Family Finances

State Innovation on Retirement Security Should Be Celebrated, not Stymied

February 24, 2017  • Ida Rademacher, Jeremy Smith & David Mitchell

The new Congress is moving rapidly to roll back a host of Obama-era regulations. Among these is a Department of Labor rule that gave a green light to innovative state efforts to improve retirement security for their citizens.

If those programs are halted, millions of hard-working Americans will lose out on a great opportunity to save for their future.

That’s because, today, roughly one-half of all private sector employees in the U.S. do not have access to a retirement plan at work. That amounts to 55 million people who, if nothing changes, will be forced to either severely reduce their standard of living in their old age, or simply never retire – despite a lifetime of hard work. These are the workers who care for our families, cut our hair, fix our computers, and build our houses, among countless other professions. Many of them work for small businesses. Many of them own small businesses. All of them work hard and deserve the same kind of on-the-job access to opportunities to build a retirement nest egg that many of us take for granted.

So what should be done about this retirement coverage gap?

A growing list of states – the nation’s laboratories of democracy – has recently landed on an innovative solution: help small businesses and other employers that do not already offer a plan to automatically enroll their workers in a state-sponsored, privately managed individual retirement account (IRA). Employees would get access to the power of payroll deduction to build savings in simple, affordable plans, and their employers would be able to offer a benefit to their workers without taking on more administrative and legal burdens. Given small business owners’ many competing priorities – including trying to keep the doors open – providing a valuable new benefit without adding yet another item to their to-do list makes a lot of sense.

Under the most common model, employers would not make any contributions themselves, and the state – not the small business owner – would be responsible for contracting with investment managers and record-keepers who offer a small number of low-cost investment options. The workers would be free to change investments, alter their contribution levels, or stop participating at any time.

More than 30 states are considering these and other policy variants to make it easier to save, and five states – California, Oregon, Connecticut, Maryland, and Illinois – have been busy implementing their programs.

In those five states alone, an estimated 13 million Americans could gain access to workplace retirement plans as a result of these innovations.

Small business owners, many of whom want to offer their workers retirement benefits but simply don’t have the capacity to do so on their own, are largely supportive of the concept.

Contrary to recent criticism, workers’ accounts in these states will not be mingled with public pensions, some of which face funding shortfalls, and the programs create no future promise to pay taxpayer-provided benefits. In fact, there is solid evidence that giving workers this chance to save their own money for their own retirement will actually save states billions of dollars, since impoverished seniors often rely on state Medicaid programs to pay for health and nursing home care.

These state programs closely resemble 529 college savings plans, popular programs that are offered in every state and help millions of Americans save for their children’s education. Like 529 plans, these state retirement initiatives will be overseen by state treasurers and administered by the private sector. A bipartisan group of state treasurers, from a wide range of states including Kentucky, Utah, and Indiana, weighed in this week urging Congress to maintain state flexibility and preserve these nascent programs.

For over a decade, the Aspen Institute Financial Security Program has championed and convened leaders from the private sector and government who recognize the shortcomings of our nation’s current retirement system and who are committed to building a more inclusive private savings system that can supplement Social Security and build retirement security for all. As state leaders began to step forward over the past several years to help solve this critical financial challenge, we have been supportive of their pragmatism and their commitment. We have provided forums and analysis designed to equip these leaders with information and insights from a broad range of stakeholders to help them design programs that would achieve the desired impact.

Sadly, though, the state programs are now under threat, having become yet another political football in these polarized times. There is a movement in Congress to rescind a legal ruling the Department of Labor published last year confirming that employers who participate in the program would not run afoul of a federal statute called the Employee Retirement Income Security Act of 1974, or ERISA. Easing the regulatory burdens that today make it hard for busy small business owners to offer a retirement plan to their workers was the whole point of these state programs. Without the legal certainty that participating employers won’t be subject to federal regulation, it is unclear if and how states will proceed with their programs.

We hope that Congress rethinks its proposed intervention, and that states are allowed to move ahead in their efforts to innovate and find ways to increase the long-term financial wellbeing of their citizens. If Congress moves forward to thwart state efforts without also committing to create a more inclusive private savings system for all workers at the federal level, the retirement security of millions of Americans will continue to hang in the balance.

This blog comes from the Aspen Financial Security Program