The Importance of Giving All Workers Access to a Retirement Savings Plan

by Reihan Salam

Back in January, Sylvester Schieber and Andrew Biggs made the case that retirement incomes are in much better shape than is commonly understood. Because the Current Population Survey (CPS) fails to count the bulk of the income older Americans derive from 401(k) and IRA plans, observers relying on CPS data have concluded that the shift from defined-benefit pensions to defined-contribution savings plans has greatly reduced retirement incomes. And some of these observers have thus concluded that we ought to increase Social Security benefits to mitigate the effects of this decline. Schieber and Biggs use the incomes retirees report to the IRS to get a clearer picture of what’s happening on the ground. They find that while the CPS reported $5.6 billion in individual IRA income in 2008, retirees reported $111 billion in IRA income to the IRS. Similarly, the CPS reports that Social Security beneficiaries collected $222 billion in pensions or annuity income while federal tax filings show that these households collected $457 billion. IRS data offers a much rosier picture of retirement incomes than CPS data, and Schieber and Biggs note that it doesn’t factor in distributions from Roth plans or pension and IRA distributions to low-income retirees who do not file annual tax forms. Moreover, they maintain that CPS understates participation in retirement plans, as the CPS relies on individual responses that are not always reliable. For example, CPS finds that only half of American workers are offered retirement plans while a 2011 analysis by the Social Security Administration’s Office of Retirement and Disability Policy finds that 72 percent of all private workers were offered retirement plans, including 84 percent at large firms with 100 employees or more.

So why do I bring this up now? Though Schieber and Biggs are right that the retirement income picture is not all doom-and-gloom, there is a difference between being offered a retirement plan and actually participating in one. In 2012, the Bureau of Labor Statistics observed that workers in management, professional, and related occupations had twice as much access to employer-sponsored retirement plans and three times the participation rate of service occupations; full-time workers had almost twice the access and three times the participation of part-time workers; union workers had an edge over non-union workers, as did high-wage workers over low-wage workers and workers in large establishments (with 500 workers and more) over workers in small establishments (with 100 workers or less). Since the 2008 crisis, it is low-wage service work that has been expanding, and it is reasonable to assume that these jobs offer relatively little in the way of access to employer-sponsored retirement savings plans. And low-wage workers are less likely to participate in retirement savings plans even when they have access to them in light of their higher marginal propensity to consume.

Florida Sen. Marco Rubio calls for allowing all American workers who don’t have access to an employer-sponsored retirement savings plan to enroll in the federal Thrift Savings Program. This is a straightforward way to make access to a well-designed retirement savings plan universal. Granted, Rubio’s proposal won’t solve the participation problem — this would require making participation mandatory, or using auto-enrollment (i.e., opt-out rather than opt-in) to raise participation levels. But auto-enrollment is a tough political sell, particularly to the extent that it reduces disposable income for cash-strapped Americans. Even without auto-enrollment, Rubio’s proposal is a huge step forward for building a more equitable, sustainable retirement savings system.

The Agenda

NRO’s domestic-policy blog, by Reihan Salam.