Universal Access to Retirement Savings? - What are the Potential Benefits of
←
→
Page content transcription
If your browser does not render page correctly, please read the page content below
Policy Report 20-02
December 2020
Angela M. Antonelli
Research Professor and Executive Director
What are the Potential Benefits of
Universal Access to Retirement Savings?
An Analysis of National Options to Expand Coverage
In conjunction with
economics | strategy | insight
Support for this research was provided by
About the Center for Retirement Initiatives (CRI)
The Center for Retirement Initiatives (CRI) at Georgetown University is a research center of the McCourt School
of Public Policy, one of the top-ranked public policy programs in the nation. Through its academic reputation
and ability to engage with policymakers, business leaders, and other stakeholders, the McCourt School attracts
world-class scholars and students who have become leaders in the public, private, and nonprofit sectors. The
CRI is dedicated to:
• Strengthening retirement security by expanding access and coverage for the private sector workforce;
• Providing thought leadership and developing innovative new approaches to retirement savings, investment,
and lifetime income;
• Serving as a trusted policy advisor to federal, state, and local policymakers and stakeholders.
600 New Jersey Avenue, NW, 4th Floor
Washington, D.C. 20001
202-687-4901 · https://cri.georgetown.edu/
About Econsult Solutions, Inc. (ESI)
Econsult Solutions, Inc. provides businesses and public policymakers with consulting services in urban
economics, real estate, transportation, public infrastructure, public policy and finance, community and
neighborhood development, planning, and thought leadership, as well as expert witness services for litigation
support. Our technical expertise ranges from Big Data analysis to GIS-based spatial analytics, sophisticated
benefit-cost analysis, and pro forma-based project feasibility analysis.
ESI’s government and public policy practice combines rigorous analytical capabilities with a depth of experience
to help evaluate and design effective public policies and benchmark and recommend sound governance
practices. ESI has assisted policymakers at multiple levels of government to design and evaluate programs that
help citizens increase their economic security.
1435 Walnut Street, 4th Floor
Philadelphia, PA 19102
215-717-2777 · https://econsultsolutions.com/
About the Berggruen Institute
The Berggruen Institute’s mission is to develop foundational ideas and shape political, economic, and social
institutions for the 21st century. By providing critical analysis using an outwardly expansive and purposeful
network, we bring together some of the best minds and most-authoritative voices from across cultural and
political boundaries to explore fundamental questions of our time. Our objective is to have an enduring impact
on the progress and direction of societies around the world. To date, projects inaugurated at the Berggruen
Institute have helped develop a youth jobs plan for Europe; fostered a more-open and constructive dialogue
between Chinese leadership and the West; strengthened the ballot initiative process in California; and launched
Noema, a new publication that brings thought leaders from around the world together to share ideas. In addition,
the Berggruen Prize, a $1 million award, is conferred annually by an independent jury to a thinker whose ideas
are shaping human self-understanding to advance humankind.
Bradbury Building
304 S. Broadway, Suite 500
Los Angeles, CA 90013
310-550-70983 · https://www.berggruen.org/
© 2020, Georgetown University
All Rights ReservedAcknowledgments
The Georgetown University Center for Retirement Initiatives (CRI) is grateful to the Berggruen Institute for
the generous support that has made this report possible, and to Econsult Solutions, Inc. (ESI) for a research
collaboration that has allowed the Center’s vision for this report to become a reality. We are honored to partner
with these organizations to advance our shared mission of strengthening retirement security and promoting the
expansion of access to savings options for millions of American workers who currently lack such access.
The CRI also thanks Courtney Eccles, Yakov Feygin, J. Mark Iwry, David John, Michael Kreps, and David Morse
for their helpful consultations and feedback in the preparation of this report. The findings and conclusions
expressed are solely those of the author and do not represent those of the Berggruen Institute, Econsult
Solutions, Inc., or the Center for Retirement Initiatives.
Suggested Report Citation
Antonelli (2020). What are the Potential Benefits of Universal Access to Retirement Savings?
Georgetown University Center for Retirement Initiatives in conjunction with Econsult Solutions, Inc.
© 2020, Georgetown University
All Rights Reserved
© 2020 Georgetown University Center for Retirment Initiatives iii What are the Potential Benefits of Universal Access to Retirement Savings?Contents
Executive Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1. Closing the Significant Gaps in Access to Retirement Savings. . . . . . . . . . . . . . . . . 9
1.1 Significant Gaps Remain in Access to Retirement Savings. . . . . . . . . . . . . . . . . . 9
Gaps in Private Sector Access Disproportionately Impact Certain Groups . . . . . . . . . . . 9
Too Many Have Little Saved for Retirement. . . . . . . . . . . . . . . . . . . . . . . 10
An Aging Population Increases the Urgency . . . . . . . . . . . . . . . . . . . . . . 11
1.2 Policy Approaches Taken to Close the Access Gap . . . . . . . . . . . . . . . . . . . . 12
International Models Toward Universal Access . . . . . . . . . . . . . . . . . . . . . 13
US Efforts Have Fallen Short of Universal Access. . . . . . . . . . . . . . . . . . . . 14
National Proposals for Universal Access. . . . . . . . . . . . . . . . . . . . . . . . 17
Analyzing How Different Design Options Affect Access and Savings. . . . . . . . . . . . . 19
2. Analyzing the Potential Benefits of National Universal Access to Retirement Savings Options. . . . 21
2.1 Participation, Savings, and Assets under a Baseline Auto-IRA Scenario . . . . . . . . . . . . 21
Starting Sooner and Saving Longer Significantly Improves Retirement Outcomes . . . . . . . . 21
How a Payroll Deduction Auto-IRA Expands Access and Builds Savings . . . . . . . . . . . 23
Protecting Savings is Critical to Asset Growth and Retirement Income. . . . . . . . . . . . 27
2.2 Policy Choices Have Impacts on Coverage and Savings . . . . . . . . . . . . . . . . . . 29
Thresholds for Employer Participation Dictate the Remaining Access Gap . . . . . . . . . . . 29
Voluntary Employer Contributions Can Increase Participant Savings. . . . . . . . . . . . . 31
Required Employer Contributions Can Increase Employee Returns — with Economic Trade-offs. . 33
Analyzing How Policy Choices Affect Participation, Savings, and Asset Building . . . . . . . . 34
3. Long-Term National Impacts from Increased Savings. . . . . . . . . . . . . . . . . . . . 38
3.1 Increased Economic Growth and Tax Revenue. . . . . . . . . . . . . . . . . . . . . . 38
Enhancing Economic Productivity and Accelerating Growth . . . . . . . . . . . . . . . . 38
Increased Tax Revenues from Economic Growth . . . . . . . . . . . . . . . . . . . . . 40
3.2 Assessing the Impact on Federal Benefit Programs . . . . . . . . . . . . . . . . . . . 41
Federal Benefit Program Spending is Anticipated to Rise Significantly . . . . . . . . . . . . 41
Increasing Retiree Incomes Can Reduce Program Expenditures . . . . . . . . . . . . . . . 42
Conclusion. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
Endnotes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
What are the Potential Benefits of Universal Access to Retirement Savings? iv © 2020 Georgetown University Center for Retirment InitiativesExecutive Summary
Part 1: Closing the Significant Gaps in Universal access to retirement savings options
would give all workers the opportunity to save, and
Access to Retirement Savings
evidence from other countries, from individual states,
Workers in the United States are being asked to and from private sector plans suggests that many
take responsibility for their financial well-being in would begin to do so, especially when encouraged
retirement now more than ever. What used to be using default options, such as automatic enrollment.
