A retirement savings program has become quite favorable with many Americans, which is implemented by some states, and many others are taking notice.
Three states, which include California, Illinois, and Oregon, have a program for retirement savings for its citizens that do not have such plans offered at their workplace. Over more than $40,000,000 have been saved up by thousands and thousands of employees.
5% of the participant’s paycheck is automatically withheld and placed into a retirement savings account that offers options for investing. However, the savings rate can be changed or even stopped without incurring any kind of penalties to do so.
These initiatives are designed to be a solution to the increasing problem of many U.S. citizens not have a retirement saving plan.
According to the Federal Reserve, one in three households of those 55 years or older do not have anything saved up for retirement. They also did a study that revealed 39% of people could not afford to pay for an emergency bill of $400 without getting a loan from relatives or a financial institution.
Around half the working American population does not have the opportunity to a retirement savings account, which is why these states with these programs are trying to fix this problem.
These programs are set up with behavioral science research in mind by Nobel Prize winner, economist Richard Thaler. Also, the work of the University of Chicago legal scholar Cass Sunstein helped with a method of implementing this matter with nudge theory.
The nudge theory is about changing behavior based on slight social cues.
David John and Mark Iwry, both economists, utilized the theory to suggest creating automatic individual retirement accounts.
The nudge is the procedure of automatically opting workers into the program as they are more inclined to start and use the program compared to them taking the initiative to join the program.
According to Angela Antonelli, Executive Director of Georgetown University’s Center for Retirement Initiatives, the government in these three states have taken the lead to get people to save, knowing that many have not saved any or not very much.
She claims that people have been wanting a chance like this, where someone else can make it less harder for them to start saving.
However, there were oppositions from financial entities regarding the bills in those three states, stating that these matters were private and something the government had no business in.
When Fidelity was questioned about these programs, they said that the company supported a different means. Though they are glad to see lawmakers taking an interest in helping citizens improve their retirement planning, they believe that solutions should be looked into within the current private retirement system.
The company’s spokesman asked Congress to put through legislation that would allow a retirement plans with multiple employers participating. The House put it through, but it is currently still waiting for a decision by the Senate.
The opposition from financial institutions has lessened somewhat in regards to government savings programs as many see the opportunities of more future clients from these participants.
Though the government is getting people started into saving up, the investment options are so basic that many may eventually want more growth options that they seek financial institutions for assistance.
Oregon State was the first state to start the auto-IRA initiative, where over 54,000 accounts were established. These accounts went on to save $36,000,000.
The options for investing in every participating state’s program are very basic. For Oregon, the initial $1,000 saved goes to a capital preservation fund that has low risk but low yields. Participants can invest in the S&P 500 or target-date funds.
According to a survey done by AARP Oregon, 82% of people favored the automatic IRA program.
At this time, there are about 12 or so states that are researching or starting up their pilot programs.
The governments are also able to see why such programs would be beneficial publicly, as fewer people would need to depend on social services due to having more savings.