How State-Run Auto-IRAs Can Tackle the Retirement Savings Gap.

Key Insights

Approximately 57 million individuals, representing half of the employed population in the United States, lack access to retirement plans sponsored by their employers.

The combination of an aging demographic and insufficient retirement savings may lead to a greater number of retirees depending on government assistance.

One potential remedy for this challenge is to enhance access to state-administered automatic individual retirement accounts (Auto-IRAs), which are presently offered in 17 states.

Nearly half of the working population in the United States, amounting to 57 million individuals, do not have access to employer-sponsored retirement plans. Experts suggest that this situation necessitates reform in the retirement system.

One potential solution is the implementation of automatic individual retirement accounts, commonly referred to as auto-IRAs. These programs, facilitated by the state, automatically enroll workers who do not have access to workplace retirement plans, such as 401(k)s.

"Half of workers don't have access to a retirement plan through their employer. And workers are much less likely to save for retirement if they're not saving through a workplace plan," stated Tyler Bond, a research director for the National Institute on Retirement Security. "[The state-run auto-IRAs] are meant to close that access gap."

Employees participating in auto-IRAs have a portion of their earnings automatically deducted from their paychecks; however, employers are not permitted to provide matching contributions. As of now, 17 states have implemented auto-IRA programs, as reported by the Center for Retirement Initiatives at Georgetown.

The Necessity of Auto IRAs

The percentage of the U.S. population aged 65 and older is projected to increase from the current 18% to 23% by the year 2050, as indicated by a recent report from Apollo Global Management.

The situation is further complicated by the fact that a significant number of Americans do not possess adequate retirement savings. According to data from Fidelity, the average balance in an American's 401(k) account was $132,300 in the third quarter, which is considerably lower than the amount individuals aspire to have saved by the time they retire.

"An older population with insufficient retirement assets is going to put a fair amount of pressure on government agencies," stated David John, a Senior Strategic Policy Advisor at AARP. Auto-IRAs can relieve some of that strain.

Furthermore, recent data from Pew suggests that auto-IRAs do not displace private retirement plans. In fact, when certain states began to implement auto-IRAs, private employers continued to provide and adopt their own workplace retirement plans.

State-administered auto-IRAs present a promising solution to address the retirement savings gap faced by millions of American workers. By offering automatic enrollment and easy access to savings plans, these programs empower employees without workplace retirement options to build financial security.

The initiatives not only alleviate pressure on government resources but also complement private retirement plans, fostering a more inclusive savings culture. As more states adopt auto-IRAs, the potential for widespread financial preparedness grows, ensuring a brighter future for retirees and reducing economic strain on the nation. Auto-IRAs are a pivotal step toward a more secure and equitable retirement system.

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