National Retirement Plan Would Lift Low-income Saving

Virtually all high-income workers in this country are saving in some type of employer retirement plan. But only a minority in the lowest-income group are.

A new study tackles this serious shortfall for disadvantaged workers in service, retail and other low-paying jobs. The crux of the problem, the researchers find, is that they lack easy access to a retirement savings plan at their jobs.

This analysis, by establishing a direct connection between access to an employer-based plan and the act of saving, goes on to show that national legislation would greatly boost the financial security of low- and also middle-income workers by providing a retirement plan when, as is often the case, their employers do not. Automatically enrolling them would increase their participation even more.

If employers were required to offer retirement plans with automatic enrollment, 37 percent of U.S. households in the bottom 20 percent of the income spectrum would be saving today, rather than the 21 percent that currently are saving, the researchers find.

Automatic enrollment, which typically includes a contribution to the plan of at least 3 percent of a worker’s income, also allows them to opt out. Low-income workers tend to opt out at higher rates than high earners, which is the likely reason only a minority of the low-earners were saving even after they got access to a retirement plan. Their employment is also spottier at any given time, which limits their opportunities to save.

The impact would be negligible for the top 20 percent of households, which already participate in retirement plans at close to 100 percent.

“Access to an employer retirement plan is a primary determinant of retirement account participation,” concluded the researchers at Princeton University and the U.S. Treasury Department.

Their study focused on millions of workers in the IRS tax data who are in their 50s and approaching retirement age. They sorted households into five income groups to draw a detailed picture of participation in three forms of retirement plan: 401(k)-style savings plans, traditional pensions, and IRAs.  

Participation in these plans increases in lockstep with income – the more workers earn, the more likely they are to be saving.

However, when universal access to employer retirement plans is put in place in this study’s hypothetical analysis, the increase in participation is much larger for the lower-income workers, who usually lack access, than for the highest-income workers who probably already had an employer plan. Participation at low incomes increases even more when auto enrollment is in place.

Social Security is often U.S. retirees’ largest single source of retirement income. But most people need to supplement their government benefits with savings, despite Social Security’s progressive formula that compensates lower-income workers disproportionately.

This study provides new evidence that providing crucial access to a savings plan can work.

To read this study by Motohiro Yogo, Andrew Whitten, and Natalie Cox, see “Financial Inclusion Across the United States.”

The research reported herein was derived in whole or in part from research activities performed pursuant to a grant from the U.S. Social Security Administration (SSA) funded as part of the Retirement and Disability Research Consortium.  The opinions and conclusions expressed are solely those of the authors and do not represent the opinions or policy of SSA, any agency of the federal government, or Boston College.  Neither the United States Government nor any agency thereof, nor any of their employees, make any warranty, express or implied, or assumes any legal liability or responsibility for the accuracy, completeness, or usefulness of the contents of this report.  Reference herein to any specific commercial product, process or service by trade name, trademark, manufacturer, or otherwise does not necessarily constitute or imply endorsement, recommendation or favoring by the United States Government or any agency thereof.