Automatic IRA Act of 2011 Hopes to Dramatically Increase Retirement Savings

U.S. Senator Jeff Bingaman has introduced the Automatic IRA Act of 2011, which he said takes a common-sense approach to addressing the nation’s retirement savings crisis.

When fully phased in, the bill will give nearly 42 million Americans an easy, effective way to take responsibility for their fiscal futures and plan for a secure retirement.

Senator John Kerry is a cosponsor.

According to a 2009 Boston College Center for Retirement Research report, nearly 50 percent of American households will retire without enough savings to maintain their pre-retirement standard of living.  A significant driver of America’s inadequate retirement savings is a crisis of coverage.  About half of all American workers now have no opportunity to save for retirement at work; in New Mexico that percentage reaches nearly 60 percent.

The Automatic IRA Act of 2011 (S. 1557) enables nearly all employees who work for a private business with more than 10 workers and whose employer does not already offer a retirement plan to contribute to retirement savings through payroll deductions.  Worker contributions would be deposited into their own Individual Retirement Account (IRA) ultimately managed by the same banks, mutual funds, insurance carriers, and other institutions that currently provide IRAs.

The approach builds on the use of automatic features in 401(k) plans that encourage employees toward sensible decisions (while allowing them to make alternative choices), which has proven highly successful in raising 401(k) contribution rates.

Employers will receive a tax credit to cover the administrative costs of setting up the IRA account, but they will not be allowed to make a contribution to it.

“Too few American workers are adequately preparing for their retirement years.  Our bill addresses that serious problem by ensuring that workers have a way to directly deposit some of their paychecks into a retirement accounts,” Bingaman said.

“This is a common sense reform to make it easier for American workers to save for retirement without adding to the cost for their employers. In Massachusetts alone, over 800,000 workers would benefit from a greater chance to carve a path to a secure retirement,” Kerry said.

The Obama administration has called on Congress to enact an automatic IRA measure, and included a proposal in its FY 2011 budget.

The concept of automatic IRAs was first developed several years ago by scholars at the Heritage Foundation and Brookings Institution. The idea enjoys the support of experts such as Martin Feldstein and Jane Bryant Quinn.

The automatic IRA concept has also been supported by a broad range of organizations, including AARP, Consumers Union, the Minority Business Roundtable, and the U.S. Women’s Chamber of Commerce.

Bingaman and Kerry are members of the Senate Finance Committee, where this bill has been referred to.

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