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Automatic IRAs: Are They Administratively Feasible, What Are The Costs To Employers And The Federal Government, And Will They Increase Retirement Savings?

The Automatic Individual Retirement Arrangement (IRA) presents a novel approach to retirement saving for individuals who do not qualify for an employer-based retirement plan. This 2007 AARP study analyzes the feasibility of the Automatic IRA proposal, exploring the problems that may arise when trying to implement such a plan. It provides an in-depth analysis of the proposal, exploring broad policy and technical implementation issues, the effect that Automatic IRAs may have on retirement and other savings, as well as Federal tax revenue implications.

Highlights include:

  • Nearly 80 percent of all taxpayers are eligible to make contributions to an IRA, but the actual participation rate is approximately 11 percent.
  • More than 50 percent of U.S. workers are employed in firms with less than 500 employees. Small firms are much less likely to offer a retirement plan to employees. In firms with less than 100 employees, only 37 percent of workers actually participate in a retirement plan offered by the employer.
  • The Automatic IRA offers an opportunity to increase retirement savings for a segment of the U.S. workforce that currently does not save. The magnitude of the savings depends heavily on the age of the worker, the number of years contributing before retirement, the consistency of the contributions, the earned rate of return on contributions, and the earnings capacity of the worker.
  • An estimated 47.9 million Americans will be eligible to participate in an Automatic IRA through an employer, with 50 percent of these individuals having adjusted gross income under $20,000.
  • Strong centralized reporting and recordkeeping are critical factors in developing an effective Automatic IRA program. These functions could be performed at the Federal government level.

This study was conducted for AARP by Optimal Benefit Strategies, LLC. For more information, contact Colette Thayer at 202-434-6294. (88 pages)