Auto-IRAs Could Reduce Retirement Savings Shortfall by 16%

The Employee Benefit Research Institute (EBRI) estimates that the national retirement deficit, or retirement savings shortfall (RSS), is $4.13 trillion for households headed by those between the ages of 35 and 64.

In an attempt to better understand the shortfall and to promote potential solutions, EBRI decided to look closer at the way a number of states have launched their own automatic retirement savings initiatives. According to EBRI, the first one to come online was OregonSaves. In this program, private sector employees’ contributions are made to individual retirement accounts (IRAs) post-tax, with the initial deferral rate being 5%. It also includes escalations of 1% a year up to a 10% threshold.

EBRI looked at two scenarios in OregonSaves to see how much it could reduce the RSS. In the first instance, EBRI assumed a 25% opt-out in the first year but none thereafter. In the second instance, EBRI assumes, again, a 25% opt-out but also that some participants decide to defer less than 5%.

For those between the ages of 35 and 44, the reduction in the RSS in scenario one is 16.1% and 11.6% in the second scenario. For those between the ages of 45 and 54, the reduction in the RSS in the first scenario is 15.5% and 10.7% in the second. For those between the ages of 55 and 64, the impact is much less, with the RSS declining 4.8% in both scenarios.

“It is clear that younger age cohorts will benefit more from OregonSaves,” EBRI says. “When additional information is available on the opt-out rates across all employer sizes and information on the opt-out rates for auto-escalation are available, EBRI will update this analysis and provide a much wider array of assumptions.”