Seven states in the U.S., namely California, Colorado, Connecticut, Illinois, Maryland, Oregon, and Virginia, have taken significant steps to address the retirement savings gap by implementing "auto-IRA" programs. These initiatives aim to provide access to workplace retirement plans or state-sponsored Individual Retirement Accounts (IRAs) for workers who do not have access to traditional pension or 401(k)-type plans. As of the end of 2023, more than 800,000 workers were participating in these programs.

According to the University of Pennsylvania's Pension Research Council, approximately 48% of Americans, or 57 million people, lack access to workplace retirement plans. However, studies conducted by AARP Research have shown that individuals are 15 times more likely to save for retirement when they have a workplace plan, with automatic enrollment increasing the likelihood even further to 20 times. In response to this gap, several states have pioneered the "auto-IRA" approach.

Oregon became the first state to launch an auto-IRA program back in 2017, and by the end of 2023, a total of seven states had followed suit. The states of Delaware, Hawaii, Maine, Minnesota, Nevada, New Jersey, New York, and Vermont are also expected to introduce similar programs in the near future, as reported by Georgetown University's Center for Retirement Initiatives.

Auto-IRA programs typically require companies of a certain size to offer their own workplace retirement plans or facilitate payroll deductions into state-sponsored IRAs at no cost to the employer. If the latter option is chosen, a portion of the workers' paychecks, typically 3% to 5% of their earnings, is automatically contributed to the state plan. However, workers retain the choice to opt out of the program. The Pew Charitable Trusts reports that more than 800,000 workers are participating in auto-IRAs, accumulating over $1 billion in total savings. On average, these workers save around $165 per month.

John Scott, the director of Pew's retirement savings project, emphasized the significance of these monthly savings for workers who may have never saved for retirement before. Approximately 195,000 employers are facilitating payroll deductions into a state auto-IRA, while it remains unknown how many companies have opted to sponsor their own 401(k) plans or other workplace retirement plans.

The underlying motivation for these auto-IRA programs is the realization that Americans are not saving enough for retirement. With the shift away from pensions to 401(k)-type plans, the onus of saving for retirement falls more directly on workers. Disturbingly, Vanguard data reveals that the typical saver aged 55 to 64 only has $71,000 in 401(k) savings. Even when accounting for Social Security benefits, a Vanguard analysis suggests that most baby boomers, excluding the highest-income bracket, will fall short of a sustainable retirement income.

As the U.S. population continues to age, it is projected that states will face increased financial strain due to a growing pool of elderly individuals with insufficient retirement savings. The implications point towards increased spending on public assistance programs and a potential need for working adults to shoulder a greater tax burden. Pew estimates that inadequate retirement savings will lead to a rise of $334 billion in state spending from 2021 to 2040.

Efforts to establish a national auto-IRA program have faced challenges in recent years, though some lawmakers have made attempts to implement similar initiatives. The Center for Retirement Initiatives highlights that access gaps to retirement plans disproportionately affect certain groups, including those employed by small businesses, lower-income workers, younger workers, minorities, and women. The participants in the auto-IRA programs tend to be female, younger, unmarried, people of color, and have a high school education as per Pew's findings.

Auto-IRA programs utilize automatic enrollment as a behavioral nudge to overcome procrastination, a common roadblock to individual enrollment in 401(k) plans. Approximately 30% of participants choose to opt out of the programs. Additionally, auto-IRAs serve as Roth IRAs, allowing investors to withdraw their contributions without penalty since they have already paid income tax on those funds.

However, experts acknowledge some limitations with auto-IRAs. They come with lower annual worker contribution limits compared to 401(k) plans, and there is no employer match, which often serves as a significant incentive for 401(k) participants. Furthermore, not all state workers are covered under auto-IRA programs, and gig workers may still lack access to retirement plans. Despite these drawbacks, proponents argue that these programs have proven successful in encouraging retirement savings.

In light of the ongoing retirement savings crisis and the demographic shift towards an aging population, the implementation of auto-IRA programs by multiple states represents a significant step towards ensuring a more secure financial future for American workers.