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Debt ‘Limits’ — Causation, Correlation or Coincidence?

You have to wonder what the Wall Street Journal has against automatic enrollment.

The latest instance of finding the cloud in this silver lining arose in a recent Journal article by Anne Tergesen, “Downside of Automatic 401(k) Savings: More Debt” (subscription required). The article, based on the findings of a recent academic study, says that automatic enrollment has “pushed” millions of people who weren’t previously saving for retirement into those plans — but quickly cautions that “many of these workers appear to be offsetting those savings over the long term by taking on more auto and mortgage debt than they otherwise would have.”

This “crowding out” concern — that automatic enrollment would stretch already strained financial resources, particularly among lower-income workers — has long been a sticking point for those advocating caution regarding automatic enrollment.

The Study

So did the study — drawn based on what the researchers termed a “natural experiment” created by the decision of the U.S. Army to automatically enroll civilian workers into their retirement savings plan at a point in time — validate this concern? Well, the researchers found “no significant change” in debt levels of those automatically enrolled four years after hire — excluding auto loans and first mortgages. In those categories, the researchers noted that automatic enrollment increased auto loan balances by 2% of income, and first mortgage balances by 7.4% of income. However, the researchers didn’t seem overly concerned about these increases, noting that they involved the acquisition of assets (and in the case of a home mortgage, an asset that might actually play a factor in retirement security) — though they did conclude that the advent of automatic enrollment seemed to leading workers to take on more debt to offset the “loss” in income to automatic enrollment savings.

On the other hand, the researchers note that it seems likely that much of the increase in first mortgage debt is caused by automatically enrolled employees being able to obtain larger mortgages due to their extra TSP balances loosening down payment constraints. And as regards their preparation for retirement, automatic enrollment clearly helps. The researchers noted that at 43-48 months of tenure, automatic enrollment increases cumulative employer plus employee contributions since hire by 5.8% of first year annualized salary.

Where’s the ‘Beef’?

So, what’s the beef about automatic enrollment? Well, despite the headline (and the subhead, “New research finds employees auto-enrolled in retirement plans borrow more than they otherwise would have, offsetting savings”), the article struggled to find anyone (including three of the authors of the research) who would say anything bad about automatic enrollment. But then, back in 2013, this same Ann Tergesen wrote about the “Mixed Bag for Auto-enrollment,” claiming that “employees who are automatically enrolled in their workplace savings plans save less than those who sign up on their own initiative.”

That article, in turn, built on — and cited — a 2011 article Tergesen jaw-droppingly titled “401(k) Law Suppresses Saving for Retirement.” In the case of the latter, Tergesen glommed on to one of 16 possible scenarios, and focused on the notion that some workers would simply rely on the mechanics of automatic enrollment’s 3% default, rather than picking the higher rate that they might if they filled out an enrollment form (encouraged by things like education meetings and incentivized by things like a company match). Remember that nothing about an automatic enrollment option requires workers to rely on automatic enrollment. In fact, under automatic enrollment, total savings actually went up, notably for lower income workers.

Auto Impact

The nonpartisan Employee Benefit Research Institute (EBRI) has estimated that moving to automatic enrollment improves projected retirement outcomes by anywhere from 17.5% to more than 33%, depending on age and income. Indeed, the lowest income quartile saw their outcomes improve by more than 20% pretty much across the board. In fact, EBRI has previously projected that approximately 60% of those eligible for automatic enrollment would immediately be better off in those plans than in one relying on voluntary employment, and that over time (as automatic escalation provisions took effect for some of the workers) that would increase to 85%.

And while it wasn’t mentioned in the most recent Journal article, the study at hand acknowledged that automatic enrollment was “extremely successful at increasing contributions to the TSP at the left tail of the distribution while leaving the middle and the right of the distribution unchanged.” Said another way, automatic enrollment did a great job of increasing contributions among lower income workers.

All in all, while automatically enrolled workers in the study (and let’s remember this is a specific subset of the population for a limited period of time), on average had more debt in two very specific categories, it’s far from clear that this was a consequence of automatic enrollment – and it’s by no means certain, even if it were, that in the long term it’s a bad thing.

Indeed, it’s not clear that the dots connected here are causality or simply an interesting correlation.

What is clear is that automatic enrollment has been enormously successful at helping workers — particularly lower income workers — prepare for a more financially secure retirement.