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Retirement Planning > Retirement Investing

Debate: Will Auto-IRAs Hurt the Retirement Savings Market?

By Robert Bloink By William H. Byrnes

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What You Need to Know

  • Proposed legislation would establish portable retirement savings accounts sponsored by the federal government.
  • Low-to-middle income Americans who contribute to these plans would also qualify for matching contributions.

Lawmakers in the Senate have recently proposed legislation that would establish portable retirement savings accounts sponsored by the federal government. Low-to middle-income Americans who contribute to these plans would also qualify for matching contributions from the government (the match would phase out as income levels rise).

We asked two professors and authors of ALM’s Tax Facts with opposing political viewpoints to share their opinions about whether the proposed federal auto-IRA program would have a negative impact on the retirement savings market.

Below is a summary of the debate that ensued between the two professors.

Their Votes:

Byrnes
Bloink

Their Reasons:

Bloink: Another tax-advantaged retirement savings option is not going to compromise those that currently exist. Small businesses are familiar with the existing structure. There’s no reason for them to forgo offering their company-sponsored retirement plans in favor of the federal version, which not all employees will prefer (and, of course, not all employees would be eligible for the government match — which would essentially prevent most employers from completely eliminating their retirement plans). 

Byrnes: The obvious answer is yes, these types of government-subsidized retirement plans would have a negative impact on the retirement savings market as a whole. If the federal government is sponsoring a program offering portable IRAs, why would private retirement plans continue to exist? How can these plans compete with a proposal that would automatically require the federal government to match contributions of certain lower-income taxpayers? Retirement plans aren’t cheap or easy to administer, and if the government is going to foot the bill, many small businesses will simply shut their plans down — hurting retirement savings in the long term.

Bloink: The Social Security system doesn’t work for all Americans, and we must focus on modernizing the government’s approach to helping Americans attain retirement income security. Social Security does not offer nearly enough for a comfortable retirement for many. There isn’t any reason why we shouldn’t turn our attention to supplemental programs as a way to provide a feasible long-term fix for the retirement system in this country.

Byrnes: While programs like this are admirable from a theoretical perspective, the reality is that they’re likely to crowd private retirement plans out of the market. This, in the end, would limit choices and investment options for retirement savers. We should instead work to fix the retirement plan that already exists at the federal level: Social Security.

Bloink: For decades, lawmakers have searched for ways to shore up the Social Security system — and haven’t come up with many workable solutions. In the end, a new federal IRA program would create another beneficial option for taxpayers who are looking for ways to grow their retirement savings. This is a goal that we should be encouraging at all levels, and it makes complete sense that the federal government would step in to create an option for employees who don’t have an existing option that’s attractive.

Byrnes: Proposals like this are a prime example of government overreach. We have a federal retirement system that’s been inexistence for decades. That’s the program that is designed to provide across-the-board retirement security for Americans. That program may be broken, but we should be focusing our resources on fixing the American Social Security system so that all Americans can continue to benefit from this vital retirement funding program.

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Robert Bloink

William H. Byrnes

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