In 2005, the personal saving rate in the United States declined into negative territory for the entire year, and it continued negative through the first three quarters of 2006. Policymakers are currently debating whether pension coverage gaps should be filled by making some version of 401(k)-type plans mandatory for all workers. Germany, Ireland, and the United Kingdom all have enacted within the past five years a 401(k)-type pension that is mandatory on employers. These plans may offer lessons for the U.S. as it attempts to increase pension coverage and retirement saving. This paper by Sophie Korczyk provides a very timely description of these three countries' experiences in the operation of their new mandatory plans and how their features compare with those of 401(k) plans.
In Ireland, Personal Retirement Savings Accounts (PRSAs) were enacted in 2002 to fill gaps in the system of employer-provided pensions, as well as to provide a retirement savings opportunity for those outside the workforce. PRSA participation and contributions have been low, which could mean that more time is needed for the plan to catch on. In Germany, a new system of pensions called Riester pensions, offering both tax incentives and direct subsidies to employees and other individuals, was enacted in 2002. They provide employees the opportunity to convert up to 4 percent of salary into pension plan contributions. The tax-deductible contribution ceiling for Riester pensions is low and is being phased in through 2008. As a result, many potential participants may feel they can postpone a decision without serious financial disadvantage, so coverage may grow further as the regulatory environment stabilizes. In the United Kingdom, "stakeholder pensions" were enacted in 2001. Like PRSAs and Riester pensions, stakeholder pensions are intended to fill gaps in the voluntary employer-sponsored pension system and to supplement retirement savings for some employees who already participate in employer pensions. The combination of an employer mandate with voluntary employee participation has not yet fulfilled expectations. As in Ireland, not all targeted employers are complying with the legal requirement to designate plans, and many employees who do participate make small contributions or transfer balances from other plans.
Perhaps the single most important conclusion from this review is that employer contributions drive employee participation. Eligibility for the Irish and UK employer-based programs is drawn fairly narrowly, encompassing primarily those workers with no private pension coverage or coverage that is deemed by government standards to be inadequate. Both countries have found that workers' take-up rates have thus far been disappointing. In Germany, in contrast, salary-conversion plans were made mandatory on all employers, regardless of their other pension offerings, because the program's goal was to introduce defined contribution plans and ease the transition to lower Social Security replacement rates, rather than to target workers with no pension coverage. As a result, more than half the workforce was covered by a Riester pension by 2004.
The experiences of these three countries suggest that employer pension mandates may not expand private pension coverage or generate new savings in the near term. But the United States may have advantages over these countries in making such plans work because the 401(k) plan is part of the popular vernacular. Many employees who are currently without coverage may have participated in a 401(k) plan in a prior job or have a spouse, other family member, or friend who has done so. Employees covered by a mandate are thus likely to be familiar with the basic concept.
For full report, see AARP Public Policy Institute Paper #2007-03
In Brief prepared by John Gist, AARP Public Policy Institute
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