Illinois, like the entire United States, is hurtling toward a retirement crisis. Around half of private-sector workers have access to employer-sponsored plans; however, most workers who do not have such plans are, essentially, saving nothing to supplement Social Security, putting themselves on a path to poverty.
In 2014, we passed a law creating the Illinois Secure Choice Retirement Savings Program, an automatic enrollment IRA for employees who lack workplace retirement options. Other states are also grappling with this issue: California, Oregon, Washington, Connecticut, and New Jersey have passed similar laws on the topic.
These states—and others that are considering joining them—are examining many different policies. In weighing the options, it is helpful to study retirement systems across the world for lessons, both positive and negative. Here are some conclusions I’ve drawn.
Programs must be mandatory or opt-out. The nations with the worst retirement problems simply hope workers will save on their own. This model teaches us that a program must specifically encourage widespread participation. Many nations—for instance, Australia and Singapore—achieve this goal by making savings compulsory. However, this approach is not necessary: plans that are optional but feature default participation unless workers affirmatively opt out have very high participation rates, often over 90 percent. In Illinois, we chose this path, and others in the United States, where we greatly value individual choice, seem to agree with it.
Accounts must be invested together to decrease fees. The evidence is painfully clear that high fees deplete retirement assets at an alarming rate. The case is especially dangerous for accounts with smaller balances, which are prevalent among low-wage workers, many of whom lack employment-based plans. Therefore, a successful system will pool resources to lower fees.
Savings rates must be high. For a system like the United States, in which individuals without workplace plans are reliant on Social Security together with what they put away, savings rates ideally should exceed 10 percent. The Secure Choice Retirement Savings Program in Illinois features a default savings rate of 3 percent. In order to truly achieve sustainable retirement security, this amount must be increased over time, ideally through a policy of automatic escalation.
National policy is crucial. It is wonderful that states are taking leadership on this issue, but state action alone is not adequate. The best systems rely on national policies. For instance, the Illinois Secure Choice Retirement Savings Program is funded entirely by employee contributions; federal law prohibits employer contributions. Allowing employer contributions would enhance this program’s ability to give dignity to retirees. Also, the federal government’s purchasing power could help decrease fees and enhance the security of investments. In other words, state approaches are crucial—but incomplete—steps toward a federal solution.
Retirement security is a difficult issue, partially because it necessitates decades of planning and partially because of changing demographics. However, it is a universal issue, so we can learn from hundreds of models around the world. Armed with this knowledge, and endowed with a commitment to solve the problem in a humane way, we have an enormous opportunity to do good.
about the author
Daniel Biss, a former mathematics professor, represents the Ninth District in the Illinois State Senate. Since joining the legislature in 2011, Biss has earned a reputation as a thoughtful, effective elected official and a leader on retirement issues, spearheading a 2-year battle to enact the Illinois Secure Choice Savings Program.