqualified from government assistance for which they’d previously qualified.
“Medicaid, food stamps, TANF (Temporary Assistance for Needy Families), home energy subsidies. They’re all slightly different, and they can be different from one state to the next. But many have means tests to them. These can be based on either the income you have or assets you have,” he says. “By defaulting (workers) into the plan, you’re going to disqualify them from a benefit they currently rely on.”
Alicia Munnell, the director of the Center for Retirement Research at Boston College, noted in a MarketWatch op-ed last year that many of the Oregon workers who lacked a retirement plan before auto-IRA implementation still made decent money. Many wouldn’t have qualified for means-tested social assistance programs anyway, she writes.
But eligibility concerns for folks on the margins of social support qualification remain. Munnell and Biggs also acknowledge the possibility of program enrollees taking on credit card or other debts to offset their monthly contributions to retirement savings – debts that may support their lifestyles in the short term but that may be difficult to repay over the long run.
Still, Biggs and other experts expect states to continue exploring their auto-IRA and retirement savings options in the years ahead, as the federal government has largely punted on the issue.
The Setting Every Community Up for Retirement (SECURE) Act – which would represent the largest federal adjustment to the retirement savings landscape in more than a decade by allowing small employers to band together in offering IRAs to employees – breezed through the House of Representatives in May by a vote of 417-3. Lawmakers hope to pass it through the Senate by the end of the year, but progress has thus far been slow going.
Federal lawmakers are also considering legislation that would tweak Social Security funding, multiemployer pension programs and health savings accounts for seniors, all of which would offer future retirees greater financial certainty in the years ahead. But Torsella says state legislatures aren’t holding their breath for federal action after years of gridlock and relative unwillingness to tackle a well-publicized aging demographic trend.
“There’s always talk of waiting for Washington to ride to the rescue. And none of us in Pennsylvania are waiting for that to happen,” he says. “We specialize in the real world. This is something we can do. We don’t need Washington’s help. We just need them to stay out of the way.”