Why Colorado Should Adopt an Auto-IRA Retirement Savings Program
The Economic and Fiscal Impacts of Doing Nothing
Are Too Great to Ignore
By Dave Young, Colorado State Treasurer
At least 40 percent of Colorado’s 2.4 million private sector workers do not have access to an employer-sponsored retirement savings plan, and another 20 percent are either ineligible to participate in their employer’s plan or are self-employed or independent contractors without a plan. This group of more than 1 million uncovered workers is more likely to earn less, experience more job transitions, work fewer hours, and earn less than workers covered by a workplace retirement plan, meaning that they are more likely to be financially vulnerable, not only throughout their working years but also into old age.
Faced with this information, the Colorado Secure Savings Plan Board, which I chair, set out to find a way to address this lack of access among Colorado workers and better understand its potential economic and fiscal consequences. The Colorado legislature passed SB 19-173 in May 2019, establishing the Board and directing it to study the feasibility of creating an automatic enrollment payroll deduction IRA (auto-IRA) and a small-business marketplace; assess the benefits to residents of greater financial education; and analyze the impact on state and local government expenditures of doing nothing to expand coverage and increase retirement savings. The Board met from July 2019 through February 2020 and retained three firms — the Center for Retirement Research at Boston College (CRR), Corona Insights, and Econsult Solutions Inc. (ESI) — to do the analysis necessary to carry out the Board’s mission effectively and objectively.
The Fiscal and Economic Impact of Insufficient Savings
In the next 15 years, the population of elderly people (those 65 and older) and the number of households headed by those 65 and older are projected to increase by 50% in Colorado. If they enter retirement with insufficient income (defined as replacing less than 75% of working age income), they will require greater assistance from the state. ESI’s analysis shows that the combined budget and revenue, i.e., foregone tax revenues, costs to the state due to insufficient retirement savings will be an estimated $370 million in 2020 and is projected to more than double to $839 million by 2035, for a cumulative fiscal impact of almost $10 billion between 2021 and 2035. The combined state, local, and federal impact on expenditures and revenue from insufficient retirement savings between 2020 and 2035 would be more than $18 billion.
Increased Savings Can Supplement Social Security in Important Ways
ESI’s analysis showed us that for the average household to bridge the retirement savings gap, an average of $1,200 would need to be set aside per year over a working career (30 years). Despite their limited financial resources and lack of experience with financial institutions, uncovered workers need to save additional income for retirement. Additional savings can help bridge the gap between Social Security benefits and target income replacement rates. For most, full retirement age starts between the ages of 65 and 67. For workers who are contemplating taking Social Security early, say at age 62, the ability to delay to age 70 makes an even bigger difference and could result in a monthly check that is more than two-thirds greater for the rest of the worker’s life. For example, this could result in a monthly check of $2,650 instead of $1,500.
An Auto-IRA Program is the Best Approach
In evaluating options, we asked ourselves what approach would best help fill this retirement savings gap, without burdening employers or employees, and allow for portability. The design features of an auto-IRA — accessibility, simplicity, and portability — work well for this population for several reasons:
- The availability of a payroll deduction program at work that uses automatic enrollment makes it easy for workers to start saving and keep saving. Auto-enrollment increases program participation; once people start saving, they keep saving. For lower-income workers, offering a Roth IRA has advantages, including greater flexibility for access to savings without penalty, if needed.
- Employers want to help employees save for retirement, but natural barriers exist. Auto-IRAs are one of the simplest ways to provide access to work-based retirement savings with minimal employer impact. Employers cannot contribute to auto-IRA accounts and their roles are restricted to simply what is needed to facilitate a worker’s payroll contribution. For employees, the decisions are kept simple: They can choose their savings rate; select from a limited number of funds, with a default investment option similar to what many employer-sponsored plans already provide; and opt out of saving and opt back in at a later time, if desired.
- Portability. The IRA account is portable to any employer in the state that is using the state program. Because workers without plans tend to change jobs more frequently than those with plans, plan portability helps workers consistently save for retirement as they move from one employer to the next. Workers are able to continue saving in their accounts even if they are not working for employers using the state program; for example, if they spend time as independent contractors, or go to work for an employer who offers a plan but has an eligibility waiting period, as many do. Savers also can always transfer their accounts to any financial institution that offers IRAs.
