Woodstock Institute released a report last month showing that more than half of private-sector employees in Illinois, over 2.5 million workers, do not have access to a retirement savings plan at work. That figure is troubling because employment-based retirement savings are the second largest source of income for retirees behind Social Security. With the leading edge of the Baby Boom already entering retirement, and with millions more reaching retirement age in the next few years, the need for adequate retirement income should be a major concern for everybody. We do not want to see millions more retirees living in poverty. According to an AARP survey, 78 percent of respondents felt that helping people save for retirement should be a high priority for policymakers.
The situation looks even worse if current trends are considered. First, Social Security is replacing a smaller percentage of pre-retirement income now than it has in the past. That means that employment-based retirement savings are going to have to replace an even higher percentage of pre-retirement income, or retirees are going to face dramatically reduced standards of living. Second, historical data show that fewer workers have access to employment-based retirement savings now than in the past. At a time when employment-based retirement savings plans are being called on to provide an even higher percentage of retirement income, fewer workers have access to such plans.
One way to address this situation is to develop an alternative way for workers to accumulate retirement savings. The alternative needs to be accessible, portable, and tax-preferred.
First, the alternative savings plan needs to be easy for workers to enroll in and fund. Research shows that people are more apt to save for the future if they don’t have to actively initiate participation in a plan and consciously decide when and how much to save on a regular basis. Employment-based retirement savings plans are an effective way for workers to save because they can be designed so that enrollment is automatic, and the plans are funded by payroll deductions. If workers do not want to participate, they can have the right to opt out, but automatic enrollment of all workers should be the norm.
Second, the alternative savings plan should acknowledge the realities of the modern job market. Traditional employment-based retirement savings plans were designed for a workforce that stayed with one employer for many years. Employers matched the workers’ contributions, but, to encourage workers to stay with the company, the employers’ contributions usually did not vest for a period of years. Today, workers change jobs more frequently, and so the alternative savings plan needs to be easily portable from one job to the next, at least to the extent of the workers’ contributions to the plan.
Third, the alternative savings plan should offer the same preferential tax benefits as existing plans, such as Individual Retirement Accounts (IRAs) or Roth IRAs. The preferential tax treatment allows workers’ contributions to accumulate more rapidly and will maximize the amount available to workers when they retire.
Private-sector workers in Illinois need to save more for retirement, and the state needs to make it as easy as possible for them to do so. A simple IRA-type plan with automatic enrollment, funding by payroll deductions, portability, and preferential tax treatment would help secure a brighter future for millions of Illinoisans.