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Why Are the States Leading on Auto-IRA the States Leading on Auto-IRA?

A large number of states are currently in the process of exploring, or in some specific cases are now working to implement, a state-run auto-IRA option — but why these states in particular?

A recent whitepaper published by the Center for State and Local Government Excellence outlines the status of the current state-run auto-IRA programs, the approaches taken to date and recent initiatives by the Labor Department in support of these state programs. The report also explores the possible explanations as to why the states taking the lead in these initiatives — California, Connecticut, Illinois and Oregon — are doing so.

The three researchers, Alicia Munnell, Anek Belbase and Geoffrey T. Sanzenbacher, all of whom are affiliated with the Center for Retirement Research at Boston College, note that one possibility — that states which require the most from taxpayers, either because their public plans are particularly generous or severely underfunded, would be the most likely to press for a retirement system that ensures adequate retirement income — is somewhat supported by the data. They note that the public plans in the auto-IRA states have a slightly lower funded ratio and a slightly higher normal cost than those without, though they acknowledge that the differences are modest.

Other Possibilities

A second possibility — that economics is driving the initiatives, specifically that those states with more workers who may be unprepared for retirement are the ones leading the effort — is also found to be somewhat supported by the data, in that those states with auto-IRAs have a smaller percentage of the workforce offered a plan, have slightly higher incomes and therefore lower Social Security replacement rates, and devote a larger share of their budgets to Medicaid.

The researchers also note that the decision to impose a mandate on employers can be a politically charged issue, and don’t find it surprising therefore that the states in the vanguard on this issue have a Democratic house and senate and a Democratic governor. (The current governor of Illinois is a Republican but a Democrat was governor when the law was passed.) However, they acknowledge that this sense may be somewhat undermined by recent actions in states like Utah, which is deeply Republican, and Iowa, which has a Republican governor and a Republican house. Consequently, the researchers conclude that, in the end, the auto-IRA movement will likely end up being a bipartisan effort.

Regardless of why, the authors admit to their bias for mandatory programs rather than the voluntary marketplaces established by (and sanctioned in the Labor Department’s interpretive bulletin on state programs) New Jersey and Washington State, as a more effective solution to the retirement coverage gap.

They further note that, even if more states are successful in setting up a tier of retirement income for their citizens, they see this state-by-state approach as a “second-best” alternative to a national auto-IRA plan (which has been included in previous White House budget proposals), which they claim would be a much more efficient way to close the coverage gap, “offering substantial economies of scale and avoiding the laborious, time-consuming, and expensive process of setting up 50 different state plans.”

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