considered the foundation for building a secure Workers would benefit from the increased savings
retirement — Social Security, employer-provided and the additional income in retirement. At the
pensions, and personal savings — has been same time, the economy benefits from stronger
weakening for decades as traditional defined savings, investment, and economic growth, and the
benefit (DB) pension plans have been replaced by nation benefits from a reduction in fiscal pressures
a defined contribution (DC) system of savings that to support an aging population lacking sufficient
was originally meant to supplement, not replace, retirement income.
traditional pensions.
Figure ES.1: More than 57 Million Employees
Most employers today that have retirement plans Lack Access to a Retirement Savings Plan in their
only offer DC options. This shift over time from Workplace (2020)
employer-provided pensions to DC plans has put Coverage access gap Access to coverage at work
greater responsibility on workers to make complex
savings and investment decisions that will affect the
amount of money available in retirement. Americans
who have access to retirement savings accounts
often do not save enough to maintain their quality of
46%
life in retirement.
57.3M 67.3M
GAP
Making matters worse, while employer-sponsored
retirement plans have become the primary way private
sector workers build retirement savings, employers in
the United States are not required to offer retirement
savings plans. Today, there are an estimated 57
million private sector workers (46%) who do not have
access to a plan through the workplace (see Figure
ES.1). These access gaps are inequitably distributed,
affecting more small businesses, and with larger gaps
among lower-income workers, younger workers,
124.6 M
Private Sector Employees
minorities, and women. ESI analysis of Census Bureau Current Population Survey
and BLS National Compensation Survey Data.
For several years, there have been discussions and
proposals in the United States about how to expand
An Aging Population Increases the Urgency
access to ways to save for retirement. If we look
internationally, there is usually little debate about This lack of access to employer-sponsored
the value of universal access to retirement savings, retirement savings plans takes on greater urgency
and several countries require employers to provide a due to the aging of the US population. Senior
retirement savings option for their employees. With households are growing significantly in number and
all workers covered, differences can be found in as a share of the population, with the “dependency
the design of such options to achieve the levels of ratio” projected to fall from its historic norms of
savings needed to boost income in retirement. almost four working age households for each elderly
household to a ratio of closer to two to one (see
© 2020 Georgetown University Center for Retirment Initiatives 1 What are the Potential Benefits of Universal Access to Retirement Savings?Figure ES.2). Since working age households are programs in countries like Australia, New Zealand
the primary contributors to the tax base, this falling and the United Kingdom have gained significant scale
dependency ratio creates greater fiscal pressures as over time, demonstrating the sustainability of these
the demand for benefit programs increases. types of programs to help participants save more for
retirement (see Figure ES.3).
Figure ES.2: Falling Ratios of Working-Age to
Elderly Households Create Fiscal Pressure Figure ES.3: Employer-Based International
Savings Programs
3.9 3.8 3.9 Australia Superannuation Guarantee – 16.7 million
3.8
3.6 3.6 3.7 participants
3.2 Requires employers to contribute 9.5% of an eligible
employee’s earnings to a retirement savings account.
2.8
KiwiSaver – 3 million participants
2.5
2.3 2.3 2.3 Workers auto enrolled (can opt out) to contribute ≥
3% of earnings + 3% employer match and a tax credit
1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 contribution.
UK NEST – 9 million participants
ESI analysis of US Census Bureau data
and University of Virginia Population Projections. Uncovered workers auto enrolled (can opt out) at default
contribution levels of 5% employee + 3% employer.
