Joseph Torsella, Treasurer of Pennsylvania, has emerged as a powerful advocate for automatic IRAs, which would require companies that do not offer retirement savings plans to enroll their employees in a low-cost program that automatically takes deductions from their salaries and sends them to a low-cost plan sponsored by the state and managed by the private sector. The Pennsylvania Treasury Department’s Retirement Task Force recently released a widely recognized report on retirement security in the Commonwealth, which found that more than 2.1 million Pennsylvanians work for employers that do not offer retirement plans. In a wide-ranging interview, Treasurer Torsella talked with Guideline about retirement security, and a big surprise in the report. We also spoke about Vanguard founder Jack Bogle, a Pennsylvanian and inspirational figure for both Torsella and Guideline’s team because of his commitment to building low-cost, high-quality investment services.
The views and opinions expressed in this interview do not necessarily represent the policies and positions of Guideline. The content of this interview is for informational purposes only, and should not be interpreted as tax, investment, financial, or other advice on behalf of Guideline. The interview has been edited for length and clarity.
Guideline: Thanks for joining us today! It was a privilege to testify before the Task Force, thank you again for inviting Guideline to participate. I’ve looked over the Task Force report. It has powerful conclusions. Most of our readers may not understand how much the lack of retirement security adds to public costs. You’ve been advocating for an auto-IRA program for Pennsylvanians. What made you choose that approach?
Torsella: We were really happy with the report, which I think is a persuasive piece of work. We have always recognized that the finances of the Commonwealth become a reflection, in the long run, of the finances of the people of the Commonwealth. Our report found how much the lack of retirement savings is likely to cost taxpayers. Financially unprepared retirees will place demands for state social services costing Pennsylvania an additional $14 billion between 2015-2030. And at the same time, reduced consumer spending activity by this group will depress Commonwealth tax collections by roughly $1.4 billion over the same time frame.
Personally speaking, my first year in office we had an extended budget stalemate in Harrisburg for eight or nine months. A deficit of $700 million precipitated the stalemate. Meanwhile, our research found that if we could nudge Pennsylvania in the direction of saving more for retirement, we could save the Commonwealth $700 million in the first year.
We’re both fans and friends of Jack Bogle and of the way he combined ethics and business. On a couple of different levels, for the Commonwealth and for people facing challenges at the end of life, this is the right thing to do.
Guideline: When two different narratives give you the same answer, it’s a good sign you’re on the right track.
Torsella: The third narrative is that when it comes to these issues, to date, Washington has shown very little ability to solve these problems. It falls to states to act. For instance, the Secure Act passed the House of Representatives. But it does not address the 2.1 million Pennsylvanians that don’t have access to a retirement plan through their employer: people who are entrepreneurs, who work one or more part-time jobs, or who work for an employer that does not offer a plan as a benefit, and many more.
Guideline: Our experience at Guideline shows that people participate in high rates when they have access to a retirement plan at work. According to our data, 86 percent of workers who live in Pennsylvania and are offered a Guideline 401(k) participate, contributing 8 percent of their annual income, on average.* Maybe we should note here for readers that the programs we’re talking about—state auto IRAs—have been launched in California, Illinois and Oregon, with several other states moving forward with similar programs. They require all businesses of a certain size to either get a 401(k) from the private market or offer their employees access to an auto-IRA through their state.
One of the criticisms of these programs, however—and of other solutions that focus on increasing access to retirement savings vehicles—is that enabling people at the lower end of the income spectrum to save $20 or $50 a month isn’t going to make a big difference.
Torsella: The kind of change that we're talking about is not taking the 2.1 million Pennsylvanians without access to a retirement plan and turning them into Warren Buffetts. It takes fairly modest changes in savings levels to save the type of public funds that we're talking about. It's not as if you're waving a wand and saying let's imagine all these people were suddenly part of the 1%. Even a little bit of retirement savings could make a big difference. For example, even if all you do is give someone the ability to defer claiming Social Security for a year or two or three, you can dramatically improve their lifetime income benefit.
Maybe that’s one way of answering the question of why I’m advocating for this so hard. It is firmly in the realm of the possible, and it can make a big difference. I like practical solutions.
