Congress must reinvent retirement savings for the gig economy

Congress must reinvent retirement savings for the gig economy
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With the emergence of the gig economy, the American workforce is changing, and the way we save for retirement needs to change with it. Congress has an immediate opportunity to take a big step toward addressing this challenge by enacting the Retirement Enhancement and Savings Act of 2016 (“RESA”), which passed the Senate Finance Committee unanimously in 2016.

Many young people and others are not pursuing a traditional career path, but rather are becoming part of the gig economy as independent or temporary workers, often working for multiple businesses and creating their own career. The lack of a strong savings culture has been a long-time challenge in the United States, a trend that is continuing into the 21st century and has particular impact in the gig economy. As independent contractors, every gig worker is his or her own sole proprietorship, legally permitted to set up a retirement plan. But not nearly enough gig economy workers set up plans because of the costs and burdens of doing so.

The need for creating effective retirement options for workers in the rapidly growing gig economy is clear. A survey conducted by Professors Lawrence Katz of Harvard and Alan Krueger of Princeton found that the percentage of individuals pursuing “alternative work arrangements” rose by almost 50 percent from 2005 to 2015, to close to 16 percent of the workforce. They further observed that, based on their estimates, “94 percent of the net employment growth in the U.S. economy from 2005 to 2015 appears to have occurred in alternative work arrangements.”

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Others estimate that the gig economy may be much larger. In a study issued in April 2015, the U.S. Government Accountability Office (“GAO”) states that the alternative workforce may be as large as 40 percent of the total workforce, depending on how the alternative workforce is defined. A CNN Money article from May 2017 quotes the CEO of Intuit as saying that "The gig economy ... is now estimated to be about 34 percent of the workforce and expected to be 43 percent by the year 2020.”

 

GAO “found that compared to standard full-time workers, core contingent workers are more likely to be younger, Hispanic, have no high school degree, and have low family income.” Katz and Krueger also note that “there also has been a notable rise in the share of workers in alternative work arrangements for women.

As a country, we would do well to ask ourselves how these workers are faring under a private retirement system built for full-time traditional employees. The answer is that many of these gig economy workers are eligible to maintain their own retirement plans, but very few do. GAO states that gig workers “are about two-thirds less likely than standard workers to have a work-provided retirement plan.”  As the gig economy has grown and will continue to grow, this has become a national challenge.

The traditional answer is that employers cannot address this issue, because an employer’s retirement plan is only permitted to cover employees of that employer, and gig workers are generally independent contractors, not employees.

Fortunately, as noted, there is a solution right under our noses, which is contained in RESA. If RESA passes, we can provide a new answer that allows businesses to provide benefits to gig workers.

Here is the key: RESA permits “multiple employer defined contribution plans,” often referred to as “open MEPs,” to cover employees of completely unrelated employers. Should RESA become law, businesses would have the ability to voluntarily cover their gig economy workers under an open MEP—the gig worker’s sole proprietorship could elect to join the open MEP, without any burden or cost for the gig worker. 

Under an open MEP, it would be very simple for gig workers to make 401(k) to their own retirement plan, and for the business to make matching contributions. It is our understanding that MEP providers already have systems already in place to allow workers to take advantage of this option in short order once RESA passes.

We have moved into a new economy, and there are projections that this movement will continue and accelerate. Our private retirement system needs to be updated to address this new economy to make sure that workers have viable options to save for a secure retirement.

In addition to having passed the Senate Finance Committee unanimously, many of the provisions in RESA either originated in House bills or have been subsequently introduced on the House side on a bipartisan basis. RESA is a completely bipartisan way to open the door to increased savings for workers in the new economy.

There will be a spending bill in February. Let’s pass RESA then.

Mario Lopez is president of the Hispanic Leadership Fund, an advocacy organization that works for public policy that strengthens liberty, opportunity, and prosperity for all Americans.