The Auto-IRA: A Possible Solution to PA’s Looming Retirement Crisis

From PA Treasury

Read Entire PA Treasury Note (with informational graphics)

In the last Treasury Note, we laid out the details of Pennsylvania’s retirement crisis. Too many private sector workers do not have the savings needed for retirement. This is of particular concern in Pennsylvania because the state has a much larger aging population than most. Collectively, workers’ lack of retirement savings will cost the state billions of dollars in social assistance and lost tax revenue.

In 2017, Treasurer Torsella convened the Task Force on Private Sector Retirement Security to study the problem in depth. It was a bipartisan group of stakeholders that included the Republican and Democratic chairs of both the Pennsylvania House and Senate finance committees. The Task Force held 4 hearings across the state in which it heard from experts in retirement security research, financial service providers, Pennsylvania small business owners, and officials from other states that are implementing their own plans. After many hours of testimony and deliberation, the Task Force ultimately reached broad consensus that the state must do something to address the problem, and that the auto-IRA is the policy option that makes the most sense.

Put simply, the auto-IRA is a means for workers to more easily save their own money. Similar to the 401(k) that many employers offer, a percentage of employee pay is deducted for investment in the employee’s retirement account. Through the state-facilitated auto-IRA program, all employers who do not already offer a retirement savings plan would automatically enroll their employees in the auto-IRA. The state would partner with employers to raise awareness among the working population about the plan prior to rollout, as well as to disclose employees’ right to opt-out. Just as all employers must deduct a certain percentage from employee pay for taxes and Social Security, employers would set up a new deduction that would send a portion of participating employees’ pay to their new auto-IRA account. In contrast to 401(k)s, employers do not make contributions to their employees’ auto-IRA accounts, as auto-IRAs are not subject to the Employee Retirement Income Security Act of 1974 (ERISA).

Within each participating worker’s auto-IRA account, $1,000 would be safeguarded in a capital preservation fund. This would shield the first $1,000 a worker saves from the ups and downs of the investment markets, providing the assurance that—while retirement investing is a long-term strategy that flourishes over time thanks to compound interest—a portion of their savings will be preserved even if the market dips in the short term. The rest of workers’ savings would go into a default low-cost investment vehicle, such as a target date index fund. If an employee decides they want to make changes to the default account settings they are enrolled in—for example default contribution rate or specific investment vehicle—they can always change it to fit their personal preferences and goals.

Another important feature of the auto-IRA is that it is portable. Since few people work for the same company their whole career anymore, portability allows workers to continue to save in the same plan if they switch employers, without having to worry about rolling the account over.

The auto-IRA can best be described as a public-private partnership. Through the bid process, state government selects a private investment manager and vets the investment vehicles the manager offers to program participants. While the program would require appropriations at the outset for startup costs, those costs would be repaid as the program ultimately becomes self-funding. The College and Career 529 Savings Plans provide a good example of how Pennsylvania has already successfully implemented this type of program for over two decades. And just like in the 529 Plans, the assets in the program belong entirely to the individual account owners, not the state.

As described in the Task Force’s report, lack of access to a workplace retirement plan is a key cause of retirement insecurity.

About 77% of workers with access to a workplace plan participate, while only about 5% of workers who lack workplace access will open their own independent account. In short, when workers have an easy, automatic way to save some of their income before it even appears in their paycheck, they are much more likely to save for retirement—at least 15 times more likely, according to AARP. 

The auto-enrollment aspect of the auto-IRA makes workplace saving that much easier because workers do not have to take any action to begin saving. Many workers with the best intentions to save may be overwhelmed and ultimately deterred by the time and effort it can take to research investment decisions. However, a growing body of behavioral economics research tells us that the easier it becomes for people to save through mechanisms like automatic payroll deduction, the more savings they accumulate. That means we can use auto-enrollment to harness the inertia many of us face when making financial decisions to ultimately improve people’s lives. 

