You’re 70 years old, and you have a choice. Do you pay your heating bill– or for prescription drugs? Do you stay in a home you can no longer afford, or do you move in with your children?
These aren’t hypotheticals. We’re in the middle of a national retirement savings crisis, and seniors across the country are facing choices like these everyday. They are over-relying on Social Security payments because they lack sufficient savings to meet their basic needs. And as more and more businesses fail to offer a retirement savings option for their employees, this trend will only get worse.
The solution to this national crisis might flow from a local source. Earlier this month, Illinois became the first state to pass legislation – the Illinois Secure Choice Savings Program– that will automatically enroll private-sector workers without access to an employment-based retirement plan into such a savings program. The question is: Can we replicate this program in other states and stem the crisis?
The solution to this national crisis might flow from a local source.
First, a little more about how it actually works. You’re probably wondering: how much is this thing going to cost, exactly? Well, that’s one of the perks for both businesses and taxpayers.
Because employers aren’t allowed to contribute to the retirement accounts, the cost to businesses is minimal. Employers only need to cover the cost of administering a payroll deduction to the retirement account. Most businesses, especially those with 25 or more employees, use electronic payroll systems that easily allow for payroll deductions and direct deposits. Since employers merely serve as pass-through entities – facilitating the required payroll deductions to the approved Secure Choice account – they bear no other financial burden. Oh, and though most are required to participate – those that are two years or older, employ 25 workers year-round and don’t have a retirement savings option currently – employers that don’t fall into that category can opt out.
Workers, too, have the freedom to participate or not. While they can opt out of the program, those that stay in will be able to build savings in a Roth Individual Retirement Account (IRA) through a payroll deduction. All accounts are pooled together and professionally managed (by a private investment firm contracted by the program’s board – more information on that here) to ensure that fees are low and investment performance is competitive.
More good news: Over time the program won’t cost the state, either. The plan is to use the (small – 0.75 percent) fees on the accounts to cover all administrative and investment costs. And because contributions to the accounts will be pooled and the number of eligible participants will eventually be large, the Program will achieve cost savings through efficiencies and economies of scale. The key here is that by requiring most businesses and workers to opt-out, rather than opt-in, this was built to be large and sustainable – part of what sets this model apart from other states. Sure, this won’t happen overnight. The State may have to cover start-up costs associated with the Program -- but these costs should be reimbursed as soon as there are adequate assets in the plan. (The state could also use private dollars to cover the start-up costs).
Since so much of the success of this plan hinges on large amounts of people participating, how can we be sure that people will actually use the system? The Illinois Program incorporates lessons learned from behavioral economics and private employer examples that show automatically enrolling workers encourages participation. In other words, people typically won’t take the time and effort to opt-out. Employers offering 401(k)s for example, are increasingly using the opt-out model, dramatically increasing employee participation rates. And happily, these rising rates are highest among lower-income and minority workers.
It won’t just be important for other states to learn from Illinois, but also for Illinois to learn from what other states have already done.
Advocates anticipate that Governor Quinn will sign the legislation into law sometime in early January. At that point, the focus will turn to implementation. While passing the legislation was a big first step, proper implementation will be equally, if not more, important. Things that will be key include: worker & business outreach (so that everyone knows what this bill is, and what’s going on), accessible financial education for workers, easy account access, creating systems to measure participation rates, and development of a RFP for a private investment firm that meets the needs of workers and the state. Over these next few years, it won’t just be important for other states to learn from Illinois, but also for Illinois to learn from what other states have already done.
No state has implemented a program identical to this one, but more than a dozen are trying to enact similar ones or have pending legislation. Massachusetts, California, Connecticut and Oregon have all passed some form of retirement savings policy and are in the process of forming and implementing programs. Why was Illinois able to lead the pack? Some states, like Connecticut and California, had to first pass bills that commissioned a study or required the completion of a feasibility study before the state could move forward with a retirement savings program. Illinois was able to bypass this step.
Illinois’ retirement savings crisis mirrors national numbers - a little more than half of all Illinois private-sector workers don’t have access to an employment-based retirement savings account. While policymakers at the federal level have attempted to pass legislation similar to Illinois . it has failed due to congressional inaction. That means it will most likely be up to the states to ensure that their citizens have the opportunity to easily save money for a secure retirement. Now, at least, they have a model for action.