Episode 34
Episode summary
It’s an unfortunate reality that many Americans have insufficient savings in their retirement accounts, if they have access to one at all. In an effort to give Americans a better chance to save, many states have turned to state-sponsored retirement plans. Many of these plans either require businesses with as few as a single employee to either offer a retirement plan, like a 401(k), or enroll that employee into the state’s plan. Caleb and Liz discuss the trend.
Shownotes
State Programs 2024 [Georgetown Center for Retirement Initiatives]
State Program Data & Trends [Georgetown Center for Retirement Initiatives]
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Transcript
Liz Wilke (00:00:33) – Hi, I’m Liz Wilke.
Caleb Newquist (00:00:35) – I’m Caleb Newquist.
Liz Wilke (00:00:36) – And this is the Gustonomics Podcast. In each episode, Caleb and I bring you a little bit of economics knowledge so you can be more informed, use the information in your business or work, or have something to put the kids to sleep on your summer road trip.
Caleb Newquist (00:00:54) – Please remember to rate, review, and subscribe to the show or share it with an economics curious friend. Anything you can do to spread the word about the podcast is greatly appreciated. Hey, Liz.
Liz Wilke (00:01:07) – Hey, Caleb.
Caleb Newquist (00:01:08) – How’s your summer going?
Liz Wilke (00:01:09) – It’s hot.
Caleb Newquist (00:01:12) – Yeah.
Liz Wilke (00:01:12) – As anything.
Liz Wilke (00:01:14) – I’m in DC, as you all know.
Liz Wilke (00:01:16) – And I’ve learned everything that I can about what a wet bulb temperature is because it is that hot.
Caleb Newquist (00:01:23) – What is a wet bulb temperature?
Liz Wilke (00:01:26) – OK, so I’m going to say for our listeners, this is definitely not in the realm of economics knowledge. So you can fast forward right through this if you just came for the economics stuff. But a wet bulb temperature is technically the coolest temperature a human can get on their skin in some combination of heat and sun and humidity. So basically, the idea is that everybody says a dry heat is more comfortable. When it’s more humid, your body is less able to cool itself. And when your body gets too hot because it’s too humid, it can’t cool itself down.
Liz Wilke (00:02:03) – And then it’s dangerous to human health. It’s kind of related to the feels like temperature, except it’s a little bit different. And so OSHA uses it to think about how to instill worker protections for heat and stuff like that. So basically, it’s sort of a measure of at what temperature, humidity combo can you die basically unless you get into the air conditioning or find some other way to cool yourself off that’s not sweating.
Caleb Newquist (00:02:30) – It feels like something important that we should all know.
Liz Wilke (00:02:33) – I mean, it’s definitely worth knowing. Yeah, for sure. So if you were curious from my weekend research for vulnerable people like older elderly people or pregnant people or young children, their wet bulb temperature at which things become very dangerous for them is somewhere between like 81 and 83 degrees. It’s actually much lower than body temperature. For the typical healthy adult, it’s like somewhere between like 85 to 87 degrees.
Liz Wilke (00:03:03) – So if you know your wet bulb temperature, then you kind of know whereabouts how long you can stay out in the sun before you really need to get inside or cool yourself off.
Caleb Newquist (00:03:13) – How would one figure out what their wet bulb temperature is?
Liz Wilke (00:03:18) – Gosh, Caleb, the National Oceanic and Atmospheric Administration has many calculators. Yes, for you to put in your exact location and it will tell you what the wet bulb temperature is and also what the corresponding risk is for human exposure.
Caleb Newquist (00:03:34) – This is fantastic. This is going in. I’m not active on Reddit, but this is totally what I would leave and that’s today I learned subreddit.
Liz Wilke (00:03:44) – Well, I will then also preface that for this set of knowledge in particular, I am neither a meteorologist nor an expert in the wet bulb temperature beyond my Internet research over the weekend. So I’m going to just put big asterisk all over the numbers that I gave. They are what I looked up on the Internet.