This shift in population composition also underscores
the importance of enabling younger generations
like millennials and Gen Z (which will cover the US Efforts Have Fallen Short of Universal Access
prime working ages of 30–60 by 2040) to have
opportunities during their crucial savings years to Several legislative proposals intended to achieve
build resources to support their financial futures. national universal access, modeled on international
experience and the innovative design ideas of policy
Policy Approaches Taken to Close the Access experts, have been introduced in Congress for more
Gap than a decade and as recently as 2019. To date,
these proposals have not had sufficient support to
Federal policymakers in the United States have advance.
developed and started to implement reforms
intended to close the gap in private sector retirement In the absence of national action, some states have
savings access, encourage savings, and strengthen started to adopt innovative public-private partnership
the retirement readiness of workers. International and models to expand access to their workers. A few
state examples provide models to achieve universal of these new state programs have adopted and
access that can do much more to expand coverage launched an Auto-IRA model, which requires
and savings levels. employers that do not already offer their workers
a retirement savings plan to automatically enroll
International Models Toward Universal Access their workers in the state program to begin to save
unless the worker opts out. These state programs
Efforts to expand access, participation, and savings
are currently providing many employers and their
are not unique to the US. Many countries have
employees with new ways to save, and the number
adopted a mix of public and private models to move
of new accounts and assets is now growing at a
toward universal access, often requiring employer
steady pace (see Figure ES.4).1
participation and/or the automatic enrollment of
workers who can choose to opt out, that have resulted Recent Congressional action, such as the SECURE
in significant coverage and savings levels. Established Act (P.L. 116-94), intended to expand the adoption
What are the Potential Benefits of Universal Access to Retirement Savings? 2 © 2020 Georgetown University Center for Retirment InitiativesFigure ES.4: Recently Launched State Auto-IRA and retirement security of a “baseline” national
Programs universal access retirement savings option, and
the relative impacts on coverage and savings of
OregonSaves – Launched 2017
a number of potential policy variations from this
Auto-IRA program required for all employers without an baseline.
existing qualified plan, 5% default employee contribution
with auto-escalation, and no employer match permitted. The baseline model analyzed is an automatic
enrollment payroll deduction individual retirement
Illinois Secure Choice – Launched 2018
account (Auto-IRA) that is similar to a model
Auto-IRA program required for employers with ≥ 25 currently being implemented by some states and
employees without an existing qualified plan, 5% default included in legislative proposals introduced in
employee contribution, and no employer match permitted. Congress. This streamlined and low-cost approach
CalSavers – Launched 2019 uses automatic enrollment, default savings, and
auto-escalation mechanisms, which encourage
Auto-IRA program required for employers with ≥ 5 participation and savings while leaving participants
employees without an existing qualified plan, 5% default with full control over their participation and
employee contribution with auto-escalation, and no contribution levels. In this model, all contributions
employer match permitted. are made by the employee with no employer
contribution.
and improve the design of defined contribution This model is used as the baseline because it is
plans, is another positive step. 2 While these comprehensive in requiring workplace access,
individual state programs and recent incremental and simple in its structure and implementation.
federal reforms are beneficial, these initiatives are Alternatives to this baseline are then analyzed by
unlikely to achieve a significant national expansion adjusting several design features, including:
of coverage and savings.
• Varying the type of savings account used
Part 2: Analyzing the Potential Benefits of between a payroll deduction Roth IRA and
National Universal Access to Retirement Roth 401(k), factoring in differences in the
administrative requirements and the costs of
Savings Options
such accounts;
The experience of well-established international
• Adding employer size and age thresholds,
programs and, more recently, the experience of
exempting the smallest and youngest
individual state retirement savings programs point
businesses from the requirement to provide their
to the need for serious consideration of national
employees with access to retirement savings;
universal access to retirement savings options to
expand the number of employers who offer their • Including a voluntary employer contribution,
workers a way to save for retirement. Such options as permitted in 401(k) accounts to give
would require certain employers to provide their businesses the discretion to contribute to
employees with access to a savings option, while employee accounts; and
retaining the ability of employees to choose to opt
out of saving. A national, universal access approach • Requiring an employer contribution by
to retirement savings would substantially increase adding a new requirement for employers to
participation and savings levels, particularly among provide contributions into an employee’s 401(k)
low- and middle-income workers. account, improving the return on investment
for savers but generating additional economic
Drawing on a range of state, national, and implications for businesses and workers.
international programs and proposals, this study
analyzes the potential impacts for access, savings,
© 2020 Georgetown University Center for Retirment Initiatives 3 What are the Potential Benefits of Universal Access to Retirement Savings?Figure ES.5: Modeled Scenarios Isolate the Impact of Policy Variations on Access and Savings √ √ √ √ √ √ √ √ √ √ √ √ √ √ These policy variations are applied to generate four automatic, and consistent contributions, and by modeled scenarios (see Figure ES.5). Most policy capitalizing on incentives to save and compounding features are retained across the scenarios to isolate investment returns over an extended time horizon, the impact of only those features that have been millions of additional private sector workers with adjusted on access, savings, and retirement security typical earnings levels will begin to save and build for workers currently lacking access. Modeling and substantial private savings that will increase their discussion within this analysis reflects the trade-offs retirement incomes. among these objectives, the potential challenges for different groups (such as employers and employees), Starting Sooner and Saving Longer Significantly and some of the technical considerations inherent Improves Retirement Outcomes in policy efforts of this scale. Policy options are Because the scenarios analyzed examine the analyzed through the year 2040, assuming adoption impact on coverage and savings through the of a policy in 2021 and a phased implementation year 2040, retirees within this time frame only period from 2022–2026. include the cohort of older savers who will begin Analysis of these scenarios shows that national to access retirement savings. However, younger universal workplace access scenarios could workers from the millennial and Gen Z cohorts reduce the access gap and expand retirement who will not yet have reached retirement age savings coverage by 28 to 40 million workers within the study period have greater opportunities (depending on the chosen design features) by to build assets through continued contributions the year 2040, with additional participation from and additional years of compounding growth. 50 to 70% of private sector workers currently As a result, future generations of Americans will lacking access. Because employees can choose to see far greater benefits from savings than those opt out, no scenario will achieve 100% participation quantified as of 2040 within these estimates. by all eligible workers. Nevertheless, by starting A simple illustration of the additional supplemental to save early in their careers, through simple, lifetime income at age 65 for a young Roth Auto-IRA What are the Potential Benefits of Universal Access to Retirement Savings? 4 © 2020 Georgetown University Center for Retirment Initiatives
saver demonstrates the long-term benefits to the payoffs for participants, even in instances where
youngest workers, who will not have yet reached savers are not able to contribute to their accounts
retirement age by 2040. A young (25-year-old) saver throughout their entire careers, as balances built
with modest earnings levels of around $35,000 up in early years continue to grow throughout the
per year contributing at the default level (5% auto- duration of a saver’s working years.
