Automatic

Automatic: Changing the Way America Saves

William G. Gale
J. Mark Iwry
David C. John
Lina Walker
Copyright Date: 2009
Pages: 278
https://www.jstor.org/stable/10.7864/j.ctt6wpgxf
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  • Book Info
    Automatic
    Book Description:

    Automaticoffers an innovative new way to think about how Americans can save for retirement.

    Over the past quarter century, America's pension system has shifted away from defined benefit plans and toward defined contribution savings programs such as 401(k)s and IRAs. There is much to be done to improve the defined contribution system. Many workers fail to participate and those who do often contribute too little, invest the funds poorly, and are not adequately prepared to manage funds while in retirement.

    To resolve these problems, the authors propose that employees should be automatically enrolled into a 401(k) plan when they are hired, with the right to opt out, change the amount that they contribute, or change investment choices if they choose. If the employer does not sponsor a 401(k) or similar retirement plan, they would be enrolled in a payroll deduction Automatic IRA. This vision of a transformed defined contribution system incorporates key positive features of defined benefit plans to improve retirement security. Employess contributions would increase over time, their investments would benefit from professional management and rebalancing, and they would receive lifetime income upon retirement. These automatic features will make the 401(k) and similar plans a more effective tool for retirement saving, and they can be extended to the many workers who do not currently have access to an employer plan.

    InAutomatic, the authors present proposals to implement automatic features in all phases of the 401(k) and in IRAs for workers with no employer plan. They also draw from the experience of countries that have implemented automatic saving structures.

    eISBN: 978-0-8157-0382-2
    Subjects: Finance, Marketing & Advertising, Business, Political Science

Table of Contents

  1. Front Matter
    (pp. i-iv)
  2. Table of Contents
    (pp. v-vi)
  3. Preface
    (pp. vii-viii)
  4. 1 Introduction
    (pp. 1-8)
    WILLIAM G. GALE, BENJAMIN H. HARRIS, J. MARK IWRY and DAVID C. JOHN

    This book is the second of two volumes put together by the Retirement Security Project (RSP). A partnership between Georgetown University’s Public Policy Institute and the Brookings Institution, supported by the Pew Charitable Trusts and the Rockefeller Foundation, RSP was founded in 2005 to develop and help enact commonsense reforms that attract bipartisan support and make saving for retirement easier and more rewarding for lower- and moderate-income households. While everyone recognizes that retirement policy entails a host of sweeping and interrelated concerns—from reforming Medicare and long-term care, to making Social Security fiscally sustainable, to shoring up and reforming the...

  5. Part I. Automatic Saving Structures
    • 2 Retirement Saving for Middle- and Lower-Income Households: The Pension Protection Act of 2006 and the Unfinished Agenda
      (pp. 11-27)
      WILLIAM G. GALE, J. MARK IWRY and SPENCER WALTERS

      The proposition that public policies can and should be used to encourage retirement saving among middle- and lower-income households commands broad, bipartisan support. Perhaps the most promising recent development in this area has been the rise of the automatic 401(k). Plan sponsors and policymakers are increasingly interested in using automatic, or “opt-out,” 401(k)s to promote retirement security among rank-and-file employees. Because these workers also need meaningful financial incentives to save, the Saver’s Credit, which interacts constructively with automatic 401(k) features, is specifically targeted to help them.

      The Pension Protection Act of 2006 (PPA) took significant steps to encourage the use...

    • 3 The Automatic 401(k): Revenue and Distributional Estimates
      (pp. 28-44)
      CHRISTOPHER GEISSLER and BENJAMIN H. HARRIS

      One of the most promising aspects of retirement saving policy in recent years is the advent of automatic, or opt-out, features in 401(k) plans. Automatic 401(k)s enable saving even for workers who make no effort to participate in their 401(k) plan. In a 401(k) plan without automatic features, workers have to actively choose whether to sign up for the plan, how much to contribute to the plan, and what the investment allocation for their assets should be.¹ These decisions can be complex and daunting, and busy people often procrastinate or are unable to decide the best way to proceed. As...

    • 4 Pursuing Universal Retirement Security through Automatic IRAs
      (pp. 45-83)
      J. MARK IWRY and DAVID C. JOHN

      Roughly half of all working Americans work for employers that offer no retirement plan. Thus about 78 million workers have no way to save on the job for the day when they stop collecting a paycheck. This circumstance, combined with a national saving rate that has been declining steadily for most of the past twenty years and the unlikelihood that Social Security will be able to provide increased benefits, makes inadequate retirement saving a major national problem.

