Welfare effects of automatic‐IRAs

Several states require employers who do not offer retirement benefits to automatically enroll their employees in individual retirement accounts (IRAs). We quantify the welfare effects of this program for individuals who follow a rule‐of‐thumb to make savings decisions. We find workers who save more than 3% would be willing to give up 0%–1.4% of lifetime consumption to avoid an IRA. We also consider a fully rational model with credit frictions, stochastic income and pre‐retirement withdrawals, and costly IRA opt‐outs. We find that being enrolled in an IRA is most likely to benefit workers who do not borrow during the life‐cycle.