A nationwide retirement program combined with improved savings credit would really help low-paid workers save for retirement.
The most amazing and wonderful thing happened. The House Ways and Means Committee has included auto IRAs in $ 3.5 trillion health, education, and climate legislation. Who knows what will eventually happen, but this supplement is a huge step forward in making sure all Americans are covered by a retirement plan at work.
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Currently, only about half of the private sector workers are covered by an employer-funded pension plan. This lack of coverage has three effects.
First, a significant proportion of households – around a third – are not insured at all during their working lives and have to rely solely on social security when they retire.
Second, many employees switch to and from insurance coverage when they have been with the company for around four years, ending up with insufficient 401 (k) balances.
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Third, households have no financial reserves to cover emergency expenditure.
With most of those working for small employers without insurance, policy makers have been trying for decades to solve the problem by introducing simplified retirement plans. But these initiatives have not moved the needle. And while the Obama administration first proposed automatic IRAs to cover what was revealed in 2009, Congress has not passed federal law to date.
In the absence of government action to fill the coverage gap, a number of states have enacted laws introducing mandatory auto IRA programs that extend coverage by requiring employers who do not offer a retirement plan to automatically enroll their employees in an individual retirement account (IRA) . Auto-IRA programs are now running in California, Illinois, and Oregon, and these three states (as well as others like Connecticut, Maryland, and Colorado that have passed the laws and are preparing to launch) have the same basic programming.
As much as I applaud the state's efforts to start programs of its own, this is a silly way of running a railroad. All Americans need an extra layer of protection in addition to social security. A nationwide problem calls for a federal solution.
The proposed federal program would require unplanned employers to deduct at least 6% from their employees' paychecks and deposit the funds with an IRA. Employees could sign out or change their savings rate. The proposal would also expand the use of the savings loan so that the government would deposit up to $ 500 in matching funds into the participant's account.
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The program, which would take effect January 1, 2023, would be limited to employers with more than five employees and those who have been in business for two years or more. The states that already have or are developing pension plans could continue their own programs. Employers who allow auto IRAs under their state or federal programs are eligible for a tax credit of up to $ 500 per year for up to four years. The penalty for non-compliance would be $ 10 per day per employee for up to three months.
This proposed legislation would represent a significant step forward in expanding coverage and, by combining auto IRAs with a repayable savings loan, would greatly improve retirement plans for lower-income workers. I very much hope it will pass.