John Scott: Keystone Saves can build retirement savings for millions of Pennsylvanians

In a promising step for the millions of Pennsylvanians who want to save more for retirement, members of the Pennsylvania General Assembly on Dec. 13 announced the Keystone Saves Program Act, which would allow workers whose employers don’t offer a retirement plan to save for retirement.

This opportunity to help working Pennsylvanians save for the future, combined with the need to avoid state budget crises, has galvanized the support of a broad bipartisan coalition of forward-thinking leaders, including Treasurer Stacy Garrity (R), Rep. Tracy Pennycuick (R-147), and Rep. Mike Driscoll (D-173).

If it adopts Keystone Saves, Pennsylvania will join 10 other states — California, Colorado, Connecticut, Illinois, Maine, Maryland, New Jersey, New York, Oregon and Virginia — that have enacted similar laws creating “automatic IRA” programs. Participants in these public-private programs are saving an average of around $100 a month. And although that may not sound like much, it’s a huge win for workers who will generate significant savings to supplement their Social Security.

For example, a participant in Keystone Saves who puts aside $100 a month over 40 years and earns an inflation-adjusted 6% would have more than $160,000 in 2021 dollars at retirement — compared with the $65,000 median value of retirement accounts for U.S. households in 2019.

And as workers build wealth through the program, taxpayers benefit too, because Keystone Saves will help address the fiscal and economic costs that would accrue when millions of Pennsylvanians reach retirement age without adequate savings.

Fiscal projections by The Pew Charitable Trusts, in partnership with the Pennsylvania Treasurer’s Office and the Philadelphia-based economic consulting firm Econsult Solutions, demonstrate that a relatively older population with inadequate savings could cost taxpayers in the commonwealth $14.3 billion in increased social assistance spending over 15 years. And, as illustrated by this county-level data tool, the savings shortfall affects every corner of Pennsylvania. But if passed and implemented, Keystone Saves would take strides toward closing this gap.

The main tenet of Keystone Saves is simplicity. That’s especially appealing to — and necessary for — small businesses, many of which don’t have the resources to sponsor a retirement plan. Employers would not be responsible for managing or funding the program, and our research shows that the vast majority of employers would incur no costs in facilitating employees’ contributions.

Participating savers would make regular contributions to their individual retirement accounts (IRA) through their employers’ payroll systems, as other workers do in familiar retirement arrangements such as 401(k) plans. Also like more familiar workplace plans, the program makes it easy for workers to participate through automatic enrollment, although workers could opt out at any time for any reason. And Keystone Saves provides participants with significant financial resiliency during their working years as well. That’s because savers would have the opportunity to withdraw their contributions tax- and penalty-free if, for example, they faced an emergency expense.

Through the public-private partnership model, the state’s role in Keystone Saves would be limited to providing regulatory oversight and contracting with a private financial services company to manage participants’ investments. Because federal law requires IRAs to be funded by the individual saver, the state has no claim on the assets that savers set aside and is never on the hook for contributions to the accounts.

The auto-IRA model doesn’t replace existing retirement plans. For example, 401(k)s offer significantly higher annual contribution limits than Keystone Saves and allow employers to make their own contributions to employees’ accounts. For these reasons, it’s unlikely that an employer with a preexisting plan would be interested in switching to Keystone Saves. However, to prevent the new program from competing with the private plan market, employers are ineligible to join Keystone Saves for two years if they terminate a plan.

The introduction of Keystone Saves is an exciting opportunity for Pennsylvania. If the bill becomes law, it will make residents more financially secure by facilitating saving and investing to generate wealth; help level the playing field for small employers by taking on the most burdensome aspects of administering a retirement plan; and lessen a looming fiscal burden brought on by an aging population with inadequate resources.

John Scott directs The Pew Charitable Trusts’ retirement savings project.