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The U.K. Doubled Participation in Retirement Savings Plans. Can the U.S. Do the Same?

States including California, Oregon, Illinois, Connecticut, and Maryland are in various stages of launching public auto-IRAs.

Laura Kerrone, owner of the Psychedelicatessen bagel bistro, supported legislation in New York to create a state-facilitated program that would allow her to provide a payroll deduction retirement savings plan to her employees. (Mary Esch/Associated Press)

As California and four other states move to launch government-run retirement programs for private-sector workers, new research shows a similar policy boosted saving rates in the United Kingdom. 

The U.K. is the first country to implement nationwide legislation requiring private-sector employers to enroll their workers in a retirement plan. During the course of the five-year rollout of the program, the national retirement savings participation rate more than doubled to 67 percent in 2017 from 32 percent in 2012

The study shows a dramatic improvement in savings, and anyone who cares about retirement security should take a close look at these results,” said Matthew Cook, Arnold Ventures retirement policy manager.

In the United States, the analog program is known as an auto-IRA,” a retirement program that makes savings the default option for employees. There’s no federal equivalent to the U.K. National Employment Savings Trust, but states including California, Oregon, Illinois, Connecticut, and Maryland are in various stages of launching public auto-IRAs.

The idea continues to gain momentum. At the end of March, New Jersey Gov. Phil Murphy signed a bill creating the Secure Choice Savings Program. And this month, a U.S. district court dismissed a lawsuit challenging the CalSavers Retirement Savings program, adding to a growing body of cases that support states’ rights to launch auto-IRAs.

Gov. Jerry Brown signs legislation to automatically enroll millions of private-sector workers in retirement saving accounts as lawmakers and supporters look on at the Capitol in Sacramento, California in 2016. (Rich Pedroncelli/Associated Press)

Here’s how the programs typically work in the United States: Over several years and in phases determined by the size of the company, employers will be required to register their employees for enrollment in the programs. Workers who join will have a percentage of their pay diverted to an individual account. In some states, the deduction will automatically increase over time, though workers can always change the amount or leave the program at any time.

The U.K. findings echo early numbers suggesting auto-IRAs in the U.S. are helping workers save for the future. In Oregon, which is home to the first and most well-established program, workers saved nearly $5 million during the first year. Two-thirds of eligible employees joined OregonSaves, and they contributed an average of 5 percent of their paycheck.

Retirement plan participation rates in the U.S. have hovered around 50 percent for years. About a third of workers do not have any savings, and employer plan coverage has declined since the 1980s, with many small business owners citing reasons such as cost, high turnover, and uncertainty about their income for not hosting a plan. 

The stagnation in enrollment isn’t surprising, since the U.S. has failed to pass major federal reforms that either boost participation rates at firms already offering retirement plans or extend coverage to workers who did not have access to one.

The U.K., on the other hand, did both, and study authors Jonathan Cribb and Carl Emmerson said the legislation led to overall strong gains in retirement savings:

  • Participation rates skyrocketed by 37 percentage points to 88 percent in 2015 among employees who worked at a company with more than 57 workers, which the researchers classified as medium or large companies in the report.
  • Participation rates also rose among firms with 30 to 57 employees, although the jump was not to levels quite as great as those seen among large employers.
  • And at small firms, participation rates grew among younger, new, and low-wage earners, who have historically lacked access to retirement savings accounts.

Cribb and Emmerson also reported that employees saved more after the policy went into effect: The share of employees contributing more than 5 to 10 percent of earnings increased by 4 percentage points, while the share of people contributing more than 10 percent rose by 6 percentage points.

The exact mechanism behind the increase in the share of workers contributing at higher levels is not clear. But one strong possibility is that some firms are enrolling their employees automatically in plans with contributions that are much higher than the minimums,” they wrote.

Their study suggests that if our country were to pass a similar policy, it could lead to substantial increases in retirement saving participation. They note the gains would likely not be as large in the U.S. because more people here already participate in a savings plan than did in the U.K. in 2012 when the law was first implemented, but it would be substantial nonetheless.

The increase would likely be the greatest among firms with fewer than 500 employees as well as among people who have historically lacked access to a retirement savings plan or have been priced out of buying one in the private market. Those people include workers in the service industry, small businesses, and even startups, who are already enrolling in the programs in California and Oregon.

This report adds to the growing body of body of evidence that government-sponsored automatic enrollment plans can provide retirement saving opportunities for those who have lacked them in the past,” Cook said.