What if every employee in America were automatically enrolled in an Individual Retirement Account?

In an ongoing study, researchers from Princeton University and the Treasury Department have analyzed just such a scenario.

Their conclusion: Not surprisingly, a national retirement savings plan would substantially raise the nation’s savings rate, especially for low-income workers.

If every worker were automatically enrolled in a retirement plan, the savings rate among low-income workers would double, from 21% to 40%.

Because fewer lower-income Americans save for retirement, a national savings plan could offer a potential solution to that challenge, the researchers say. Workers who retire with sufficient savings put less of a strain on social services.

Few low-income Americans save for retirement

The 401(k) employee retirement plan and its personal-savings counterpart, the IRA, offer tax breaks as an incentive for Americans to save.

But the programs are hardly a resounding success. Only about half of American households have retirement accounts, according to the federal Survey of Consumer Finances.

Most wealthy Americans take full advantage of retirement tax perks. In the 50-to-59-year-old age group, the researchers found, more than 90% of upper-income households (the top two-fifths of earners) have tax-favored retirement accounts.

By contrast, among lower-income Americans of the same age, retirement savings is comparatively rare. For those earning the lowest 20% of income, only about one household in five has a 401(k) or IRA.

Low-income workers often lack access to retirement savings, experts say. They are more likely to work part-time jobs that lack retirement benefits, to change jobs frequently, to work for companies that don’t offer retirement plans, or to be out of work.

The Princeton and Treasury researchers calculated how a national “automated savings” retirement plan might impact retirement savings among low-income workers.

Such a plan would nationalize the patchwork of automated savings programs already in place in several states. Those initiatives automatically enroll hundreds of thousands of workers in retirement savings, covering employees whose companies don’t offer retirement plans.

Would a national retirement plan raise savings rates?

Even with a national retirement plan, researchers found, the savings rate for low-income workers would top out around 40%. Researchers cite two main reasons: Many low-income employees are in "gig" work and other jobs that don't yield a W-2 form at the end of the year. And many workers would opt out of an automated savings plan to focus their funds on more urgent needs.

A 40% savings rate “is still not 100,” said Motohiro Yogo, an economics professor at Princeton. “But doubling from 21 to 40 is still a pretty nice gain.”

Yogo and his colleagues, Natalie Cox at Princeton and Andrew Whitten at Treasury, published preliminary findings in 2023. Their work continues: Yogo said the 40% savings rate is a new data point, yet unpublished.

The study focuses on lower-income workers because higher-income Americans don’t need help saving for retirement: Most of them are already doing it.

'Auto-IRA' programs have helped workers save more than $1B

Advocates for retirement savings hail the new automated savings programs, which have popped up across the country over the last several years. Collectively, the initiatives have enrolled more than 800,000 workers, who have saved at least $1.5 billion, according to research from Pew Charitable Trusts and Georgetown University.

Sixteen states have enacted automated retirement savings, according to a tracker maintained by Georgetown. At least eight programs are up and running, in Oregon, Illinois, California, Connecticut, Maryland, Colorado, Virginia and Maine.

But a national retirement program remains a longshot.

U.S. Rep. Richard Neal, a Democrat from Massachusetts, has repeatedly introduced an automated savings bill that would nationalize the state-led movement. But the national legislation has not gained traction.

“And that was where the focus shifted to states,” said Catherine Collinson, CEO of the nonprofit Transamerica Center for Retirement Studies.

Southern and conservative states have been slow to adopt automated retirement savings. Yet, retirement-savings legislation “has a long history of being bipartisan,” Collinson said.

Retirees who lack savings strain social services

State governments have an incentive to help workers save for retirement, because retirees who lack savings put a strain on social services. Pew puts the collective tab at $334 billion over 20 years if savings rates do not increase.

Researchers who studied automated savings in Illinois found participants tended to be part-time, female, younger and unmarried, with high school educations, working jobs that pay by the hour.

"It could be a young single mom working at a local bakery, or where you get your coffee in the morning," said Angela Antonelli, a research professor and executive director of the Center for Retirement Initiatives at Georgetown’s McCourt School of Public Policy.

Between 1989 and 2022, the share of workers ages 25 to 64 who participated in employer-sponsored retirement plans rose just 2 percentage points, from 51% to 53%, according to the Center for Retirement Research at Boston College.

Lackluster savings has prompted some economists to suggest the 401(k) and IRA should be abolished, or the benefits capped, because the tax savings mostly benefit the rich. In theory, they reason, Americans could save for retirement with or without a tax loophole as incentive.

While Congress may not be amenable to a national retirement plan, lawmakers have collaborated with the Biden administration to enact several smaller retirement savings initiatives.

The new programs, passed in 2022 as part of SECURE Act 2.0, could collectively yield trillions of dollars in savings, according to industry estimates.

More:Is the government going to take my 401(k)? Some economists say accounts aren't worth it

Here’s a rundown:

The Saver’s Match

Under the Saver’s Match, starting in 2027, nearly 22 million low- and middle-income employees who contribute to a retirement savings account become eligible for matching funds from the government. The maximum match is $1,000 per person, according to a Pew analysis.

The Saver’s Match replaces the current Saver’s Credit, a nonrefundable tax credit for lower-income taxpayers.

The big difference: The Saver’s Credit only reduces the tax you owe. The Saver’s Match puts dollars into your retirement account.

Auto-portability

This initiative encourages workers to “roll over” retirement savings into an IRA if they leave a job, whereupon the funds can automatically transfer to a retirement plan at a new employer.

The auto-portability program applies to accounts valued at $7,000 or less. Research shows workers often cash out low-value accounts, potentially losing thousands of dollars of compounded interest over time.

In 2022, a consortium of private retirement-plan providers announced a collaboration to boost the portability of small retirement accounts.

“These things, taken together, are very significant,” said Spencer Williams, CEO of the Retirement Clearinghouse, which is collaborating with the retirement providers in the portability initiative. “We’re talking trillions of dollars.”

Auto-enrollment

Starting in 2025, most new 401(k) plans must automatically enroll employees, rather than leave the decision to workers.

Currently, many 401(k) plans are voluntary, meaning that employees must sign up to participate. Under auto-enrollment, an employee who does nothing opts in.

Auto-enrollment is a powerful tool for saving. Vanguard, the investment management company, found that workers with auto-enrollment plans participated at a rate of 93% in 2022, compared with 70% enrollment in voluntary plans.