escalating up to a cap of 10%) envisioned in the
baseline scenario would make contributions of Expanding Access to Retirement Savings
about $110,000 over a 40-year period, and have The ability to close the access gap and boost
an account that grows to more than $262,000 in savings will be affected by the design of the savings
assets. If this lump sum is used to purchase an option. The type of retirement savings accounts
immediate fixed annuity at the age of 65, it would (IRA and/or 401(k) structure), the employers required
generate an annual supplemental income stream of to participate, and the default levels of employee
$14,320 over the remainder of the saver’s lifetime contributions and any employer contributions over
(see Figure ES.6). The returns for this young saver time are all factors that will drive access, savings,
could be helped even more by making an enhanced, asset growth, and retirement income.
refundable Saver’s Tax Credit (“Saver’s Credit”)
available that would boost savings to more than The Auto-IRA model with no employer threshold
$390,000 and generate an annual supplemental (“Baseline Auto-IRA”) would expand access to
income stream of $21,300 for the remainder of the workers at all private sector firms, increasing
saver’s lifetime. participation by more than 40 million workers in
the year 2040 (with the remaining workers gaining
The benefits of starting sooner and saving longer access but choosing to opt-out of saving).
can produce significant improvements in retirement
income outcomes and long-term retirement security. Participation levels fall significantly if employers
The passage of time and the power of compound below a certain employee threshold are exempt.
interest boost savings, because future market returns Policy options, whether through an Auto-IRA or
apply not only to initial contributions, but also to the 401(k) approach, that exempt smaller and younger
market returns already achieved. This compounding firms from the requirement to provide access would
dynamic means that options that encourage savings limit the degree to which the scenarios can close
at a younger age can have significant long-term the access gap. As an example, an exemption of
Figure ES.6: Supplemental Lifetime Income at age 65 for a Young Auto-IRA Saver
(With and Without a Refundable Saver’s Credit)
Assets w/ Credit: $390,456
$400,000 Annual Annuity: $21,300
$300,000
Assets w/o Credit: $262,427
Annual Annuity: $14,320
$200,000
Contributions: $110,122
$100,000
$0
25 35 45 55 65
© 2020 Georgetown University Center for Retirment Initiatives 5 What are the Potential Benefits of Universal Access to Retirement Savings?firms with fewer than 10 employees or in existence the IRA models due to matching or supplemental
less than two years would reduce participation by contributions from some employers, the effect of
an estimated 11 million workers by 2040 under an the increased annual contribution limit on a small
Auto-IRA model (“Threshold Auto-IRA”), with modest sub-set of savers, and lower anticipated levels of
additional reductions in coverage under 401(k) early withdrawals. Savings levels are estimated to
approaches because of anticipated variations in the be slightly lower under a 401(k) approach requiring
number of firms and workers likely to participate (see employer contributions (“Mandatory Employer
Figure ES.7). Contribution 401(k)” relative to a voluntary employer
contribution 401(k) approach, due in part to the
Figure ES.7: Required Universal Access to constraint on wage growth for workers from the
Savings Options Can Increase Participation required employer contribution.
by 50 to 70% Among Workers Currently
Lacking Access Average account balances for participants reaching
60 age 65 in 2040 grow from $66,300 in the threshold
Access Gap Among WorkersFigure ES.8: Cumulative Savings Contributions Part 3: Long-Term National Impacts from
are Highest Within the Baseline Auto-IRA Model,
Increased Savings
Totaling $1.9 Trillion through 2040
Baseline Voluntary Employer In addition to the impacts on participating savers,
Auto-IRA Contribution 401(k)
enhancing access, and building retirement savings
Threshold Mandatory Employer
Auto-IRA Contribution 401(k) would have “downstream” impacts on the broader
$150 $132 economy and the nation’s fiscal health.
Cumulative
$120
$1.89 T Increased Economic Growth and Tax Revenue
$1.53 T
Total Contributions ($Billions)
$1.48 T
$1.42 T Savings programs have implications for the
$90 everyday decision-making of businesses, workers,
and families. These individual microeconomic
$60 decisions around what job to take, whether to start
a business, and how to spend disposable income
$30 aggregate together to have significant impacts on
the economy. More-accessible savings options help
$0 the competitiveness of small businesses and the
2022
2025
2035
2030
2040
financial security of workers, including the self-
employed, encouraging a more-dynamic economy,
*A phased implementation period is assumed from 2022–2026 for a policy
enacted in 2021, with participation in early years consistent with while increased savings levels grow the income
some voluntary early sign-ups by employers before a phased that senior households have available to spend in
implementation of coverage requirements by employer size.
retirement. In addition to the returns they generate
higher average levels of contributions and asset for individuals, personal savings provide a source of
accumulation over time among those who do capital for business investment and growth.
participate due to its provisions around contributions Increased productivity growth from increased
and withdrawals. savings and investment accelerates GDP growth.
If feasible, a voluntary employer contribution Expected increases in the growth rate from the
401(k) approach without a threshold for required scenarios analyzed would add $72–$96 billion
participation (similar to the baseline Auto-IRA (depending on program design) to the national GDP
scenario) or a mandatory employer contribution in the year 2040 (see Figure ES.9).
401(k) approach with a more-aggressive employer Increases are highest under the baseline Auto-IRA
contribution level could produce higher levels of approach, which generates the largest increase in the
savings than the baseline Auto-IRA model. However, personal savings rates through the highest coverage
these approaches and requirements have impacts levels, thus stimulating the greatest productivity
on participating businesses and the broader growth. Among scenarios with an employer
savings market, and federal 401(k) or IRA legislative threshold, the voluntary employer contribution 401(k)
proposals to date have typically contemplated generates slightly more growth than the threshold
an employer threshold out of consideration for Auto-IRA, though in either case the tradeoff is that
the implications for the smallest businesses. The the overall coverage is significantly lower than the
inclusion of the baseline Auto-IRA scenario is baseline scenario. Increased economic activity
intended to show how important the decision of would also grow the tax base, increasing federal tax
whether to include and where to draw an employer collections in the year 2040 by $11–$14 billion.
participation threshold is to overall levels of access,
participation, and savings.
