With the introduction of new legislation to implement the Automatic IRA—a simple, low-cost retirement savings vehicle for employees of small businesses—the effort to enable many more Americans to use a payroll deduction to build retirement security moves to a more active phase. A new bill by Senator Jeff Bingaman (D–NM) and a somewhat different version by Congressman Richard Neal (D–MA) retain the basic features of the original version, but they also include major improvements over past efforts.
The Automatic IRA is a conservative, market-oriented solution to help address our retirement savings crisis. It would increase the proportion of Americans who can save for retirement at work from 50 percent to 90 percent, make it simple for small business owners to offer IRAs to their employees, and create low-cost accounts that an employee can understand and use without having to be a financial expert.
The new version contains a number of new ideas that will even further increase the value of the proposal. The basic idea was unveiled at Heritage in February 2006, and it has support from both conservatives and liberals.
The need for an Automatic IRA is simple to understand. With Social Security facing financial problems sooner than expected, either retirement saving will have to become easier and more universal, or there will be huge pressures for new and massive government initiatives to expand Social Security or otherwise provide benefits for retirees. Even if it were fully funded, Social Security provides only about half of the income that an average American will need in retirement, and absent major tax increases the program will end up paying younger workers much less than what it provided to their parents and grandparents.
It is simple to say that people should save, but the fact is that today most do not until it is too late to build up an adequate nest egg. Most retirement saving vehicles are too complex for the average person. Other potential savers hesitate because they fear going into the wrong investment or being cheated by a salesman. As a result, large numbers of people do nothing for fear that they will make the wrong decision.
That is why 401(k) plans increasingly use automatic enrollment, a private sector innovation that keeps the worker in complete control but offers automatic choices that the worker can override if he or she chooses. Studies by the group Retirement Made Simpler show that automatic enrollment is extremely popular among workers and enables them to begin saving much sooner than they would otherwise.
The Automatic IRA simply uses the same automatic enrollment technique that has worked so well in 401(k) plans and adds it to the same IRA we have all known for decades to create a simple, low-cost retirement savings vehicle for workers who currently have no workplace-based way to save for retirement.
While many focus on the value of the Automatic IRA to a new saver, it would be equally valuable to older workers who change jobs from a company that offers a 401(k) plan into a smaller company that has only the Automatic IRA. Under the proposal, that worker could combine his or her old accounts into an Automatic IRA that allows the worker to continue saving. Data show that most workers change jobs as many as 10 times during a career, and without the ability to continue saving through payroll deduction, many workers will have gaps in their saving history that could endanger their ultimate financial security.
The Automatic IRA makes it easy for almost all Americans to use privately managed retirement savings vehicles to build their own retirement security rather than ending up having to depend on the taxes of future workers through a government program. Making retirement saving simpler and more available is far preferable to another government program that replaces savings with government-paid benefits.