Allow eligible private-sector or self-employed workers to establish a retirement savings account managed by the state retirement system.
Conventional wisdom holds that retired workers draw their income from a three-legged stool of pensions, personal assets, and Social Security benefits. If ever true, this model is unlikely to match the realities facing “Baby Boomers” or working members of younger generations. Social Security benefits haven’t kept pace with rising health care costs.1 Many employers have switched from pension plans that provide workers with defined retirement benefits to ones that provide defined contributions with no guarantees of any future benefit levels. And the recent financial crash reduced the value of many retirement accounts and demonstrated the random effects associated with linking retirement security to financial markets.2
In today’s labor market, most workers don’t have access to employer-sponsored retirement savings, and even those who do often earn too little to save adequately. A 2014 National Institute for Retirement Research study found that just 41.6 percent of private-sector workers in North Carolina participated in any kind of employer-sponsored retirement savings plan, with the average participant possessing an account valued at $38,330.3 Such numbers suggest that sizable numbers of North Carolinians will reach retirement with few financial resources beyond modest Social Security retirement benefits—benefits that averaged $1,298 per beneficiary in December 2014.4
A retirement savings account managed by the state retirement system that is open to all employees without access to an employer-sponsored plan could address this issue. This “Work and Save” model, championed by AARP, is already established in Massachusetts, Oregon, and California, and is encouraged by the US Department of Labor.5
Such a plan would provide a retirement savings vehicle to individuals who lack access to one at their place of work. The plan would offer low fees by virtue of being centrally managed by the Department of the State Treasurer and could be designed to maximize tax savings by coordinating with the NC Department of Revenue.
Employers could choose to participate, and if so, could provide matching funds for their employees, without the costs and hassle of creating their own 401(k) plan.
1 Marte, Janelle. (October 15, 2015). "The retirement costs that are rising faster than Social Security benefits." The Washington Post.
2 Quinterno, John. (April 2015). “The Public Price of Growing Old." North Carolina Insight. North Carolina Center for Public Policy Research.
3 Christian Weller, Nari Rhee, and Carolyn Arcand. (2014) Financial Security Scorecard: A State-by-State Analysis of Economic Pressures Facing Future Retirees. National Institute on Retirement Security.
4 Analysis of Social Security Administration, “OASDI Beneficiaries by State and County, 2014: North Carolina.”
5 AARP. “Work and Save 101." and Tara Siegel Bernard. (November 16, 2015). “More States Are Initiating Programs to Encourage Retirement Savings,” The New York Times