Millions of Americans work in jobs that provide no savings plan for when they retire. Calling that a “gross disparity,” President Trump promised in his recent State of the Union speech to provide them with a government-sponsored plan.
That could save federal and state governments trillions of dollars over time, RAND found. Researchers used new tools to estimate the costs and savings from such a plan, decades into the future. Their analysis was part of the RAND von Furstenberg Family Budget Model Initiative.
A plan like the one Trump outlined would not only give workers a cushion for retirement, researchers found. With enough time, it could also start winding back the federal deficit.
How It Would Work
The White House has yet to release more information. But Trump did say the plan would offer workers the same kind of retirement accounts that federal workers have. The federal government would match up to $1,000 a year in individual contributions.
RAND modeled what that would mean for thousands of simulated workers, with different savings and investment-return rates. For example: a young worker making $42,000 a year who decides to set aside 5 percent for retirement. That contribution would qualify for the full federal match. Assuming a modest 8 percent rate of return and some wage growth over time, that worker would retire after 40 years with $1.1 million in the bank.
Costs and Savings
The program would cost the federal government $285 billion over its first ten years, RAND estimated. That assumes full participation, with all eligible workers contributing enough to get the full match.
Budget analysts often stop there, after ten years. But the RAND Budget Model enables researchers to go much further out. And when researchers ran the numbers on these retirement accounts, they found that something interesting starts to happen within about 20 years.
As workers build up their retirement savings, they become less dependent on Medicaid and Supplemental Security Income, a Social Security program. Enrollment in those safety-net programs falls. Right around year 30, researchers estimated, those savings start to overtake the total costs of the program.
By year 40, total government costs would add up to nearly $1.2 trillion. Total savings would have pushed past $5 trillion.
“If you just look at the first ten years, then, yes, you get people with better retirements, but it costs the federal government a lot of money,” said RAND senior mathematician Carter Price, who led the analysis. “But when you go out longer, you start to see workers who are no longer reliant on these safety-net programs. And that could result in meaningful deficit reduction in the long run.”
As workers build up their retirement savings, they become less dependent on Medicaid and Supplemental Security Income.
Who Would Benefit
RAND estimates that around 63 million American workers have no retirement savings accounts through their employers. That would make them eligible for the government accounts. Around two-thirds of those workers would qualify for the federal match.
The program would especially benefit middle-income earners. They can more easily save enough to qualify for the full federal match. Lower-income workers are more likely to be living paycheck to paycheck. For them, setting aside enough to get the match would leave less money to pay the bills or buy groceries.
To help, the government could structure the program so those lower-income workers get the match earlier, researchers noted. That would raise costs in the short run. But it would likely yield additional savings to Medicaid and Social Security down the road.
RAND's modeling assumed that the government match would start to phase out for workers making more than the median U.S. wage of $42,000 a year. It would fall to zero for those making more than $65,000.
New Capabilities
The analysis was part of a new, high-priority effort at RAND to examine federal budget policy in unprecedented detail. The RAND Budget Model Initiative aims to better predict how policy proposals will affect the American middle class. Researchers can now track how federal spending ripples through individual communities. They can map every provision, connection, and hidden loophole in the U.S. tax code.
Using this suite of new tools, researchers have analyzed earlier proposals to extend federal retirement accounts to more workers. They've looked at the likely impact of changes to the tax code on both corporate balance sheets and family budgets. And they've shown what it would take to reduce the burden of the federal debt and save taxpayers trillions of dollars in future interest payments.
“We've accumulated this debt over the last 50-plus years,” Price said. “It's going to take us 30-plus years to get out of it. Steps like these proposed retirement accounts, where you shift costs and take advantage of the market, are one way we could get there.”