      This chapter spells out an ambitious yet practical set of initiatives to expand retirement saving dramatically. We propose making saving automatic—and hence...

    • 5 National Retirement Savings Systems in Australia, Chile, New Zealand, and the United Kingdom: Lessons for the United States
      (pp. 84-120)
      DAVID C. JOHN and RUTH LEVINE

      Financial security in retirement is not just an important goal for working families in the United States. Retirees across the globe typically rely on a combination of public pensions (such as the U.S. Social Security system), private savings, and corporate pensions to pay their way after their paychecks have stopped. Modern industrialized countries, embracing the three-pillar philosophy advocated by the World Bank and others, have created complex pension landscapes that combine public and private provision of old-age income.¹

      However, achieving this security is an increasing challenge at a time when structural and demographic trends are putting ever-rising strains on government-paid...

  6. Part II. Taking the Money Out
    • 6 Increasing Annuitization in 401(k) Plans with Automatic Trial Income
      (pp. 123-150)
      WILLIAM G. GALE, J. MARK IWRY, DAVID C. JOHN and LINA WALKER

      Over the next two decades, an estimated 75 million Americans who were born during the postwar years will retire. While much attention has been focused on whether retirees will have saved enough, less attention until very recently was paid to the distribution stage of the retirement planning process and whether retirees will manage their retirement resources to ensure that they last throughout retirement.

      A major challenge for retirees at the distribution stage is deciding how to allocate their resources when they do not know exactly how long they will live. If they live longer than expected, they face the dire...

    • 7 Automatic Annuitization: New Behavioral Strategies for Expanding Lifetime Income in 401(k)s
      (pp. 151-170)
      J. MARK IWRY and JOHN A. TURNER

      Workers contemplating retirement face significant financial risks. Inflation, an uncertain rate of return on investments, the insolvency of a former employer or financial provider—all these external factors can deplete retirees’ assets and income. Personal risks such as unemployment, illness, disability, and even life span can lower earning capacity or raise financial need.

      A long life, a blessing in so many ways, is especially hard to manage. Some underestimate how long they will live or neglect to plan for the possibility of many years in retirement. Many find it difficult to devise and adhere to a plan for managing retirement...

  7. Part III. Retirement Saving for Vulnerable Groups
    • 8 Retirement Security for Latinos: Bolstering Coverage, Savings, and Adequacy
      (pp. 173-198)
      PETER R. ORSZAG and ERIC RODRIGUEZ

      The termsLatinoandHispanicare used interchangeably by the U.S. Census Bureau and throughout this chapter to identify persons of Mexican, Puerto Rican, Cuban, Central and South American, Dominican, and Spanish descent; they may be of any race. Similarly, the use of the termwhitein this chapter denotesnon-Hispanic white.

      Too many Americans—and too many Latinos in particular—are not saving adequately for retirement. Half of all households nearing retirement have only $10,000 or less in an employer-based 401(k)-type plan or individual retirement account (IRA). Among Hispanics, the figures are even more astonishing: over half of Hispanic...

    • 9 Retirement Security for Women: Progress to Date and Policies for Tomorrow
      (pp. 199-230)
      LESLIE E. PAPKE, LINA WALKER and MICHAEL DWORSKY

      As the baby boomers approach retirement, hardly a day passes without reference—in media outlets, policy discussions, and research circles—to concerns about whether households are saving enough to finance adequate living standards in retirement.¹ Most of this discussion, however, focuses on the generation as a whole. In this chapter, we explore financial prospects and problems for women, together with policies that could materially improve their financial security in retirement.

      The last several decades have seen major shifts in the economic opportunities and challenges facing women. These shifts imply that women face a number of issues that are often not...

    • 10 Strategies to Increase the Retirement Savings of African American Households
      (pp. 231-260)
      NGINA CHITEJI and LINA WALKER

      Concerns about whether African Americans are sufficiently prepared for retirement have been raised in academic circles, in the policy arena, and in the popular press.¹ The voices of African American citizens tell a story that suggests current levels of saving are a concern for this minority population. A quarter of African American survey respondents expressed reservations about having enough resources to simply take care of basic expenses during retirement, and about one-fifth reported that they expect to struggle during the first five years of retirement. By comparison, only one-tenth of all U.S. workers had this latter concern.²

      In this chapter,...

  8. About the Contributors
    (pp. 261-262)
  9. Index
    (pp. 263-272)
  10. Back Matter
    (pp. 273-273)