Caleb Newquist (00:04:00) – Right. Because this is what Liz does on the show is that she asterisks most of our comments, most of my comments. Anyway. All right. All right.
Caleb Newquist (00:04:10) – Well, speaking of hot, Liz, things that are hot, the stock market is hot. Have you noticed?
Liz Wilke (00:04:16) – The stock market is hot. In fact, the Dow Jones touched its tippy high of 40,000 points back in May, not too long ago, and it is still hovering right around there, somewhere around 39,000. So stocks have been on a tear since late last year, which is good for everybody that is in the stock market, which is about 40% of Americans. They’re all in the stock market on their 401k for the most part. Yeah.
Caleb Newquist (00:04:42) – For the most part, people are indirectly invested in the stock market and that’s through a retirement account now and then other people through like other retirement vehicles like pensions for the I don’t know. How prevalent are pensions these days? Is it still are there still people alive with pensions?
Liz Wilke (00:05:01) – There are still people alive with pensions. I know a few of them, actually, and they’re very much alive and very much with pension, but it’s definitely a dwindling benefit.
Caleb Newquist (00:05:12) – Yeah, but in general, lots of people have exposure to the stock market because as history has shown, it’s a great way to save money, but also grow your money for retirement because I don’t know about you, Liz, but I’d really like to stop working. I don’t know when that’s going to happen, but I would like it to happen, and I think a lot of people share this feeling. Is that fair to say?
Liz Wilke (00:05:37) – I don’t know that we have exact statistics on it, but yeah, I think what you’re referring to is what people generally talk about when they say retirement, and yes, I think a lot of people look forward to and plan for their retirement at some point in their lives.
Caleb Newquist (00:05:52) – Right, but something else that we, I don’t know if we have the hard stats on this, but as much as lots of us would like to stop working someday, we’re not exactly doing a great job of preparing to stop working someday, right? What I mean by that is Americans aren’t known to be great savers.
Liz Wilke (00:06:15) – I might put a slightly different spin on that because I think the way you have phrased it, Caleb, suggests that the fault is some moral failing of Americans to save adequately for their retirement needs.
Caleb Newquist (00:06:27) – Hold it right there. There’s no fault. I would say it’s a, I think it’s a cultural thing. I don’t necessarily think it’s a, it is not a character flaw that we have. This is something that I think is deeper than just surface level.
Liz Wilke (00:06:43) – I mean, what I would say is however you feel about the moral or cultural propensity of Americans to save, the fact is that they are not generally saving enough for retirement. Very high income people, right, don’t tend to have a problem, but sort of middle and lower income people really have not saved what is thought to be enough to keep their income steady in retirement. And in large part, because a lot of them don’t necessarily have good savings mechanisms like a 401k, which is what we’re going to be talking about primarily today.
Caleb Newquist (00:07:18) – Yeah, and this is a concern because as people age, they’re less able to work, but they still have to live because we’re all living longer. In general, we’re living longer. And so if you have people who are older that aren’t able to work, but still need to live, and they have insufficient savings to live on, then the rest of us kind of bear the burden of that kind of gap in between what people are living on and what they actually have.
Liz Wilke (00:07:49) – Yeah, I mean, sort of having more elderly people who cannot support themselves on their own income causes a lot of social ills, right? It increases their need for food assistance and housing assistance. They might delay getting health insurance, excuse me, healthcare or medications that they need, right? Which can make them sick. If they end up being reliant on their other family members, then their other family members, right?
Liz Wilke (00:08:15) – Can have to maybe choose between taking care of them or supplementing their income with saving for their own retirement or helping out other family members. So it’s definitely not a great outcome to have elderly folks that can’t support themselves on their own income.
Liz Wilke (00:08:32) – And as pensions have become less common, and there’s sort of this wide open question about what’s gonna happen with social security, a lot of the shifts in the emphasis on like a retirement plan has been on 401k, we’ll just get people to save, they’ll put that money in the market, that money will grow, which is great if you have a 401k and you put that money in the market, right? And you put enough of that money in the market and let it grow over time. But the problem is that a lot of people aren’t saving enough for retirement.
