For millions of Americans, an unexpected expense or a sudden loss of income can severely affect their household’s balance sheet. The need to pay for housing, childcare, transportation, and other necessities forces many workers throughout the country to choose between paying for today’s basic daily needs and saving toward the secure financial future that every American worker deserves, regardless of employment status or income level.
Several states are working toward a solution to these retirement concerns, and Michigan could soon join California, Colorado, Connecticut, Delaware, Hawaii, Illinois, Maine, Maryland, Minnesota, Nevada, New Jersey, New York, Oregon, Virginia, Vermont, and Washington in making it easier for working families to save. Michigan’s Retirement Savings Program Act (HB 5461), would establish an automated savings program—also known as an auto-IRA or work-and-save program—that would enroll employees who currently lack access to a retirement plan at work into an individual retirement account (IRA). This proposed legislation, in which a portion of a participant’s wages is automatically set aside each pay period, could help the approximately 1.5 million Michigan workers—or 42% of the state’s private sector workers—who currently lack access to a workplace savings plan begin to build a reliable retirement fund.
Like other employer-based retirement plans, such a program gives workers control over their financial futures by allowing them to make regular—and voluntary—payroll contributions to fund their IRA. Along with the freedom of choosing when and how much they contribute, workers can always decide to opt out of the program. And since contributions into these programs are generally made after-tax, participating employees can access their contributions, without penalty, during a financial emergency or setback.
Taxpayers will also benefit from this bill, which—by helping people increase their personal savings—will ease the growing cost of public assistance programs that people turn to when they have insufficient retirement savings. For example, recent studies by The Pew Charitable Trusts found that savings shortfalls could lead to increased pressure on public assistance programs; reduced tax revenue; and decreased household spending by retirees. At the same time, saving shortfalls also mean that the fiscal burden of assistance programs is shifted to a shrinking population of working-age taxpayers. Data for all 50 states show a combined $1.3 trillion in increased federal and state spending to fund public assistance programs from 2021 to 2040.
These state programs work: Over 800,000 savers in the seven states with active programs have amassed more than $1 billion in assets since 2017. And as workers build their personal wealth and taxpayers save money, auto-IRA or work-and-save programs also offer a benefit to employers and small businesses that cannot offer their own retirement plans due to high startup costs or a lack of administrative capacity. These employers and small businesses get an easy-to-use retirement benefit that can help attract and retain employees; all the employers have to do is facilitate the payroll contributions of their workers. As a public-private partnership, the money that workers invest would be professionally managed by a third-party financial firm overseen by the state. Employers would be charged no fees and could choose to opt out by adopting their own retirement plan at any time.
Americans want to build a secure retirement, but more than half are living paycheck to paycheck and are frequently having to decide between focusing on daily survival and planning for their futures. Despite working hard throughout their lives to provide for themselves and their families, many people—regardless of demographics and socioeconomic background—may find that they are not prepared when the time comes to retire. Auto-IRA programs are designed with these individuals in mind: those who want, and deserve, the opportunity to build a secure retirement.
This op-ed was first published in Route Fifty on April 1, 2024.
John Scott directs The Pew Charitable Trusts’ retirement savings project.