EL
E B R AT I N
years
The Population of
Workers Covered by the Auto IRA:
Trends and Characteristics
Benjamin H. Harris1
Ilana Fischer
The Brookings Institution
1
Harris is on leave from the Brookings Institution while serving as a senior economist with the Council
of Economic Advisers. He was a research economist with the Brookings Institution when this paper was
written.
Research Report
G
C
AARP Public Policy Institute
The Population of
Workers Covered by the Auto IRA:
Trends and Characteristics
Benjamin H. Harris
Ilana Fischer
The Brookings Institution
AARP’s Public Policy Institute informs and stimulates public debate on the issues we
face as we age. Through research, analysis and dialogue with the nation’s leading experts,
PPI promotes development of sound, creative policies to address our common need for
economic security, health care, and quality of life.
The views expressed herein are for information, debate, and discussion, and do not necessarily represent official policies of AARP.
#2012-03
February 2012
©2012, AARP
Reprinting with permission only
AARP Public Policy Institute
601 E Street, NW, Washington, DC 20049
http://www.aarp.org/ppi
Acknowledgment
The authors thank David John, Surachai Khitatrakun, and Gary Koenig for helpful
comments.
iv
Table of Contents
Acknowledgment............................................................................................................iv
Abstract ..........................................................................................................................vii
Executive Summary ........................................................................................................1
Results............................................................................................................................1
Introduction......................................................................................................................3
Previous Research ..........................................................................................................4
Methodology and Data ....................................................................................................5
Results..............................................................................................................................7
Conclusion .....................................................................................................................14
List of Tables
Summary
Table.
Workers Eligible for Automatic Enrollment under Various Restrictions...................................... 2
Table 1.
Workers Eligible for Automatic Enrollment Under Various Restrictions
2007 Survey of Consumer Finances ............................................................................................. 8
Table 2.
Workers Eligible for Automatic Enrollment Under Various Restrictions
2009 Current Population Survey (2008 data)................................................................................ 9
Table 3.
Distribution of Workers Eligible for Auto IRA........................................................................... 11
Table 4.
Workers Eligible for Automatic Enrollment under Various Restrictions
1998 Current Population Survey (1997 data).............................................................................. 12
v
The Population of Workers Covered by the Auto IRA: Trends and Characteristics
AbstrAct
This study investigates the claim that the Auto IRA proposal can potentially boost the
retirement adequacy of tens of millions of workers. We estimate that between 24 million
and 43 million workers—approximately one-quarter of the workforce—would be eligible
for automatic enrollment in the proposals under consideration in Congress. Moreover, we
find that the eligible population is heavily skewed toward workers with low and moderate
wage levels and that exempting very low-wage workers from the automatic enrollment
mandate would have only a modest impact on the number of eligible workers. Lastly, we
find that the proportion of Auto IRA–eligible workers is increasing over time owing to
the shift away from employer-sponsored retirement plans.
vii
The Population of Workers Covered by the Auto IRA: Trends and Characteristics
Executive Summary
Automatic enrollment in individual retirement accounts (IRAs) is an innovative
proposal designed to increase retirement saving among millions of Americans. The
plan—which we refer to as the “Auto IRA”—aims to improve retirement security for
workers without employer-provided retirement plans. Under the Auto IRA, eligible
workers are automatically enrolled in a private retirement account unless they explicitly
elect not to participate (“opt out”). Using employer payroll systems, contributions are
automatically withdrawn from workers’ paychecks as a set percentage of pay, deposited
in worker-owned retirement accounts, and invested in low-cost diversified investment
vehicles (such as life-cycle funds). Workers have ultimate control over their participation
in Auto IRAs and can opt out of any default option, such as changing the amount
contributed or the default investment.
Since the concept was introduced in 2006, the Auto IRA has gained substantial
momentum among policy makers and sparked the introduction of two bills in Congress.
The goal of this report is to estimate the population of workers who would be
automatically enrolled in an IRA after accounting for the bills’ various restrictions and
exemptions.
Results
We estimate the population of workers eligible for automatic enrollment given the
restrictions in Congress’s Auto IRA proposals; this forms our baseline scenario. We also
estimate the population of workers subject to the Auto IRA under a scenario where very
low-wage workers are exempt from the program, and a scenario where half of small
businesses, otherwise exempt because of their size, voluntarily enroll employees.
Our estimates of the population of workers eligible for automatic enrollment are
presented in the summary table below. Under the baseline scenario, we estimate that
between 24.4 million (19.7 percent) and 35.8 million (26.6 percent) workers would
be eligible for the Auto IRA. Most of these workers are employed full time. Between
19.3 million and 27.2 million full-time workers and between 5.0 million and 8.5 million
part-time workers would be eligible.
The population of workers subject to automatic enrollment would shrink if Congress
elected to exclude very low-wage workers from the mandate. Under a scenario where
workers with low annual wages—less than $5,000—were excluded from the Auto IRA
program, the number of workers subject to automatic enrollment would drop modestly to
between 23.6 million (19.1 percent) and 32.7 million (24.3 percent).
