Auto IRA Introduced in the Senate

Yesterday, Senator Jeff Bingaman (D-NM) and Senator John Kerry (D-MA) introduced legislation that would vastly improve access to retirement savings plans for working Americans, S. 3760,  the Auto IRA. Here's what Mr. Bingaman had to say upon introducing the bill:

Currently, about half of American workers have no opportunity to save for retirement at work...Among those lacking coverage at work, only 1 in 10 contributes annually to an individual retirement account, IRA; the rest generally make no dedicated savings for retirement. The result? An alarming number of American workers are woefully unprepared for a financially secure retirement...

Under this bill, most private sector employees working in establishments of 10 or more employees who are not currently covered by a workplace retirement plan would be given the opportunity to save through regular payroll deposits that continue automatically, unless they elect out. The savings will be deposited into the worker's own IRA, which will be subject to the laws already in place governing IRA accounts. Employers' administrative functions will be minimal. And the arrangement is market oriented; other than the smallest of accounts, automatic IRAs will be provided by the same banks, mutual funds, insurance carriers, and other institutions that currently provide them.

The automatic IRA approach is intended to help these households overcome the barrier of inertia. It builds on the successful use--encouraged by reforms I strongly supported the Pension Protection Act of 2006--of automatic features in 401(k) plans that encourage employees toward sensible decisions (while allowing them to make alternative choices). We have already seen evidence that automatic 401(k) enrollment can dramatically boost employee participation rates, from seven in ten eligible workers to nine in ten. And in the 401(k) context, the gains are even more striking for population groups least likely to save, including women, Latino, and low-income workers.

The Auto IRA takes lessons from behavioral economics and applies them to retirement savings for people who aren't covered by their employer and can't be reached by reforms enacted in the PPA. This could be as many as 42 million workers, and Senator Bingaman mentioned that annual, national retirement savings could be increased by as much as $15 billion.

The Auto IRA doesn't cover everyone, it doesn't take advantage of the years before people begin to work, and it's sole focus on retirement leaves something to be desired for those of us who believe that there are a panoply of savings needs throughout the life course. However, we've come to see the Auto IRA as a truly foundational step in creating a more secure, vibrant economic future for Americans. Full credit to the cosponsors of this piece of legislation and to President Obama's team for including it in their budget.

The bill has a long way to go before it sees passage, but it has support from a wide array of important organizations and individuals. The proposal was in the President's Budget, AARP is on board, as are a host of pro-retirement, pro-savings and business groups. The Auto IRA comes from work done by The Retirement Security Project, a joint project featuring Mark Iwry (then of Brookings) and David John of the Heritage Foundation, so there's a solid grounding for the proposal both intellectually and across party lines, a point David John made recently. Congress now has an opportunity to enact this legislation as part of a tax package that could move before the end of the year. They should take the opportunity to do so.