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State Solutions:Universal Retirement Savings

CFED Assets Learning Conference

Phoenix, AZ

September 21, 2006

Marilyn P. Watkins

Economic Opportunity Institute

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Why Improve Retirement Security?

• Social Security is not enough

• Half of all workers aren’t in a retirement plan

• Retirement wealth is falling

• We’re living longer

• Workers change jobs more often

• States will bear the costs of seniors in poverty

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Social Security Provides a Solid Base

• progressive benefits

• guaranteed benefits

• family benefits

• annual cost-of-living adjustments

• lifetime retirement benefits

• low administrative costs

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Too many in or near poverty

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

white men whitewomen

blackwomen

Latina Asianwomen

150%

100%

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Sources of Income for Senior Households, 1996

80.7% 80.4%

65.8%

47.3%

20.6%

20.7%

23.8%

14.6%6.5%

2.6%2.7%

5.7%9.5% 14.8%

25.0%

6.6% 11.7%31.5%

11.4%

$0-8,156 $8,157-13,007 $13,008-20,000

$20,001-33,777

$33,778+

Quintiles of Income

Public Asst.

Earnings

Asset income

Pension

Social Security

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Life Expectancies at Age 65

Men:• can expect to live to 81• 17.5% will live past 90

Women:• can expect to live to 84• 31.4% will live past 90

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Who Lacks Workplace Retirement Plan ?

• Half of all workers

• Low income workers

• Part-time and temporary workers

• Small business employees

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Half of Workers Have No Plan

46.1% 47.4% 47.8% 51.6% 48.3%

0%

10%

20%

30%

40%

50%

60%

1987 1990 1995 2000 2004

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Families with Employed Member with Workplace

Retirement Plan

22.6%11.0% 12.0%

13.0%

13.1% 12.2%

21.5%33.2% 26.3%

0%

10%

20%

30%

40%

50%

60%

70%

1992 2001 2004

DC only

both

DB only

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Low Income Families are Least Likely to Have Plan

(income of families with employed member)

57.1%

50.5%

0%

10%

20%

30%

40%

50%

60%

70%

80%

<$10,000 $10,000-$24,999

$25,000-$49,999

$50,000-$99,999

$100,000+ Total

19922004

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Access and Participation Vary by Education

14.7%

37.1%

41.8%

55.9%

65.5%

0%

10%

20%

30%

40%

50%

60%

70%

non HS grad HS grad some college college grad grad degree

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Few Part-Time Workers Covered

48.3%

56.6%

25.7%

0%

10%

20%

30%

40%

50%

60%

all workers full-time part-time

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Plan Coverage Increases with Age, But Is Falling for All Age Groups(families by age of head of household)

0%

10%

20%

30%

40%

50%

60%

70%

<35 35-44 45-54 55-64

19922004

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Workers in Small Firms Least Likely to Have Access

12.3%23.9%

36.2%46.8%

51.2% 53.8%

72.9%

0%

20%

40%

60%

80%

1 to 9 10 to 24 25 to 99 100 to499

500 to999

1,000+ public

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Why Small Businesses Don’t Offer Plans

• administrative complexity

• cost

• difficulty comparing options

• lack of interest by employees

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Median IRA Values in 2004(for those with IRAs)

$30,000

$5,000

$16,000 $17,000

$24,000

$83,000

total <$10,000 $10-24,999 $25-49,999 $50-99,999 $100,000+

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Balance in All Individual Accounts(for those with any plan)

$111,043

$24,622

$75,479

$260,741

$25,000$2,000

$9,100 $22,000

$96,000

$41,353

Total $10-24,999 $25-49,999 $50-99,999 $100,000+

median

average

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Median Value of All DC Plans by Age(for those with plans)

$8,700

24,000

$47,200

$60,000

$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

<35 35-44 45-54 55-64

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State Solution: Voluntary Savings Accounts

• Defined contribution plan

• Tier – IRAs for individual workers

• Tier 2 – 401(k) or Simple IRA

• Pre-selected menu of investment options

• Administered by state

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Advantages of Retirement Accounts for workers

•Payroll deductions

•Portability between jobs

•Low costs – economies of scale

•Simplicity – pre-vetted options

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Advantages to Companies

• Easy administration

• Low cost

• Allows small firms to provide retirement plans

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What Small Business Owners Say:

2001 Focus Group Findings

• 17 out of 18 supported Voluntary Accounts• Payroll deduction would not be undue burden• Believe that providing a retirement plan very important

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Summer 2006 business interviews

• Business locations:• 11 in Seattle • 3 in North Seattle suburbs• 4 in Langley/Clinton - rural villages• 3 in Mt. Vernon - 70 miles north of Seattle• 3 in Aberdeen – an economically depressed

(former) timber community with a population of 17,000

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Interview Findings

• 15 out of 17 businesses with 1-10 employees (88%) supported WVAs.

• 6 businesses with 11 - 50 employees – all supported WVAs.

• 1 business with over 50 employees - supported WVAs.

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Recommendations by Small Businesses

• Provide diverse investment options

• Provide some sort of support for employers and employees, such as hotline or website

• Provide program promotion in the workplace

• Provide portability

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Additional Findings

• Only 5 businesses had retirement plans for employees (4 had 20 or more employees)

• Major reasons for not providing retirement plan: time, difficulties finding right plan, expense

• All believed that saving for retirement was important

• Many believed that Social Security is not enough• Larger businesses with retirement plan also saw

WVAs as advantageous.

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Necessary allies

• Public employee unions

• Small businesses

• State Executive Departments

• Investment firms

• Pension experts

• Senior groups

• Other states

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Couldn’t anyone open up an IRA?

• Any worker can, but few workers do. • Difficulty saving up lump sum payments• Investor fees • Overwhelming array of investment options

• VA’s will provide payroll deduction, low fees, and pre-screened investment options

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VAs will help the private investment industry

• States will contract with private companies

• Pool of investors will increase

• Over time, people will roll over VA accounts into accounts with private firms

How will Voluntary Retirement Savings Accounts affect the private investment industry?

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Contact Information

Marilyn Watkins

Economic Opportunity Institute

marilyn@eoionline.org

(206) 529-6370