Georgetown CRI Study Explores Retirement Plan Coverage Gap
By Mike Rahn, CISP
One of the enduring conundrums in American life is how to prepare more workers for financial security in retirement. It is generally accepted that roughly one-third or more of private sector workers do not have access to a retirement plan at their place of employment. How the country might address this “coverage gap” is the subject of a study by the Center for Retirement Initiatives (CRI) at Georgetown University entitled, What are the Potential Benefits of Universal Access to Retirement Savings?
The study, published in December 2020 was conducted in collaboration with the Berggruen Institute and Econsult Solutions, Inc. It examines the potential for reducing the coverage gap through several retirement plan design approaches, and projects potential individual and societal benefits that could result. Sources of data and input include the U.S. Census Bureau, the federal Bureau of Labor Statistics, Employee Benefit Research Institute (EBRI), the American Association of Retired Persons (AARP), and The New School, a private research university in New York City. Following are selected highlights.
How Large a Gap and Why?
The study cites a steady decline in the number of private sector employers that offer defined benefit (DB) pension plans to their employees and the optional nature of employer-sponsored retirement plans in general, including both DB and defined contribution plans. Examples of the latter include profit sharing/401(k), 403(b), simplified employee pension (SEP), and savings incentive match plan for employees of small employers (SIMPLE) IRA plans.
As for the breadth of the problem, the study places the retirement gap—those without access to a workplace plan—at 46% of private sector workers, or 57.3 million of an estimated total of 124.6 private sector employees. The study also notes that this gap is “inequitably distributed,” with greater gaps found in the small business sector and among workers with lower incomes, younger workers, members of a minority group, and women.
A Shaky Retirement Security Stool
Sources of retirement income have traditionally been described as a three-legged stool, the individual legs being a workplace retirement plan, additional personal savings, and the federal Social Security program. But today this stool is not as stable as it once was. This is due not only to the uncertainty of having a workplace plan, but to U.S. population changes that are reflected in funding for the Social Security leg of this stool.
With the U.S. worker population aging and more entering retirement, there has been a shift in the ratio of working households to non-working households, with more receiving Social Security benefits and fewer paying into the program. According to the Social Security Administration, the ratio of working households to retiree households was 5.1-to-1 in 1960, had declined to 3.3-to-1 in 2005, and was 2.5-to-1 in 2020. It is projected to decline to 2.1-to-1 by 2040.
The tax base that has supported income-supplementing Social Security benefits is becoming strained, and eventually benefits will have to be reduced or employment taxes increased. Those who have not accumulated reasonably adequate financial resources for retirement rely heavily on benefits from a Social Security program that, by all accounts, faces an uncertain future.
International Models for Closing the Coverage Gap
The CRI examined programs in other countries that could provide models for expanded access to workplace retirement plans here in the U.S. One element that the following examples share is their mandatory nature, either in required employer contributions, or in automatic enrollment of workers in payroll withholding saving programs. Payroll withholding programs share opt-out features if a worker chooses not to contribute.
United Kingdom NEST
Under the United Kingdom National Employment Savings Trust (NEST) program, workers not covered by another employer plan are automatically enrolled in this payroll withholding program at 5% of pay, with a 3% required employer contribution. Employees may opt out of the program if they wish. The NEST program reports only about 10% of workers automatically enrolled opt out of participation.
New Zealand “KiwiSaver”
In New Zealand, the KiwiSaver program is an automatic enrollment program that begins at 3%, with an opt-out available. There is a mandatory 3% employer contribution and government tax credit, as well as restricted pre-retirement withdrawals, with exceptions for such things as a first home purchase.
Australia Superannuation Guarantee
The Australia Superannuation Guarantee program requires employers to contribute 9.5% of eligible employees’ pay to the program. Contributions are not required for very low-wage and part-time workers, but contributions made for low- and middle-income workers are matched by the national government up to $500 annually.
A Universal Program Needed Here?
The study concludes that tweaking the existing U.S. retirement plan framework—with incentives like the SECURE Act’s start-up and auto-enrollment tax credits, and liberalized plan entry for less-than-full-time workers—is unlikely to significantly close the coverage gap.
Similarly, while noting individual states’ successes in mandating auto-enrollment IRA savings programs (e.g., Oregon, California, and Illinois) the CRI believes that “these initiatives are unlikely to achieve a significant national expansion of coverage and savings.”
Rather, “a national universal access approach to retirement savings would substantially increase participation and savings levels, particularly among low- and middle-income workers,” asserts the CRI.
The CRI’s baseline proposal to increase coverage is an automatic-enrollment Roth IRA program for all employers who have no workplace plan, with no employer contributions and no exempt employers. It then expands to include the following alternatives.
Use designated Roth accounts (Roth 401(k), 403(b), 457(b)) instead of Roth IRAs.
Exempt the smallest and newest employers from the mandate.
Permit a voluntary employer contribution.
Require an employer contribution.
Potential Reduction of Coverage Gap by 2040
The following projections were measured in terms of additional participants, assuming stable worker numbers, and starting with CRI’s current estimate of 57.3 million private sector workers with no access to a workplace retirement plan.
Auto IRA for all, no exemptions: Would add 40.4 million workers (projected to reduce the current coverage gap to 13.5%, or 16.9 million; includes expected opt-outs)
Auto IRA with small employer exemptions: Would add 29.6 million workers (exempts employers with fewer than 10 employees and less than 2 years in business; includes employee opt-outs; projected to reduce coverage gap to 22%)
401(k)-type plan/voluntary employer contributions: Would add 28.3 million workers (similar exemptions and opt-outs; projected to reduce coverage gap to 23%)
401(k)-type plan/mandatory employer contributions: Would add 28.1 million workers (similar exemptions and opt-outs projected to reduce coverage gap to 23%)
Increased Economic Growth and Tax Revenue
The CRI projects that more accessible retirement saving options would enhance the competitiveness of small businesses, increase the financial security of workers, encourage a more dynamic economy, increase the ability of seniors to contribute to our economy, and provide a source of capital for business investment and growth.
Increased Productivity/Gross Domestic Product Growth
The CRI also estimates that under its scenarios, the country could see a growth in Growth Domestic Product (GDP) of $72–$96 billion by 2040. The larger figure is projected to result from a full-participation model with no employer exemptions.
Reduced Benefit Program Spending?
The CRI projected that reduced retiree dependence on taxpayer-funded income support programs would save $6.2 billion in federal government spending, and $2.5 billion in collective state spending by 2040 under a full-participation, no-exempt-employers program design. The savings in taxpayer-funded income support were projected to be 80% of these levels under a model with employer exemptions.
Conclusion
The CRI study concludes that “[a]ny effort to improve retirement readiness must expand access to ways to save for retirement to as many workers as possible.” The study clearly argues for a national program with mandatory employer participation and projects that fewer exemptions will lead to better outcomes.
