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June 24, 2007
Ted Boettner
Half of us won’t have enough money for old age, but here’s part of the
solution
A healthy pension system to augment Social Security is critical for the
long-term health of West Virginia seniors. Currently, only half of all workers
have access to a retirement plan at their workplace. That percentage drops ever
further for employees of small businesses, low-wage workers, and part-time and
temporary workers. Many of these individuals will never be able to accumulate
pension assets and could put more stress on taxpayer-supported services.
While many future retirees will rely on personal savings and benefits earned
through their work-based retirement plans, over 300,000 West Virginia workers,
more than half, are not covered by employer provided pensions at work. This is
largely attributable to the sharp falloff in personal savings and the erosion of
the traditional defined benefit pension system. While defined contribution plans
such as 401(k)s have largely replaced defined benefit plans, most workers with
defined contribution plans have accumulated relatively little money in their
accounts. A recent study by the Federal Reserve points out that 53 percent of
near retirement age workers (ages 45-54) had accumulated less than $48,000 in
financial assets.
National data from the Employee Benefit Research Institute shows that 75
percent of employers with less than 10 workers, and more the 60 percent with 10
to 24 workers, do not sponsor pension plans. This presents a particular problem
for West Virginia workers, since 32 percent of West Virginians worked in
businesses with fewer than 20 employees or were sole proprietors.
Access to retirement plans is also determined by income. Only 40 percent of
workers making under $20,000 have access to a retirement plan, while
three-quarters of those making above $50,000 have access. Nationally, two out of
three low-wage workers lack access to a retirement plan, while only one in four
high-wage workers do. Participation among low-wage workers is also low. Only a
quarter of workers making between $15,000 and $20,000 participate in a
retirement plan, compared with nearly three-fourths of those making more than
$50,000.
Companies that do not sponsor retirement plans tend to employ many part-time
and temporary workers. In fact, 80 percent of part-time and temporary workers
lack retirement coverage. Even if their company does have a retirement plan,
many part-time and temporary workers may not qualify for coverage.
Surveys show that small businesses do not provide retirement plans because of
cost, complexity and time it takes to administer them. Moreover, many employers
might feel that it’s something easy to put off, unlike meeting payroll, paying
taxes and figuring out health insurance.
One way we can overcome this pension problem would be to establish a system
of universal voluntary retirement accounts that would immediately give every
worker in the state a low-cost defined contribution account, to which they could
contribute directly from their paycheck. This program could mirror the state’s
457 program that offers defined contribution plans and the 529-college savings
program. Like the 457 program it could offer a pre-selected menu of options. It
could include options for employee-only savings (work-based IRAs) and
employee-employer plans (work-based 401(k)-type programs). Administration could
be assigned to the Treasurer’s Office, taking advantage of its low-cost
structure, and the management of the accounts and the investments could be
contracted to a private firm. Simply reducing administrative fees from the
levels charged by private managers of defined contribution accounts would
increase accumulations in those accounts by a staggering 25 to 30 percent.
Another distinct advantage of these accounts would be their portability
between jobs and the fact that workers could contribute to the account
immediately, with no vesting period, regardless of where they work. This program
would give small employers the ability to provide their workers with a decent
pension with almost zero paperwork and with no fiduciary obligations whatsoever.
While the state would create the infrastructure, it would not fund the pensions
nor match worker contributions.
The retirement accounts would be funded through automatic payroll deductions
and have options for employer contributions.
With this system in place, a low-income worker can significantly enhance
retirement income. A typical twenty-five-year-old worker, making $25,000 this
year, putting a little less than $15 a week into a retirement account with an
employer match would have over $200,000 saved by his retirement based on a
conservative five percent interest rate. That translates to a $1500 monthly
annuity, more than doubling his Social Security check! To put this in
perspective, the median value of all defined contribution accounts is only
$60,000 for people aged 55-64, which translates into a monthly annuity of $385.
This lack of financial assets is a recipe for impoverishment in retirement, and
could be a future drain on state resources.
While Social Security provides a foundation for retirement, it’s not enough
for a comfortable and secure retirement. The average Social Security check for
retired West Virginians is $910 a month. Currently, 147,000 West Virginia
seniors rely on Social Security checks for at least half of their total income,
while 72,000 depend on these benefits for almost all — 90 percent or more — of
their total income. While few West Virginia seniors collecting Social Security
fall below the official poverty line, over 58 percent would live in poverty
without Social Security benefits.
This retirement savings proposal offers a convenient, simple solution that
helps provide long-term financial security for West Virginia’s retirees and
helps local businesses cut through the red tape while improving benefits.
Boettner is a policy analyst with Mountain State Education & Research
Foundation.
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