Auto-IRAs: How Much Would They Increase the Probability of 'Successful' Retirements and Decrease Retirement Deficits? Preliminary Evidence from EBRI's Retirement Security Projection Model®

32 Pages Posted: 21 Jun 2015

See all articles by Jack VanDerhei

Jack VanDerhei

Morningstar Center for Retirement and Policy Studies

Date Written: June 1, 2015

Abstract

This paper analyzes the potential of a generic auto-IRA proposal to increase the probability of a “successful” retirement and decrease retirement deficits. Results were provided for all age groups from ages 35-64, but the primary focus was on the youngest cohort (ages 35-39), as they would have the longest period to benefit from this change and thus provide a better sample to assess the long-term effects of this proposal. Assuming no opt outs, this analysis finds that for households in the youngest cohort working for small employers, the introduction of an auto-IRA would increase the probability of a “successful” retirement (as measured by the Retirement Readiness Ratings, or RRR) by 8.4 percent, declining as employer size increases. This increase in RRR was reduced to 5.7 percent for those working for medium-sized employers and 4.6 percent for those working for larger employers. Several sensitivity analyses of opt-out rates were included, but even in the worst-case scenario (75 percent opt out) there was an increase in RRR, albeit only 2.2 percent for those working for small employers, 1.5 percent for those working for medium-sized employers, and 1.1 percent for those working for large employers. If the analysis is limited to those households covered by at least one auto-IRA, the 8.4 percent RRR increase for the youngest cohort working for small employers assuming no opt-out increases to 9.3 percent. If the conditional probability of participating in a defined contribution plan after being in an auto-IRA is assumed to increase to 1, the 8.4 percent RRR increase for this group rises to 9.1 percent. If the employee contribution rate is doubled to 6 percent, the 8.4 percent RRR increase for this group nearly doubles, to 15.2 percent. Among all families where the head is ages 35-64, the aggregate national retirement deficit (in 2014 dollars) decreases from $4.13 trillion without auto-IRAs to $3.86 trillion (or a 6.5 percent decrease) with auto-IRAs and no opt outs. As opt-out rates rise, there is progressively less reduction in the aggregate deficits; at a 75 percent opt-out rate, the aggregate deficit is $4.06 trillion (only a 1.7 percent decrease).

Note: The PDF for the above title, published in the June 2015 issue of EBRI Notes, also contains the full text of another June 2015 EBRI Notes article abstracted on SSRN: “Self-Insured Health Plans: State Variation and Recent Trends by Firm Size, 1996-2013.”

Keywords: Automatic IRAs, Defined contribution plan participation, Defined contribution plans, Employee contribution rate, Employment-based benefits, Individual retirement accounts (IRAs), Long-term care costs, Retirement deficits, Retirement income adequacy

JEL Classification: D31, D91, J26, J33

Suggested Citation

VanDerhei, Jack, Auto-IRAs: How Much Would They Increase the Probability of 'Successful' Retirements and Decrease Retirement Deficits? Preliminary Evidence from EBRI's Retirement Security Projection Model® (June 1, 2015). EBRI Notes, Vol. 36, No. 6 (June 2015), Available at SSRN: https://ssrn.com/abstract=2620846

Jack VanDerhei (Contact Author)

Morningstar Center for Retirement and Policy Studies ( email )

22 W Washington Street
Chicago, IL 60602
United States

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
64
Abstract Views
874
Rank
623,067
PlumX Metrics