The baseline scenario might underestimate the number of eligible workers. The
baseline estimates assume that firms will enroll workers only if required to do so,
excluding the possibility of voluntary enrollment. We estimate the number of workers
subject to the Auto IRA under the condition that half of workers at small firms are
automatically enrolled voluntarily by their employer. Under this scenario, the number of
workers subject to automatic enrollment increases to between 29.3 million (23.7 percent)
and 43.1 million (32.0 percent). Given the experience with automatic enrollment in
401(k)s, the assumption that small firms would elect to voluntarily enroll workers in an
IRA is plausible.
1
The Population of Workers Covered by the Auto IRA: Trends and Characteristics
Summary Table
Workers Eligible for Automatic Enrollment under Various Restrictions
Number
Worker Characteristic
of Workers
2007 Survey of Consumer Finances
(1) Baseline Eligible Workers
Eligible Full-Time Workers
Eligible Part-Time Workers
Percentage
of Total
Total Eligible Workers
19,358,685
5,049,241
24,407,926
18.0%
31.5%
19.7%
Total Eligible Workers
19,214,842
4,363,853
23,578,695
17.8%
27.2%
19.1%
23,076,540
6,272,438
29,348,978
21.4%
39.1%
23.7%
(2) Eligible Workers with Wage Restriction
Eligible Full-Time Workers
Eligible Part-Time Workers
(3) Eligible Workers with Voluntary Small Business Participation
Eligible Full-Time Workers
Eligible Part-Time Workers
Total Eligible Workers
2009 Current Population Survey (2008 data)
(1) Baseline Eligible Workers
Eligible Full-Time Workers
Eligible Part-Time Workers
Total Eligible Workers
27,239,255
8,517,329
35,756,584
24.6%
35.6%
26.6%
Total Eligible Workers
26,281,578
6,387,598
32,669,176
23.8%
26.7%
24.3%
32,534,775
10,542,792
43,077,567
29.4%
44.1%
32.0%
(2) Eligible Workers with Wage Restriction
Eligible Full-Time Workers
Eligible Part-Time Workers
(3) Eligible Workers with Voluntary Small Business Participation
Eligible Full-Time Workers
Eligible Part-Time Workers
Total Eligible Workers
We further estimate the distribution of eligible workers by wage level and calculate
the changes in the proportion of eligible workers over the past decade. We find that
automatic enrollment is decidedly progressive in terms of eligible workers, in large
part due to the correlation between lower wages and lack of employer-sponsored
retirement plans. Survey of Consumer Finance data show that more than 80 percent of
the population eligible for automatic enrollment earn less than $50,000 in wages, and
more than one-third earn less than $20,000 in wages. Fewer than 5 percent of eligible
workers have wages in excess of $100,000. Current Population Survey data show a
nearly identical trend. We also find that the proportion of Auto IRA-eligible workers is
increasing over time owing to the shift away from employer-sponsored retirement plans.
2
The Population of Workers Covered by the Auto IRA: Trends and Characteristics
Introduction
Automatic enrollment in individual retirement accounts (IRAs) is an innovative
proposal designed to increase retirement saving among millions of Americans. The
plan—which we refer to as the “Auto IRA”—aims to improve retirement security for
workers without company retirement plans. Under the Auto IRA, eligible workers are
automatically enrolled in a private retirement account unless they explicitly elect not to
participate (“opt out”). Using employer payroll systems, contributions are automatically
withdrawn from workers’ paychecks as a set percentage of pay, deposited in workerowned retirement accounts, and invested in low-cost diversified investment vehicles
(such as life-cycle funds). Workers have ultimate control over their participation in Auto
IRAs and can opt out of any default option, such as changing the amount contributed or
the default investment.
Since the concept was introduced in 2006, the Auto IRA has gained substantial
momentum among policy makers. Automatic enrollment in IRAs was included in the
Obama administration’s fiscal year 2012 budget proposal;2 the President’s Economic
Recovery Advisory Board3 endorsed automatic enrollment in IRAs in its recent report on
tax policy. In addition, two Auto IRA bills were recently introduced in Congress, one in
each chamber, (S. 37604 and H.R. 6099) aimed at automatically enrolling a substantial
proportion of private sector employees in retirement accounts. Slightly differing
legislation was introduced in earlier sessions of Congress.
The Senate and House bills are similar but not identical. Both bills would require
that firms meeting certain criteria automatically enroll their employees in IRAs; the bills
would provide a modest tax credit for the administrative costs of automatic enrollment
while using tax enforcement mechanisms to ensure firms’ compliance. The bills differ
in other respects, but differ only slightly in their restrictions on workers who are exempt
from automatic enrollment.
Under both bills, several classes of workers would be exempt from Auto IRAs.
Public sector workers, workers with access to employer-sponsored pensions, employees
of church and religious organizations, workers at firms with fewer than 10 employees,
workers with fewer than three months’ tenure, workers employed by firms established
for fewer than two years,5 and workers younger than 18 would all be exempt from the
automatic enrollment mandate.
2
U.S. Treasury, General Explanation of the Administration’s Fiscal Year 2012 Revenue Proposals (2011
Green Book) (Washington, DC: Government Printing Office, 2010). http://www.treasury.gov/resourcecenter/tax-policy/Documents/Final%20Greenbook%20Feb%202012.pdf.
