The States’ Retirement-Savings Social Experiment
Many of them are implementing or seriously considering savings plans for private-sector workers. At stake are both the states' and their residents' fiscal well-being.
Several states are undertaking what amounts to a significant social experiment, one that leaders and policymakers in other states will want to watch closely.
Concerned about private-sector employees' lack of retirement savings and the potential impact on poverty levels, and subsequently on state budgets, legislators in nine states -- California, Connecticut, Illinois, Maryland, Massachusetts, New Jersey, Oregon, Vermont and Washington-have enacted programs designed to remedy both problems.
They have good reason. Unlike most government employees, more than 30 million of the nation's private-sector workers -- about a third of the workforce -- lack access to a retirement savings plan through their jobs. While some of these employees may have other savings vehicles, such as individual retirement accounts (IRAs), research by The Pew Charitable Trusts has shown that only 28 percent of those without access to an employer-provided plan have any retirement savings at all.
More recent research illustrates the concern and cost that inadequate retirement savings pose for states. In January, the Pennsylvania Treasury released an independent study that quantified the fiscal and economic costs to the state of insufficient savings: Public-assistance costs due to inadequate retirement savings reached an estimated $702 million in 2015, while tax revenue shrank by about $70 million. The study projects that Pennsylvania's net assistance costs will grow to $1.1 billion by 2030, by which point the cumulative 15-year cost could top $14 billion.
The fiscal issues Pennsylvania faces from inadequate retirement savings are by no means unique. In 2016, lawmakers in more than half of the states introduced legislation to create state-sponsored retirement savings plans for employees who lack access to one at work. Today, 80 percent of the states -- including Pennsylvania -- are considering or have considered legislation to address gaps in retirement-plan access. But the major development in the past year is that nine states have already moved to implement these programs.
Their approaches vary. California, Connecticut, Illinois, Maryland and Oregon are launching automatic-enrollment IRAs, state-facilitated programs administered by private financial firms with plan participants bearing the program cost. New Jersey and Washington state, meanwhile, have created online marketplaces: state-managed websites listing plans administered by private firms that meet minimum standards. Massachusetts and Vermont have opted for a multiple-employer plan, which is a state-developed group 401(k) available to eligible employers (the Massachusetts plan is limited to small nonprofits).
Coverage of privately employed workers could eventually be extensive. California's Secure Choice auto-IRA program, CalSavers, aims to have a pilot in place by year's end and ultimately to cover 285,000 employers with more than 6 million employees. Speaking at a Pew-hosted forum in Sacramento in late 2016, State Controller Betty Yee underscored the program's potential impact, calling it "an ambitious step that is part of a growing national movement" and adding that it could help keep millions from retiring in poverty.
Oregon, the first state to launch a state-sponsored auto-IRA program for the private sector, completed its first wave of enrollments in late 2017. OregonSaves is focusing initially on large employers, with smaller companies joining during the next two years. Once the program is fully implemented, the state hopes to provide retirement-plan access to nearly 800,000 workers at more than 64,000 businesses.
The plans do have some possible risks: How would a statewide program affect small employers? Would savings in a state plan be offset by increases in credit-card and other debt among low- to moderate-income households? And how these state-sponsored plans relate to federal pension law remains somewhat unclear.
Pew's research shows that the biggest hurdles for businesses when it comes to offering retirement savings plans are the financial costs and organizational resources needed to launch them. The findings suggest that if states could minimize administrative and financial burdens on employers, the business community would react positively, especially employers who do not offer savings plans now.
Meanwhile, the workers themselves have cited their lack of knowledge about retirement plans as a roadblock to saving. Many workers also are unsure about how much they need to be able to retire comfortably; less than a third who responded to a Pew survey had tried in the past two years to determine how much they would need.
It's clear, however, that plan participation can make a difference in financial behavior beyond the mere act of saving. In addition to adding to their nest eggs, research shows, employees saving through a workplace plan are more likely to engage in formalized retirement planning and to seek out online tools and calculators rather than simply "guesstimating" their retirement needs.
The implementation process for this experiment will continue, as will close scrutiny by states that are considering programs of their own. Much is at stake -- both in terms of states' budgets and their residents' financial well-being in retirement.