The foundation of our government, the U.S. Constitution, was the result of a collaborative effort among the states. Throughout our history, the states have worked together to address the needs of their residents.
One example of this collaborative spirit has been the creation of state-based savings programs to help parents save to pay for college for their children or help ensure the financial security of a disabled family member.
With a rich history of state innovation and collaboration to solve important economic challenges, states have the opportunity now to do so again by helping to expand access to ways workers can save for retirement.
It’s no wonder that more than one-half of Americans, according to a recent Gallup survey, rank retirement readiness as one of their top financial concerns. American workers of all ages are unprepared for their retirement years. An astonishing two-thirds of millennials and almost one-third of households over age 55 have saved nothing for retirement.
One of the reasons is that more than half of today’s private sector workforce — about 55 million Americans — do not have access to an employer-sponsored retirement savings plan. Employers, especially small businesses, cite the high costs and complexities of offering such plans to their employees.
If millions of workers today are not putting anything away for their retirement, they will have little more than their Social Security benefits to live on. With an average benefit of only $16,000 a year, insufficient retirement income will be a problem for both retirees and government budgets and will slow economic growth. Pennsylvania alone paid more than $4.2 billion in 2015 in state assistance for elderly residents. By 2030, it has estimated that this cost will grow by almost 50% — and that’s just one state.
In response, more than 40 states have begun considering state-based solutions to expand access to low-cost, simple ways to save for retirement. Of these, 10 states and one city have enacted new programs, ranging from automatic IRAs (California, Connecticut, Illinois, Maryland, Oregon, and Seattle) to marketplaces (New Jersey and Washington) and 401(k) multiple employer plans (Massachusetts and Vermont).
While these new programs have already begun to increase the number of Americans actively saving for retirement, more states have an opportunity to accelerate progress by working together, just as they have done with 529 plans for college education and the new Achieving a Better Life Experience (ABLE) savings accounts for disability-related expenses. Doing so will expand access for millions of workers while reducing the fiscal and economic burden on the states in the future.
In a recent working paper published by the Georgetown University Center for Retirement Initiatives, David John of AARP and I explore the history of these collaborative programs. While any state can certainly establish its own plan, we encourage states to consider options for multistate collaboration that could make expanding access to retirement savings even easier.
For example, a state could open its new retirement program to the residents of other states. This already happens with many 529 plans, where parents can enroll in another state’s savings plan. As 529 plans became ubiquitous, state program administration then became turnkey, with providers offering all necessary services under a single, simple, comprehensive agreement. That also made it easier for states to keep costs low. Such an approach increases choice while promoting the economies of scale to help lower costs and make these state-based plans very appealing.
More recently, some states have found it attractive to open their plans to residents more quickly and affordably by outsourcing the plan management to another larger state, or by teaming up with a group of other similarly sized states to share management costs.
States have taken this approach with the implementation of the more recent ABLE program, which creates tax-advantaged savings accounts for individuals with disabilities and their families. This savings initiative offers states a unique opportunity to learn from experiences with 529 college savings programs and explore new ways to collaborate that would help them keep costs as low as possible while benefiting savers over time.
In 2016, a group of 13 states followed a collaborative model when they created the ABLE Consortium Advisory Committee, led by the Illinois State Treasurer. The committee consists of members from each participating state, with a firm hired to handle administration and management of the program on behalf of the member states. The model was so attractive that three more states have joined this committee since it was created.
Several other states are using an alternative model for collaboration. When the Ohio Treasurer built that state’s program, known as STABLE accounts, the state decided to make its program available to other states. While states can brand the program as their own, all the investment management and administrative support is handled through the Ohio STABLE program, making it very easy for more states to have ABLE programs.
Like the consortium, this approach helps spread costs over a larger investment base, benefiting investors and state governments alike. It also removes many of the regulatory and administrative obstacles that states might have to overcome to design, build, and maintain their own programs. To date, at least 11 states have opted to partner with Ohio to bring STABLE accounts to their own residents.
Whether states choose to go it alone or take advantage of one of the multistate collaboration options already proven successful for 529 and ABLE savings plans, the key is to make saving for retirement easy and accessible for more Americans in more states.
The state-sponsored private sector retirement plans already in place will help expand access for as many as 20 million workers, and those numbers will continue to grow as more states recognize the value of facilitating simple savings options.
A multistate approach encourages further innovation while expanding access to savings mechanisms. It gives states more choices and the ability to share costs and responsibilities.
A state may choose to contract with another state to run its plan, participate in an interstate alliance, employ a turnkey provider, or allow residents to use other state plans.
While a state can certainly choose to build its own plan, multistate collaboration can create innovative new approaches to expanding access and helping more workers save for a secure retirement.
