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The Effect of a Universal Automatic IRA With Emergency Savings on Household Wealth

spinner image A senior African-American couple meeting with a consultant. They are sitting in the living room signing paperwork.

There are powerful links between retirement savings, emergency or rainy-day savings, and household wealth. Emergency savings can help to stabilize household finances over time, thus making it easier for families to build assets. They can also reduce the need to prematurely take money out of a retirement account.

Unsurprisingly, there are significant disparities by race and ethnicity. As of 2019, the median wealth of a white household in the U.S. was $188,200, well above the $24,100 level for Black households and $36,100 for Hispanic households.

The median amount of retirement savings for white households is $80,000, while those for Black and Hispanic households are $35,000 and $31,000, respectively, as of 2020. White households are also more likely to have retirement savings in the first place.

In terms of emergency savings, 41 percent of Black households and 29 percent of Hispanic households, as compared with only 19 percent of white households, reported having none in a 2022 study.

The Automatic Individual Retirement Account

This report models the effects of an Automatic Individual Retirement Account (Auto IRA), a simple retirement savings program that is currently in use in several states, along with a feature for emergency savings.

Read the report.

An Auto IRA combines a payroll deduction IRA with automatic enrollment. Automatic enrollment is a mechanism that simplifies participation and guides workers to saving an appropriate initial amount in a suitable investment choice. Employees have complete control over their savings decisions, but unless they choose not to participate or change suggested amounts, they are enrolled in the program and set aside a recommended amount in a particular investment choice. Unlike 401(k)s, Auto IRAs are not considered retirement plans and accordingly are not subject to ERISA or plan qualification rules.

Access to a payroll deduction retirement savings program is an essential part of building retirement security. About 58 percent of those who have such a benefit have saved more than $100,000 for their future, while only 14 percent have less than $10,000 saved. Conversely, only 9 percent of those without a payroll deduction program have saved over $100,000, while 75 percent have saved less than $10,000.

Who Can Access Workplace Savings Programs

Roughly 57 million Americans cannot save for a more secure future through a payroll deduction retirement savings program.

  • Only 47 percent of Black employees and 36 percent of Hispanic employees work for a firm that offers a retirement plan or a similar benefit; 58 percent of white workers are offered such a plan. 
  • While 80 percent of workers earning over $78,000 are able to save at work, only 21 percent of those earning $18,000 or less annually, and 36 percent of those earning between $18,000 and $31,000, have access to a workplace-based retirement savings program.
  • The size of the employer also matters. Seventy-eight percent of employees working for a firm with fewer than 10 workers do not have a retirement benefit, nor do 65 percent of those employed by companies with 11 to 25 workers.

Findings

Please see the full report for a detailed discussion of the data and assumptions used in the model.

The report’s modeling showed that the effects of a universal Auto IRA with emergency savings on household savings are substantial. Employees who saved in such an account across all working ages experienced a significant improvement in net wealth as well as in liquid funds available for financial emergencies. The retirement net worth of white households improved by about $199,000 in the Optimistic Case (the model considers five different scenarios), slightly more than that of Black and Hispanic households, which increased by over $167,000. Even households with lower incomes would have an additional $41,000 in net worth at age 68 under the optimistic assumption that they made full contributions every year in the Auto IRA, placing their expected total net worth at retirement at $223,000—close to the current Federal Reserve median net worth of $234,000 for all households.

Although white households had a larger increase in wealth, the combined Black and Hispanic households saw a greater rise in percentage terms. White assets increased by 71 percent, while Black and Hispanic households saw an 89 percent improvement. Workers who started saving in their 20s saw an even greater increase in assets by age 68.

Liquid funds show the same pattern of improvement as that in net worth at retirement. With participation in the Auto IRA plan with emergency savings, liquid funds increased for all household groups, even under pessimistic assumptions. According to estimates, the universal Auto IRA system would raise median liquid funds by approximately $65,000 in an optimistic scenario and by approximately $9,000 in a worst-case one.

In addition to greatly increasing the wealth and liquidity of individual households, a universal Auto IRA with emergency savings could increase the amount of overall national retirement savings. This increase in investable wealth, totaling in the trillions, could spur additional growth in the economy and create new jobs.

Please see the full report for comprehensive findings.

Conclusion

A universal and simple savings system using payroll deduction could substantially improve household wealth for its participants. Unfortunately, this type of savings program is not available to millions of Americans. The gap in coverage especially hurts people of color, employees of small businesses, lower-income workers, and those just joining the workforce. The people who would especially benefit from a savings plan are often the ones who lack access to it.

The 401(k) system, despite its faults, has proven that it can build financial security, especially if it contains automatic mechanisms that simplify enrollment, investment choice, and the right amount to save. The Auto IRA allows small businesses to offer the same type of features to their employees as those of larger employers, through a simple, low-cost program. Further, the presence of emergency savings as either part of the Auto IRA or as a separate, automatically enrolled account reduces the chance that an unexpected expense will destabilize family finances.

Lastly, however, it is important to underscore that this reform is not a cure for the racial wealth gap. Although Black, Hispanic, and lower-income households move to a much higher median wealth amount as a result of the program, the gap with white households would persist.