3
President’s Economic Recovery Advisory Board, “The Report on Tax Reform Options: Simplification,
Compliance, and Corporate Taxation” (2010), http://www.whitehouse.gov/sites/default/files/microsites/
PERAB_Tax_Reform_Report.pdf.
4
On September 14, 2011, Senator Jeff Bingaman reintroduced the Auto IRA bill as S. 1557 the Automatic
IRA Act of 2011.
5
Both bills exclude new businesses. New businesses are defined as those “not in existence at all times
during the calendar year and the preceding calendar year.” Thus, it is possible for a firm established for
nearly two years to be exempt from the Auto IRA.
3
The Population of Workers Covered by the Auto IRA: Trends and Characteristics
The goal of this paper is to estimate the population of workers who would be
automatically enrolled in an IRA after accounting for the bills’ various restrictions and
exemptions. We further estimate the distribution of eligible workers by wage level and
calculate the changes in the proportion of workers who would have been eligible over
the past decade. We find that between 24 million and 43 million workers—approximately
one-quarter of the workforce—would be eligible for automatic enrollment under the
proposals recently introduced in Congress. Moreover, we find that the eligible population
is heavily skewed toward workers with low and moderate wage levels, and that the
proportion of Auto IRA–eligible workers is increasing over time owing to the shift away
from employer-sponsored retirement plans.
We present a review of the existing literature on automatic enrollment in the next
section, followed by a description of our methodology. We then present our findings and
conclude with a brief summary and discussion.
Previous Research
There is a growing literature on the effects of automatic enrollment broadly defined,
but little is known about the potential effects of automatic enrollment in IRAs. Perhaps
the most well-known study of the effects of automatic enrollment was conducted by
Madrian and Shea,6 who studied the effects of automatic enrollment in the 401(k) plan of
a large U.S. corporation. Madrian and Shea found that automatic enrollment substantially
boosted employee participation in the company’s retirement saving plan. Under automatic
enrollment, the average participation rate in the company’s 401(k) jumped from
37.4 percent to 85.9 percent.7 Madrian and Shea also found that employees who were
automatically enrolled in a retirement plan tended to maintain the default contribution
rate and investment allocation. Other studies report similarly high rates of participation
under automatic enrollment.8 In an important study, Beshears et al.9 examined the impact
of the employer match on opt-out rates under automatic enrollment. They found that the
existence of an employer match creates only a modest reduction—5 to 11 percentage
points—in the proportion of employees who opt out. Such a finding is relevant to
automatic enrollment in IRAs, since IRAs usually offer saving incentives similar to an
6
Brigitte C. Madrian and Dennis F. Shea, “The Power of Suggestion: Inertia in 401(k) Participation and
Savings Behavior,” The Quarterly Journal of Economics 116, no. 4 (2001): 1149–87.
7
Madrian and Shea control for demographic and economic factors, including gender, race, age, and
compensation, and find the regression-adjusted effect of automatic enrollment to be even larger. After
controlling for these factors, the difference is 50.4 percentage points, compared to the raw difference of
48.5 percentage points noted above.
8
John Beshears, James J. Choi, David Laibson, and Brigitte C. Madrian, “The Importance of Default
Options for Retirement Savings Outcomes: Evidence from the United States,” in Lessons from Pension
Reform in the Americas, ed. Stephen J. Kay and Tapen Sinha (New York: Oxford University Press,
2008); James J. Choi, David Laibson, Brigitte C. Madrian, and Andrew Metrick, “For Better or For
Worse: Default Effects and 401(k) Savings Behavior,” in Perspectives in the Economics of Aging, ed.
David Wise (Chicago: University of Chicago Press, 2004).
9
John Beshears, James J. Choi, David Laibson, and Brigitte C. Madrian, “The Impact of Employer
Matching on Savings Plan Participation under Automatic Enrollment,” in Research Findings in the
Economics of Aging, ed. David A. Wise (Chicago: University of Chicago Press, 2009).
4
The Population of Workers Covered by the Auto IRA: Trends and Characteristics
unmatched contribution to a 401(k). Soto and Butrica10 found a correlation between
automatic enrollment and lower employer match rates in retirement plans, but were
unable to provide causal evidence that automatic enrollment led to lower match rates.
Using a different methodology and alternative sample, VanDerhei11 found the opposite
effect. Geissler and Harris12 estimated the revenue and distributional effects of automatic
enrollment in 401(k)s, finding revenue costs to be modest and the reform to be generally
progressive.
While the growing literature on automatic enrollment in 401(k)s can inform policy
makers about the Auto IRA, the literature’s lessons may not translate perfectly owing to
differences in populations eligible for the respective programs. Workers who are eligible
for employer-sponsored retirement plans tend to be older, better educated, and more
highly compensated than workers eligible for the Auto IRA.13
Since the Auto IRA has yet to be implemented, the few studies that focus on the Auto
IRA are speculative. Iwry and John14 discussed the merits of Automatic IRAs, while also
describing some of the practical concerns with the proposal. Harris and Johnson15 found
that Auto IRA benefits would be primarily spread across the middle three quintiles of the
income distribution, with small average changes in benefits for those at either end of the
income distribution. The study also found that if automatic enrollment is coupled with
an expansion of the Saver’s Credit, benefits are more concentrated toward lower-income
taxpayers, with the largest gains in after-tax income accrued by those in the second and
third income quintiles.
