Pensions around the world blog series: USA

Like many things we take for granted, automatic enrolment was popularised in the USA.

Auto-enrolment’s origins across the Atlantic stems from attempts by large, paternalistic employers to drive up participation in their retirement savings plans. These attempts were studied by behavioural economists like Richard Thaler and David Laibson. In the UK, the Department for Work and Pensions and the Pensions Commission picked up on their research on automatic enrolment and saw in it a mid-way between compelling people to save and more laissez-faire approaches to workplace pension reform.

While the US devised and popularised automatic enrolment, it is not actually that commonplace as an enrolment technique. This reflects one of the stranger aspects of the UK’s Magpie relationship with US politics and policy. Not all of the things that we borrow are as successful or widespread in the country of origin, as they turn out to be in the UK.

Half of Americans over 55 don’t have pension savings

There are many factors at play here; as with the UK, a worrying number of Americans have nothing saved for retirement. According to a 2019 study by the US Government Accountability Office, roughly half of Americans over the age of 55 have nothing saved for retirement. But, they are in a better position than Britons.

The US first pillar pension, commonly known as social security, is much more generous than state pension arrangements in the UK.

Social security is earnings related and the average amount paid to individuals in 2022 was $1,657 per month or $19,884 per annum with a theoretical maximum for high earners of just over $40,000. Notwithstanding the fact that there is now more being paid out from the notional social security trust funds in benefits than there is coming in in payroll taxes, social security has been remarkably resistant to reform.

This means that while the first pillar will not afford American retirees a luxurious retirement, support given to almost all retired American workers is, for the most part, well in excess of that provided by the UK’s state pension. Second pillar savings are, obviously, highly desirable but the base level of support provided by social security is much greater.

No nation-wide AE for Americans

There have been successive attempts to roll out automatic enrolment at a federal level, which have not met with success. Meanwhile a variety of states have brought in variations of automatic enrolment at the state level. Illinois was the first to bring in its programme in 2015, followed by Oregon, California, Connecticut, Maryland, New Jersey and Virginia. Pennsylvania and Hawaii are currently considering the issue. While there has been some bi-partisan support for automatic enrolment, both at a state and at a federal level, these states are predominantly wealthier than average and lean Democrat.

At the federal level, last autumn, all the proposals in the Biden administration’s flagship Build Back Better bill were removed from the bill’s framework. Those included proposals to require established employers with more than six workers to begin automatically enrolling employees into either individual retirement accounts. In some ways, this is emblematic of slow progress at the federal level.

An important year for US pension savers (possibly)

2022 could, potentially, be the year this changes. HR 2954, dubbed the SECURE Act 2.0, which is currently in front of Congress, contains provisions intended to mandate that businesses of more than 10 employees, which have been trading for more than three years automatically enrol their workers in a retirement plan. The initial contribution rate is 3% of pre-tax earnings but this escalates automatically by 1% every year to a minimum of 10% and a maximum of 15%. Individuals can select a different contribution rate if they want.

We are watching this with interest. There have been many attempts to bring in significant reform of workplace retirement saving at the federal level, but none have yet succeeded.

That alone tempers enthusiasm in the experiment. But the provisions on automatic escalation are interesting and, should they work wholesale, could provide an example for the UK to follow. It would be a pleasing development if the nation that pioneered automatic enrolment managed to extend its benefits to the bulk of its own citizens.