Liz Wilke (00:09:03) – And one of the reasons for that is that they don’t have 401ks.
Caleb Newquist (00:09:06) – Right. Yeah, because 401k is, like it’s basically replaced pensions as the most common way that people have a retirement account.
Caleb Newquist (00:09:16) – And that’s been the case for maybe, I don’t know, the last 20, 30 years. It’s kind of been a slow evolution out of pensions and into 401k.
Liz Wilke (00:09:24) – One of the ways that people save for retirement is with Social Security, right? So how much a 401k is in your retirement portfolio depends a lot on where you are on the income spectrum. So like I said, a lot of middle and low income people don’t have a 401k or aren’t necessarily saving in it, even if they have one.
Caleb Newquist (00:09:46) – Okay, so then what’s kind of been happening over the last several years, let’s say not even the last 10 years, there’s kind of been a new development in this space, Liz, and that’s part of what we’re gonna talk about today in addition to 401k. So can you talk about that a little bit, like what that development is?
Liz Wilke (00:10:03) – Yeah, so there’s this idea, right? So one, the idea that workers should get certain benefits from their employers is a very old idea, right? Health insurance is the classic and first example of this. Pensions also used to be an example of this. But so states in particular are looking at their aging populations and thinking, uh-oh, what are we gonna do when all of these folks come to retirement age and they don’t have any savings and they’re gonna put all this pressure on our systems?
Liz Wilke (00:10:34) – A lot of states, in order to address this problem, have been experimenting with the idea of what we kind of loosely call a 401k mandate. And here’s what it basically is, although 48 states plus the District of Columbia are toying around with or have already implemented this idea. So I’m gonna use pretty general terms and there’s a lot of variability, but sort of stick with me and give me a little grace here to paint this thing with a broad brushstroke.
Liz Wilke (00:10:58) – So basically, if you’re an employer, and in some states if you have as few as one employee, you have to do one of two things in any state with one of these mandates. You either have to offer a 401k to your employees, right? Or you have to enroll them in a state-run auto IRA program where they will have an IRA, an individual retirement account, with the state. So the most recent stat I could find was from June 30th of last year, where there were 20 states that had enacted a new program and some of them were still in the implementation phase.
Liz Wilke (00:11:40) – So not all of these 20 states actually have a mandate in place, but they’re getting ready to put a mandate in place. And 17 of those states have the auto IRA program. So basically, you’re saying, hey, employer, you either have to offer a 401k to your employees, or you have to automatically enroll them in the state-run auto IRA and you have to send part of their paycheck to the state-run program.
Caleb Newquist (00:12:05) – Okay, Liz, how have these programs been received so far?
Liz Wilke (00:12:12) – Generally, well, I guess that depends on the perspective, but generally fine, right? I think generally, it’s not such a heavy lift for an employer to do the registration, right? Or to offer a 401k. And also, states have been pretty lenient about enforcement up to this point, right? They don’t really wanna hit businesses over the head for not complying immediately. They really wanna give nice long grace periods. They just wanna get people to comply sooner rather than later and eventually. But right now, it’s been a pretty soft launch.
Liz Wilke (00:12:49) – And that’s, I think, been very good to sort of get people comfortable with the idea and to sort of help them get used to it and then make the adjustment, right? As opposed to just sort of bringing down the hammer. And so I think that’s really helped a lot of folks accept and get on board with the decision. And it’s also been effective for helping people, especially low-income people, get 401k coverage. So we actually looked into it when Colorado did their program last year.
Liz Wilke (00:13:23) – And the share of businesses that had at least five employees offering a 401k went from 25% to 38% after the mandate went into effect. And that’s a 401k, that’s not an IRA enrollment. That’s companies actually just offering a private 401k to their employees.
Caleb Newquist (00:13:42) – And so that’s good.
Liz Wilke (00:13:43) – Yeah, Oregon enacted a similar mandate in 2023 and they actually went down to the one employee threshold. So the share of companies with one to four employees offering a 401k plan went from 7% to 11%. So a little over a 50% increase.
