№ 087 — The Default Account — American Dividend Fund

The problem

The American retirement system has three legs, the saying goes: Social Security, a pension, and personal savings. For about half the workforce the second leg does not exist. Roughly 57 million workers, 48 percent, work for an employer that offers no retirement plan at all, and they are disproportionately the workers of small businesses, of the service economy, and of the gig platforms № 013 described. For them, saving for retirement means opening an account themselves, choosing investments themselves, and remembering to contribute from a paycheque that has no line for it. Most, being human, do not.

The behavioural finding here is among the most robust in economics: people stay where they are put. Enrol a worker by default and let them opt out, and most stay in; ask them to opt in, and most stay out. Britain applied the finding nationally in 2012, requiring every employer to enrol every eligible worker in a pension and permitting the worker to leave. Participation among eligible private-sector employees rose from just over 40 percent to 89 percent by 2024, with 21.7 million people saving. The employers did not choose the investments; a national default provider, with costs capped by law, did.

The United States has been running the same experiment at the state level. Since Oregon's programme opened in 2017, 21 states have enacted automatic retirement accounts for workers whose employers offer nothing, and by 2026 more than 1.2 million workers had saved about $2.75 billion through them. California's programme reached $1 billion in assets in five years with more than half a million funded accounts. Research finds the state programmes do not crowd out private plans; employers offered a choice tend to adopt their own. The model works. It exists in 21 states and not in 29, and it stops at the border of each.

№ 040 addressed the first leg, Social Security. This proposal is the second leg, for the half of the country that does not have one.

The proposal

The Default Account: every citizen worker whose employer offers no retirement plan is enrolled automatically in a national account, with a default contribution of 5 percent of pay rising to 8 percent over three years, and the right to opt out or change the rate at any time. The employer's only obligation is to forward the payroll deduction. The account is invested in the American Permanent Fund's index portfolio under № 065, at a cost capped at one-tenth of one percent, and it belongs to the worker for life, wherever they work.

How it would work

Enrolled by default. An employer with no plan of its own registers its workers with the national account, as it registers them for Social Security, and deducts the default contribution from pay. The worker may opt out with a click, reduce or raise the rate, or stop and restart. Nothing is compulsory except the employer's forwarding of what the worker chose.

Five to eight. The default starts at 5 percent of pay and rises by one point a year to 8, the rate the British programme found sufficient to build a real pension without triggering opt-outs. The worker may set any rate from zero to the legal maximum.

The employer does nothing but forward. No matching, no fiduciary duty, no plan document, no fees. A business with three employees fills in one form and adds one line to payroll. The state programmes have shown that this is the level of burden at which small employers comply rather than lobby.

Invested by the rule. The account is invested in the same global index portfolio the fund holds under the Index Rule of № 065, at the same cost, with a lifecycle glide toward bonds as the worker ages. No picking, no fees for advice, no menu of 40 funds. The federal Thrift Savings Plan has run on this model for federal employees since 1987, at a cost near five hundredths of one percent, with seven million participants.

Portable for life. The account follows the worker from job to job, through self-employment, and into retirement, under one number. A worker who later joins an employer with its own plan may keep contributing to the account or roll it in. There is one account per citizen, and it is never lost, orphaned, or cashed out by accident, which is what happens to a large share of small 401(k) balances today.

The Saver's Match. The federal match enacted in 2022 and beginning in 2027, up to $1,000 a year for lower earners, is paid directly into the Default Account. A worker earning $30,000 who contributes 5 percent receives the match automatically and never files a form.

Citizens, and the line. The account is for citizens, on the registry of № 001. A guest under № 003 already has a fifth of pay banked for the trip home under that proposal's terms; the two are different instruments for different members of the household, and neither is available to the other.

The numbers

The coverage. 57 million workers without a plan; if enrolment follows the British and state experience, about 80 to 85 percent stay in, or roughly 45 million new savers.

The saving. At an average of 6 percent of a $45,000 wage, about $2,700 a year per worker, or on the order of $120 billion a year in new retirement saving, invested at index returns. Over a working life, a worker who saves 8 percent from 25 to 65 at a real return of 4 percent accumulates about eight years of final salary.

The cost. To the Treasury, the Saver's Match, already enacted. To the employer, a payroll line. To the worker, a fee of at most one-tenth of one percent, against the 1 percent and more that a small 401(k) or a retail account charges, a difference that over forty years is about a quarter of the final balance.

What the states have shown. 1.2 million savers and $2.75 billion in a few years, from a standing start, with employer compliance rates above 80 percent where the state enforced the mandate and no measurable reduction in private plan formation.

The honest objections

"Workers who cannot afford to save will be enrolled and will quietly lose 5 percent of their pay." They may opt out at any moment, and the ones who most need the money do, in the state programmes, at rates of about 20 to 30 percent. The ones who stay are saving money they would otherwise not have saved, and they are receiving the federal match for it. The honest concession is that a default is a nudge, and a nudge moves people who would not have moved themselves; that is the reason it works and the reason it should be reversible with a click.

"This is the government running everyone's retirement." It is the government running the plumbing for people whose employers run nothing, with the investment fixed by a rule that permits no discretion and a cost cap that permits no fees. The Thrift Savings Plan has done this for federal employees for nearly forty years without a scandal. A worker who wants a different investment may open any account they like; the Default Account is for the half of the country that has not.

"Employers with small margins cannot take on another mandate." The mandate is to forward a deduction, which every employer already does for taxes. The state programmes were designed for exactly this objection and the compliance data show that it is not the burden employers feared.

"It will crowd out real 401(k) plans with matching." The Pew study of the state programmes found the opposite: employers exposed to the mandate were more likely to start their own plan, presumably because a plan with a match is a better recruiting tool than a default account without one. The Default Account is a floor, and floors make ceilings visible.

"The Fund's index portfolio is a public fund; mixing private accounts into it blurs the line." The accounts are the workers' own, held in their names, invested alongside the fund's holdings under the same rule and at the same cost, as the Thrift Savings Plan's funds are held alongside each other. The Fund's principal is the citizens' in common; the Default Account is each citizen's in particular. The Index Rule serves both because it is a rule, not a manager.

Sources

Pension Research Council, University of Pennsylvania, on workers without access to an employer plan; AARP Public Policy Institute, How Auto IRAs Are Helping More Workers Save for Retirement
Department for Work and Pensions (UK), Workplace pension participation and savings trends, 2012–2024; Institute for Fiscal Studies on automatic enrolment
The Pew Charitable Trusts, Status of State Auto-IRA Savings Programs (2026) and State Automated Retirement Programs Don't Crowd Out Private Plans (2024)
CalSavers Retirement Savings Board, programme statistics, treasurer.ca.gov/calsavers
Federal Retirement Thrift Investment Board, Thrift Savings Plan participation and expense ratios
SECURE 2.0 Act of 2022, § 103, the Saver's Match
Proposals № 001 (The American Dividend); № 003 (The Open Door Compact); № 013 (The Portfolio Act); № 040 (The Retirement Compact); № 065 (The Index Rule)