Andrew Biggs, American Enterprise Institute scholar (and fellow Forbes contributor) has a new article at the Washington Post, “State-run retirement plans are the wrong way to protect the poor,” in which he addresses the new auto-enrollment state-managed IRA plans.
Five states are launching plans to automatically enroll employees, predominantly lower-income workers, in state-administered individual retirement accounts. More than 20 other states are considering “auto-IRA” programs like those of California, Connecticut, Illinois, Maryland and Oregon. Auto-IRAs seem like an obviously benign effort: Only about 20 percent of low-income workers participate in 401(k) plans, and many low earners depend heavily on Social Security when they retire.
But bureaucratic good intentions sometimes address problems that aren’t problems or end up doing more harm than good. In the case of auto-IRAs for low-income workers, states are likely doing both: These workers are in better shape for retirement than misleading news coverage suggests, and auto-IRAs could saddle them with higher debt while disqualifying them from means-tested government health and welfare programs — thus saving the states a fortune.
The problem, Biggs writes, is that low-income workers have little to no need to save for retirement because Social Security (and, as needed, the relevant means-tested benefits) will provide a sufficient degree of pay replacement, at the standard of living they’re accustomed to. However, many of these folk are living at the margin to such a degree that even a small loss in income due to (semi-)obligatory savings could increase their debt levels (you’d think they could adjust their savings over time, but Biggs cites a study demonstrating this effect), and the asset tests for many benefits for the poor would mean that they wouldn’t be able to benefit from much of their savings anyway. Biggs notes as a partial answer that “A good model is Britain’s national saving plan policy of automatically enrolling only workers with salaries above £10,000 pounds (about $13,000).”
So here are a few thoughts to build on this:
What the United Kingdom has done is not simply a matter of a creating an income threshold below which workers do not participate in the autoenrollment plan. Not only is participation for workers with less than £10,000 in income on an opt-in rather than opt-out basis, but income below £5,876 is not included in the calculation at all. A typical retirement plan in the Netherlands works similarly, with pensionable salary for employer pension purposes excluding between approximately the first €13,000 – €15,000 of pay, depending on plan type. Likewise, Switzerland’s Second Pillar plan starts at income of about CHF 25,000. And in my “MyPlate” retirement savings proposal I had suggested “a rule of thumb such as, ‘save 15% of your annual income above $20,000.'” (As a reminder, I’d also prefer a Social Security system in which the benefit was a flat benefit for everyone to ensure that every American is protected from poverty, but even absent this, there are multiple layers of supplemental benefits, such as SSI and food stamps, for the elderly whose benefit accrual was low during their working years.)
In our American Social Security system, we don’t have a floor but we do have a ceiling, and that is applied on an annual basis; at whatever point in the year, one reaches that year’s ceiling, Social Security taxes stop. But this wouldn’t make sense for a floor, and for savings for the poor, which should be regular and predictable. What would make sense, though, is to apply a floor on an hourly-wage basis. For example, for simplicity’s sake, a plan could make automatic contributions on income that exceeds, when adjusted to an hourly basis, $10 per hour (though the nice rounding would be lost if the threshold is indexed for inflation) or on income that exceeds the minimum wage.
