New research from Morningstar examines the impact of The Retirement Savings for Americans Act (RSAA), according to Financial Advisor.
The legislation, introduced in Congress in October 2023, would create a federal retirement plan that automatically enrolls workers without access to an employer-sponsored plan, including gig workers, at a 3% savings rate. The RSAA would also provide a federal match tax credit for low- and moderate-income workers consisting of a 1% non-elective contribution and a match of 100% up to 3% and 50% up to 5%, that would begin to phase out at median income.
But Morningstar researchers Spencer Look and Jack VanDerhei determined that the federal plan could lead to worse retirement outcomes, and that the majority of working Americans would be better with the status quo.
The researchers said retirement wealth “could decrease by as much as 20% for Gen Z workers and 12% for millennial workers. This occurs because the RSAA would likely crowd out the private retirement plan market to some extent by subsidizing contributions for lower-income workers.”
The Morningstar report assumes that the RSAA would lead to fewer employers sponsoring defined contribution plans. because it would no longer make economic sense for them. This is because the government would effectively fund employer contributions for workers earning around median income or less.
In addition, they sad, “net contribution rates are typically lower under the RSAA, as contribution rates in defined-contribution, or DC, plans—even for lower-income workers—are often much higher than the 3% default.”
The authors said the bill would also likely reduce contributions to IRAs, as investors may view the federal plan as equivalent to an employer sponsored plan, making them less likely to save to an IRA.
The report found that while the RSAA would boost retirement outcomes for workers not covered by an employer sponsored plan, this benefit would be offset by larger decreases for those covered in the current system.
For workers with 10 or more years of future participation in a DC plan, the RSAA would result in significantly worse outcomes, particularly for those with 20-plus years of future participation.
In conclusion, the authors said that “when factoring in realistic changes to investor savings behavior, the
RSAA would likely lead to worse overall retirement outcomes. These results highlight the importance of
maintaining a balance between the private and the public retirement systems, ensuring that changes do
not negatively impact retirement-savings behavior.”
Supporters of the federal bill contend it could improve retirement outcomes for Americans, especially moderate- and lower-income workers who have no access to an employer-sponsored retirement plan.
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