© 2020 Georgetown University Center for Retirment Initiatives 7 What are the Potential Benefits of Universal Access to Retirement Savings?Figure ES.9: Increased Savings and Investment Conclusion
Boost GDP Growth by $72–$96 Billion in
the Year 2040 Any effort to significantly improve retirement
Baseline Voluntary Employer readiness must expand access to ways to save for
Auto-IRA Contribution 401(k) retirement to as many workers as possible. The
Threshold Mandatory Employer ability to close the access gap and boost savings
Auto-IRA Contribution 401(k)
$120 will be affected by the way a program is designed.
The type of retirement savings accounts (IRA and/
$100
Additional Annual US GDP ($Billions)
$96 B
or 401(k) structure), the employers required to
$78 B participate, and the default levels of employee
$80 $76 B
$72 B contributions and any employer contributions over
$60 time are all factors that will drive access, savings,
asset growth, and retirement income.
$40
Regardless of the model selected, what is clear is
$20
that the benefits to savers, retirees, and the nation’s
$0 fiscal and economic well-being can be enormous.
Depending on the design features, a national
2022
2025
2035
2030
2040
approach to universal access to retirement savings
which would require some or all employers to offer
Reduced Benefit Program Spending
their workers either an IRA or 401(k) could:
Reduced demand for government benefit programs
• Increase the number of workers saving for
is another long-term impact of increasing retirement
retirement in the year 2040 by 28–40 million,
security. Several federal programs provide a
with participation from about 50–70% of private
range of support resources to elderly Americans
sector workers who currently lack access;
with demonstrated needs, including health care,
nutrition, housing, and supplemental income. Federal • Help a young worker with a modest income who
spending on these programs already totals nearly starts saving early and follows program defaults
$100 billion per year and is often supplemented for 40 years to save enough to generate as
by state funding. Federal expenditures on these much as $14,320 in additional annual income
programs are anticipated to grow by $75 billion for retirement, increasing to $21,300 in annual
over the next two decades (absent any change in income if eligible to take advantage of a
retirement income trends) as the composition of refundable Saver’s Credit;
the population changes, increasing the demand
from an elderly population and the tax burden on • Increase cumulative total retirement savings by
proportionately smaller generations of future workers. $1.4–$1.9 trillion by the year 2040; and
The modeled universal access scenarios are all • Accelerate economic growth, increasing
expected to diminish this rate of growth in program national GDP by $72–$96 billion in the year
expenditures for low-income seniors over time by 2040.
increasing savings and retiree resources. Federal
Experiences from other countries and the early
and state governments share in these savings,
evidence from states here in the US demonstrate
due to the shared nature of many programs. Federal
that increases in access can be achieved in a simple,
savings in the year 2040 under the baseline Auto-
cost-effective way that supports and includes a
IRA scenario are estimated at $6.2 billion and state
private market of providers ready and willing to
savings at $2.5 billion, for a total of $8.7 billion,
compete to provide such options for employers and
while alternative scenarios generate an estimated
their workers.
combined federal and state program savings of
approximately $7 billion in 2040.
What are the Potential Benefits of Universal Access to Retirement Savings? 8 © 2020 Georgetown University Center for Retirment Initiatives1. Closing the Significant Gaps in Access to Retirement Savings
1.1 Significant Gaps Remain in Access to Gaps in Private Sector Access Disproportionately
Retirement Savings Impact Certain Groups
Workers in the United States are being asked to take Millions of private sector workers in the United States
responsibility for their financial well-being in retirement lack access to an employer-sponsored retirement
now more than ever. What used to be considered the savings plan. Estimates of the size of this “access
foundation for building a secure retirement — Social gap” range significantly based on the data source
Security, employer-provided pensions, and personal and method of analysis, ranging from 33% (about
savings — has been weakening for decades as 40 million) to 64% (about 80 million) of the roughly
traditional defined benefit (DB) pension plans have 125 million private sector employees in the United
been replaced by a defined contribution (DC) system States.3 Using a blend of data from the Current
of savings that was originally meant to supplement, Population Survey of the US Census Bureau and
not replace, traditional pensions. the National Compensation Survey from the Bureau
of Labor Statistics, this analysis estimates that
Most employers today that have retirement plans only 46% of private sector workers lack access to an
offer DC options. This shift over time from employer- employer-sponsored plan, representing about 57
provided pensions to DC plans has put greater million workers as of 2020 (see Figure 1.1).4 This
responsibility on workers to make complex savings figure is anticipated to grow to more than 64 million
and investment decisions that will affect the amount by 2040 under the continuation of current trends.
of money available in retirement. Even Americans
who have access to retirement savings accounts Figure 1.1: More than 57 Million Employees Lack
Access to a Retirement Savings Plan in their
often do not save enough to maintain their quality of
Workplace (2020)
life in retirement. Making this situation worse is the
reality that almost half of all private sector workers do Coverage access gap Access to coverage at work
not have access to employer-sponsored retirement
savings plans to help them save.
A rapidly aging population and differences across
generations increase the urgency to address
46%
retirement savings shortfalls. As senior households
grow in both in number and as a share of the 57.3M 67.3M
GAP
population, there will be fewer working households
to support the needs of the elderly, non-working
population. This demographic shift makes the
ability of elderly households to maintain their living
standards in retirement an important economic and
quality of life issue for all US households.
