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  • The Automatic IRA: A Conservative Way to Build Retirement Security

    With the introduction of new legislation to implement the Automatic IRA—a simple, low-cost retirement savings vehicle for employees of small businesses—the effort to enable many more Americans to use a payroll deduction to build retirement security moves to a more active phase. A new bill by Senator Jeff Bingaman (D–NM) and a somewhat different version by Congressman Richard Neal (D–MA) retain the basic features of the original version, but they also include major improvements over past efforts.

    The Automatic IRA is a conservative, market-oriented solution to help address our retirement savings crisis. It would increase the proportion of Americans who can save for retirement at work from 50 percent to 90 percent, make it simple for small business owners to offer IRAs to their employees, and create low-cost accounts that an employee can understand and use without having to be a financial expert.

    The new version contains a number of new ideas that will even further increase the value of the proposal. The basic idea was unveiled at Heritage in February 2006, and it has support from both conservatives and liberals.

    The need for an Automatic IRA is simple to understand. With Social Security facing financial problems sooner than expected, either retirement saving will have to become easier and more universal, or there will be huge pressures for new and massive government initiatives to expand Social Security or otherwise provide benefits for retirees. Even if it were fully funded, Social Security provides only about half of the income that an average American will need in retirement, and absent major tax increases the program will end up paying younger workers much less than what it provided to their parents and grandparents.

    It is simple to say that people should save, but the fact is that today most do not until it is too late to build up an adequate nest egg. Most retirement saving vehicles are too complex for the average person. Other potential savers hesitate because they fear going into the wrong investment or being cheated by a salesman. As a result, large numbers of people do nothing for fear that they will make the wrong decision.

    That is why 401(k) plans increasingly use automatic enrollment, a private sector innovation that keeps the worker in complete control but offers automatic choices that the worker can override if he or she chooses. Studies by the group Retirement Made Simpler show that automatic enrollment is extremely popular among workers and enables them to begin saving much sooner than they would otherwise.

    The Automatic IRA simply uses the same automatic enrollment technique that has worked so well in 401(k) plans and adds it to the same IRA we have all known for decades to create a simple, low-cost retirement savings vehicle for workers who currently have no workplace-based way to save for retirement.

    While many focus on the value of the Automatic IRA to a new saver, it would be equally valuable to older workers who change jobs from a company that offers a 401(k) plan into a smaller company that has only the Automatic IRA. Under the proposal, that worker could combine his or her old accounts into an Automatic IRA that allows the worker to continue saving. Data show that most workers change jobs as many as 10 times during a career, and without the ability to continue saving through payroll deduction, many workers will have gaps in their saving history that could endanger their ultimate financial security.

    The Automatic IRA makes it easy for almost all Americans to use privately managed retirement savings vehicles to build their own retirement security rather than ending up having to depend on the taxes of future workers through a government program. Making retirement saving simpler and more available is far preferable to another government program that replaces savings with government-paid benefits.

    Posted in Economics [slideshow_deploy]

    34 Responses to The Automatic IRA: A Conservative Way to Build Retirement Security

    1. Bobbie says:

      Sounds like a good one, Difficult to breath in, as the government is now on to it and looks everywhere they can for hard earned money and goes beyond their duties and the law, to force out of rightful hands. There'll be a crisis right around the corner.

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    11. Bill, Kansas City, M says:

      Sounds like a good idea. What would have been a better idea is if the politicians in Washington would have left Social Security alone and never taken money out of it to balance the budget. I paid into Social Security for 40 years, not because I wanted to, but because the feds said I had to. I wish they would have let me chose how to save my money. Now, even after paying into it for 40 years, it sounds more and more like most of us are going to get the shaft in our golden years.

    12. Mark Lokowich says:

      Please hurry up! I'm not getting any younger.

    13. Tracy Turner, Roanok says:

      Hopefully this will get bipartisan support as it could possibly reduce dependence on Social Security as the sole retirement plan for many people and is a much better way than raising taxes so the government can provide your retirement needs. That is, unless the government uses the auto IRA funds to bail out or subsidize Union Pension funds, Freddie Mac, Fanny Mae, or their favorite private sector failing corporation.

