Automatic IRAs -- a Quick Fix for Workers Without Pensions?

By Albert B. Crenshaw
Sunday, February 19, 2006

For the past year or two, the turmoil in the U.S. private pension system has captured headlines and sent shivers through many households.

But for roughly half of U.S. workers, failing pensions aren't a concern. They don't have pensions -- or any employer-sponsored retirement plan -- to worry about.

They do have old age and retirement to face, however, and policymakers increasingly fear that many of those workers, who today number about 71 million, will live out their final years with only Social Security income to support them.

Already, about 20 percent of retirees have income only from Social Security even though that program was not designed to provide full retirement income. David C. John of the Heritage Foundation said last week: "We cannot assume . . . that Social Security is going to provide any more benefits [in the future] than it does now."

"Odds are" that, as a percentage of pre-retirement income, it may provide less, John said.

To try to head off what could become an explosive growth of poverty among the elderly, experts across the political spectrum have been looking for ways to expand retirement saving that really work for low-income families.

Last week, a group covering much of the political waterfront -- comprising the Heritage Foundation, the Retirement Security Project (which is funded by the Pew Charitable Trusts and affiliated with the Georgetown University Public Policy Institute and the Brookings Institution) and AARP -- proposed an idea they think would work: automatic IRAs.

The brainchild of John and J. Mark Iwry, a former Clinton administration official affiliated with Brookings, the automatic IRA would have employers withhold a portion of each employee's pay and forward it to an individual retirement arrangement, much as employers withhold taxes and forward them to the Internal Revenue Service.

Worker participation would be voluntary, but plans would be designed to encourage them to join. Employers could have employees elect in or out of the program -- forcing them at least to make a conscious decision -- or it could enroll workers automatically unless they opt out.

Contributions could be transferred to a specific IRA designated by the employee, much as is done with direct deposit of paychecks, or the employer could choose a financial institution to receive the contributions and either forward them to the employee's IRA operator or provide IRA services itself. But because lots of small accounts might not be very appealing to banks, mutual funds and other institutions, Iwry and John suggest that the federal government could contract with a single private institution to receive the contributions when neither the employer nor the employee has made a choice.

That institution would operate accounts for workers in a way analogous to federal employees' Thrift Savings Plan.

The authors acknowledge that there are many obstacles to saving, especially for lower-paid workers, but say "these obstacles can be overcome by making participation easier and more automatic," much the way automatic enrollment and investment defaults are being used to boost 401(k) plan participation.

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