Tens of thousands of Washingtonians are living out their years with a diminished quality of life due to insufficient income in retirement. One factor contributing to the problem: Among the bottom half of wage-earners nationally, only 60% have access to a retirement plan at work – and just 40% participate in such a plan.[1]

Enter the Auto IRA

To tackle this challenge, eight states are now running automatic IRA (aka “Auto IRA”) programs. These require that businesses which don’t offer a retirement plan automatically enroll their employees in an Individual Retirement Account (IRA). This IRA would be set up for the employee by the state.

The employer then automatically forwards a portion of the employee’s pay to their IRA, typically 3%-5% to start, with scheduled increases each year up to a defined maximum. Employees can pause, opt-out, or change their contributions at any time. Employers are not permitted to contribute.

Washington lawmakers are now considering legislation to create an Auto-IRA program called Washington Saves (HB 2244, SB 6069), by request of State Treasurer Mike Pellicciotti. What can we expect if legislators enact such a program? We don’t have to look far for an answer.

Lessons from Oregon

Oregon was first in the nation to start an Auto-IRA (called Oregon Saves). Today, the state requires every employer that does not offer a qualified retirement plan to participate. Outcomes there appear relatively modest so far. However, the data do show that an Auto-IRA can help some people build some degree of additional financial security.

Of two recent studies of Oregon Saves, one found average account balances grew by $700 over a three-year period.[2] The other found that IRA balances had increased about 3%. However, just 34% of all those eligible for the program participate.[3] One reason for these modest outcomes is that the workers most likely to be covered by Oregon Saves are those working in food service, hospitality, and health care – areas where turnover is high, part-time work is common, and wages are below average. The most common reason people cite for opting out of Oregon Saves is “I can’t afford to save at this time.” The lack of employer matching may also make it less appealing.

We can expect similar results in Washington, where many low- and moderate-income families do not have sufficient earnings to meet their daily expenses, much less save for retirement. In eleven of Washington’s 20 largest counties, a family of four earning 90% of median family income has less than 5% of their income remaining after expenses.[4]

Without additional contributions, either from employers or the state, many middle-class families simply don’t earn enough to save.

We need the Saver’s Match from the “other Washington”

As part of our community, employers have a responsibility to contribute to their employees’ future retirement security. But one of the biggest shortcomings of Auto-IRA programs is the lack of an employer match – the kinds of IRAs that can be used are for individuals, not employers, so such contributions are prohibited.

Higher-wage workers are far more likely to have access to an employer-sponsored retirement plan with a matching contribution (like a 401k or 403b), which significantly improves retirement savings over time. The lower-wage workers most likely to be covered by Washington Saves (or most any Auto-IRA program, for that matter) won’t have that opportunity. But help is (hopefully) on the way.

Recent federal legislation (the SECURE 2.0 Act of 2022) created a federal matching contribution called Saver’s Match for low-income savers – equal to 50% of IRA or retirement plan contributions, up to $2,000 per individual – to be deposited into the taxpayer’s IRA or retirement plan. The match is set to become effective in 2027.

If the program becomes operational – and with one presidential and two Congressional elections between now and then, that’s a big if – it could be a powerful tool for helping lower-income people build retirement security.

How to make Washington Saves the best it can be

The Washington Saves legislation aims to make retirement saving convenient, cost-effective, and portable for workers. A state-facilitated public-private partnership would encourage (without replacing or competing with) employer-sponsored plans. As drafted, the bill is a very strong step in that direction. For example, Washington Saves:

• Will be run for the “exclusive benefit of individual participants and beneficiaries” by a balanced seven-member governing board, led by the state treasurer.

• Must be designed and operated to minimize costs (to participants, employers, and the state) and maximize simplicity, portability, and financial security in retirement.

• Can utilize an interstate partnership can be utilized to reduce startup complexity and overhead.

• Includes several important worker/consumer protections, including caps on fees (which erode savings over time) and enforcement mechanisms to prevent wage theft (such as an employer failing to transmit a worker’s savings).

Lawmakers could make two significant improvements to the proposed law.

One is expanding coverage. Every worker needs access to retirement savings at work – no matter how long their employer has been in operation, or how large or small the firm. But as currently written, businesses in operation for less than two years, and those with less than five employees, would be exempt from Washington Saves. Oregon’s program covers every employer. Washington should do the same.

The other is to lower the default contribution range. The current bill calls for a default range of 3% to 7%, with the final determination to be made by the governing board. The reality of economic life for the people most likely to participate is that 3% is simply too much for many workers to afford. The low end of that range should be 1%, and the high end no more than 5%. The program includes automatic (but optional) step increases of 1%, which will help encourage additional savings over time.

We don’t all plan to spend our retirement the same way, but everyone wants to live out their years with dignity. If it covers all workers – and especially if federal matching funds come through – Washington Saves would be a small but meaningful step toward making that possible for everyone in our state.

References:

[1] Author’s calculations based on United States Bureau of Labor Statistics, 2023 National Compensation Survey, https://www.bls.gov/opub/ted/2023/73-percent-of-civilian-workers-had-access-to-retirement-benefits-in-2023.htm

[2] Chalmers et al, “Auto-Enrollment Retirement Plans in OregonSaves”, 2021, https://mrdrc.isr.umich.edu/pubs/auto-enrollment-retirement-plans-in-oregonsaves-2/

[3] Dao, Ngoc, “Does a Requirement to Offer Retirement Plans Help Low-Income Workers Save for Retirement? Early Evidence from the OregonSaves Program”, August 1, 2023, https://ssrn.com/abstract=4561558.

[4] Author’s calculations based on data from Economic Policy Institute Family Budget Calculator, https://www.epi.org/resources/budget/ and American Community Survey, Median Family Income in Past 12 Months by Family Size, 2022.