Methodology and Data
To measure the potential universe of employees who might be affected by the Auto
IRA, we begin with two related bills introduced in the U.S. Congress. In the Senate,
Senator Jeff Bingaman (D-NM) introduced the Automatic IRA Act of 2010 (S. 3760),
which would require most private firms without employer-sponsored retirement plans to
automatically enroll employees in a Roth IRA, to automatically direct a preset proportion
10
Mauricio Soto and Barbara A. Butrica, Will Automatic Enrollment Reduce Employer Contributions to
401(k) Plans? Urban Institute Retirement Policy Program Discussion Paper 09-04 (Washington, DC:
The Urban Institute, 2009).
11
Jack VanDerhei, The Impact of Automatic Enrollment in 401(k) Plans on Future Retirement
Accumulations: A Simulation Study Based on Plan Design Modifications of Large Plan Sponsors,
Employee Benefit Research Institute Issue Brief 341 (Washington, DC: Employee Benefit Research
Institute, April 2010).
12
Christopher Geissler and Benjamin H. Harris, “The Automatic 401(K): Revenue and Distributional
Estimates,” in Automatic: Changing the Way America Saves, ed. William G. Gale, J. Mark Iwry, David
John, and Lina Walker (Washington, DC: Brookings Institution Press, 2009).
13
Investment Company Institute, “Who Gets Retirement Plans and Why,” Research Perspective 14, no. 2
(2008).
14
J. Mark Iwry and David C. John, Pursuing Universal Retirement Security Through Automatic IRAs,
Retirement Security Project Discussion Paper 2009-3 (Washington, DC: Brookings Institution, 2009).
15
Benjamin H. Harris and Rachel M. Johnson, “Automatic Enrollment in IRAs: Costs and Benefits,” Tax
Notes 124, no. 9 (2009): 903–14.
5
The Population of Workers Covered by the Auto IRA: Trends and Characteristics
of the employees’ wages to the IRA on behalf of the employees, and to automatically
invest these contributions in a designated low-cost investment.
The Senate version of the legislation does not require all workers to be automatically
enrolled in an IRA. Firms that offer retirement plans are generally exempt from the
requirement, but firms that exempt particular divisions from the retirement plan
are required to automatically enroll ineligible workers in an IRA. Other classes of
exempt workers include those who have not satisfied the minimum age and job tenure
requirements, government workers and church employees, employees with fewer than
three months of service at a company, employees of newly established firms, and workers
under 18 years of age. In the first year of enactment, firms with fewer than 100 employees
are exempt from the requirement; this exemption is gradually phased down over four
years to firms with fewer than 10 employees. For these purposes, an “employee” is
counted as a worker earning more than $5,000 in annual wages.
A nearly identical companion bill with the same title (H.R. 6099) was introduced
in the House by Rep. Richard Neal (D-MA). With respect to automatic enrollment, the
primary difference between the bills is the threshold for the size of company subject to
the provisions. While the Senate bill gradually reduces the minimum size of the firm
subject to the requirement from 100 to 10, the House bill immediately requires firms with
10 or more employees to enroll workers in an Auto IRA.16
We use data from two large-scale government surveys to estimate the number of
workers who would be eligible for the Auto IRA under the congressional proposals. One
of the surveys is the 2007 Survey of Consumer Finances (SCF). The SCF is a triennial
cross-sectional survey conducted by the Federal Reserve Board. The SCF contains
a wealth of data on household finances, as well as substantial data on demographics,
employment, and participation in employer-sponsored retirement accounts. The 2007
SCF contains 4,422 family-level observations.
The other data source is the Current Population Survey (CPS). The CPS is a monthly
survey of labor force participation conducted by the Bureau of Labor Statistics within the
U.S. Census Bureau; it is a primary data source for U.S. labor market data. The CPS also
contains an Annual Social and Economic Supplement administered in March. The March
Supplement collects additional data on income, demographics, and labor market activity
not captured in the monthly survey. In addition, the CPS administers a Displaced Worker,
Employee Tenure, and Occupational Mobility Supplement in January. We primarily use
labor force, demographic, and pension data from the 1998 and 2009 March Supplements
in our estimates, but also use the job tenure data in the January Supplement to impute
data on job tenure. Since the March CPS Supplements ask respondents about their
behavior in the prior year, our data correspond to 1997 and 2008, respectively.
Neither data source can perfectly estimate the population of workers who would be
subject to automatic enrollment under the congressional bills. From the SCF, we can
identify workers who are employed in the private sector, work at firms with 10 or more
employees, and do not have a pension plan and are not eligible to receive one; these
16
For the purposes of measuring the proportion of workers exempt from automatic enrollment, we ignore
the phase-in provision in the Senate bill.
6
The Population of Workers Covered by the Auto IRA: Trends and Characteristics
workers are subject to the Auto IRA. We exclude workers who are currently ineligible to
receive a pension but expect to be eligible in the future.17
The SCF allows the identification of employees with less than one year of job tenure.
