State Retirement Initiatives Need to Be Coordinated With Existing Benefits
Without government action, some may have to choose between assistance and savings
More than half of the states have considered or are implementing programs that enroll certain private sector workers in individual retirement accounts funded by automatic payroll deductions—known as auto-IRAs—to help them save for their later years. But as these programs encourage savings, growing IRA accounts could bring unintended consequences as some lower-income workers face asset and income eligibility limits for public benefits programs. That reality could discourage some from participating, though policymakers can act to lessen the possibility that workers would face such situations.
Under auto-IRA programs, employees without a workplace retirement plan are enrolled automatically and contribute a preset percentage of wages or salaries unless they opt out or change the contribution percentage. Workers’ accumulated contributions typically are not available until retirement. Although Congress recently repealed clarifying regulations for state auto-IRAs, several states have indicated they plan to proceed with implementation.
Many policymakers anticipate a positive impact on their budgets because retirees who have saved may rely less on public benefit programs. At the same time, programs such as Supplemental Security Income (SSI), the Low Income Housing Energy Assistance Program (LIHEAP), and Temporary Assistance for Needy Families (TANF) often place eligibility limits on participants’ assets and income to ensure that these programs are used by those most in need. For example, SSI caps assets at $2,000 for an individual and $3,000 for a couple. In many states, TANF applicants cannot have more than $2,000 in assets.
Participants in these auto-IRA plans could reach such thresholds quickly. A February brief by The Pew Charitable Trusts, “‘Secure Choice’ Retirement Savings Plans Could Affect Eligibility for Public Benefits,” examined these issues. For example, a single worker earning $15,000 a year and contributing 3 percent of pay to an auto-IRA would accumulate over $2,000 during the fourth year. This could create quandaries for many low-income workers: Should they save but potentially give up public assistance, or avoid saving and just depend on Social Security in retirement?
Some states, including Alabama, Colorado, Illinois, and Maryland, have addressed this interaction between savings and public benefits, choosing to eliminate asset limits on TANF and LIHEAP. On the federal level, Congress in 2008 excluded retirement savings programs—including IRAs, 401(k)s, cash balance plans, and traditional defined benefit plans—from resource tests for the Supplemental Nutrition Assistance Program (SNAP), formerly known as food stamps.
Governments at both levels have several options:
- Legislators, when authorized by statute, can raise asset limits for specific programs and index them to inflation.
- State legislators can exempt auto-IRA savings accounts from means testing. There are precedents for this: Congress in 2008 excluded individual development accounts and Achieving a Better Life Experience accounts from SSI eligibility calculations, and excluded IRAs when determining SNAP eligibility.
- States also could eliminate asset limits if they have the authority and have not already done so for LIHEAP, SNAP, and TANF. (The Corporation for Enterprise Development has developed a scorecard of state actions.)
Changing asset rules appears to have only limited impact on aid programs. For example, separate research by Pew in 2016 found no statistically significant increase in the number of TANF recipients in states that eliminated asset limits for the program.
Policymakers at the state and federal levels can take several approaches to help ensure that mixed incentives do not discourage low-income workers from participating in auto-IRA programs. Among them are raising or eliminating asset limits or exempting auto-IRA savings from eligibility or benefit calculations for certain aid programs.
John Scott is the director of the Pew Charitable Trusts’ retirement savings project.
Alison Shelton is a senior research officer with The Pew Charitable Trusts’ retirement savings project.