The Value of Nudging Public Workers to Save for Retirement
As government pensions become less generous for new hires, automatic enrollment in supplemental savings plans can make a big difference.
Polly was 67 years old, had failing health and was ready to retire. She had rejoined the workforce in her 50s after her husband passed away, but never took advantage of her employer's deferred-compensation program. Although her employer reminded her that if she joined the plan the organization would match her contributions, she thought she could not afford it. Polly lost out on 15 years of retirement savings.
Inertia is a big part of the savings problem. Behavioral economists talk about the importance of nudging people so they make better decisions. Automatically enrolling employees into a retirement savings plan is an example of a nudge that is effective and has become popular in the private sector. Employees have to take action to opt out of the retirement plan.
Although most state and local government employees have access to a defined-benefit pension, that pension has become less generous for many newly hired employees. They will have to rely on other retirement savings to have an adequate income in retirement. This is a compelling reason for public employers to make it easier for employees to save in a supplemental savings plan. Yet there are challenges to putting auto features into action in the public sector.
What are the barriers? The Center for State and Local Government Excellence recently partnered with researchers from the University of Georgia and found that legal constraints, perception, labor concerns and administrative challenges are the major hurdles. Although only 11 states permit automatic enrollment for public defined-contribution plans, a few places have found a way forward.
The Missouri State Deferred Compensation plan, for example, uses automatic enrollment for state employees hired after July 1, 2012. Multnomah County, Ore., also was able to set up auto-enrollment in its supplemental deferred-compensation plan because the state's anti-garnishment statutes allowed the practice if approved in a labor contract. Since Multnomah County moved to a hybrid pension plan for new employees in 2003, the county's largest union had become concerned that its members had low participation rates in the county's 457(b) plan. The union agreed during negotiations that automatic enrollment would apply to new unionized employees, with the option available to others. Most employees have stayed in the plan rather than opting out.
Likewise, the city of Los Angeles has been a leader in promoting supplemental retirement savings, in part because the city does not participate in Social Security. After examining state laws, the city of Los Angeles Board of Deferred Compensation Administration and human resources staff determined that automatic-enrollment programs could be established as long as they were negotiated and included in collective-bargaining agreements.
Although some would argue that it is paternalistic to establish automatic enrollment into a retirement savings plan, the evidence demonstrates that most people will stick with a savings plan if they don't have to make an effort to set it up.
While career public-sector workers traditionally have been able to retire with an adequate retirement income, more-recent hires likely will need to work longer and save more. State legislatures should take a look at their anti-garnishment laws to see if they need to be changed to make it easier for state and local workers to save. Automatic enrollment in retirement-savings plans is an excellent way to help the new wave of public-sector workers achieve the same post-employment retirement security as the baby boomers they are replacing.
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