Retirement Savings Proposal Could Provide Six-Figure Nest Eggs for Lowest Earners

Under the RAND Corp.’s optimistic model, the proposed Retirement Savings for Americans Act could help the bottom 10% of earners save $126,000 over a 40-year working career.

The bill, reintroduced in Congress by Representative Lloyd Smucker, R-Pennsylvania, on April 7, would establish federally run Roth-style after-tax retirement savings accounts for low- and middle-income workers who do not have access to an employer-sponsored retirement plan.

If passed, the Department of the Treasury would administer the program, which would offer matching contributions of up to 5% via a 1% automatic contribution and a tax credit match of up to 4%. The latter match would be phased out at the national median income level.

According to RAND, about 42 million of the estimated 63 million workers without an employer-sponsored retirement account would be eligible to receive federal matching funds for an RSAA account. Those who earned at the 50th percentile during their career would be able to save $585,000, RAND estimated.

RAND’s research indicated the RSAA could reduce by “more than $2 trillion” state and federal government spending on asset-tested programs, such as Medicaid and Supplemental Security Income for seniors. The savings would cut costs by more than the program costs on an annual basis after 20 to 30 years—depending on the behavioral scenario. The savings would be driven primarily by delaying older workers’ eligibility for SSI and Medicaid.

“By having assets, [workers] are not reliant on safety net programs, at least initially,” says Carter Price, a senior mathematician and professor of policy analysis at the RAND School of Public Policy and one of the co-authors of the study. “Over time, lower-income people might spend down those assets. But by [helping] them [accumulate] assets, they don’t need those [safety net] programs as soon as they retire.” 

Price explains that the government savings—in the best-case scenario—might not materialize for several decades, however.

“In the 10-year window … [we] don’t see much savings, if any. But then after 20 or 30 years … [it’s] significant,” Price says.

RAND estimated the net costs for the retirement accounts to federal and state governments would be $274 billion in the first 10 years and almost $1.5 trillion over 40 years, along with a reduction of more than $3.6 trillion in Medicaid and SSI spending on seniors over 40 years.

RAND’s study also noted that an RSAA account would provide more benefits to younger workers, especially, as they are more likely to earn below the median annual earnings and therefore qualify for the matching contributions. Workers are more likely to earn above the national median annual earnings as they age, meaning their federal matching contributions would phase out. In addition, older workers are more likely to work for employers that offer retirement plans, translating to an eventual transition off the RSAA entirely.

RAND’s modeling is sensitive to several assumptions, including the potential for crowding out, or firms being less willing to offer employer-sponsored retirement plans once a federal account plan is available; changes in labor supply, either in labor force participation or a change in hours of work; and retirement percentage savings adjustments, changes to the amount of someone’s income that they save for retirement from other savings.

“If policymakers are concerned about crowding out, there are options for tweaking the policy to relieve some of those [maintenance of effort] concerns,” Price says. “A firm [could] have some penalty associated with dropping benefits, or there are some inducements to maintain benefits.”

He points, as an example, to the Accordable Care Act’s policies to ensure that firms continue to offer health insurance despite potential subsidies for marketplace-purchased plans. He said there were concerns in the ACA’s proposal stage that firms would drop their sponsored plans and workers would join Medicaid or government exchanges.

“[Nevertheless], that hasn’t happened, in part because of some of those maintenance-of-effort provisions,” he says.

RAND conducted analyses of several other potential crowd-out and spend-down rate scenarios that could deviate from the optimistic outlook. If RSAA participants spent down their assets quickly in retirement, they would qualify for Medicaid earlier in retirement. RAND estimated that if workers’ average spend down rate were to double from $10,000 per year to $20,000, the RSAA would fail to pay for itself after 40 years.

Additionally, if crowd-out rates increased from 10% to 20% and 30%, each 10% increase would raise crowd out costs by approximately $34 billion over 10 years, or $231 billion over 40 years. But the rise in costs comes with a caveat.

“Overall cost savings change negligibly owing to the fact that many of the workers whose employers dropped plans are not likely to be SSI- or Medicaid-eligible,” the report found.

However, RAND concluded by mentioning that the bill does not guarantee positive outcomes on individuals’ budgets and quality of life.

“The bill is quite expensive and requires borrowing for many years until other social program use declines and the net benefits of the RSAA begin,” the report stated. “These borrowing costs are not trivial given the current debt and budget deficit. These may have large unintended consequences on the United States’ ability to borrow, or this additional borrowing may raise interest rates.”