April 9, 2015
Retirement Coverage Expanded: UK vs US
President Obama signed a January memo officially launching his MyRA program to encourage saving by low-income and other Americans who lack a retirement plan through their employers.
The United Kingdom is also addressing pension shortfalls for uncovered workers in a much more ambitious way. The U.K. program, put in place in 2012, has two key provisions that MyRA lacks: it automatically enrolls workers so more will save in the first place, and it provides them with matching contributions.
The U.K. program has enrolled 1.8 million of the 4 million workers targeted, primarily at small employers. A 2014 study by the Center for Retirement Research, which supports this blog, described the program and compared it with MyRA.
The United Kingdom’s retirement income problems largely stem from the contraction of the government’s retirement system. A first stab at improving retirement income security came in 2001, when the government mandated that employers with five or more workers offer a low-cost retirement savings plan that workers could volunteer to join. That program gained little traction among workers or financial firms.
The 2012 reform was much bolder. In addition to mandating a 3 percent employer match (starting in 2017), the government matches 1 percent, with both matches contingent on the employee saving 4 percent of his earnings. To manage the program and offer a low-cost savings plan to employers, the National Employment Savings Trust, or NEST, was established.
A critical provision seeks to overcome workers’ inertia. Rather than ask them to sign up, they are automatically enrolled and have the freedom to opt out of their employer’s NEST plan.
It’s too early to fully assess the success of the U.K. initiative. But its innovative feature – auto-enrollment – reflects the best thinking in pension design to improve employee participation. And the match gives employees a real incentive not to opt out. Operating costs are extremely low, which is important for plans serving lower-wage workers at small employers.
President Obama established MyRAs – short for my retirement account – for U.S. households with up to $191,000 in income, though they target lower-income, uncovered Americans, including part-time workers who are permitted to save through multiple employers. MyRAs operate like Roth IRAs, which is appropriate for workers with little or no tax liabilities. They also carry no fees, allow very small payroll deductions, and are invested in low-risk Treasury securities.
But past evidence suggests MyRA’s design might limit its participation. Unlike NEST accounts, MyRAs are voluntary for employers and don’t automatically enroll employees. It’s important to note, however, that since MyRAs were approved by presidential administrative action, there were constraints on the program’s design. Specifically, an auto-enroll feature was not possible without legislation.
With the U.K. program now reaching half of all the workers targeted, it seems to be validating what the retirement experts already know works.
Years ago (when I was a teenager) my parents taught me to only live on 80% of what I earned, donate 10% to church, and save 10%. That basic savings plan – as simple as it is – was all that I needed to know during my early working years. Later, as I climbed my career ladder, earned more, and learned more complex rules about saving and investing, I was able to build on those basic rules and accumulate real wealth. Personal responsibility for ones own future and well-being is something that has to be ingrained early on for any of this to work well (rather than finding innovative ways to trick people into saving).
I think it’s really awesome what the UK is doing here. Pensions are an incredibly important feature of an older person’s life and so many people don’t have enough in their pension.