To approximate private sector workers employed fewer than three months, we impute
short-term job tenure based on data from the Displaced Worker/Job Tenure Supplement
to the CPS. Among private sector workers employed less than a year, 27.6 percent were
employed fewer than three months in 2008; a similar proportion was employed fewer
than three months in 1998. Based on these estimates, we randomly assign short-term job
tenure among private sector employees reporting job tenure of less than one year.18
Due to survey design, our CPS estimates are slightly less precise. We use the same
approach applied to SCF data, estimating the number of private sector workers, workers
without a pension who are ineligible to receive one, and employees of firms with more
than 10 workers. Unlike the SCF, the CPS does not report employees who expect to
eventually become eligible for a pension. We also cannot determine job tenure using CPS
data and consequently do not exempt workers under this criterion.19
We make two adjustments to the baseline calculations. First, we calculate the number
of workers who would be covered under the automatic IRA if the proposal exempts
workers with very low wages to increase administrative ease. For purposes of this
calculation, we define very low-wage workers as those with earnings less than $5,000
annually. While neither congressional bill includes this exemption, it might be considered
in response to criticism that the administrative costs associated with the Auto IRA exceed
the benefits for very low-wage workers. Second, we estimate the number of workers
eligible for the Auto IRA if 50 percent of small business employees are automatically
enrolled despite their exemption. To achieve this estimate, we randomly assign
“participation” to half of the small business employees who would otherwise be exempt.
Results
The population of workers eligible for automatic enrollment are presented in
table 1 (SCF) and table 2 (CPS). Under the baseline scenario, we estimate that between
24.4 million (19.7 percent) and 35.8 million (26.6 percent) workers would be eligible for
the Auto IRA. Most of these workers are employed full time. Between 19.3 million and
27.2 million full-time workers and between 5.0 million and 8.5 million part-time workers
would be eligible.
17
These workers most likely do not meet the minimum age and service requirements under the employer’s
plan guidelines.
18
Firms without employer-sponsored retirement plans are more likely to have short-term workers. A
survey of small employers found that in 2000, 34 percent of employees in small businesses without
retirement plans had fewer than three years’ job tenure, compared to just 13 percent among small firms
with retirement plans. Dallas L. Salisbury, Hearing on H.R. 10, The Comprehensive Retirement Security
& Pension Reform (2001), http://www.ebri.org/publications/testimony/index.cfm?fa=t127.
19
Both surveys also allow us to identify self-employed workers. While the Auto IRA proposals do not
exempt self-employed workers, it seems unlikely that the “financial inertia” that makes automatic
enrollment effective would apply to self-employed workers; establishing an IRA would likely require
more administrative effort than would opting out. Consequently, we assume that self-employed workers
will not enroll in retirement plans under the Auto IRA.
7
The Population of Workers Covered by the Auto IRA: Trends and Characteristics
Table 1
Workers Eligible for Automatic Enrollment Under Various Restrictions
2007 Survey of Consumer Finances
Number of
Workers
Percent of
Total
Eligible Full-Time Workers
19,358,685
18.0%
Eligible Part-Time Workers
5,049,241
31.5%
24,407,926
19.7%
Eligible Full-Time Workers
19,214,842
17.8%
Eligible Part-Time Workers
4,363,853
27.2%
23,578,695
19.1%
Eligible Full-Time Workers
23,076,540
21.4%
Eligible Part-Time Workers
6,272,438
39.1%
29,348,978
23.7%
Full-Time Workers
107,692,958
87.0%
Part-Time Workers
16,052,254
13.0%
123,745,212
100.0%
7,797,111
6.3%
Self-Employed Private Sector Workers
17,031,665
13.8%
Private-Sector Workers Employed by a Firm
98,916,435
79.9%
Workers with a Pension
56,295,802
45.5%
Eligible Workers without a Pension
35,807,512
28.9%
Workers without Pension Eligibility
14,610,231
11.8%
Self-Employed Private Sector Workers
17,031,665
13.8%
35,271,349
28.5%
Workers at a Firm with 10 or More Employees
97,880,206
79.1%
Workers at a Firm with Less than 10 Employees
25,865,006
20.9%
25,124,610
20.3%
2,813,706
2.3%
120,931,506
97.7%
Employees with Less than $5,000 in Wages
11,804,017
9.5%
Employees with At Least $5,000 in Wages
111,941,196
90.5%
24,407,926
19.7%
Worker Characteristic
(1) Baseline Eligible Workers
Total Eligible Workers
(2) Eligible Workers with Wage Restriction
Total Eligible Workers
(3) Eligible Workers with Voluntary Small Business Participation
Total Eligible Workers
Incremental Calculation of Total Baseline Eligible Workers
Total Workers
Public-Sector Workers
Subtotal: Private Sector Workers (non self-employed)
without Pension Eligibility
Subtotal: Private Sector Workers (non self-employed)
without Pension Eligibility at Firms with 10 or More Employees
Employees with Three Months or Less of Job Tenure
Employees with Greater than Three Months of Job Tenure
Total Eligible Workers
8
The Population of Workers Covered by the Auto IRA: Trends and Characteristics
Table 2
Workers Eligible for Automatic Enrollment Under Various Restrictions
