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Default Contribution Rates and Participation in Automatic IRAs by Uncovered Workers

Author

Listed:
  • Anek Belbase

    (Center for Retirement Research at Boston College)

  • Geoffrey T. Sanzenbacher

    () (Center for Retirement Research at Boston College)

Abstract

Abstract About half of workers are not covered by a retirement plan at work and these workers are unlikely to save for retirement. For this reason, a number of states have passed legislation that will require employers to automatically enroll their employees into an IRA sponsored by the state (an “auto-IRA”) and administered by a third party. An extensive literature suggests that automatic enrollment will lead to high rates of participation in auto-IRAs. But this literature is based on auto-enrolled 401(k) participants who are likely different from uncovered workers in observable and unobservable ways. This paper instead conducts a national survey of uncovered workers to determine how likely they are to participate in a state-sponsored IRA. The results are encouraging and suggest that uncovered workers are likely to participate at rates similar to those in 401(k) plans at default contribution rates of up to 6 per cent. However, regression analysis suggests that auto-escalation of the default above 6 per cent may result in increased opt-out.

Suggested Citation

  • Anek Belbase & Geoffrey T. Sanzenbacher, 2017. "Default Contribution Rates and Participation in Automatic IRAs by Uncovered Workers," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 42(3), pages 376-388, July.
  • Handle: RePEc:pal:gpprii:v:42:y:2017:i:3:d:10.1057_s41288-017-0047-2
    DOI: 10.1057/s41288-017-0047-2
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    References listed on IDEAS

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    1. John Beshears & James J. Choi & David Laibson & Brigitte C. Madrian, 2009. "The Importance of Default Options for Retirement Saving Outcomes: Evidence from the United States," NBER Chapters,in: Social Security Policy in a Changing Environment, pages 167-195 National Bureau of Economic Research, Inc.
    2. Karamcheva, Nadia S. & Sanzenbacher, Geoffrey, 2014. "Bridging the gap in pension participation: how much can universal tax-deferred pension coverage hope to achieve?," Journal of Pension Economics and Finance, Cambridge University Press, vol. 13(04), pages 439-459, October.
    3. John Beshears & James J. Choi & David Laibson & Brigitte C. Madrian, 2010. "The Impact of Employer Matching on Savings Plan Participation under Automatic Enrollment," NBER Chapters,in: Research Findings in the Economics of Aging, pages 311-327 National Bureau of Economic Research, Inc.
    4. Norma B. Coe & Anek Belbase & April Yanyuan Wu, 2016. "Overcoming Barriers to Life Insurance Coverage: A Behavioral Approach," Risk Management and Insurance Review, American Risk and Insurance Association, vol. 19(2), pages 307-336, September.
    5. Gabriel D. Carroll & James J. Choi & David Laibson & Brigitte C. Madrian & Andrew Metrick, 2009. "Optimal Defaults and Active Decisions," The Quarterly Journal of Economics, Oxford University Press, vol. 124(4), pages 1639-1674.
    6. Brigitte C. Madrian & Dennis F. Shea, 2001. "The Power of Suggestion: Inertia in 401(k) Participation and Savings Behavior," The Quarterly Journal of Economics, Oxford University Press, vol. 116(4), pages 1149-1187.
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    Cited by:

    1. Teresa Ghilarducci & Michael Papadopoulos & Wei Sun & Anthony Webb, 2017. "“Catch-Up Contributions” An Equitable and Affordable Solution to the Retirement Savings Crisis," SCEPA working paper series. SCEPA's main areas of research are macroeconomic policy, inequality and poverty, and globalization. 2017-02, Schwartz Center for Economic Policy Analysis (SCEPA), The New School.

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