States Forge Ahead of Feds to Address Retirement Crisis
As research shows how ill-prepared most working Americans are for retirement, pressure is mounting for states to step in.
As President Obama advocates this week for shoring up the nation's Social Security program, some states are already moving ahead with their own programs to try to improve retirement security.
Two states, Illinois and Oregon, have signed so-called Secure Choice bills into law, while nearly two dozen more have been considering similar legislation. Secure Choice bills would set up retirement plans for workers who don't have pensions through their employer. In a speech at a White House conference on aging, Obama on Monday announced he had directed Labor Secretary Thomas Perez to craft rules giving states clear guidance on how to establish such plans.
Momentum has gained as more and more research shows how ill-prepared most working Americans are for retirement. More than 38 million people, or roughly 45 percent of working-age households, have no retirement savings at all, according to new data from the National Institute on Retirement Security. The median retirement account balance is $3,000 for all working-age households -- with and without retirement accounts -- and $12,000 for near-retirement households.
And many retirees won't be able to depend solely on Social Security benefits, said Richard Hiller, head of TIAA-CREF's national government market. Last year, the average annual social security payout was about $16,000 a year while the poverty threshold for individuals was $11,670. While it's just enough to keep the average retiree out of poverty, it certainly isn't enough for most to maintain their current standard of living. "Social security was never intended to be the primary source of retirement income," he said. "Yet for many, many people, that's all they've got."
States are hoping to help people save more. Illinois was the first state in January to create a retirement plan for private-sector workers who don't have access to an employer-sponsored retirement plan. Its retirement accounts are similar to Roth 401(k)s with a default 3 percent payroll deduction. Companies can decide to work with private entities to create their own plan or they can join the state's Secure Choice Savings Program. The law will affect an estimated 2.5 million workers.
This month, Oregon became the second state to sign a Secure Choice bill into law. Its program auto-enrolls workers into retirement plans if their companies have a minimum threshold of employees and don't offer their own retirement plan. The employees can opt out if they choose. The law also calls for the creation of a 401(k)-style plan that would be pooled and professionally managed. According to a 2013 survey by AARP Oregon, more than half of Oregonians between the ages of 45 and 64 do not have retirement savings through an employer. A separate survey found that 3 in 5 small business owners do not currently provide a retirement savings plan to their employees.
In both states, employers do not have to contribute and administration will be done by an investment company hired by the state. Both programs go into effect in 2017.
Washington state also passed a law addressing retirement security, but its law creates a state small business marketplace designed to encourage small employers' voluntary participation in state-vetted, low-cost, low-burden retirement savings plans. California in 2012 was the first state to pass a law calling for an auto-enroll plan for private-sector workers, but that law also required a market analysis be conducted first. President Obama proposed legislation requiring companies without retirement plans to automatically enroll workers in IRAs, but it stalled in Congress.
The state level movement isn't without its challenges. Chief among them is the concern about how or whether the state retirement programs will have to comply with the federal Employee Retirement Income Security Act (ERISA) that governs private retirement plans. But labor economist Teresa Ghilarducci noted that many of the disclosure features of ERISA -- like the requirement to provide participants with plan information about fees and funding -- are features states would include in their plans anyway.
Fears like that have contributed to a slow start for these types of state programs. But many attribute the more recent momentum on the state level to the fact that states and cities will bear the brunt of the retirement crisis. Social and human services, which many governments have struggled to fully restore following cuts during the Great Recession, could be taxed even more in the coming years. Better retirement preparedness could save states millions. A recent report prepared for Utah found that increasing individuals' retirement savings by as little as $14,000 over a career could save the state more than $194 million over the next 15 years.
"They see the impact this has on taxpayers down the line," said Sarah Mysiewicz Gill, senior legislative representative for AARP. "And for that [reason], it's truly becoming a bipartisan movement."