This article first appeared in The Hill’s Congress Blog on December 11, 2015.
It’s now a familiar story: as jobs with good employer-sponsored benefits slowly disappear, policymakers struggle to formulate a coherent response. In the 1990s and 2000s, the number of Americans with health insurance at work declined and the un-insured rate crept up, making reform proposals promising universal coverage more urgent.
We have reached a similar crossroads with retirement benefits. The transition from defined benefit pensions to 401(k)s is now almost complete, but roughly half of all Americans lack access to any retirement plan through work. This coverage gap has remained stubbornly high over the last few decades and is one of the main reasons millions of Americans enter their golden years without adequate savings.
People who do not have a retirement plan through their jobs could contribute to an Individual Retirement Account (IRA) on their own. But, like with pre-ACA health insurance, this individual market is difficult to navigate and costly – which means that only a small fraction of people – roughly 5 percent– open an IRA on their own. The Obama administration’s proposed solution, the “Automatic-IRA,” was incubated at the Heritage Foundation and the Brookings Institution and formerly enjoyed bipartisan support (sound familiar?). Now it is held up by partisanship and Congressional dysfunction.
Just as they did with healthcare, states have picked up the slack. California, Illinois, and Oregon, among others, are currently designing “Secure Choice” programs which require employers to default their workers into a payroll-deduction retirement scheme. If these programs – which recently received the federal government’s blessing – are successful, they could expand effective savings opportunities for millions of Americans and, like Romneycare, pave the way for federal action. But states would be wise to learn lessons from the rollout of Obamacare:
1) Go slow. We all remember the healthcare.gov fiasco, which almost sunk the ACA before it even started. While it’s tempting to get a program up and running all at once – especially given the urgent need for more retirement security – this desire for speedy action is apt to blind policymakers to the very real administrative hurdles necessary to make the program a success. A more prudent approach would be to follow the British model known as the National Employment Savings Trust(NEST), which began with a small number of large employers and then gradually expanded over a number of years, with tweaks as necessary along the way.
2) Shape the market with clear and simple products. The ACA marketplace was designed to empower consumers, and has succeeded in extending coverage to millions of American families. But the health insurance market is still complex and confusing, so choosing the right product can be a daunting task.
Retirement plan customers face a similarly complex market. This is why states are attempting to create simple, low-cost, and diversified default investment options, based on the best research emerging from behavioral economics. Ideally, all state retirement plans should include a contribution rate that is high enough to provide real retirement security; a cap on management and other fees; default investment funds that balance risk and growth; and affordable options to annuitize part of your next egg at retirement.
3) Stress the universality of the problem. Obamacare’s image problems stemmed in part from the majority of Americans with health insurance fearing that the reform would make them worse off. But states pursuing retirement initiatives can avoid this pitfall.
First, states should highlight that retirement insecurity affects a majority of Americans and is getting worse. Indeed, the number of jobs that don’t offer retirement benefits is growing, especially in the services sector and as a result of the gig economy, and even those who may currently be enjoying access to a workplace retirement plan are liable to lose that favored status the moment they switch jobs. This was a missed opportunity during the health reform debate, which focused too heavily on the 15 percent of Americans who did not currently have insurance rather than the 48 percent who went without insurance at some point over a ten-year span.
Second, states should emphasize that their retirement programs are a new and better way for families to save their own money. Unlike health insurance, which involves young, healthy people subsidizing old, sick ones, retirement products simply move a worker’s own income flows from the present to the future. This means that those happy with their current retirement offerings have nothing to fear from state retirement initiatives.
States are often called laboratories of democracy – the testing ground for policy ideas not yet ready for prime time. But in the case of expanding retirement coverage, the process can be reversed. The recent federal effort to expand health insurance coverage can teach states valuable lessons about how to design a retirement program that is well-administered, politically palatable, and effective.
Ida Rademacher is executive director of the Financial Security Program at the Aspen Institute.