A report published by the Brookings Institution, “Retirement Plans for Contingent Workers: Issues and Options,” suggests Americans who have embraced alternative work arrangements are still substantially underserved by traditional financial services firms.
The white paper was penned by William Gale, Sarah Holmes, and David John, and it opens by documenting the rise of the so-called gig economy, “which allows people to hail cabs through Uber, find household help through TaskRabbit, and book lodging through Airbnb, among other applications.” According to the analysis, the latest iteration of gig work is notable because many of the opportunities for workers involve personal services conducted outside of a traditional workplace and with a substantial degree of freedom over hours and schedules.
The increased visibility and flexibility of gig work in everyday life has “brought contingent workers into the spotlight,” the researchers suggest. Yet, it should also be remembered that a broad class of “contingent workers” has always constituted a significant part of the U.S. labor force—one that has not been a big focus for benefits providers.
“Similar issues have been present for the last several decades at least,” the authors suggest, “as employers have substituted independent contractors or firms employing them for traditional employees. Few of these workers receive health or retirement benefits, and as a group, they are often overlooked in policy debates.”
More than anything, the group of contingent workers is diverse, and not all of them struggle with financial stability. The gig economy includes people of all income levels and fields of occupation.
“The sector includes full-time workers as well as part-time or seasonal workers,” the research observes. “It includes white-collar consultants and independent contractors, some of whom are highly paid, as well as blue-collar workers such as printers, security guards, maintenance professionals and factory workers, a significant number of whom were once regular employees. Some contingent workers, including many in the gig economy, also work in traditional jobs and use contingent work to supplement their other earnings. Some people do contingent work because they cannot find traditional employment, while others choose it because they prefer the flexibility of the hours or other aspects of the job.”
NEXT: Challenges faced by continent workers
Using the most widely accepted definition, there were nearly 11 million contingent workers in 2010, according to the Brookings analysis, representing about 8% of the employed labor force. Many in this group are successful financially, yet it also has to be observed that on average, gig workers have a tough time saving sufficiently for retirement.
“On average, these workers earned almost 13% less annually (even controlling for the effects of working part-time or seasonally) and were two-thirds less likely to have access to a work-provided retirement plan than their traditionally-employed counterparts,” the report finds. “More generally, scattered evidence … suggests that retirement saving is low among these workers.”
According to the white paper, the challenges facing contingent workers can be lumped under two main headings.
“First, conventional retirement saving mechanisms are usually not available to this segment of the workforce unless they are also working as a traditional employee at another job. Thus, they tend to miss out on provisions that encourage retirement wealth accumulation, such as payroll deductions, automatic enrollment, and employer matching contributions,” the report explains. “Of course, anyone with earnings can contribute to Individual Retirement Accounts (IRAs), but only a very small percentage of those without an employer plan do so on a regular basis.”
Second, the diversity of contingent workers means that it is very unlikely that any single approach will be suitable for the entire group. Full and part-time workers are likely to have differing needs, for example, especially if the part-timers are working more than one job.
These challenges suggest that incremental and targeted solutions designed to improve access to and increase participation in existing retirement savings vehicles are the most promising path forward, at least as it pertains to the short-term. The paper does argue for a more comprehensive solution that would “decouple retirement saving plans from the employer, so that individuals would have retirement accounts—much like their Social Security accounts—that follow them across employers and across various work arrangements,” but it acknowledges this type of reform is unlikely for the foreseeable political future.
NEXT: Doing better for contingent workers
Digging deeper into the retirement savings picture, the Brookings analysis shows contingent workers earned a median personal annual income of just under $15,000 as of 2012, compared to the $35,000 earned by standard workers.
“Nationally, 75% of traditional employees with incomes under $14,000 annually and 62% of those with incomes between $14,000 and $25,000 are not offered a payroll deduction retirement savings or pension plan at work,” the analysis shows. “We believe that the percentage for contingent workers without such a benefit is likely to be higher. While certain low-earning contingent workers share finances with a traditionally employed spouse or partner, many others are supporting themselves on modest and/or irregular pay. For example, just under half of gig workers are married.”
According to the Brookings report, the good news is that, as more researchers focus on this question and with continuing rapid advances in technology, it is reasonable to anticipate that additional solutions will be developed.
“For example, Harris and Krueger’s (2015) proposal to create a new category of ‘independent workers’ could pave the way towards improved retirement security for certain contingent workers,” the paper argues. “Similarly, Choitz and Conway (2015) offer a series of policies that include using state-sponsored retirement savings plans to improve contingent and lower income workers’ retirement outcomes. In any case, as the number of contingent workers grows and the average American lifespan extends, it is essential to begin to address these issues quickly.”
Other near-term solutions discussed include modest changes to the income tax system. “The most direct way would be to modify the savers credit, which helps low and moderate-income workers offset retirement savings to make it both refundable and deposited directly into the taxpayer’s retirement account. As described in Gale, Gruber, and Orszag (2006) and proposed in both legislation and early Obama Administration budgets, the credit could also be reimagined as a government match; instead of receiving the credit as part of their refund where it is likely to be spent, individuals would have their contributions matched (up to a certain threshold) directly into their retirement account.”
The rest of their refund would be treated just as it is currently, the analysis suggests, and thus the restructured savers credit would “encourage retirement saving and help people who qualify for it to build their retirement balances much faster than they could otherwise.”
The full white paper, including other specific recommendations for better serving gig workers, is available for download here.