2009 Current Population Survey
(2008 data)
Number
of Workers
Percent
of Total
Eligible Full-Time Workers
27,239,255
24.6%
Eligible Part-Time Workers
8,517,329
35.6%
35,756,584
26.6%
Eligible Full-Time Workers
26,281,578
23.8%
Eligible Part-Time Workers
6,387,598
26.7%
32,669,176
24.3%
Eligible Full-Time Workers
32,534,775
29.4%
Eligible Part-Time Workers
10,542,792
44.1%
43,077,567
32.0%
Full-Time Workers
110,606,954
82.2%
Part-Time Workers
23,918,236
17.8%
134,525,190
100.0%
20,648,844
15.3%
9,060,147
6.7%
104,816,199
77.9%
Workers with a Pension
59,598,722
44.3%
Workers without a Pension, Employer Offers Pension
12,756,854
9.5%
Workers without a Pension, No Pension Offered
62,169,614
46.2%
61,386,576
45.6%
Workers at a Firm with 10 or More Employees
107,294,274
79.8%
Workers at a Firm with Less than 10 Employees
27,230,916
20.2%
46,039,825
34.2%
Employees with Less than $5,000 in Wages
14,981,704
11.1%
Employees with At Least $5,000 in Wages
119,543,486
88.9%
35,756,584
26.6%
Worker Characteristic
(1) Baseline Eligible Workers
Total Eligible Workers
(2) Eligible Workers with Wage Restriction
Total Eligible Workers
(3) Eligible Workers with Voluntary Small Business Participation
Total Eligible Workers
Incremental Calculation of Total Baseline Eligible Workers
Total Workers
Public-Sector Workers
Self-Employed Private Sector Workers
Private-Sector Workers Employed by a Firm
Subtotal: Private Sector Workers (non self-employed)
without Pension Eligibility
Subtotal: Private Sector Workers (non self-employed)
without Pension Eligibility at Firms with 10 or More Employees
Total Eligible Workers
9
The Population of Workers Covered by the Auto IRA: Trends and Characteristics
The population of workers subject to automatic enrollment would shrink if Congress
elected to exclude very low-wage workers from the mandate. Under a scenario where
workers with annual wages less than $5,000 were excluded from the Auto IRA program,
the number of workers subject to automatic enrollment would drop modestly to between
23.6 million (19.1 percent) and 32.7 million (24.3 percent). In table 1 and table 2, this
scenario is referred to as “Eligible Workers with Wage Restriction.”
The baseline scenario might underestimate the number of eligible workers. The
baseline estimates assume that firms will enroll workers only if required to do so,
excluding the possibility of voluntary enrollment. The growing trend of automatic
enrollment in 401(k)s20 has shown that many employers will automatically enroll workers
in retirement plans even though not required to do; such a trend would likely be stronger
for the Auto IRA, which will generally cost employers less than 401(k)s. We estimate the
number of workers subject to the Auto IRA under the condition that half of workers at
small firms are automatically enrolled voluntarily by their employer. Under this scenario,
the number of workers subject to automatic enrollment increases to between 29.3 million
(23.7 percent) and 43.1 million (32.0 percent). In table 1 and table 2, this scenario is
referred to as “Eligible Workers with Voluntary Small Business Participation.”
Tables 1 and 2 also show the effects of individual restrictions on the potential pool
of Auto IRA eligible workers. The number of U.S. workers in our data amounts to
between 123.7 million and 134.5 million; the higher estimate corresponds to the CPS
data. Of these, between 35.2 million (28.5 percent) and 61.4 million (45.6 percent) are
private sector workers employed by a firm (i.e., not self-employed) who are ineligible to
receive retirement benefits through their employer. The small business exemption reduces
this pool of eligible workers to between 25.1 million (20.3 percent) and 46.0 million
(34.2 percent).
Automatic enrollment is decidedly progressive in terms of eligible workers, in large
part owing to the correlation between lower wages and lack of an employer-sponsored
retirement plan. SCF data show that more than 80 percent of the population eligible for
automatic enrollment earn less than $50,000 in wages, and more than one-third earn less
than $20,000 (table 3). Fewer than 5 percent of eligible workers have wages in excess of
$100,000. CPS data show a nearly identical trend.
The population of workers eligible for automatic enrollment is gradually increasing
over time (table 4). Using the CPS, we find that in 1997 29.1 million workers
(23.4 percent) were eligible under the baseline scenario, 24.8 million (19.9 percent) were
eligible under a wage restriction, and 35.3 million (28.3 percent) were eligible assuming
some small businesses voluntarily enroll workers in IRAs.
20
The percentage of firms with 401(k)s offering automatic enrollment has steadily risen from 4.2 percent
in 1999 to 23.6 percent in 2006. Large firms are much more likely than smaller firms to offer automatic
enrollment. In 2006, 41.3 percent of plans offered by large firms (more than 5,000 employees) included
automatic enrollment, compared to just 6.8 percent of those offered by small firms (49 or fewer
employees); however, the proportion of small firms offering automatic enrollment is growing over time.
Profit Sharing/401(k) Council of America, Annual Survey of Profit Sharing and 401(k) Plans (Chicago:
Profit Sharing/401(k) Council of America, 1999); Profit Sharing/401(k) Council of America, Annual
Survey of Profit Sharing and 401(k) Plans (Chicago: Profit Sharing/401(k) Council of America, 2006).
