Retirement has historically hinged on a variety of income sources, including personal savings, Social Security benefits and defined benefit pension plans. All of these have become less reliable since the Great Recession in 2008, with debt and cost of living inhibiting saving, private-sector pension plans nearing extinction and the future of Social Security looking uncertain. In our recently published report, A Roadmap of the Financial Wellness Ecosystem, we surveyed over 1,500 employees, of whom a large plurality has less than $10,000 saved for retirement. Much of the data we parsed points to an under-prepared populace whose savings habits will not sufficiently prepare them for a sustainable retirement.
In response to low confidence in the longevity of Social Security and an overall lack of retirement readiness among workers, some states have introduced or passed legislation to establish state-run IRAs or similar programs. Though specifics vary from state to state, auto-enrollment seems to be a top feature of most proposed and existing plans. OregonSaves, the first state-sponsored IRA plan for private sector employees and individual workers, has seen high retention rates and few contribution rate reductions during its first year of operation. While an IRA itself is not exclusively available via workplace benefits, data from AARP suggests that workers are 15 times more likely to save for retirement when they can do so via a payroll deduction program. The plan includes several compelling features, most notably a 5% default deferral rate, which has the potential to reduce the state’s retirement savings shortfall by as much as 16% by capturing segments of the population that are less likely to prepare for retirement on their own.
Although 1,800 employers have registered and nearly 22,000 employees are contributing, the plan’s greatest challenge thus far involves implementing payroll deductions: only about a third of employers that have enrolled in the program have actually submitted employee contributions, according to an issue brief from Boston College’s Center for Retirement Research. Still, OregonSaves saw a 95% retention rate in its inaugural year, with 93% of enrollees maintaining the default 5% contribution and 2% increasing their rate to an average of 10%. Only 5% of enrollees decreased their deferral rate. The model aims to go further by auto-increasing enrollees’ deferrals in one-percentage point increments each year, a feature to monitor since it has not been implemented yet.
Programs like OregonSaves stand primarily to benefit the least likely savers: young people and those on limited incomes. Increasing the availability of workplace retirement deferral plans should scale back overreliance on Social Security while improving retirement readiness across the general working populace. In our financial wellness study, we learned that younger generations are statistically less likely to be saving for retirement, despite their overwhelming confidence in their ability to achieve a desirable retirement lifestyle. Given the uncertain retirement futures of so many workers in the U.S. Programs like OregonSaves could improve awareness and action among the least-prepared populations, buoying the health of the retirement industry as a whole and easing the increasing burden on Social Security.