Philadelphia Introduces First City-Sponsored Retirement Plan

Philadelphia has launched what is being described as the nation’s first city-sponsored retirement program for employees whose employers lack such benefits.

This initiative, called the PhillySaves program, was approved by voters on Tuesday through amendments to the city charter. It mandates that employers without retirement options enroll their workers in this new plan. Employees will see a small percentage of their pay go into an Individual Retirement Account (IRA) unless they choose to opt out.

“This is a significant development for Philadelphia,” remarked Mayor Sherrell Parker during the event marking the program’s endorsement earlier this year.

Supporters argue that PhillySaves will tackle issues of affordability, enhance financial literacy, and aid families in accumulating wealth over generations. Advocates include groups like AARP, the Greater Philadelphia Chamber of Commerce, and the Pew Charitable Trusts.

While Philadelphia will be unique in having an automatic retirement scheme, several states have initiated similar programs. Surprisingly, over 50 million Americans currently lack access to job-based retirement plans.

The new initiative requires most employers without existing retirement plans to implement payroll deductions for employees but does not mandate employer matching contributions. Employees will be automatically enrolled in an IRA, although they do have the option to opt out. Research indicates that having automatic enrollment increases participation significantly.

Proponents believe these automatic programs will simplify the process for more individuals to start saving for retirement, ultimately reducing reliance on social services. However, some businesses resist mandatory participation in the plan, viewing it as an additional burden and questioning its practical impact.

As of now, over 1.2 million workers from 15 states with existing programs have saved about $3 billion through state-sponsored retirement plans. Other states are also gearing up to introduce similar initiatives in the near future.

Since the launch of Oregon’s first state program in 2017, total savings through state-sponsored IRAs have rapidly increased. Notably, it took six years to reach the first $1 billion, but only 18 months to amass another billion.

Angela Antonelli, executive director at Georgetown University’s Center for Retirement Initiatives, expressed enthusiasm about the growing national interest in these programs.

The management of the program will typically fall to the state treasurer and an appointed board, while a private contractor will oversee the investment funds, which will vary with market performance.

Philadelphia’s move reflects a rising interest in automatic retirement plans. Nevertheless, it’s uncertain how many other cities might replicate this approach due to potential implementation costs. Smaller states like Delaware, Rhode Island, and Vermont appear to be exploring partnerships for retirement plans rather than pursuing standalone programs.

Antonelli noted, “Philadelphia could serve as a pilot for other cities.”

Last month, the President signed an order aimed at providing alternative avenues for individuals without employer-sponsored plans to save for retirement. This new directive proposes the establishment of a website for workers to explore and sign up for IRA accounts, with some lower-income workers even qualifying for federal matching contributions.

According to Antonelli, this presidential attention could spur additional interest among states to roll out similar initiatives.

By creating automatic IRA programs, states aim to help more low- and moderate-income individuals access retirement savings options. Starting next year, subsidies of up to $1,000 for single individuals and $2,000 for couples will be available, funded through a federal tax credit deposited directly into retirement accounts.

State-Level Discussions Continue

This year, state lawmakers are still debating the formation or enhancement of automatic IRA programs. For instance, Minnesota is working on its automatic IRA program, which aims to cover workers in businesses with five or more employees. Similarly, programs in Hawaii and Washington state are in the pipeline.

Notably, many states with active programs lean liberal, while some conservative states like Missouri and Utah have opted for voluntary initiatives to aid small businesses in obtaining retirement plans.

In Pennsylvania, where political opinions are divided, progress on the automatic IRA plan has slowed down since it was approved by the Democratic-controlled legislature last year. It has yet to receive a vote in the Republican-led Senate.

Greg Moreland, of the National Federation of Independent Business, criticized the plan as insufficient, stating that it doesn’t adequately tackle retirement savings shortfalls and could burden small businesses. He pointed out that many employees end up opting out of automatic IRAs, suggesting a lack of demand for the program. Data shows that about 35% of participants in California and more than 37% in Illinois chose to opt out.

Moreover, workers have withdrawn over $1 billion from these state auto IRA programs since their inception, which Moreland argues undermines their effectiveness as substantial retirement tools. On average, Colorado workers have saved nearly $2,000, while those in Oregon have around $3,229 in their accounts.

Supporters counter that many participants are among the lowest wage earners, and automatic IRAs can provide an essential safety net for both immediate needs and future retirement income.

Emerson Sprick from the Bipartisan Policy Center highlighted that a significant portion of the population struggles with saving. “If people feel they can’t afford to save, they will choose to opt out,” he said.

Research suggests that the introduction of state programs has encouraged more businesses to consider their own retirement offerings, as employers with their own plans are not obligated to comply with state mandates.

Additionally, while anyone can open a private IRA, employer-sponsored plans facilitate saving by automatically deducting contributions from paychecks, often with matching from the employer.

“The access gap is substantial,” Sprick remarked. “It particularly affects the smallest businesses and industries with the lowest wages, which can lead to significant retirement outcome disparities.”

Future Implications for Other Cities

On Tuesday, voters in Philadelphia approved a ballot measure paving the way for the establishment of a nine-member board to oversee the PhillySaves initiative.

Though New York City and Seattle have also approved similar plans, they have yet to implement them due to pre-existing state programs.

John Scott from Pew Charitable Trusts, who was involved in developing the PhillySaves program, believes that other cities may follow Philadelphia’s example.

The city anticipates spending around $1 million in initial costs and approximately $500,000 annually on management fees. Participation is required for employers with at least one employee, operating for a minimum of two years, and lacking existing severance benefits.

Scott noted, “As wealth accumulation patterns shift, more attention is being drawn to these issues, explaining the growing legislative interest across the country.”