Over the next decade, for example, the final wave of
baby boomers will reach retirement age, Generation
X will approach retirement, and millennials and
124.6 M
Private Sector Employees
increasingly Generation Z will be in their prime ESI analysis of Census Bureau Current Population Survey
and BLS National Compensation Survey Data.
working years. This shift in population composition
also underscores the importance of enabling younger Workers are much more likely to save for retirement
generations like millennials and Gen Z (which by 2040 if they have access to an employer-sponsored
will cover the prime working ages of 30–60) to have retirement savings plan. Although workers can
opportunities during their crucial savings years to establish their own retirement savings accounts
build resources to support their financial futures. if they lack such access, they rarely do so in
© 2020 Georgetown University Center for Retirment Initiatives 9 What are the Potential Benefits of Universal Access to Retirement Savings?practice, with workers 15 times more likely to 2020, the average monthly Social Security retiree
save for retirement if they have access to a payroll benefit was $1,503 per month for an individual,
deduction savings plan at work.5 Workers at equivalent to an annual income of just 1.4x the
firms that provide an employer-sponsored plan Federal Poverty Level, or $2,531 for a couple.10
are considered to have access to coverage,
although they may not choose to be participants. Unfortunately, a significant proportion of the retired
population in the US has come to rely on Social
For small businesses, the complexity, cost, Security for a material proportion, if not all, of their
and perceived legal risk reduce the likelihood retirement income. Among elderly Social Security
they will offer a plan to their employees. beneficiaries, 70% of unmarried people receive half
Programs that make access to savings easier or more of their income from Social Security, as do
by connecting a worker to a savings account 50% of married couples. About 45% of unmarried
and including design features such as automatic people rely on Social Security for 90% or more of
enrollment and auto-escalation can significantly their income.11 While a large share (42%) of the
increase participation and savings levels.6 baby boomer cohort expects to rely heavily on
Social Security as a source of income in retirement,
The gaps in access to retirement savings plans younger generations are expecting lower income
are greater among younger workers, women, replacement from Social Security and to rely primarily
minorities, and lower income workers.7 Access to on self-funded savings for retirement income.12
retirement savings plans also varies significantly by
employer size and industry. Larger employers — for Shortfalls in Private Savings
example, those with more than 500 employees, and
in sectors paying higher wages — are more likely The shift over time from employer-provided
to offer their workers retirement savings plans.8 pensions to defined contribution plans has put
These differences contribute to variations in access greater responsibility on workers to ensure their
among demographic groups and widen access financial well-being in retirement. However, even
gaps among different segments of the population. Americans who have access to retirement savings
accounts often do not achieve sufficient savings
Too Many Have Little Saved for Retirement levels to maintain their quality of life in retirement.
Researchers from the Center for Retirement
These gaps in access have serious implications, Research at Boston College report that median
leaving many ill-prepared financially for retirement. account balances for 55- to 64-year-old working
While elderly Americans are supported by households with incomes near the median are below
Social Security, many elderly households fall $100,000.13 For lower income households who are
short of the income replacement standards less likely to have access to retirement savings plans
recommended to maintain the quality of life they through their employers, the retirement readiness
enjoyed during their working years. Even when gap is even more stark. Among workers nearing
considering a generous measure of retirement retirement with the lowest 20% of income, 79%
savings (net worth), more than three-quarters of have no retirement account assets whatsoever.14
Americans fall short of conservative retirement
savings targets for their age and income level.9 Younger generations are also struggling to build
the foundational savings that will help support their
Putting Social Security in Context retirement readiness. Young savers face a range of
challenges, such as rising educational costs and
Social Security is one of the key pillars of the
student loan debt burdens, challenges in securing
American retirement system, but was never
housing, and a cycle of economic challenges. Amidst
designed to meet all retirement income needs.
these challenges, two-thirds of working millennials
Social Security provides a basic retirement income
lack any retirement savings, raising concerns
floor for retirees and should be supplemented
about their long-term retirement readiness.15
by employer-based and personal savings. In
What are the Potential Benefits of Universal Access to Retirement Savings? 10 © 2020 Georgetown University Center for Retirment InitiativesAn Aging Population Increases the Urgency for each elderly household in 2005 to a ratio of
closer to two to one by 2030 (see Figure 1.3).
Within this context, a rapidly aging population
and differences between generations increase the Since working age households are the primary
urgency to address retirement savings shortfalls. contributors to the tax base, this falling dependency
Over the next decade, for example, the final ratio will create significant fiscal pressures as
wave of baby boomers will reach retirement demand for benefit programs increases. This
age, Generation X will approach retirement, demographic shift makes the ability of elderly
and millennials and increasingly Generation households to maintain their living standards in
Z will be in their prime working years. retirement an important economic and quality of
life issue for all US households. While considerable
The aging of the baby boomers continues a shift focus has been placed on the future fiscal
that has been occurring for decades in the balance solvency of Social Security and Medicare, several
between the retiree and working-age population. means-tested programs like Medicaid and the
The University of Virginia’s Weldon Cooper Center Supplemental Nutrition Assistance Program (SNAP)
projects the nation’s elderly population will increase also will see significant increases in demand
from 54 million in 2020 to 71 million by 2040, a if elderly households lack sufficient income in
growth rate of 32%, about three times the rate of retirement. This also portends a lower economic
the non-elderly population.16 This also affects the growth environment, with the workforce growing
composition of US households, with households at a slower rate than in prior generations.
headed by seniors anticipated to grow from 33
million in 2020 to 43 million in 2040, an increase of Structural factors indicate that this shift in the
more than three times the expected rate of growth balance between retiree and younger households
for working age households (see Figure 1.2).17 is likely to reflect a new normal. Increasing life
expectancy will help to grow the elderly population,
As senior households grow in both in number while younger generations show declining birth rates
and as a share of the population, there will be and are having their first children later in life (slowing
fewer working households to support the needs generational replacement cycles). Figure 1.4 shows
of an elderly, non-working population. Census projected changes to the US “population pyramid”
Bureau data indicate that the “dependency ratio” by age and generation over the next two decades.