As several small business owners stated at a Retirement Task Force hearing, employers face significant obstacles in establishing a retirement plan such as a 401(k) for their workers—particularly cost, liability, and compliance obligations related to ERISA. A state-facilitated auto-IRA program would bring the remaining employers who do not offer a retirement plan into the fold without those burdens, thereby evening out plan coverage gaps so that all Pennsylvanian workers would have workplace access to a retirement savings plan.

From inception, the auto-IRA has represented a bipartisan effort to address the country’s lack of retirement savings. It was first proposed in a 2006 article written by David John of the Heritage Foundation and J. Mark Iwry of the Brookings Institution. Since then, it has been adopted into law by six states. California, Connecticut, Illinois, Maryland, New Jersey, and Oregon. Notably, the Maryland auto-IRA bill was signed into law by a Republican Governor in May 2016, where it passed the Senate with a unanimous vote from all 32 Democrats and 14 Republicans. This year, Oregon’s standalone compliance legislation passed with bipartisan support. It was also supported by the Oregon Farm Bureau and the Oregon Association of Nurseries.

The president and CEO of the American Council of Life Insurers Susan Neely recently gave a public endorsement of a federal auto-IRA bill, stating “It is a market-based solution that can help more people save more of their own money for the good of their families’ futures.”

Numerous other conservative individuals have spoken in favor of the auto IRA, including former chairman of President Reagan’s Council of Economic Advisors, Martin Feldstein, Ramesh Ponnuru of the American Enterprise Institute, and journalist George Will.

At a Retirement Task Force hearing, several small business owners testified that it is important to them to offer retirement benefits to their employees, both for competitiveness and because it’s the right thing to do. However, they also noted there are many challenges involved with doing so—particularly cost, complexity, and liability risk. Results from a recent AARP survey of Pennsylvania businesses with 100 or fewer employees support these remarks. According to the survey, nearly 9 in 10 of PA small business owners agree that state lawmakers should support the creation of a state-facilitated retirement savings option. In addition, three quarters of respondents favored a ready-to-go retirement plan over having to stand one up on their own. 

In contrast to most employer-sponsored plans, a state-facilitated auto-IRA involves minimal obligations for employers. Under the plan, employer obligations would be limited to simply adding an extra payroll deduction for all employees who do not opt-out, maintaining and sharing payroll deduction records with the state, and distributing information to employees. Because the auto-IRA is not subject to ERISA, employers cannot contribute to employees’ accounts. They also do not have to take on any of the administrative paperwork or liability risk that comes with ERISA.

In today’s tight labor market, the auto-IRA allows small businesses a step up in offering retirement benefits to potential hires without taking on the burdens of an employer-sponsored plan. This improves their competitiveness and the Commonwealth’s economy.

State to Broaden Base of Corporation Net Income Tax

From PA Chamber of Business & Industry

Beginning in January of 2020, the Pennsylvania Department of Revenue will begin to assess the state’s Corporate Net Income Tax on out-of-state corporations that do business in the Commonwealth. 

The change in policy comes on the heels of last year’s U.S. Supreme Court decision in South Dakota v. Wayfair which found that states can collect sales tax from corporations that, while not physically located within the states’ boundaries, do business within the state.  According to a Corporate Tax Bulletin issued by the Department, corporations that aren’t located in the state but have “$500,000 or more of direct or indirect gross receipts pursuant to their sales factor” sourced to Pennsylvania will be required to pay the state’s CNI tax.  The gross receipts sales can be factored from a combination of the following three categories: 1. the sale, rental, lease or licensing of tangible personal property; 2. the sales of services; and/or 3. the sale of licensing of intangibles, including franchise agreements. 

The Wolf administration has not publicly stated how much additional revenue this expansion of the CNI tax is expected to bring into the state’s General Fund.  The tax generated $3.4 billion in the 2018-2019 fiscal year.