Caleb Newquist (00:14:02) – And compared to Washington, which is a state next door, who didn’t do anything, they’re basically the rate of employers with that many employees that offered 401ks essentially stayed the same.
Liz Wilke (00:14:16) – Yeah, basically didn’t change. Yeah, it was a nice little experiment.
Caleb Newquist (00:14:20) – Yeah, so the policy seems to be nudging businesses in the direction that we would want, or that is in a direction where more people have the ability to save.
Liz Wilke (00:14:34) – I mean, if you I mean, it’s, if you think about the goal from States as being we want more people in a 401k, period. It seems to be pretty good at that.
Liz Wilke (00:14:43) – The question is, I think, one, is that going to make a difference for retirement, right? And I think we are less clear on the answer to that.
Caleb Newquist (00:14:53) – So it appears that they work, but there’s some work left to do, or there’s some still unknowns.
Liz Wilke (00:14:59) – Yeah, Caleb, that’s definitely right. I think it’s been effective to get people either a 401k or an individual retirement account with a state. But the savings rates in those accounts still seem to be a little bit lower than you would think would make a difference in retirement. So Georgetown University looked at a bunch of these accounts. And a lot of them, especially in the state-run IRA programs, have less than $1,000 in them, right? And so you think, that’s not going to make a difference in anybody’s retirement, right?
Liz Wilke (00:15:31) – And so it’s kind of like you have an account that you’re not using. The caveat to that is, again, that we’re still in the early days of implementation. And the first step is to get an account. The second step is to fund the account, right? So you can’t save for retirement in these accounts until you have an account. So the question, it’s not really like it doesn’t work. The question is, how do you get to the next step, right, and make it work?
Caleb Newquist (00:16:01) – Incremental progress.
Liz Wilke (00:16:02) – Yeah, but we can’t claim victory like we’ve solved the retirement savings problem just from the step of mandating either a 401k account or an IRA account.
Caleb Newquist (00:16:14) – So we’ve come to the point in the show where I ask the question that many people are asking. And I think it’s actually an easy one this time around. But why do small businesses care about this? I mean, it’s obvious. But let’s talk about that a little bit.
Liz Wilke (00:16:29) – Well, great question, Caleb. And I love this question always, because it’s the point of the show. Small businesses should care about this one because it’s incredibly likely that you as a small business owner will be affected by this mandate at some point in the near future. Either you already are affected by this mandate and you’ve had to take some action, or you will be affected by a mandate in your state or some sort of program. Seems very likely for a lot of employers. So this is coming down the pike.
Liz Wilke (00:16:58) – And I think your decision as a small business owner is, do I offer a 401k, or do I just put my employees in the state-run program? Now, I’m going to take a small diversion here and talk about what the state-run auto IRAs actually do because they’re seen as being a lesser, not as good, inferior product to a private 401k. And that’s because the fees tend to be higher for IRA accounts. The investment options are different. And also, the contribution limits are lower.
Liz Wilke (00:17:37) – So an employee can’t put in as much tax-advantaged money into a state-run IRA account as they can put into a 401k, whether or not your employer matches the account. So there are lots of reasons that a 401k is really preferable to an IRA. Plus, people understand what a 401k is. And as far as I can tell, many people don’t understand what an IRA is. It’s just a better-known product. So for businesses, they’re thinking, should I offer a 401k, which has some expenses and some administration costs? Or should I get somebody to do that for me?
Liz Wilke (00:18:18) – Or should I just enroll them in the state fund? When we looked at California, a lot of businesses weren’t offering anything. And then they had to make this choice. And you might think that they weren’t offering it because they just didn’t want to, for practical or philosophical reasons. And what we found is that’s not true.
Liz Wilke (00:18:42) – You got a significant increase in the share of employers that were offering a private 401k, that were not enrolling their folks in the IRA program, but were offering their own private 401k, which suggests that these small businesses, or lots of small businesses that aren’t offering a plan right now, aren’t doing it because they don’t want to, but probably because they’re busy, and things get in the way, and this is a bit of a complicated space that they’re not necessarily experts in.
