Statewide retirement plans would not only help people get access to retirement savings, they could also reduce the use of social programs like Medicaid for people 65 and older.
The state-sponsored savings plans, which help employees not covered by workplace retirement plans save, have been growing.
A study by Segal Consulting asked how better preparing a population for retirement could affect public safety net programs like Medicaid. It looked at all 50 states and the District of Columbia to estimate the impact of expanded retirement savings by individuals not currently participating in a retirement plan on future Medicaid expenditures.
“The analysis showed a positive correlation between increased retirement savings, sufficient to remove a percentage of currently vulnerable households from the poverty rolls by the time they retire, and a related reduction in Medicaid spending,” the study found.
Every state in the study showed a reduction in state Medicaid expenditures based on 10 years of increased retirement savings.
Rocky Joyner, vice president and actuary in The Segal Group’s Atlanta office, says that his company was asked to look into this by a client who said about half of all working class people in the state had no retirement access at all.
re“We know that if you don’t have access to funds when you retire, you will be into social services, such as Medicaid, housing and food [programs]. There’s a host of things. They actually showed us 10 to 15 programs people are eligible for if they are only getting Social Security,” Joyner says. “Medicaid was the largest financial outlay for poverty level [of people] over 65, so we decided to focus on that.”
It isn’t easy to come up with hard numbers for a study like this, but using conservative savings estimates, like 3 to 5%, “we discovered that would throw some of these people over the poverty line into a more self-sustaining mode,” Joyner says.
Using data from the Bureau of Labor Statistics, Segal looked at how many full-time employees were in each state and how many of them didn’t have access to a retirement program at work.
“If you dig deeper, they aren’t saving for anything for any purpose at all. That was a frightening point,” he says.
The study then took Medicaid payment data from the states to determine how many of those individuals were over age 65.
It found that 15 states would save more than $100 million each, with total projected savings approaching $5 billion. The savings ranged from $11 million in Mississippi to $604.7 million in California.
“This study shows states could realize meaningful savings on Medicaid spending when a retirement savings plan is available to all private-sector workers,” says Cathie Eitelberg, senior vice president and director of public sector consulting at Segal. “The majority of jurisdictions has yet to consider this option but should at least start to evaluate the feasibility of such a program from a cost/benefit perspective.”
Six states — California, Connecticut, Illinois, Oregon, Maryland and Massachusetts — are currently setting up workplace payroll-deduction individual retirement account programs. Employers would be required to offer this option to employees if the company does not offer a workplace retirement plan. New Jersey and Washington are setting up marketplace websites to help direct people to retirement savings options that are reviewed by the state using a set of guidelines, the report says.
Between 10 and 12 other states have set up committees to look into offering a state-sponsored retirement plan of some kind, Joyner says.
State by state
Each state is tackling the problem differently. In California, for instance, its law focuses on employers with fewer than 100 employees because often these small companies don’t have access to efficient markets for retirement, but larger employers do. Meanwhile Massachusetts is limiting its program to small not-for-profits.
“We’re anxious to see how these models work out. It will be interesting in future years,” says Joyner.
Many people make a decent middle class wage while they are still employed but are bumped into poverty when they reach retirement age, he says. These types of plans target those people who are making $40,000 to $50,000 a year, and who could set some money aside for retirement while they are still employed.
Large municipalities, with more than 600,000 people living in them, can also set up a program for employees. It doesn’t have to be a state-run program. Cities like New York are looking into forming their own such program, he says.
“We’re not talking anything fancy here, just a very simplistic payroll-directed IRA program under an employer,” he says.
He believes these types of plans can make a huge difference in how much a state or municipality spends on social programs. “Take a state like California. They’re the monster. You’ve got millions of people without anything. If you only get a fraction of them, you will still see significant savings in your social programs,” he adds.
Segal is agnostic about what type of retirement program works best or what rate to put in there, but Joyner says that “if you get people to do what is good for them, it ends up being good for the state too and other taxpayers as a byproduct.”
If people save enough to get off the poverty rolls and become more self-sustaining, then not only are they not drawing funds from social programs, but they are out spending money on restaurants and going to the movies.
“They are an active older force, which is what you really want to happen. The potential is really strong for good economic things,” says Joyner.