10
Total
11
32,669,176
1,647,019
35,756,584
$100,000+
Total
1,647,019
5,379,996
$50,001-$100,000
5,379,996
14,692,374
14,692,374
$20,001 - $50,000
10,949,787
14,037,195
Less than $20,000
Wages
Millions of Eligible Workers
23,578,694
24,407,925
3,479,545
953,338
3,479,545
$50,001-$100,000
10,833,941
8,311,870
953,338
10,833,941
$20,001 - $50,000
$100,000+
9,141,101
Millions of Eligible Workers
43,077,567
2,057,727
6,351,188
17,682,743
16,985,909
29,348,978
962,023
3,890,735
13,140,882
11,355,338
CPS
100.0%
4.6%
15.0%
41.1%
39.3%
100.0%
3.9%
14.3%
44.4%
37.5%
100.0%
5.0%
16.5%
45.0%
33.5%
Percent of Eligible Workers
100.0%
4.0%
14.8%
45.9%
35.3%
Percent of Eligible Workers
100.0%
4.8%
14.7%
41.0%
39.4%
100.0%
3.3%
13.3%
44.8%
38.7%
Percent of Eligible Workers
Eligible Workers
Eligible Workers
with Voluntary
Baseline
with Wage
Small Business
Eligible Workers
Restriction
Participation
SCF
Millions of Eligible Workers
Eligible Workers
Eligible Workers
with Voluntary
Baseline
with Wage
Small Business
Eligible Workers
Restriction
Participation
Less than $20,000
Wages
Table 3
Distribution of Workers Eligible for Auto IRA
The Population of Workers Covered by the Auto IRA: Trends and Characteristics
The Population of Workers Covered by the Auto IRA: Trends and Characteristics
Table 4
Workers Eligible for Automatic Enrollment under Various Restrictions
1998 Current Population Survey
(1997 data)
Number
of
Workers
Worker Characteristic
Baseline Eligible Workers
Eligible Full-Time Workers
Eligible Part-Time Workers
Percent
of Total
Change from
1997 to 2008
Percent
of Total
Number
Percentage
of Workers Point Change
22,938,469
6,197,871
Total Eligible Workers 29,136,340
Eligible Workers with Wage Restriction
Eligible Full-Time Workers
21,139,931
Eligible Part-Time Workers
3,640,410
21.9%
31.2%
23.4%
4,300,786
2,319,458
6,620,244
2.7%
4.4%
3.2%
20.2%
18.3%
5,141,647
2,747,187
3.6%
8.4%
Total Eligible Workers 24,780,341
19.9%
7,888,835
4.4%
26.3%
38.9%
28.3%
4,929,774
2,814,905
7,744,679
3.1%
5.1%
3.7%
84.1%
15.9%
100.0%
14.4%
7.4%
78.2%
46.0%
11.8%
42.3%
5,775,458
4,074,245
9,849,703
2,673,597
-188,361
7,364,467
2,253,497
-1,895,030
9,491,237
-1.9%
1.9%
0.0%
0.9%
-0.7%
-0.2%
-1.7%
-2.3%
4.0%
43.8%
6,831,002
1.9%
99,868,626
24,806,860
80.1%
19.9%
7,425,648
2,424,055
-0.3%
0.3%
Subtotal: Private Sector Workers
(non self-employed) without Pension Eligibility at 40,956,783
Firms with 10 or More Employees
32.9%
5,083,043
1.4%
14.9%
85.1%
23.4%
-3,576,779
13,426,482
6,620,244
-3.7%
3.7%
3.2%
Eligible Workers with Voluntary Small Business
Participation
Eligible Full-Time Workers
Eligible Part-Time Workers
27,605,000
7,727,887
Total Eligible Workers 35,332,887
Incremental Calculation of Total Baseline Eligible
Workers
Full-Time Workers
104,831,496
Part-Time Workers
19,843,991
Total Workers 124,675,487
Public-Sector Workers
17,975,247
Self-Employed Private Sector Workers
9,248,507
Private-Sector Workers Employed by a Firm
97,451,733
Workers with a Pension
57,345,226
Workers without a Pension, Employer Offers Pension 14,651,885
Workers without a Pension, No Pension Offered
52,678,377
Subtotal: Private Sector Workers
54,555,574
(non self-employed) without Pension Eligibility
Workers at a Firm with 10 or More Employees
Workers at a Firm with Less than 10 Employees
Employees with Less than $5,000 in Wages
Employees with At Least $5,000 in Wages
18,558,483
106,117,004
Total Eligible Workers 29,136,340
12
The Population of Workers Covered by the Auto IRA: Trends and Characteristics
Comparing CPS data between 1997 and 2008, the number of eligible workers
increases by 6.6 million (or from 23.4 to 26.6 percent of total workers—a 3.2 percentage
point increase) under the baseline scenario, 7.9 million (or from 19.9 to 24.3 percent
of total workers—a 4.4 percentage point increase) under the wage restricted scenario,
and 7.7 million (or from 28.3 to 32 percent of total workers—a 3.7 percentage point
increase) under the voluntary small business participation scenario. The proportion of
part- and full-time workers increased in each scenario. The increase in the number of
workers eligible for the Automatic IRA is driven by both a growing labor force and the
growing proportion of workers without access to employer-sponsored pension coverage.
