How to increase retirement savings of 60 million employees – Robert Pozen

MIT Sloan Senior Lecturer Robert Pozen

MIT Sloan Senior Lecturer Robert Pozen

From Pensions & Investments

Senate Republicans are voting to repeal the Labor Department’s recent rules that would have expressly allowed states and cities to sponsor a type of individual retirement account, called an automatic IRA. These votes will rescind those rules, because they already have been rejected by House Republicans and the administration supports rescinding them.

While Republicans objected to a patchwork of state-sponsored retirement plans, Congress should promptly pass a federal automatic IRA invested by the private sector. This vehicle, developed by conservatives, is the most feasible way of substantially increasing retirement savings in the U.S.

About a third of all Americans have no retirement savings, and most don’t have enough to retire comfortably. The main reason: More than 60 million American employees have no retirement plan offered to them by an employer.

Such employees are eligible to set up an IRA at a qualified financial institution and receive a tax deduction. But very few get around to filling out an application and making regular contributions.

Yet, according to many studies, if 2% or 3% of an employee’s wages were automatically placed in a retirement plan — unless he or she opted out — a substantial majority would stay in the plan. The automatic IRA was designed by conservatives at the Heritage Foundation to take advantage of this behavior response.

Here’s how it would work: Employees in companies above a certain size, without a company-sponsored retirement plan, would be required to contribute a specified percentage of their wages to an IRA plan — unless they opt out. The employers would not have to make any contribution; instead, they simply must connect their payrolls to an IRA plan run by a qualified financial institution.

Read the full post at Pensions & Investments.

Robert Pozen is a Senior Lecturer at the MIT Sloan School of Management and a Senior Fellow at the Brookings Institution.

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