is currently falling rapidly from its historic norms This shift in population composition underscores
— from almost four working age households the importance of enabling younger generations
Figure 1.2: Senior Households are Figure 1.3: ... While Falling Ratios of Working-Age
Growing as the Population Ages ... to Elderly Households Create Fiscal Pressure
2020
3.9 3.8 3.9
3.8
2040 3.6 3.6 3.7
+5%
+12% +32% 3.2
US Households (Millions)
48.4 2.8
44.9 45.9
43.4
40.0 2.5
32.8 2.3 2.3 2.3
+13%
6.3 7.2 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040Figure 1.4: Millennials and Gen Z will be in Prime Earnings and Savings Years by 2040
Post-Alpha Alpha Gen Z Millennials Gen X Boomers Silent
2020 Age Cohort 2040
0 to 4
5 to 9
10 to 14
15 to 19
20 to 24
25 to 29
30 to 34
35 to 39 Millennials
40 to 44 and Gen Z
30 - 60
45 to 49
Years
50 to 54
55 to 59
60 to 64
65 to 69
70 to 74
75 to 79
80 to 84
85+
US Population (M)
ESI analysis of American Community Survey Data and University of Virginia Population Projections
like millennials and Gen Z to have opportunities to already adopted a mix of public and private
build resources during their crucial savings years. By models to move toward universal access that
2040, the millennial and Gen Z cohorts will occupy have resulted in significant savings over time.
the prime earnings years of ages 30 to 60 and will be
helping to supporting a larger retiree population than National universal access models have been
ever before while trying to ensure their own financial proposed by academics and policy experts, and
futures. Enhancing the ability of these generations several legislative proposals have been introduced
to strengthen their financial security is crucial to the in Congress over the past decade and as recently as
nation’s long-term economic health and prosperity. 2019. In the absence of national action, several states
have adopted innovative public-private partnership
1.2 Policy Approaches Taken to Close the models to expand access requiring employers to
provide a retirement savings option for their workers.
Access Gap
A few of these new state programs have launched,
Policymakers in the United States have developed providing many employers and their employees with
and started to implement reforms intended to new ways to save, and the number of new accounts
close the gap in private sector retirement savings and assets are now growing at a steady pace.18 At
access, encourage savings, and strengthen the the same time, recent Congressional action, such as
retirement readiness of workers. Such efforts are the SECURE Act (P.L. 116-94), intended to expand
not unique to the US, with other countries having the adoption and improve the design of defined
What are the Potential Benefits of Universal Access to Retirement Savings? 12 © 2020 Georgetown University Center for Retirment Initiativescontribution plans is another positive step.19 However, Australia: Superannuation Guarantee
both of these initiatives are unlikely to achieve a
significant national expansion of coverage and Launched in 1992, the Superannuation Guarantee
savings. in Australia requires employers to contribute
to a retirement savings account on behalf of
International and state examples, as well as national eligible employees. Employers are currently
proposals advanced by legislators and policy experts, required to contribute 9.5% of an employee’s
provide several scenarios intended to achieve the earnings to a superannuation (or “super”) fund
goal of universal access. This section reviews these on behalf of workers above certain salary and
approaches and outlines a set of policy scenarios that hours thresholds.20 The guaranteed contribution
are modeled and analyzed in Part 2 of this study to rate will rise to 12% by July 2025. Contributions
see how they expand access and boost retirement are not required for very-low-wage and part-
income. time workers. However, contributions made for
low- and middle-income workers are matched
International Models Toward Universal Access by the national government up to a maximum
amount of $500 annually to help build assets.21
Several countries have launched programs to
provide universal workplace access to retirement Although most employees are free to determine
savings options. These programs feature a mix of which fund they prefer their employers contribute to,
public and private structures for administration and many allow default investment funds to be applied.
contributions. Common elements include automatic Funds can be organized by a financial services
features to help make enrollment and saving easier company, employer or industry group, or through
for participants, which helps to build scale and self-managed funds for five people or fewer.
control costs.
As of 2020, 16.7 million Australians held super-
Programs in Australia, New Zealand, and the United accounts and super-fund assets totaled $2.9 trillion.
Kingdom, for example, have gained significant The average account balance of those with savings
scale over time, with millions of participants in super-funds (non-zero balances) is approximately
and billions in assets under management (see $121,000 for women and $169,000 for men.22
Figure 1.5). Their stories demonstrate the
sustainability of these types of programs and New Zealand: KiwiSaver
their potential to build significant wealth.
Launched in 2007, the KiwiSaver is a publicly
administered defined contribution system in New
Figure 1.5: Employer-Based International Zealand. Participation is voluntary, but its auto-
Savings Programs enrollment feature requires that a worker must
opt out if they choose not to participate. Once an
Australia Superannuation Guarantee – 16.7 million
account is created, it is portable among employers
participants
and requires contributions from both employers
Requires employers to contribute 9.5% of an eligible and employees. Employees set a contribution level
employee’s earnings to a retirement savings account. of 3% or higher of earnings, employers provide a
KiwiSaver – 3 million participants contribution of 3% of earnings, and the government
makes an additional “tax credit” contribution.
Workers auto enrolled (can opt out) to contribute ≥
3% of earnings + 3% employer match and a tax credit Early withdrawals are highly restricted before
contribution. the retirement age of 65, but employees may
UK NEST – 9 million participants be able to make early withdrawals of part (or
all) of their savings if they are buying a first
Uncovered workers auto enrolled (can opt out) at default
home, moving overseas permanently, suffering
contribution levels of 5% employee + 3% employer.