The Experience with Existing State Auto-IRA Programs Is Encouraging
The experience of existing state programs is a useful guide. Programs in Oregon, Illinois, and California are already are enrolling workers and other states will join them later this year. As these programs have launched, support has only increased as employers and employees become familiar with them. OregonSaves already has more than 60,000 funded accounts and $40 million in assets. In its first year, Illinois Secure Choice has more than 42,000 funded accounts with $11 million in assets. More than two-thirds of those who have auto-enrolled are continuing to save, and that is well within the range required to support the long-term financial feasibility of these programs and significantly expand coverage across the state. More importantly, workers are saving an average of about 5% or about $100 per month. ESI’s analysis showed us what a difference $1,200 per year in additional savings can do to boost income in retirement and delay the need for Social Security.
Why Other Options Fall Short
The Board was also directed to consider a small-business marketplace and assess the benefits to residents of greater financial education. After careful study and consideration, we conclude that these options would not achieve the expansion of coverage and savings that could be achieved by an auto-IRA program.
- Small-business marketplace: An examination of employer take-up rates for various federal- and state-based voluntary retirement options shows that these programs have not significantly increased retirement plan coverage. In Washington’s small-business retirement marketplace, launched in March 2018, less than 1 percent of employees at firms with fewer than 100 employees are currently enrolled. In the Massachusetts CORE plan, a state-facilitated multiple employer plan for nonprofit organizations with 20 or fewer employees, participation rates are similarly low. Based on numbers from these voluntary programs, a marketplace model would be insufficient to help residents accumulate a sufficient level of savings.
- Financial education: While Coloradans recognize the importance of retirement savings, it has not been a top priority for them. This stems from factors such as a knowledge gap in how to save money effectively, lack of resources that residents can turn to for information about saving for retirement, and reported anxiety and nervousness about making financial decisions. While increasing financial education efforts may help alleviate some of these issues, such efforts will not meaningfully change savings by themselves.
The Path Forward for Colorado
The evidence from existing state auto-IRA programs suggests that these programs have great potential to provide uncovered private sector workers with access to a simple way to save. The proposed design features are well-suited to meet the needs of Colorado’s uncovered workers. Such a state-facilitated program offers an effective and quick way to expand coverage and get more workers saving. The fiscal and economic benefits to the state of Colorado are significant.
In its report to the legislature, the Board made the following recommendations:
- Establish the Colorado Secure Savings Program, an auto-IRA program that would require employers that do not offer qualified plans to automatically enroll its employees.
- Support financial education initiatives as a coordinated effort in conjunction with the auto-IRA program by partnering with existing organizations to increase awareness and education.
Based on advice received from other states, the Board also recommended that it would be important to give any new program board the flexibility to use its best judgment in the establishment, implementation, and operation of a program within the parameters defined by statute. Key steps needed for a successful implementation will involve collaboration with related government agencies and working with stakeholders to build program awareness statewide. Colorado also could establish its own program in a way that would be attractive to potential partner states.
It’s time for Colorado to join the successful experience of other states and allow our workers to take advantage of this simple, accessible, and proven way to save. We have the opportunity to act now and the cost of doing nothing is too great to ignore.
Dave Young is the Treasurer of the State of Colorado.
March 2020, 20-03
Colorado Secure Savings Plan Board, “Report to Governor Polis and the General Assembly: Recommendations to Increase Retirement Savings in Colorado,” February 2020.
Center for Retirement Research at Boston College, “Study A: Colorado Secure Savings Plan,” February 2020.
Center for Retirement Research at Boston College, “Study B: Colorado Small Business Marketplace ,” February 2020.
Corona Insights, “Retirement Savings Research: Colorado Secure Savings Plan Board,” December 2019.
Corona Insights, “Employer Input Research: Colorado Secure Savings Plan Board,” January 2020.
Econsult Solutions Inc. (ESI), “The Fiscal Impacts of Insufficient Retirement Savings in Colorado: a Report to the Colorado Secure Savings Plan Board,” February 2020.