Liz Wilke (00:19:12) – And the mandate forces you to make a choice that you otherwise might have been just putting off, or you intended to do in the future, but hadn’t really got around to.
Liz Wilke (00:19:22) – And I think employers that choose the 401k are doing so because it’s a better product, and it’s a talent acquisition and an attraction issue, right? I’m not going to put you in the state-run program that has higher fees for you and lower limits. I’m going to give you a 401k, which is something I have to do anyway, and I’m going to take the tax credit for it at the same time, right? And so I think that decision is coming for employers, and the obvious decision is not necessarily just to do the free thing.
Liz Wilke (00:19:55) – There is actually an employer value in offering a 401k direct because people know it and they understand it, and it’s like a talent attraction thing. So to wrap that all up with a bow, to bring it back to your question, Caleb, is I mean, I think one, small business, this decision is coming for small businesses, and it’s going to force the hands of lots of small businesses to take some action here. And the calculus between an auto IRA that’s in the state-run program, that’s sort of like table stakes. You’re going to have to do that anyway.
Liz Wilke (00:20:26) – The question won’t be, will I or won’t I offer a program that will be what’s the value of a 401k program that I offer relative to what they can get in the state-run program? And I think that’s going to change the decision-making a little bit, and it’s also going to force the decision for a lot of these small businesses that aren’t necessarily opposed to a 401k or offering some sort of retirement assistance to their employees, but just really haven’t gotten to making the decision yet.
Caleb Newquist (00:20:56) – Even though I think most businesses care about their employees, it is one of those things that you feel like people probably are just putting off because they can and they have more urgent things to attend to. And there is a timing, right? Like you have to enroll in the plan or you have to have the plan set for the upcoming year so it’s ready on January 1st.
Caleb Newquist (00:21:24) – And so you can imagine somebody in July thinking, oh, well, I can do that in a couple of months, but then there’s a window of time where after that point, you won’t be able to do it in time for the next new year. And so then you’re back to square one where you’re like, oh, we don’t have a retirement plan for next year, but I’ll get to it eventually. And that sounds like a pretty vicious cycle. And it’s probably not that it’s probably not too much of a stretch. I feel like that’s probably happening to a lot of small businesses.
Liz Wilke (00:21:56) – I won’t claim to know the inner workings of the minds of all small business owners, but it seems likely to me that that’s happening to at least a few folks. What I would also say is this, this is coming as a mandate for lots of businesses, but there are tax credits available to help offset plan administration costs. So one thing that small businesses really should be thinking about is not only what do I have to do, but what assistance is there to help me? There are probably state tax credits in a lot of cases.
Liz Wilke (00:22:31) – To be honest, I haven’t looked into it, but there are definitely federal tax credits for offering a 401k. And talking to an accountant or talking to your tax preparer, thinking about how to offset some of those costs. So 401k is a pretty effective retention tool for workers. So there’s a real benefit to employers to offering them.
Caleb Newquist (00:22:49) – Yeah, Gusto’s done, Gusto’s done, we’ve done some research around that, haven’t we?
Liz Wilke (00:22:53) – Yeah, that’s right. So the risk that your employee quits in the first 12 months is much, much lower with a 401k than without after we control for things like the industry and the pay and all of that stuff. So it’s sort of good for business to offer it, but then it can be made even better by getting your tax credits.
Caleb Newquist (00:23:12) – I mean, credits are nice because they reduce your tax liability dollar for dollar.
Liz Wilke (00:23:17) – Tax credits are great. It’s very nice to see dollar for dollar, like your $500 tax credit, wipe out $500 of tax liability.
Caleb Newquist (00:23:25) – Absolutely. That’s it for this episode. We hope you learned something new and useful for yourself or your business, perhaps a 401k, perhaps. Please let us know what you think of the podcast by leaving a review or sharing it with a friend or colleague who might enjoy it. I’m Caleb Newquist.
Liz Wilke (00:23:45) – And I’m Liz Wilke. Thanks for listening.
