Social Security May be Adequate for Low-Income Workers

The American Enterprise Institute questions the benefit of automatically enrolling low-income workers into state-run IRAs.

Around the country, more than half of state governments are pushing to establish automatically enrolled individual retirement accounts (IRAs) for low-income workers, who most likely are not being offered a retirement plan at their workplace, notes the American Enterprise Institute.

The state plans have initial deferral rates ranging between 3% and 6%, with some pairing that with auto escalation up to an 8% ceiling. While the intention is to help these people have a better quality of life in retirement, Social Security pays lower-wage workers much higher relative benefits, the Institute notes. The lower-paid also pay less tax and are more likely to receive social insurance disability income and survivor benefits.

According to the Institute’s report, Census Bureau data shows only 8.8% of Americans ages 65 and older had incomes below the poverty line, which the Institute attributes to “Social Security’s progressive benefit formula, which pays more generous benefits to low earners.” For instance, for a person earning an average wage of $12,000 a year, Social Security would replace 90% of those earnings. “It is not clear why a worker with poverty-level earnings would place a great emphasis on saving for retirement versus other potentially more pressing needs,” the Institute says.

Additionally, there is the danger that low-income workers who are automatically enrolled into an IRA will seek out loans with high interest rates and increase their credit card debt, the Institute says. It looked at federal Thrift Savings Plan data that showed the debt level for low-income workers automatically enrolled in that plan increased in line with the amount of deferrals they made into the plan or even more.

The paper also argues that automatically enrolling low-income workers would more than likely make them ineligible for means-tested government benefits, such as Medicaid, Temporary Aid for Needy Families, food stamps, Supplemental Security Income, Section 8 housing assistance and the Low Income Home Energy Assistance Program. “Even at low contribution rates and modest investment returns, it would not take many years for low-income, auto-IRA participants to bump up against common asset thresholds,” the Institute says.

In conclusion, the Institute says, “Many low-income workers may be rational in not saving substantial amounts for retirement over and above what Social Security will provide.”

American Enterprise Institute’s full report, “How Hard Should We Push the Poor to Save for Retirement?”, can be downloaded here.