Member News – October 16, 2019

  • DRIVE will host an Open House tomorrow, Thursday, Oct. 17, from 4-6 p.m., at its new office building located at 418 Railroad St., Danville (in the old Metso Minerals Building). Come check out the newly renovated DRIVE office space and common areas, which include a 700 square foot training room available for daily rental and 24,000 square feet available for fit-out and lease. Refreshments will be provided. RSVP by emailing or call 570-284-4296. 

 

 

 

  • There will be a fun, Halloween-themed, family-friendly fundraising event on Saturday, Oct. 26, at Hawkins Chevrolet, located at 1856 Montour Blvd. (Rt. 11), Danville, to benefit the Montour Area Recreation Commission, which manages the Montour Preserve. This event is being hosted by the Danville Business Alliance and several other Danville-based organizations. It will feature an obstacle course, pumpkin toss, trunk or treat and much more. All proceeds raised from the event will benefit MARC, which currently does not have enough funding to sustain operations beyond next fall. For additional information, visit the Facebook event page, and view the below video. 

  • Hand in Hand Family Resource Center will present a special Halloween edition of C.A.M.P.S. (Construction, Art, Music, Play, Sensory), called Tricks & Treats on Sunday, Oct. 27, from 2-5 p.m. at Arnold’s Golf Course in Mifflinville. The event will begin with a Halloween golf cart parade (with golf card decorated by local families), and then will move onto the C.A.M.P.S. program, which will include: building haunted houses from recycled materials, skeleton handprints, apple, pumpkin and potato stamping, blowing ghost paintings, making musical instruments, eyeball putting, pumpkin bowling, and more. This free event (which includes a suggested but not mandatory donation to benefit Hand in Hand), is for all ages and every ability. For more information, visit the Facebook event

Economic Development Groups Considering Opportunities

More information about the Opportunity Zone program

Economic development organizations from the region gathered recently at Monty’s on the Upper Campus of Bloomsburg University to learn more about a Federal program designed to spur development in selected communities. Qualified Opportunity Zones were created as part of the 2017 Tax Cuts and Jobs Act. The program provides tax benefits for investing eligible capital into designated zones.  

Investors who realize capital gains can defer their tax liability by investing in Qualified Opportunity Funds (QOF), which are established to provide funding for projects in Opportunity Zones. Funds can be used to invest in commercial properties, housing, and stock or interest in a business. If funds are held in a QOF for at least five years, 10% of the liability on the investment is eliminated. If the investment is held for at least seven years, an additional 5% of the liability is eliminated. If the investor holds the investment for at least 10 years, when the investor sells or exchanges the investment, the liability for the gain on the increased value of the investment is also eliminated. There are deadlines for investing funds in order to maximize tax benefits.

Opportunity Zones were established by census tract based on economic demographics. There are zones in significant areas of Berwick, Bloomsburg, and Danville. Congressman Dan Meuser spoke about the program with Chamber members in August. Meuser attended the workshop in early October which was sponsored by State Senator John Gordner and SEDA-COG. Representatives Kurt Masser and David Millard were also in attendance.

The Chamber has been in discussions with other economic development groups about potential projects in the three local zones.

Welcome Pennsylvania MENTOR

More than 400 businesses and organizations belong to the Chamber to receive benefits and support efforts to strengthen their businesses and our region. Increased membership allows us to offer additional programs and benefits, have a stronger voice in advocacy and be involved in more activities and initiatives in our communities. The Chamber welcomes its newest member, Pennsylvania MENTOR, to help us fulfill our mission.

Pennsylvania MENTOR is a leading home and community-based human services provider that serves individuals, both adults and children, with intellectual or developmental disabilities, as well as emotional, behavioral and mental health challenges. Part of how they go about serving the children among this population is through therapeutic foster care and foster parents, which are called “Mentors.” Founded in 1989, PA Mentor is part of The MENTOR Network, which is in 36 states. PA Mentor will soon be opening an office in the Columbia/Montour region, and can be reached at 570-982-4112, by email, or visit its website