significant financial hardship, or seriously ill. As
© 2020 Georgetown University Center for Retirment Initiatives 13 What are the Potential Benefits of Universal Access to Retirement Savings?of 2020, KiwiSaver has grown to more than 3 ESI studies for task forces examining the issue
million participants and $62 billion in assets.23 of insufficient retirement savings in Pennsylvania
and Colorado have shown that the “cost of doing
United Kingdom: National Employment Savings Trust nothing” for each of these states will amount
(NEST) to several billion dollars in additional state
expenditures.25 For a representative household
NEST is a defined contribution savings plan in the
in Colorado, the study found that additional
United Kingdom that launched in 2012. It provides
savings of just over $100 a month over 30 years
individualized savings accounts to those who do
could close the gap and achieve recommended
not have access to an employer-based plan. The
income replacement levels in retirement.26
NEST program’s administration is funded through
fees on contributions, and program services Recognizing the significant costs of doing nothing,
are contracted to private financial providers by states across the country have initiated a variety
the NEST board. Employers can participate in of efforts aimed at helping private sector firms
private sector plans or use the NEST program, overcome the barriers to offering retirement savings
which essentially functions as a public option. options for their employees. Since 2012, at least 45
NEST is required to take any employer, but the states have introduced legislation to either establish
self-employed are currently not covered. a state-facilitated retirement program for private
sector workers or study the feasibility of establishing
Workers must be auto enrolled, and they can choose
one.27 States are designing different models that
from a set of investment options, including target
seek to address these issues (see Figure 1.6).
date funds, but there must be a default investment
option and fees are capped at 75 basis points. State-facilitated programs seek to establish the
Default contribution levels for the plan have grown program architecture and administration at a
over time to 5% of earnings for the employee and statewide level, enabling employers to participate
3% of earnings for the employer, totaling 8%. The with minimal effort. The state generally appoints a
overall savings opt-out rate is about 10% and 99% of board to develop program rules and contract with
participants stay with the default investment option. administrative and investment managers. Program
funding is covered by fees to the participants, and
As of March 2020, the program had grown to more
states do not subsidize the program ongoing or
than 9 million participants, received $4.8 billion in
assume financial liability for investment outcomes.
contributions, and had $9.5 billion in assets.24
There are currently three basic state models with
US Efforts Have Fallen Short of Universal Access
variations considered:
State Efforts to Enhance Savings
Auto-IRA: The most common approach for state-
Due to the continued failure of Congress to take facilitated programs has been a payroll deduction
action to close the access gap, several US states “Auto-IRA” model. States facilitate a simple and
are adopting simple, low-cost, easily accessible low-cost IRA program using automatic enrollment,
ways for more private sector workers to save for a voluntary enrollment mechanism where the saver
retirement. States are acting out of necessity. has complete control over participation in the
They already understand that they face significant program and can opt out at any time or change
budgetary and economic consequences if their the default contribution level. All the employer
residents retire with insufficient retirement income. must do is provide basic employee information
As the population ages, states will be increasingly to the program, and remit payroll deductions.
pressed to deal with dramatic increases in the cost Employers who do not already have a plan of their
of social service programs for seniors living at or own would be required to facilitate the use of the
below the poverty line — namely, programs related state program for their workers. These programs
to healthcare, housing, food, and energy assistance. seek to maximize participation and savings and
What are the Potential Benefits of Universal Access to Retirement Savings? 14 © 2020 Georgetown University Center for Retirment InitiativesFigure 1.6: State-Facilitated Retirement Savings Models Adopted to Date
Auto-IRA Voluntary IRA Voluntary Voluntary Open Multiple
(Secure Choice) Marketplace Employer Plan (MEP)
California (active) New York Washington (active) Massachusetts (active)
Illinois (active) Vermont
Oregon (active) New Mexico (hybrid)
Colorado
Connecticut
Maryland
New Jersey
minimize fees through automatic features, simple Multiple Employer Plans (MEPs): A MEP is
design in investment options, and scale. Active essentially a 401(k) used by several businesses
programs in California (CalSavers), Illinois (Illinois that join together to offer a common plan to each
Secure Choice), and Oregon (OregonSaves) employer’s workforce, pooling their resources and
follow this approach (see Figure 1.7). outsourcing plan management. Because 401(k) plans
are ERISA plans, participation by employers must
be voluntary.28 This scenario is currently operating
Figure 1.7: Recently Launched State Auto-IRA in Massachusetts and will soon launch in Vermont.
Programs
OregonSaves – Launched 2017 Marketplace: A marketplace by design is
a voluntary platform that creates a single
Auto-IRA program required for all employers without an
“clearinghouse” for private sector providers to
existing qualified plan, 5% default employee contribution
offer plans. It enables small businesses to find and
with auto-escalation, and no employer match permitted.
compare retirement savings plans in an apples-
Illinois Secure Choice – Launched 2018
to-apples manner. It presents a diverse array of
Auto-IRA program required for employers with ≥ 25 plans (IRAs and 401(k)s) pre-screened by the state
employees without an existing qualified plan, 5% default to ensure certain standards are met. This reduces
employee contribution, and no employer match permitted. search costs for employers, allowing them to rely
CalSavers – Launched 2019 on the state to establish certain standards for plans
Auto-IRA program required for employers with ≥ 5 offered and ensure that the offerings meet those
employees without an existing qualified plan, 5% default standards. This model is currently operating in
employee contribution with auto-escalation, and no Washington.
employer match permitted.
Hybrid: In addition to these three basic models,
states also have considered combining these models
Participation in the Auto-IRA programs is typically to create a “hybrid” version of a program. New
required for private firms meeting certain criteria Mexico is the first state to adopt a hybrid model
(such as a size threshold) if they do not already that includes both a voluntary payroll deduction IRA
offer their employees a qualifying alternative. and a marketplace. Other options considered but
However, a program also can be structured as a not yet adopted include offering both an Auto-IRA
voluntary payroll deduction option that is voluntary and a MEP or combining all three approaches.
for both employers and employees, requiring opt-
To date, international experience with the KiwiSavers
in. This approach has been adopted, but not yet
program in New Zealand and early state experiences
implemented, by New York and New Mexico.
with MEPs and marketplaces in the US suggest that
it is much more challenging for a voluntary program
to achieve significant reductions in the access gap.29
© 2020 Georgetown University Center for Retirment Initiatives 15 What are the Potential Benefits of Universal Access to Retirement Savings?You can also read
