If the Retirement Savings for Americans Act were to become law, new research from Morningstar has found it would likely lead to worse retirement outcomes for most Millennial and Gen Z workers.
“Our analysis shows that, when factoring in realistic changes to investor savings behavior, the RSAA would likely lead to worse overall retirement outcomes.”
Morningstar Retirement research paper
The study by the Morningstar Center for Retirement & Policy Studies, “The Retirement Savings for Americans Act: Increased Access, Worse Retirement Outcomes Overall,” uses the Morningstar Model of US Retirement Outcomes and analyzes five scenarios to assess the impact of the bill on retirement-income adequacy. It was authored by Spencer Look, FSA, Associate Director of Retirement Studies, Morningstar Retirement, and Jack VanDerhei, Ph.D., Director of Retirement Studies, Morningstar Retirement.
The Retirement Savings for Americans Act, which aims to expand retirement coverage for American workers by creating a federal retirement plan for those not covered by their employer, was reintroduced in Congress in October 2023. The bipartisan, bicameral bill is sponsored by U.S. Senators John Hickenlooper (D-CO) and Thom Tillis (R-NC), along with Representatives Lloyd Smucher (R-PA) and Terri Sewell (D-AL)—both of whom were reelected to the House in Tuesday’s election.
The legislation closely follows recommendations made by the Economic Innovation Group’s (EIG) Inclusive Wealth-Building Initiative, which launched in 2021 with a white paper by economists Teresa Ghilarducci and Kevin Hassett. In it, the authors outline an idea to significantly expand retirement savings for millions of low- and moderate-income Americans through a new program modeled after the highly successful federal Thrift Savings Plan (TSP), which has helped millions of federal workers and members of the military save for retirement.
It has gained support from the likes of AARP, Goldman Sachs, the Society for Human Resource Management, and even gig worker-focused companies Uber and Doordash, who assert that the widened accessibility to all workers has the potential to take pressure off small business owners who cannot afford to provide adequate retirement strategies.
But the bill is adamantly opposed by many in the workplace retirement industry, including the American Retirement Association, which believes the RSAA would undermine the existing employer-sponsored retirement system with its government-subsidized matching contributions that could incentivize employers to terminate existing 401(k) plans and also poses risks to Social Security’s stability.
Opponents say provisions in SECURE 2.0 legislation, state-sponsored auto-IRAs, and savings innovation in the form of auto-enrollment and auto-escalation are closing the retirement plan coverage gap and need to be given time to work rather than launching a massive government retirement program at a time when Social Security solvency is in question.
Morningstar’s RSAA findings
In most plausible scenarios, the research paper found a majority of Gen Z and Millennial workers would be better off with the status quo instead of being covered by the RSAA. Under the RSAA, the median wealth at retirement age could decrease by as much as 20% for Gen Z workers and 12% for Millennial workers.
The decline is attributed to anticipated reductions in employer-sponsored defined contribution plans and lower default contribution rates under the RSAA (3% default rate) compared to current workplace DC plan averages (7.4% average deferral rate as reported by Vanguard). The paper also modeled preretirement withdrawals and opt-outs, both of which lessen the impact of the RSAA.
The paper found the RSAA would boost retirement outcomes for workers not covered by an employer-sponsored plan, but this benefit would be offset by larger decreases for those covered in the status quo.
While Gen Z and Millennial workers without any future years of participation in a DC plan or with limited participation (1 to 9 years) would generally benefit from the RSAA. But for workers with 10 or more years of future participation in a DC plan, the RSAA would result in significantly worse outcomes, particularly for those with 20-plus years of future participation.
The findings covered in the paper reflect the RSAA’s likely impact on both investor savings behavior and plan sponsor behavior, which it says would lead to lower net savings rates.
The findings emphasize the importance of ensuring that policy changes support, rather than undermine, long-term retirement savings.
“In sum, our analysis shows that, when factoring in realistic changes to investor savings behavior, the RSAA would likely lead to worse overall retirement outcomes,” the paper concludes. “These results highlight the importance of maintaining a balance between the private and the public retirement systems, ensuring that changes do not negatively impact retirement savings behavior.”
Access the Morningstar Retirement paper here.
SEE ALSO:
• Controversial ‘Retirement Savings for Americans Act’ Reintroduced in Congress
• AARP Endorses ‘Retirement Savings for Americans Act’ Opposed by ARA