Tens of millions of US workers could be saved from spending their old age in poverty if the federal government adopted a nationwide pensions auto-enrolment system, according to a study.
More than 57m US employees, close to half of the nation’s private sector workforce, do not have access to a workplace retirement savings plan.
Modelling by the Center for Retirement Initiatives at Georgetown University in Washington indicates that up to 40m more workers could be saving for retirement by 2040 if private sector companies were required to provide retirement savings options to their employees.
“Addressing the savings crisis can be done in a simple, cost-effective way. Millions of American workers would benefit,” said Angela Antonelli, executive director of Georgetown’s CRI.
The US has the biggest economy globally but its pension system ranks only as the 18th strongest in an analysis of 39 countries published annually by Mercer, the consultancy.
Lower-income workers, minorities, women and younger employees are more likely to be excluded from US workplace pension savings schemes. Two-thirds of millennials have little or no retirement savings.
The ageing of the US population is contributing to the deepening pensions crisis. The dependency ratio — the number of working households compared with the number of retired households — is projected to drop from 3.9 in 2005 to just 2.3 by 2040 as the baby-boomer generation born after the second world war moves into retirement.
The decline in the dependency ratio will shrink tax income streams for the government just as more spending will be required on medical assistance and other benefits for the growing population of US pensioners.
Total US retirement savings stood at $33tn at the end of September, according to ICI, the investment association.
An additional $1.4tn to $1.9tn could be added by 2040 to the total pool of US retirement savings via the creation of a national pensions auto-enrolment programme, known as an “Auto-IRA.”
Employees contribute in an Auto-IRA scheme but employers do not. Oregon, Illinois and California have already introduced auto-IRA programmes but Ms Antonelli said a national programme was required.
“A national, universal access approach would substantially increase participation and retirement savings levels, particularly among low- and middle-income workers,” she said.
Addressing the pensions savings crisis at a national level could also deliver annual cost savings of $8.7bn by 2040 for federal and state budgets by reducing the assistance needs of pensioners who do have sufficient income after retiring. Universal access to retirement savings would also add up to $96bn to US gross domestic product growth by 2040, said Ms Antonelli.
Auto-enrolment schemes where employers contributed alongside employees, similar to existing 401(k) plans, would deliver higher pension benefits but were likely to capture fewer workers because more companies would seek opt-outs.
Millions of additional workers have been recruited into auto-enrolment retirement savings schemes in Australia, New Zealand and the UK, which have created valuable new sources of revenues for asset managers that provide investment services to these programmes.