| Abstract: |
In 2008, the Obama campaign proposed a “Plan to Strengthen Retirement
Security.” This plan consisted of items ranging from increasing the threshold
of the Social Security payroll tax to expanding the Saver’s Credit for
families earning under $75,000. One of the more far-reaching proposals would
require employers with 10 or more employees to automatically enroll their
employees in Individual Retirement Accounts (IRAs). As a default, 3 percent of
each worker’s earnings would be invested in a low-risk portfolio, but workers
could choose to change the defaults or opt out of the plan. Employers would
not be required to make a matching contribution, but employees who participate
would be eligible for the expanded Saver’s Credit.1 The purpose of the
“Auto-IRA” is to increase the pension participation of all workers, but
particularly low-income workers. Yet, it is unclear how many of these workers
would participate. Our own research using the Survey of Income and Program
Participation indicates that 60 percent of low-income workers currently
eligible for voluntary 401(k) plans, similar to IRAs, choose to participate in
those plans. And other research suggests that when workers are automatically
enrolled in a 401(k) plan, they are even more likely to participate.2 However,
these numbers are based on individuals who have a 401(k) available to them. It
seems likely that these individuals may have sought out jobs offering such
plans with an intention of participating. If so, workers who did not seek
employment offering pensions may be less likely to participate in the IRA
plan, limiting the program’s success in expanding pension participation. This
brief explores the participation issue and estimates how many workers would
participate if 401(k)-type coverage were extended to those who currently lack
it. The first section summarizes trends in pension coverage. The second
section describes the data and methodology used for estimating participation,
while the third discusses the results. The final section concludes that, while
offering convenient savings options to low-income workers should help improve
their retirement security, fewer individuals may take advantage of the
opportunity than policymakers hope. |