By Robert C. Jazwinski, CPA, PFS, CFP
I had the honor and pleasure of representing the Pennsylvania Institute of Certified Public Accountants (PICPA) on the Private Sector Retirement Task Force assembled by Pennsylvania Treasurer Joe Torsella to analyze the problems and barriers many Pennsylvanians have accumulating sufficient funds for a financially secure retirement. The task force held four public hearings and several meetings over five months, beginning in October 2017. It was chaired by Torsella, and included the Republican and Democrat leadership of the state Senate and House Finance Committees. Also included were representatives of the National Federation of Independent Business of Pennsylvania, AARP, the Pennsylvania AFL-CIO, and the PICPA.
More than 2.1 million Pennsylvanians work for employers that do not offer retirement plans. A report from the AARP estimates that 44 percent of private sector workers in Pennsylvania have employers who do not offer participation in a retirement plan. Testimony presented to the task force indicates that employers in Pennsylvania do want to assist their employees by providing effective and low-cost alternatives to accumulate retirement savings. Other testimony indicated that recent innovations in retirement plan design – such as auto-enrollment, minimum salary reduction contributions, auto-increases, and default investment options – have a beneficial impact on employees saving more for retirement than they otherwise would. This occurs even with employees’ rights to opt out of default choices.
Across the country, many states are working on solutions to help solve this crisis. The Pennsylvania task force reviewed alternatives that included automatic individual retirement accounts, multiple employer qualified retirement plans, and marketplaces that organize the alternatives that employers might select from in offering an employee retirement plan. The task force also heard testimony on the USA Retirement Plan, essentially a cash balance plan that combines features of defined contribution and defined benefit plans.
A key observation by the task force is that the lack of access to low-cost, effective, and efficient payroll deduction retirement plans is a primary barrier to achieving retirement security in Pennsylvania.
If left unchecked, a lack of retirement preparedness among individuals will also have a substantially adverse effect on the financial position of Pennsylvania. Individuals who are aren’t financially prepared for retirement rely disproportionately on state financial assistance, increasing government outlays. They also have less income to spend on consumption in Pennsylvania, reducing future rates of economic growth and collection of taxes. The Treasury Department engaged Econsult Solutions to quantify the financial impacts to Pennsylvania. Over the next 15 years, increased demand for social services by those not prepared for retirement could consume $14 billion in additional state expenditures, and tax revenues from reduced consumer spending could be affected by $1.4 billion.
The task force was sensitive to the needs and objectives of employers in Pennsylvania, too. Any state-sponsored program adopted should include no employer costs or liabilities and only minimal administrative burdens. In addition, the program should be self-funding, requiring no state support other than support for start-up costs, which could be repaid once the program achieves sufficient scale.
The consensus among the task force members is that an auto-IRA program is the most appropriate program to adopt in Pennsylvania. Such a program could be designed to provide access to Pennsylvanians who aren’t covered by an employer-provided retirement plan, to incentivize participants to save more, to provide low-cost investment choices, and to enhance financial literacy and investment education. It would also impose minimal burden on employers, requiring little more than payroll deductions and remittances.
The full report of the task force can be found on the Treasurer’s website.
My hope is that the PICPA can assist in educating Pennsylvania’s employers and employees on the significant benefits that can be achieved by this program. The benefits of improving Pennsylvanians’ financial literacy and financial security, along with improving the future fiscal conditions of the commonwealth, can be very powerful and fulfilling.
Robert C. Jazwinski, CPA, PFS, CFP, is president and managing principal of JFS Wealth Advisors with offices throughout Pennsylvania in Camp Hill, Doylestown, Hermitage, Lancaster, Philadelphia, and Pittsburgh. He is a past president of the PICPA and current member of PICPA's Fiscal Responsibility Task Force.