Automatic IRAs: Federal Budget, Congressional, and State Proposals

NesteggNesteggSocial Security alone cannot remedy the growing inadequate rate of Americans’ retirement savings and current pessimism about the security of such savings. In fact, Social Security was never intended to be the sole source of retirement income, but rather to provide seniors with a moderate standard of living. Yet, it has become an increasingly larger part of people’s retirement funds. According to the Social Security Administration, Social Security benefits constituted 50 to 90% of income for more than 33% of Social Security recipients, and 90 to 100% of income for more than 31% of recipients. This highlights the need to put more policies like Automatic IRAs in place to provide economic security for low- to moderate-income people.

Automatic IRAs are a simple, easy way to encourage individual retirement savings. Under most Automatic IRA proposals, employers that do not offer a retirement plan would be required to allow their workers to open and contribute to an individual retirement account (IRA) through regular payroll deductions. Through automatic enrollment with an opt-out option and a limited number of investment options, Automatic IRAs can attain high participation rates. Additionally, by including a low default contribution rate, these plans alleviate potential burdens on low-income individuals while ensuring that individuals engage in at least minimal savings. Because Automatic IRAs are paid through payroll deductions, they are the least costly retirement plan option available for employers. 

The concept of Automatic IRAs is gaining in popularity and has bipartisan support.  Legislation to create a national Automatic IRA program was reintroduced last month. Congressman Richard Neal (D-MA), following the lead of Jeff Bingaman (D-NM) in the Senate (S. 1557), and the Obama Administration’s proposal in the FY 2013 Budget Request, introduced the Automatic IRA Act (H.R. 4049).

Under these bills, businesses with more than 10 employees that do not already offer retirement accounts would enable employees to contribute to IRAs though payroll direct-deposit facilitated by their employers. Additionally, Rep. Neal introduced a House Concurrent Resolution (H. Con. Res. 101), which states that businesses that do not have direct-deposit capabilities should receive a tax credit to cover the administration costs to set up IRAs. The passage of this legislation would provide retirement savings accounts to 78 million Americans who do not currently have access.

Similar legislation has been introduced in the past several Congresses (Automatic IRA Act of 2006, H.R. 6210, 109th Cong. (2006), Automatic IRA Act of 2007, H.R. 2167, 110th Cong. (2007), and Automatic IRA Act of 2010, H.R. 6099, 111th Cong. (2010)), as well as in President Obama’s previous budget proposals. 

Illinois recently introduced legislation, H.B. 4497 and S.B. 1844, to create an Illinois Automatic IRA program that, if successful, would provide retirement savings opportunities for the approximately half of all Illinois workers who do not currently have an employer-sponsored retirement plan.

For more information on Automatic IRAs, see “Universal Voluntary Retirement Accounts: A Financially Secure Retirement” in Clearinghouse Review and the archive of the Shriver Center’s recent webinar on Automatic IRAs. 

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