National opinion: This Labor Day, Arizona can boost workers’ retirement security

Labor Day became a federal holiday 130 years ago to celebrate the contributions of working women and men to America’s economy and well-being. And this year, Labor Day falls on the 50th anniversary of one of the most consequential laws for working Americans: the Employee Retirement Income Security Act (ERISA), a comprehensive reform of our country’s pension and employee benefits rules that provides important protections for retirees.

But much has changed since 1974. The population of older Americans has increased dramatically, making retirement security far more important today than it was a half-century ago. ERISA largely focused on protecting traditional pensions, in which an employer funded a predetermined benefit every month. But by 2021, only 10% of working Americans were actively participating in this type of pension. Today, most employees must save for retirement on their own, typically through workplace retirement plans such as a 401(k).

But saving enough, in the absence of a traditional pension, hasn’t been easy. Vanguard reports that the median amount saved by people on the cusp of retirement is about $87,000—far less than the $1.5 million people say they’ll need.

Why are savings so low? Millions of workers, and at least one-third of private sector employees, don’t have access to retirement plans at their jobs.

Now, a growing number of states have found an innovative way to help these workers save: a retirement savings program known as an auto-IRA.

These state-sponsored programs allow employees to automatically contribute their own earnings to an individual retirement account (IRA) through voluntary payroll deductions. And not only do auto-IRAs help workers save, but they’re also a financial win for both states and taxpayers.

Consider Arizona. A 2023 study from The Pew Charitable Trusts found that employees’ insufficient retirement savings have led to increased public assistance costs for retirees, reduced tax revenue for the state, decreased household spending, and lower employment, with an estimated price tag for Arizona taxpayers of 4.1 billion over 20 years. That’s why forward-thinking Arizona policymakers are working to pass legislation, H.B.2839, which would give more than 1.2 million private-sector workers in the state access to an auto-IRA program.

Pew research reveals that many employers want to offer retirement benefits but are dissuaded by what they see as high startup costs and limited administrative capacity. What is the cost to employers and small businesses of an auto-IRA program? Zero. Employers would provide their employees access to the retirement program by establishing a simple payroll deduction. In a tightening economy and labor market, these no-cost state-facilitated programs give businesses a major advantage by allowing them to offer potential employees a coveted benefit.

And the upside for Arizona taxpayers of these programs, which reduce workers’ reliance on government-funded programs? H.B.2839 would help reduce that $4.1 billion state fiscal burden.

Arizona is not alone. Seventeen states — California, Colorado, Connecticut, Delaware, Hawaii, Illinois, Maine, Maryland, Minnesota, Nevada, New Jersey, New York, Oregon, Rhode Island, Vermont, Virginia, and Washington — have adopted similar programs. In the six states for which data is available, about 890,000 savers have amassed roughly $1.6 billion in retirement assets since 2017. And auto-IRAs will also help employees navigate financial shocks because their contributions can be withdrawn at any time without penalty or taxes.

Fifty years ago, ERISA promised Americans a secure retirement. That promise has become frayed as the responsibility for funding retirement has shifted from employers to employees. Now, states are leading with innovative ways to build retirement savings through the creation of voluntary payroll deduction programs — something that’s well worth celebrating this Labor Day.