Andrew G. Biggs is a resident scholar at the American Enterprise Institute and a former principal deputy commissioner of the Social Security Administration.
Five states are launching plans to automatically enroll employees, predominantly lower-income workers, in state-administered individual retirement accounts. More than 20 other states are considering "auto-IRA" programs like those of California, Connecticut, Illinois, Maryland and Oregon. Auto-IRAs seem like an obviously benign effort: Only about 20 percent of low-income workers participate in 401(k) plans, and many low earners depend heavily on Social Security when they retire.
But bureaucratic good intentions sometimes address problems that aren't problems or end up doing more harm than good. In the case of auto-IRAs for low-income workers, states are likely doing both: These workers are in better shape for retirement than misleading news coverage suggests, and auto-IRAs could saddle them with higher debt while disqualifying them from means-tested government health and welfare programs — thus saving the states a fortune.
The perception that Americans are dangerously negligent in saving for retirement is fed by anecdote and well-meaning but flawed research. Government data show that retirement incomes and savings have never been higher. According to a 2017 Census Bureau analysis of Internal Revenue Service data, the median retiree's total income rose by 32 percent above inflation from 1990 to 2012, far faster than the 11 percent growth of median salaries. Likewise, Federal Reserve data show that total retirement savings have risen sevenfold since the heyday of traditional pensions in the 1970s, and data from the Organization for Economic Cooperation and Development show that Americans have saved far more for retirement on average than workers in other developed countries.
Nor is it clear that low-income Americans need to dramatically boost their savings. The Congressional Budget Office finds that Social Security provides low-income retirees with benefits equal to roughly 90 percent of their inflation-adjusted career-average earnings. The same 2017 Census Bureau research shows that from 1990 to 2012, incomes for low-income retirees rose 31 percent and poverty among retirees dropped from 9.7 percent to 6.7 percent. Economists at the Investment Company Institute and the IRS found that typical low-income retirees have a total income equal to 103 percent of their earnings just before retirement. None of this points to a dramatic need for low-income workers to save more.
Moreover, state auto-IRA plans could leave low-income households burdened with debt. Yes, automatically enrolling workers in retirement accounts would raise their retirement savings. But a 2017 study by prominent behavioral economists found that when the federal government auto-enrolled a group of Defense Department employees, less-educated employees amassed new debt more than three times larger than their new savings. With less money arriving in each paycheck, workers may have relied more on high-interest credit cards and made lower down payments toward auto and mortgage loans. Low-income workers, who have roughly $4,000 in potentially high-interest credit card, auto loan or other types of debt, would be better off retiring that debt before saving for retirement.
Even modest savings in auto-IRA plans could disqualify tens of thousands of households from means-tested benefit programs such as food stamps, Temporary Assistance for Needy Families, Supplemental Security Income, housing subsidies and Medicaid, which have asset and income tests that can be triggered by as little as $1,000 in savings. Poor households would be forced to spend down their savings — perhaps paying a penalty for early withdrawals — before regaining eligibility for benefits.
The actuarial firm Segal Consulting projected that in the first five years alone, state auto-IRA plans would cause more than 47,000 households nationwide to lose access to Medicaid. Their loss would be the states' gain: more than $680 million not spent on Medicaid benefits.
One defense of state auto-IRA plans is that they would allow workers to opt out. But the whole premise behind automatic enrollment is that most workers will follow the default.
Clearly, this idea hasn't been fully thought through. What can be done?
First, state auto-IRAs should not apply to truly low-income workers, with whom there is the most potential for harm. A good model is Britain's national saving plan policy of automatically enrolling only workers with salaries above £10,000 pounds (about $13,000).
Second, the best way to protect the poor in retirement would be through Social Security reform. Granted, the overhaul that Social Security urgently requires is still a distant dream, given the shortsighted, risk-averse lawmakers now in Congress. But one day the need to save Social Security from fiscal disaster will become an emergency that even Washington can't ignore. That will present an opportunity to gradually reduce benefits for middle- and upper-income retirees and restore the program's original goal of saving Americans from an impoverished old age.