Guideline: We recently interviewed John Scott, the director of the Pew Charitable Trusts’ Retirement Savings Project who also testified for your retirement committee. We talked about how the problem of poverty among the elderly is hidden.
Torsella: There are all kinds of trade offs and choices that we hear about. There are connections between all these problems that we see as separate, stubborn poverty rates and intergenerational lack of opportunity, and retirement security, and higher education costs. We hear from people who are not in a position to both help their children and grandchildren with education. Rising higher education costs means that retirement security gets harder with age. When one in three Americans doesn’t have any savings at all, it may be, as John Scott said, a hidden problem, but it's kind of hidden in plain sight. And it’s not the lowest income population that’s affected by this. It’s a broad problem.
Guideline: What has the response been to the auto IRA from businesses in Pennsylvania?
Torsella: We worked hard to make the hearings inclusive and to get input from all kinds of businesses. And to a surprising degree, there was a kind of broad acknowledgement from the business sector that we have a problem, and broad support for the solution that we've proposed. There was a survey done towards the end of our work by the AARP in Pennsylvania, which was part of our task force. Four out of five businesses thought the auto IRA we are proposing was a great idea. Businesses understand that this is a competitiveness issue--that having this as an easy option may help them keep people.
There are a few concerns about whether the auto IRA plans require employers to contribute. They don’t. They require employers to offer the plan. Of course we would rather see all businesses set up a 401(k), do employer matches, and do some bells and whistles. But for those who don't, we think it's hugely important that there be a fail safe plan in place, which is what this work intends to achieve.
Guideline: What was most surprising finding from the report?
Torsella: Although many employees who lack access work for small firms, there is a significant – and surprising – concentration of workers without plans in medium and large firms. More than 500,000 are in companies with 50 to 499 employees; another 703,000 work for businesses with 500 or more employees.
Guideline: That’s shocking, actually. And it does take some of the wind out of the argument that auto IRAs are a big burden on businesses. Yet there can still be strong opposition to these plans.
Torsella: Sometimes you hear that the private sector can solve this problem. We heard that once in the hearings. But if the current landscape were able to solve the problem, there would not be 2.1 million people in the Commonwealth who don't have a way of saving money, and we'd all have a lot more in current savings. This will, I hope, catalyze a lot of businesses to look at what they can offer on their own and drive more private-sector activity.
I also think once people start saving, they often save more. As you bring people into the power of saving to build your financial future, it tends to be a virtuous circle. So people who have a little bit of emergency savings start saving for other things.
Guideline: What about political opposition?
Torsella: The potential narrative that this is an intrusive big government program is preposterous. We don't run our 529 college savings program—no state does. We contract with the private sector to manage our plan. When you look at the country, you see advocates for this that are very much from both parties.
I come from the church of Jack Bogle—he was never afraid to criticize people who were acting more out of their own self-interest than their clients! We could see troubling opposition from people who peddle high-priced plans that don't work well. But I think the American people are beginning to see through that.
Guideline: Will there be legislation introduced in Pennsylvania this year?
Torsella: Yes. We’ve been working with four prime co-sponsors, two Republicans, two Democrats, two in each house. We've been working with them to draft legislation that I expect will be introduced very soon. I know this is a hill to climb, and I get it's complicated, and I get people have anxiety, but I really hope we can see action this year -- a bill that’s introduced this summer and acted on in the fall. I don't think we have time to waste. I think people are depending on us, and I hope it will proceed with all deliberate speed.
If we can do this, we can really show Pennsylvanians that in spite of the dysfunction that oozes out of Washington, we're still capable of solving problems and doing it the way that really makes a difference in their lives. And really gives folks the chance to build some security for themselves, which is abundantly valuable.
We studied the saving behaviors of hundreds of employees who live in Pennsylvania and have participated in employer-sponsored Guideline 401(k) plans from May 29, 2018 through May 28, 2019. Their saving behaviors were measured by saving rate, defined as the fraction of a participant's gross pay deferred in the plan. Participation rate of Guideline 401(k) plans based in Pennsylvania was calculated as of May 28, 2019.