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A growing number of states are adopting state-run auto-enrollment IRA plans to expand access to low-cost retirement options and to encourage more workers to begin saving. Auto-IRAs are savings vehicles employers can offer workers that automatically defer a small percentage of income to a retirement plan.

Federal lawmakers have introduced several proposals requiring employers to offer these benefits. Seeing the value in these programs, many states have adopted these requirements. To date, California, Connecticut, Maryland, Illinois, Oregon, and New Jersey have enacted such programs, with other states and cities proposing to follow.

A recent paper by Timothy F. Harris, Kenneth Troske, and Aaron Yelowitz, however, claims that state-run auto-IRA plans could hurt low-income participants because they will be investing in lower-return retirement plans instead of paying off high-interest shorter-term revolving debt, such as credit card debt. While calling attention to the indebtedness of U.S. workers is a great argument for raising the minimum wage, expanding overtime protections, increasing union density, and building worker power, these findings do not make a persuasive case for limiting access to savings vehicles for low-income workers. That’s because the multiplier effects of starting to save for retirement while young are hugely beneficial for the majority of workers. Moreover, auto-IRA programs give workers with other more urgent financial priorities the ability to opt out.

The multiplier effects of starting to save for retirement while young are hugely beneficial for most workers.

The paper looks only at national Census Bureau data from 2014 about the debt that the average hypothetical person carries. This is just a general survey of the population that pre-dates the enactment of state auto-IRA programs; it does not look at actual participant behavior. (The survey finds that 33 percent of workers have credit card debt exceeding $5,000, and 15 percent of workers have trouble meeting basic needs.) The paper also assumes that low-income workers who need to spend their income on other urgent expenses will not opt out. However, available data show that 25 percent of workers already exercise currently available opt-out options. In reality, many low-income workers demonstrate extraordinary skill at managing their small amounts of income to make ends meet month to month. While it is unfortunate that working people may still have to forego even minimal contributions to their retirement, it is already completely in their power to do so.

Second, this paper considers only short-term impacts of trade-offs between saving for retirement versus paying down debt. It compares a relatively low-return but long-term investment with higher-interest revolving debt, ignoring the magic of compound interest. Hypothetically speaking, let’s take a relatively low-income 25-year-old worker with $5,000 in credit card debt. If she invests $5,000 in an IRA, that money now has 40 years to accrue interest before retirement. Too few people understand that putting aside $5,000 per year between the ages 25 and 35 may be better than setting aside that amount per year from ages 35 to 65. Younger workers may also be at the start of a career in which they can expect to earn more over time, increasing their ability to pay off high-interest debt later. It might make sense to nudge that worker toward saving for retirement. Alternatively, if that same worker is approaching retirement age with high-interest debt, it would make more sense to apply their income to paying off that debt. The conversation should be about how to make sure that all workers can comfortably save for retirement, not about limiting their opportunities to save.

The conversation should be about how to make sure that all workers can comfortably save for retirement, not about limiting their opportunities to save.

While it would be interesting to look at actual behavior in auto-IRA plans to understand who is opting out and why in order to get better financial education to workers who could use advice, this paper falls short of that mark. It is important to counter these findings, because we should be expanding access to well-run, low-fee retirement savings vehicles. Because of declining real incomes and the disappearance of defined benefit pension plans, our nation faces a retirement crisis of epic proportions. While tackling it will require more robust solutions, auto-IRAs are a positive first step for expanding access to low-cost retirement vehicles and nudging more employees to save.

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