AARP's One-Minute Guide to Automatic IRAs

Do you want to bookmark ?

What’s at Stake: Your Savings

Currently, many employers sponsor Individual Retirement Accounts, or “IRAs,” in which workers can choose to save. But many small businesses don’t have IRAs for employees. The Government Accountability Office estimates that 75 million workers—about half the workforce—have no access to a retirement savings plan. Only 10 percent of them save on their own. “Automatic IRA” (popularly known as “Auto IRA”) legislation would require businesses which have more than 10 workers and which have been in business more than two years to offer a system in which money would be deducted from paychecks automatically and forwarded to an IRA. Contributions would start at 3 percent of a worker’s pay and could go higher, up to the annual limit for regular IRAs ($6,000 for workers age 50+). The accounts could be regular IRAs, in which contributions are tax deductible but withdrawals are taxed, or Roth IRAs, in which contributions are taxed but withdrawals are tax-free. Workers could take their accounts with them when they changed jobs. Employers would not be required to match contributions and would get tax credits to help offset the cost of setting up the system.

What Proponents Say: 
Backers of the bills say that considering the abysmally low (one-half of one percent) savings rate in the United States, the government should be doing all it can to stimulate savings. The GAO projects that 37 percent of all workers will retire with no planned savings, and that 63 percent of low-income and younger workers will have no savings plan to tap at retirement. Plans that set aside money at work, without workers ever seeing the cash, have proved effective at increasing Americans’ savings rates.

What Opponents Say:
Opponents worry that the cost to employers will be more than the government is willing to underwrite with tax payments; meaning employers will be stuck with paying more. They also say that the benefits are exaggerated, because even with an automatic payroll deduction, some people may be so strapped for cash that they can’t afford to have anything taken out of their paycheck. And there is a risk that if automatic IRAs become too popular, employers who already sponsor plans (and perhaps match contributions) may drop their private plans in favor of the government-sponsored one.

Legislative Timeline: 
Congress appears to be establishing the groundwork for action on Auto IRAs. The House Ways and Means Subcommittee on Select Revenue Measures has held a hearing on a bill authored by its chairman, Rep. Richard Neal, D-Mass. While much testimony was taken, no markup has been scheduled. On the Senate side, a similar bill, authored by Sen. Jeff Bingaman, D-N.M., has been introduced and sent to the Senate Finance Committee. The timeline gives supporters of the bills time to build momentum and to entice more members of Congress to co-sponsor them.

Where AARP Stands:
AARP is FOR the Auto-IRA bills. At the Ways and Means subcommittee hearing, Leo Estrada, Ph.D., a member of the Board of Directors of AARP, testified in support of this bill. He said, “Studies have shown that automatic enrollment programs provide a way of improving retirement savings by using the so-called ‘power of inertia’ to change non-savers into savers.”