State Initiatives to Cover Uncovered Private Sector Workers

At any given moment, only about half of private sector workers are covered by any sort of employer-spon­sored retirement plan. This lack of coverage has two implications. First, a substantial share of households – roughly one-third – end up with no coverage at all during their worklives and must rely exclusively on Social Security in retirement. And, even under cur­rent law, Social Security will provide less in the future relative to pre-retirement earnings than it has in the past. Second, with median job tenure of about four years, many employees move in and out of coverage so that they end up with inadequate 401(k) balances. Since most of those without coverage work for small employers, policymakers for decades have tried to solve the problem by introducing simplified retire­ment plans. But these initiatives have not improved coverage because plan administration costs are only one of several reasons that small businesses do not offer plans. Equally important considerations include too few employees, lack of employee interest, and unstable business income. Recognizing the difficulty in getting small businesses to adopt plans, the Obama Administration proposed “Automatic IRAs” in 2009 to cover the uncovered, and others have come up with alternative proposals. But no progress has been made in passing federal legislation. Into this breach have stepped the states. This brief provides an overview of retirement savings initiatives at the state level. The discussion proceeds as follows. The first section describes the nature of the coverage problem. The second section provides a summary of the state initiatives, separating the states into those moving ahead with a plan, those with legislation currently in play, and those where no legislation has been pro­posed or legislation has been rejected. It also de­scribes the two approaches that states have adopted to date – an employer mandate to auto-enroll their em­ployees in an IRA or the creation of a “marketplace” – as well as a third option, a state multiple employer plan, that some are considering. The third section pokes at the data to see if any systematic relationship exists between the initiatives and the characteristics of the states involved. The fourth section describes the U.S. Department of Labor’s efforts to clear away the regulatory underbrush, which should ease the path toward implementing the state programs. The final section concludes that, while the expansion of coverage could best be done at the federal – not the state – level, those states that require their employers to auto-enroll employees will significantly improve the retirement security of their citizens.