Roadmap for retirement? Pennsylvania eyes savings program for private-sector workers
Over the past few months, a task force led by state Treasurer Joe Torsella has been holding hearings that explore ways to help more Pennsylvania workers save for retirement — and potentially save the state money.
Other states, including Oregon and Vermont, are designing or have already implemented programs to encourage savings.
A bipartisan group of Pennsylvania lawmakers hope Pennsylvania is next. They have floated legislation to create a safety net for private-sector workers who don’t have retirement plans through their employers.
“This is not just a national trend, it’s also a state reality,” said Diane Oakley, executive director of the National Institute on Retirement Security.
Many small businesses don’t offer retirement benefits because they see plans as too costly or complex to administer. That has left an estimated 2.1 million Pennsylvanians without a workplace retirement plan.
Business leaders and retirement consultants agree on the need to discuss retirement savings, but they also expect pushback from companies that may see a new program as a government mandate.
Oakley, who has been tracking retirement initiatives across the country, believes Torsella has done a good job of building a case for Pennsylvania to adopt some type of state-run program.
Doing nothing, she said, could harm the commonwealth’s bottom line. An independent study commissioned by the Pennsylvania Treasury found that insufficient retirement savings led Pennsylvania to spend an estimated $702 million more in 2015 on public assistance programs, covering services such as medical care, housing and transportation, while losing about $70 million in tax revenue.
Absent any changes, those numbers are projected to grow by 2030 to $1.1 billion in extra spending and $106 million in lost revenue, according to the study, by Philadelphia-based Econsult Solutions Inc.
“That’s a direct cost to the state,” Oakley said.
Most states have explored three types of so-called retirement security programs. The most popular option has been individual retirement accounts, or IRAs, with automatic enrollment for workers who lack access to an employer-sponsored plan.
In states that have created this kind of program, most employers that do not offer a retirement plan are required to participate in the auto-IRA, though rules vary by state.
These auto-IRA plans feature automatic payroll deductions and the money is sent to portable retirement accounts, which are often managed by the state. Deductions can vary, though most plans start around 3 percent. Employees can choose to opt out.
A state House bill favors the auto-IRA option for Pennsylvania, with the state Treasury collecting funds from employers with at least five or more employees. The requirement would not apply to companies with fewer than five employees.
A retirement proposal in the state Senate calls for a minimum employee contribution of $25 per month.
How's it going in Oregon?
Oregon was the first state to launch an auto-IRA program for the private sector. Known as OregonSaves, the state-run program kicked off its pilot phase last July with 11 employers.
The group grew to 53 employers by October with nearly 3,300 employees contributing to the plan. About 72 percent of employees in the pilot group have stayed in the program, while others have opted out.
"The most common reason we can identify is people don't think they can afford to save at this time," said Joel Metlen, public engagement manager for OregonSaves. "A smaller percentage of employees report opting out because they are already saving through other means."
The first phase of an Oregon-wide rollout began in November, starting with companies with 100 or more employees. The program will roll out to smaller businesses over the next two years. Oregon officials estimate that about 60,000 of the 104,000 employers in the state will end up participating in OregonSaves by 2020.
OregonSaves aims to keep things simple for employers, Metlen said. Companies that don't offer a retirement plan are asked to register for the program and provide employee data. They then have to make payroll deductions for participating workers and keep track of what was paid in.
"When talking to some employers for the first time, we've heard concerns about the program being a requirement," he said. "We are definitely aware that there are a lot of pressures on employers, so we are always looking for ways to limit their role to just parts of the process we can't do. We want the program to benefit businesses as well as employees, helping provide an important benefit for employees that attracts and retains good workers."
As of this week, Metlen said 334 companies have registered to facilitate the program. There are about 32,000 employees in the system, with about 80 percent of participants contributing about 5 percent of gross pay.
OregonSaves was set up with 5 percent as the minimum contribution, though employees can cut that rate to as low as 1 percent of gross pay. The program also has a 1 percent automatic annual escalation built into the 5 percent standard until the employee contribution reaches 10 percent. Participants can opt out of the automatic increases, and they can also opt back into the program at any time if they leave.
In the future, Metlen said the plan is to allow employees to contribute a specific dollar amount, not just a percentage of pay.
Other states have created marketplace programs, in which the state develops an approved list of financial services firms that can promote and sell low-cost retirement plans to small businesses.
Another option is a multiple-employer plan, in which two or more unrelated companies adopt a single 401(k)-style plan.
The multiple-employer plan, or MEP, allows for higher employee contributions than an auto-IRA plan. Contribution limits for a 401(k) plan are $18,500 per year, while IRA plans are capped at $5,500 per year. The IRA limit is $6,500 for people over 50.
Oakley isn’t calling on Pennsylvania to adopt a specific program, as long as it adopts something.
“I think it comes down to what is the most effective plan to give the most amount of people the opportunity to save,” Oakley said.
If the Republican-led General Assembly decides to pass legislation, Oakley believes Pennsylvania may be able to learn from other states and move more quickly.
But not everyone is ready for a change, especially if it is accompanied by mandates.
Kevin Shivers, executive state director for the National Federation of Independent Business, said many of his small-business members eventually want to offer retirement plans, but they can’t afford it or administer it at their current size.
“My members are more worried about paying the light bill and finding good employees,” he said.
Shivers, who is on the state task force, also said he doesn’t believe forcing people to put money into a state-administered program will help them realize the importance of retirement savings.
Shivers is pushing for more financial literacy and retirement education in school.
“If this is such a major issue, shouldn’t we talk about it before kids go into the real world?” he asked.
Karen Degenhart, a vice president and employee benefits officer for F&M Trust in Camp Hill, also believes state lawmakers should focus more on directing school districts to teach financial planning.
She thinks the state would help more workers with retirement savings if it offered companies tax credits or other incentives to start retirement plans.
With no additional task force hearings ahead, Torsella’s office has said the hope is for legislative action this year.