    14. Jeanne Stotler, Wood says:

      Social Security was suppose to be vol. and a separate account accruing int. then came the FEDS and said "Look at this money just sitting there, let's use it" wHAT IN gOD'S NAME WOULD LET ANYONE THINK THIS WOULD NOT HAPPEN to IRA's and 401K's if the goverment controls them or even gets near them. NO WAY put your hard earned money in accounts you control and the gov't cannot get their grubby, greedy hands on or else down the road there will be a repeat of today.

    15. baseballguy2001, Tex says:

      The auto IRA is only a good idea only if the Social Security tax is eliminated. Otherwise, it's just another tax reducing the amount of my check. It's my money sure, but isn't the mandated amount for FICA mine (ours) also?

    16. David A. White says:

      This is just another way for the big financial instutions to control your money. They are behind upping the social security retirement age to 70 or above. They want you to work longer, therefore you wait about pulling retirement funds out. The big financial groups use your mutual fund retirement money to lobby to keep your money longer. They make billions a year from the trillion dollar 401 k scam.

    17. Mike, Wichita Falls says:

      It’s interesting that while some people hesitate to save for fear of investing in the wrong fund, stock, etc. or encountering a bad salesman, they have no fear of investing their money with the government where you won’t even recover your principle. Who among us would choose SS if we had a choice?

      Hopefully, as these same people become aware of how much government has abused their power and wasted our money, they will petition their legislators for a gradual shift from SS to private investment for older folks and a complete opt-out for us younger folks.

      Why worry about so-called Wall Street greed? The numerous financial institutions available for investing provides the check on their misuse of your money. If they cannot deliver a good return, they will lose your business. I can always take my investments elsewhere in the private sector; I only have one federal government.

    18. Greg in St. Paul says:

      “You are posting comments too quickly. Slow down.”
      I have received this error message on 2 consequtive posts over several days.

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    20. oooo says:

      amazing that this species survived as long as it has.

      drop ya draws, uncle pokey wants some

    21. Pete,, IA says:

      Yea this investment vehicle will be really easy to understand. You give your retirement money to politicians to spend and they give you an IOU when they force you to buy treasuries after the Chinese stop buying them. This definatly will get bipartisan support.

    22. Matt, Arizona says:

      The AUTO IRA will allow the government to kick the can further down the road by forcing us to buy government debt in the form of (I'm guessing) low-quality government bonds. I discontinued contributing to any IRA or 401k (regardless of match) when I came to the conclusion that any money tied up in a contract with this government isn't really my money after all. Even after-tax dollars do not look like a good idea given the looming insolvency of the US government and piling debt obligations of both government and citizenry (print, print, print !!!!). I wish I had figured this out 10 years ago and not bothered with retirement accounts and instead had purchased gold with after-tax dollars at $300/oz.

    23. Gunter Penna Aug.19t says:

      The goverment has lied to everyone, in Edjucation$ 45 000,00 per semester for college is no longer affortabel for anyone, get a loan to go in depth so you can learn, then graduate with$ 200 000.00 in depth for live, SS – replaced my money for my retirement with IO YOU'S confiscated by lawmakers , FICA a forced taxdeduction for the benefit ??? IRA cost of withdraw 35% this year 39 % next year up to 50 -60 next % paid in my money , leaving little for retirment ,AUROMATIC IRA would work only if you had a physcal responsibel Goverment, Bush the worst, Obama even more irresponsibel Miche'ls$ 6ooo,00 hotel nights in spain we are getting shafted by our elected Officials, first we need a radical new Goverment ,through all the BUMS out , FIRST.

    24. Chris Kierst says:

      This is a pathetic, dismal idea to emanate from an organization that pretends to a "conservative" stance. This is simply more federal government socialism further designed to siphon off a large slice of individuals' hard earned income and lock into idiotic government debt investments denominated dollars which are sinking in value already and will do so even faster when the newly incurred bailout(s) debt hits the markets (Fed is holding it for the bailed out big banksters), no mention made of the FUTURE debt to prevent the impending Wall St. crash (Why hasn't the Dow gone back up yet? Hmmmm?). This will mandate that everyone contribute to this debacle and it can be locked into certain investments and the proceeds can be metered out WITH means testing. No thanks, I would rather risk my own investments (which have prospered) than play this fool's game. This is pure socialism. Stop being gullible!

