Table bussers, fast food workers, home health aides and others earning low wages could end up retiring with as much as $100,000 apiece if the federal government rolled out “automated IRAs” for everyone, new data suggest.
That idea, which sounds so astonishing as to be fanciful, emerges from an early study of the “OregonSaves” automatic-Ira program that has been running since 2018.
And it helps show the type of option that ought to be on the table as the Biden administration looks at addressing the looming retirement crisis, and finding ways of shoring up the retirement security of the lowest paid.
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Participating Oregonian workers in OregonSaves have so far managed to save an average of $600 per person per year in the program, report John Chalmers, Olivia Mitchell, Jonathan Reuter and Mingli Zhong in a paper published recently by the National Bureau of Economic Research.
If you think that’s chicken feed, think again. Someone saving just that amount a year over the course of a 45-year working career, and earning an average of 5% a year after inflation on their investments, would retire with $96,000 to their name.
About two-thirds of eligible workers participated, reports the study. The average participant earns less than $2,400 a month, and 38% change jobs each year. (The charges fees per account of 1% a year — 14 times as high as, say, the annual fees on the basic Vanguard Balanced Index Fund
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OregonSaves is designed to include all those workers who are left out of company 401(k)s or pensions. That mainly means people who are in the kind of jobs where wages are low and turnover is high. Eligible workers are automatically enrolled in a Roth IRA run by the Oregon State treasury, and initially 5% of every paycheck goes into the account. (That number rises over time.)
But it’s voluntary. Eligible workers can opt out completely, or just set their saving rate to 0% temporarily when they need the money. The power of the program lies in inertia: Making people choose to opt out of saving, instead of having to choose to opt in.
A study by investment manager T. Rowe Price recently found that when you convert a company 401(k) plan from an “opt-in” model to an opt-out model based on automatic enrollment, the percentage of employees who participate doubles.
There are obvious caveats to the latest findings. The plan has been going for less than three years. About a third of eligible employees opted out. We will have to wait for more data from the similar programs taking place in many other states. Measuring people’s savings ignores their debts, and if low-paid workers are earning 5% in an IRA but paying 15% interest on credit card debt they are going backwards, not forwards. There are no guarantees people will be able to earn 5% a year after inflation, or that low-wage savers will be able to save regularly over the course of a 45 year career.
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Yet someone earning a more modest 3% a year and saving for 25 years would still end up with more than $20,000.
To put this in context, the Federal Reserve reports that the typical family in the bottom 25% of the economic pile boasts total financial assets of less than $1,400. That was before the crisis.
Meanwhile, the early years of OregonSaves have hardly been typical and they do not flatter the long-term picture. Many participants drained their accounts last spring when the pandemic and the lockdowns shut down the economy and wiped out many of their jobs. Unless we are planning to impose a cataclysmic depression on the entire country every couple of years the recent data from OregonSaves surely lowballs what this sort of program is likely to achieve.
Many of those who start out in low-wage or entry-level jobs will get promotions or move on to better-paid jobs at other stages in their career, when they will have the chance to save more, not less. “Nudging” workers through this program to save modest amounts, even during periods of their lives when they are earning bupkis, is a net positive for retirement security. It doesn’t have to be the cap or limit on what they save.