JOHN: Auto IRAs can shore up retirement security

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OPINION/ANALYSIS: 

Social Security will celebrate its 75th birthday this Saturday, but the retirement program’s fiscal health is fading. Last week the trustees’ report revealed it’s running deficits much sooner than expected.

There is no danger that Social Security will cut benefits for current retirees, but the report makes it quite clear that the program cannot afford to pay younger workers the same level of benefits their parents and grandparents enjoyed.

This reality makes it even more essential that all of today’s workers have the opportunity to build retirement savings that will combine with their Social Security benefits to provide a comfortable standard of living in their retirement years.

While one hears a great deal about 401(k) plans, the sad fact is that only about half of all Americans work for a company that offers them. Others may want to save for retirement but get confused by the wide variation of products, providers and complex financial terms. The complexity breeds fear among many that they may be misled by a sharp operator or make a move only to find out that they didn’t understand what they were buying. Daunted by those unsavory prospects, most simply do nothing to build a retirement nest egg.

Enter the Automatic IRA, a private-sector, small-business retirement savings program with support from both the right and the left that would allow 90 percent of Americans to use the simplicity of a payroll deduction to save for retirement. The Automatic IRA idea has been percolating for several years, since it was developed at the Retirement Security Project by Mark Iwry (who was then at Brookings Institution) and me.

Last week, Sen. Jeff Bingaman, New Mexico Democrat, introduced a new version. This latest iteration, S. 3760, features several new twists that expand the role of the private sector and make it easier for workers to build retirement security.

The Automatic IRA is designed to benefit both new savers and small-business employees who had a 401(k) at a previous job and want to continue to contribute regularly to a retirement account. To keep things simple for both employers and employees, it offers a very simplified account structure and automatic enrollment, a mechanism that automatically directs a percentage of every paycheck into a specific tax-advantaged retirement investment unless the worker decides to opt out.

Studies by the group Retirement Made Simpler show that well over 80 percent of employees who have been enrolled automatically strongly like the process and that most start to save earlier than they would have otherwise.

The Automatic IRA is designed to use private-sector funds managers. Mr. Bingaman’s new version creates a website that enables the employer to select a funds manager and then connect the two to establish the relationship. It also creates a list of private-sector providers who are willing to accept accounts from any small business. If an employer cannot decide on a specific funds manager, he or she can simply click on that button on the website and be assigned at random to one of the universal providers.

As parts of a private-sector initiative, both the website and the system of universal private-sector providers replace what in previous versions had been a centralized structure similar to the federal employees’ Thrift Savings Plan for workers who could not find another place to put their account. The new Bingaman bill aims to let workers move their money from a 401(k) plan to an Automatic IRA and then back to a 401(k) as they move from job to job. The result would be a seamless account system that would enable employees to save for retirement no matter where they work.

Other improvements include a new version of a temporary Treasury bond account that would allow new savers to accumulate up to $5,000 without paying administrative costs. Once it reaches that amount, the account automatically would be transferred to private-sector management. This eliminates the problem of costly small accounts where a worker’s savings are depleted by administrative costs that exceed the earnings on the account.

The Bingaman bill and a House counterpart introduced Tuesday by Rep. Richard E. Neal, Massachusetts Democrat, are a practical way for younger employees to build real retirement security over and above what they will receive from Social Security. This common-sense approach was endorsed in 2008 by both presidential campaigns and has attracted support from the conservative National Review and the liberal New York Times.

With support spanning the political spectrum and Social Security fading fast, the Automatic IRA is a big idea whose time has come.

  • David C. John is senior research fellow in retirement security and financial markets at the Heritage Foundation’s Roe Institute for Economic Policy Studies.

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