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    26. Les, Herndon says:

      This is socialism for the benefit of the annuity industry. Not only will accounts be mandated for all workers, the government will provide matching funds to workers to keep workers as a sweetener as they do in the 401(k). That money has to come from the taxpayer.

      The proposal also neglects to mention that one-third of SS is non-retirement with benefits to the disabled and the survivors. Of course, a retirement system can't be anywhere near fully funded using only 9% of gross pay. Even Bush admitted that privatization wouldn't make SS a full retirement system or fix the underfunding.

    27. John, Lynnwood, WA says:

      Mr. David, are you kidding?

      This Auto IRA scheme is just another deceitful mechanism by which the Federal Gov't can slowly and quietly (but with absolute certainty over time) steal more money from the good people of the USA. Disgusting. You should be ashamed for promoting this garbage.

      401K = scam

      IRA = scam

      Auto IRA = scam

      What do you think the purchasing power of the typical 401K will be after the bipartisan Clowns of Corruption (Republicrats) in WA DC get done destroying the $USD, and the US economy?

      Market-oriented? Are you kidding? If it's "market-oriented" why is l-e-g-i-s-l-a-t-i-o-n necessary? The last time I checked, "legislated" is the exact opposite of "market-oriented". I'm wondering why it appears that you are blind to that distinction, Mr. David.

      The fact that this Auto IRA creature must be installed by force of law is proof that it is worthless.

      The fact that it's receiving "bipartisan support" indicates that it is a thoroughly awful idea. When muggers from both sides of the street achieve "bipartisan support" for a new way of stealing my wallet, I don't take that as a positive development.

      How did this propaganda piece even make it to publication?

      It is apparent to me that the Heritage Foundation has become either incompetent or corrupt. I did not realize HF was putting forth this sort of garbage. Very disappointing.

    28. Carla, New York says:

      What's wrong with some of the people commenting here? The government isn't taking the money. The investments will be made into stable value funds, equity funds, target date, etc….whatever investment firms the employers or the payroll processors agree to. The legislation is needed to give employers a tax credit to offset the admin costs to their payroll systems. Let's see, tax credit to small employers, tax deferred savings for employees. Sounds subversive. I think I'll go hide out on a mountain in Montana.

    29. Tom, Boston says:

      Nothing is wrong with some of the people here. They are realists. This is another government scam wrapped in warm words.

      The article doesn't say so but the proposal includes a clause that will force part of the money to be invested in treasuries. Expect that percentage to rise over time as the refinancing need of the government becomes more acute.

      You then end up with two government 'guaranteed' social securities. One via SS the other via direct government debt. Both can be made worthless in a second by sovereign default or in a decade by the stealth of under-reported inflation and a binge-printing FED. Whatever will suit the financial and political elite better at that time.

      This idea of forcing treasuries up the rear end of the average retirement saver is floating around Washington circles for 2 years now, under varying pretexts. This tells me that it will come.

      You better stop funding your 401k/IRAs.

    30. Steve, Portland, OR says:

      If you actually read the proposed bill, you will see that most of your fears of "government takeover" are unfounded. Your money is not being given to politicians. No one will be forced to participate in the Automatic IRA. It's very simple: your employer is required to establish an IRA account for you and set-up a contribution of 3% of your pay. But you can lower that contribution or even opt-out of the IRA completely if you want. This is no different than what many private-sector employers are doing today with their 401(k) plans. Also, the bill does NOT require anyone to invest in gov't bonds. The bill requires that ONE of the choices in the plan be a conservative investment, which could be a bank savings account, a CD, or a Treasury Bond. There will be at least TWO other investment choices besides the conservative choice, and although the conservative choice is the default choice, you are always free to choose either of the other two options. Geez, people, get a grip.

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    33. john says:

      Would be nice, but what about an opt out of SS? Why should I have to throw my money away in a failing system when I could put that money in an IRA that I manage and have a better chance of having something when I retire?

    34. Guest says:

      This may have some merit if and ONLY if, AUTOMATIC is NOT synonomis with MANDATORY. Else what is the difference with the Affordable Care Act individual mandate? IF this suggestion DOES carry a mandatory participation then we are forcing funds that would enhance and save Social Security into the hands of FOR-PROFIT organizations who by their very nature wish to capture some of the funds allocated to them.

      And recent history blares out the dangers of relating retirements to the whims of the stock market.

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