The Automatic IRA at 15: Helping Americans Build Retirement Security

This article originally appeared on the Brookings Institution’s Up Front Blog. 

             Fifteen years ago, this week, we proposed the Automatic IRA as a way to boost retirement saving among the multitudes of American workers – now numbering roughly 55 million – who have no retirement plan at work.  Since that day, this Retirement Security Project initiative has helped over a quarter of a million people start building a more secure future through the three operating state-facilitated Auto IRAs now in existence.

From the start, the Auto IRA has been nonpartisan. It was created as a collaboration between researchers at Brookings and the Heritage Foundation.  In short order, Republicans and Democrats on both congressional tax-writing committees co-sponsored the Auto IRA, and in 2008, both the Obama and McCain Presidential campaigns endorsed it.

Auto IRAs are simple.  They combine automatic enrollment with payroll deduction IRAs. Using inertia to promote saving, individuals are in total control of whether and how much to save and how to invest; but unless they choose otherwise a pre-set amount from each paycheck is regularly contributed into a pre-determined, privately managed investment.

Employers with more than ten workers and that do not offer a 401(k) or pension would have to allow employees to use their payroll system to save in an IRA but have only minimal other responsibilities or obligations. Simplicity matters because most Auto IRA employers would be smaller firms that are less likely to have a separate human resources department.

Although the Auto IRA was structured to be a uniform, nationwide program, congressional action on Auto IRAs stalled due to broader political divisiveness. Instead, states took up the cause. The resulting state-based Auto IRAs – now operating in Oregon, Illinois, and California – have resolved any questions about the Auto IRA’s feasibility or practicality.  Four other states and the City of Seattle are also preparing to implement similar Auto IRA programs; more states will likely follow.

Already, about 276,000 people, participating through more than 30,000 employers, have contributed nearly $170 million in the three active state Auto IRA programs, two of which are still phasing in. [1] And the programs are growing: even during the pandemic year of 2020, the number of active Auto IRA savers increased 142 percent, contributions nearly tripled, and the number of participating employers increased nearly 50 percent. 

About two-thirds of employees offered an account make contributions despite typically having moderate or lower incomes.  The median contribution is about 5 percent of income, and participants often qualify for a tax credit that can further increase their balances. While their accounts start small, they will grow over time and can be a meaningful source of income in retirement.

As more states and municipalities implement Auto IRAs, interest grows in a national Auto IRA. The need is increasingly obvious:  Tens of millions of American workers still have no way to save for retirement at work using payroll deduction. A national Auto IRA, building on and incorporating the state-based Auto IRAs, can change that.


Reference: [1] OregonSaves, CalSavers, and Illinois Secure Choice