Retirement

Retirement Savings for all California Workers

Hosai Ehsan — Wed, 24 Jun 2009 00:15:00 -0400

Imagine a California where every employee has the option to participate in a work based retirement savings plan.

Imagine a California where all workers retire with enough savings to sustain them through old age, so they do not have to depend on the government for assistance.

Well, this may not be too far-fetched of an idea, because California is taking strong steps in this direction.

Yesterday, the California State Senate Public Employment and Retirement Committee passed Assembly Bill 125, the California Employee Savings Program. Authored by Assemblyman De Leon, AB 125 aims to create a voluntary, universal, portable retirement account for California workers who do not have access to a retirement savings plan. Furthermore, AB 125 would enable thousands of small businesses to offer low-cost retirement savings to their employees.

The truth is that California's economy is built on its dedicated workforce, so it is important to nurture their enthusiasm and reward their hard work by giving them the tools to secure a financially stable future. Currently, 43% of California's workforce does not have the option to save through payroll deduction. That means that despite their years of hard work and economic contributions to the state, they will most likely end up depending on government aid when they retire. Also, 78% of today's seniors did not build sufficient assets to sustain their standard of living, reports the Institute on Assets and Social Policy.

In a recent AARP survey, 63% of respondents whose current employers do not offer a retirement plan said they would be likely to use it if their employers offered one. In other words, a majority of the employees are interested in building retirement savings if they are given the adequate tools to do so on the job.

At the national level, President Barack Obama has endorsed the idea of creating automatic workplace retirement savings plans. After all, a California where every worker has the option to secure retirement savings is not an imaginary scenario. It is a realistic possibility, favored by California workers and small businesses and supported by the California Legislature.

If Auto-Enrollment Isn't Quite Enough, Why Not Make it Better?

Mark Huelsman — Wed, 01 Oct 2008 22:31:00 -0400

If you’re like me, you have no interest in foolishly looking at the dwindling numbers in your retirement plan. Luckily, I’m decades away from retirement and can afford occasional market volatility. My initial concern during this crunch, however, wasn't the fluctuating values in our nest eggs. Instead, my worry was that employers might draw back from automatic enrollment programs, and that new employees might consider opting out of plans more frequently. Not so, according to people smarter than myself. According to a recent Chicago Tribune article, not only has the number of companies automatically enrolling employees in retirement plans doubled, but there shouldn’t be much cause for concern that, despite what looks like prolonged doom and gloom for our economy, companies may find auto-enrollment less attractive.

For behavioral economists (and their many fans), this probably comes as no surprise—default options work. What the article argues and suggests by its title, however, is that automatic enrollment (despite its increasing popularity) is insufficient in creating a robust nest egg at current match rates. Likely true, though the Tribune makes it seem as though auto-enrollment is a static business decision by saying that it “may create a false sense of security and discourage workers from putting more away.” A false sense of security is an issue, of course, but I would argue that a balance of $0.00 in an employer-sponsored plan is far, far riskier.

The real fix lies in automatic escalation—the next generation of automatic enrollment. Instead of automatically enrolling workers at a higher, static contribution rate, auto-escalation would simply add a higher percentage of the employee’s pay into the company plan over time (while still maintaining the opt-out option at any point). This strikes me as a way to solve the problem of insufficient funds without crippling an employer with mandatory higher match rates—though ideally, a company would increase its match rate if possible.

In 2007, according to the Profit Sharing/401k Council of America, 81.9% of eligible workers had balances in their plans—up from 78.9% in 2006. Those 3% may not have sufficient funds for retirement, but it’s certainly better than not contributing. The alternative to automatic enrollment isn't forcing employees to fend for themselves, it's nudging them toward even more beneficial decisions.

The past few weeks and months have taught us the value of savings and responsibility on a personal, corporate, and federal level. Automatic enrollment, by any measure, has been beneficial to America’s workers. The discussion shouldn’t be about how comprehensive it isn't. It should be about how comprehensive it can be.

The Pressing Need to Rethink Our Existing Tax Rules for Retirement Savings

Annette Nellen — Sun, 20 Jul 2008 18:00:00 -0400

On 6/26/08, the House Ways & Means Committee held a hearing on Individual Retirement Accounts (IRA) due to concern over underutilization and reasons why many small businesses did not offer some type of IRA plan for workers. The GAO report on the topic was highlighted. Subsequent to this hearing, a few other committees held hearing on retirement savings and a report was released by Ernst & Young on people not having enough to live on in retirement.

There are some troubling data and realities about IRA participation and inadequate retirement savings. For example:

For 2004, 79% of all taxpayers were eligible to make an IRA contribution (about 145 million taxpayers). Just 14.7 million taxpayers made a contribution though (about 10%). Participation was highest for taxpayers with $200,000 or more of AGI and that group also made the largest average contribution. For eligible taxpayers with positive AGI, participation was greater among higher income taxpayers. [Bryant, Accumulation and Distribution of IRAs, IRS, 2004]
In 2001, 60% of taxpayers either had assets in or income from an IRA or employer-sponsored plan. Thus, 40% of taxpayers have no retirement accounts although they may have other assets for retirement. (Sailer & Holden, IRS, 2004)

I have more information in a short article - Rethinking IRAs.

On 7/10/08, the Joint Economic Committee held a hearing on the shift from defined benefit plans to defined contribution plans, the greater risk upon workers under DC plans, and the greater return DB plans produced. A representative of the venture capital industry noted the importance of DB plans to providing funds for investment.

On 7/16/08, the Senate Special Committee on Aging held a hearing on people not saving enough for retirement, the recent increase in hardship withdrawals from 401(k) plans and the possibility of "automatic IRAs" that allow for payroll contributions to IRAs. Click here for more information on this topic from Chairman Kohl.

The EY report (July 2008) - Retirement vulnerability of new retirees, found that "almost three out of five middle-class new retirees can expect to outlive their financial assets if they attempt to maintain their current pre-retirement standard of living. To avoid outliving their financial assets, middle-class retirees will have to reduce their standard of living, on average, by 24 percent." The report was prepared for Americans for Secure Retirement.

Living longer, inadequate participation in retirement savings, financial illiteracy, greater personal responsibility for managing retirement savings (DC versus DBs), frequent job changes, and retirement tax rules that are skewed to benefit higher income individuals all point towards a retirement savings crisis that will cause people to work longer, put pressure on social programs and children of retirees, and lower our standard of living.

The reality of greater personal responsibility for retirement will require greater financial education in schools, easier options for retirement savings (such as automatic payroll contributions) and modification of existing tax rules to bring greater equity to the system.

What do you think?