The size of the workforce increased by 9.8 million between 1997 and 2008; the increase
boosted the number of workers eligible for the Auto IRA. The shift away from employersponsored retirement plans also increased the proportion of workers eligible for the Auto
IRA. Between 1997 and 2008, the percentage of workers ineligible for an employer
retirement plan rose from 42.3 percent to 46.2 percent, an increase of 4.0 percentage
points (table 4).
The difference in estimates between the CPS and SCF is substantial. We attribute
these differences to three primary factors. First, we attribute differences in estimated
number of eligible workers (as opposed to proportion of eligible workers) to differences
in total population of U.S. workers indicated in the two data sets; the SCF estimates U.S.
workers at 123.7 million, compared to 134.5 million in the CPS. Second, as discussed
above, the SCF offers more extensive data on worker characteristics relevant to this study,
which allows for a more comprehensive measurement of eligible workers. Third, the
survey questionnaires differ in their wording among comparable questions, and can thus
produce different estimates of a given population. For example, the CPS asks respondents
if they have worked at all in the previous year, while the SCF asks respondents whether
they are working at the present time. Differences in questionnaires can lead to moderate
differences in estimates of the same population.21
One noteworthy comparison is that the number of Auto IRA–eligible workers is
substantially larger than the potential pool of Auto 401(k)–eligible workers. Using the
2007 SCF, we estimate that approximately 10.6 million workers (8.5 percent of workers)
would be eligible for automatic enrollment in 401(k)s if it were universally applied to all
existing 401(k) plans,22 less than half the number eligible for the Auto IRA. While opt-out
rates would likely be higher for the Auto IRA than for automatic enrollment in 401(k)s,
the significantly higher proportion of Auto IRA–eligible workers illustrates the potential
for the program to affect saving behavior for a large number of workers. Moreover, a
combined policy of automatic enrollment in IRAs and 401(k)s has the potential to affect
nearly one-third of American workers.
We conclude this section with two important points. First, we emphasize that our
estimates calculate the number of American workers who will be eligible for the Auto
IRA, not those who will actually enroll in an IRA after being given the option to opt
21
For example, Sanzenbacher shows that pension coverage estimates vary across major surveys. Geoffrey
Sanzenbacher, Estimating Pension Coverage Using Different Data Sets, Center for Retirement Research
Issue Brief, No. 51 (Chestnut Hill, MA: Center for Retirement Research, 2006).
22
This estimate is not shown in the tables. The calculation is based on the number of employees eligible
for, but not enrolled in, an employer-sponsored plan. Several of the “Auto 401(k)” proposals in
Congress would exempt small businesses and particular classes of employees from the automatic 401(k)
mandate; these restrictions would reduce the number and proportion of eligible workers.
13
The Population of Workers Covered by the Auto IRA: Trends and Characteristics
out. Second, we note that the data are based on snapshots of employee characteristics
at a given point in time. Employee turnover, which may be higher for the population of
workers most likely to be subject to the Auto IRA, will increase the number of workers
eligible for the program over the course of a year. Data limitations preclude us from
estimating the impact of employee turnover on Auto IRA eligibility.
Conclusion
Auto IRA proposals continue to gain momentum in Congress. The bills’ sponsors and
other supporters of automatic enrollment claim the Auto IRA will put millions of workers
on the path toward better saving and will particularly help low- and moderate-income
workers. The limited number of studies focusing on the Auto IRA’s potential has made it
difficult to either support or reject these claims.
This study reinforces the claim that the Auto IRA can potentially boost the retirement
adequacy of tens of millions of workers. We estimate that between 24 million and
43 million workers—approximately one-quarter of the workforce—would be eligible for
automatic enrollment in the proposals recently introduced in Congress. Moreover, we
find that the eligible population is heavily skewed toward workers with low and moderate
wage levels, and that exempting very low-wage workers from the automatic enrollment
mandate would have only a modest impact on the number of eligible workers, while
potentially reducing administrative burdens. Lastly, we find that the proportion of eligible
workers is increasing over time and that this trend is due, in large part, to the shift away
from employer-sponsored retirement plans.
These results reflect some uncertainty. Due to data limitations, it is difficult to
determine precisely which workers would be exempt from automatic enrollment on the
basis of job tenure, although the effect of this requirement on firms’ behavior is unclear.
Firms might, for example, opt to automatically enroll workers on or near their hire date,
rather than wait three months. In addition, small firms that are exempt from the automatic
enrollment mandate may opt to participate anyway once the infrastructure is established;
this scenario would be consistent with the recent trend of large corporations adopting
automatic enrollment voluntarily. Data limitations also make it impossible to identify
workers at new firms; these firms would also be exempt from automatic enrollment. Like
the exemption for small firms, it is unclear whether this exemption would be binding.
Despite these limitations, the estimates presented here indicate that the Auto IRA
can have a widespread impact on worker participation in retirement saving accounts,
especially for workers with low or moderate wage levels. The economic effects of
automatic enrollment remain somewhat of a mystery: More research is needed to
determine the effects of automatic enrollment generally, and the Auto IRA in particular,
on net saving, labor supply, and retirement adequacy.
14