The gig economy, in which people make money on digital apps and work on their own schedules, is also sometimes referred to as the “new economy.”
But not everyone wants to give up the trappings of the “old,” especially when it comes to saving for retirement.
In a Senate hearing in early February on “Exploring the ‘Gig Economy’ and the Future of Retirement Savings,” economists and business leaders proposed ways to fix the alarming reality that many people in this expanding labor market are not preparing for old age. Just 16 percent of independent workers have a retirement savings plan, compared to more than half of employees who have access to an employer-sponsored one.
There is a near-perfect storm of reasons for why retirement saving is difficult for independent contractors, said Camille Olson, a lawyer and partner at the law firm Seyfarth Shaw. (See chart below.)
Chief among them: Companies generally don’t offer retirement savings accounts to non-employees.
“If you’re an employee and you want to save in a 401(k), who does it?” said Olson, who spoke at the Senate hearing on behalf of the U.S. Chamber of Commerce. “Your employer does it, and that’s why so many people contribute to it. Gig economy workers don’t have that option.”
Of course, people who are self-employed have other savings options including SEP or SIMPLE IRAs, or a Solo 401(k). But workers may procrastinate on setting up such accounts.
“With someone in a contingent worker’s role, you have to make all of these decisions yourself,” said David John, co-director of The Retirement Security Project at Brookings Institution and an advisor with the AARP Public Policy Institute. “We know that when people don’t have choices they’re completely comfortable with and understand, they tend to put off that decision.”
Other hurdles independent contractor’s face in saving for their later decades include income that is often unsteady, and a lower average annual salary than their employee counterparts (although gig workers put in fewer hours a week on average).
Redd Horrocks, a voice-over artist who sells her recordings on Fiverr, an online marketplace, left the corporate world — and her ability to grow her 401(k) account with her employer — after three years. She contributes to an IRA now, but finds it hard to plan around her fluctuating income.
“When you’re a freelancer, it’s based on other people’s choices,” said Horrocks, 34. “You can’t say I’m going to work 40 hours a week; it’s, how many people are going to order from me? It can really, really differ.”
“This is going to be a growth part of the debate, both in terms of public policy and innovation. “
Horrocks didn’t have to think as much about retirement when the company she worked for automatically deducted payments from her checks.
“When you have to physically move the money yourself, it’s harder,” she said. “There’s a mental thing where it’s like, ‘That’s going away for the next 30 years’.”
At the Senate hearing, Olson argued that the laws should be amended to allow companies to offer workers retirement benefits, regardless of whether they’re an independent contractor or employee. The current laws draw a hard line between the two, she said, and one of the major tests to see if someone is an employee is whether they receive benefits.
“Companies are saying “I can’t risk that. If I help them on the retirement benefits side, it’s going to come down as a ton of bricks that they’re treated as employees’,” she said.
Another retirement savings solution on the table for gig economy workers are open “Multiple Employer” plans, in which a single 401(k) plan is sponsored by multiple employers. (Picture a worker who drives for three different ride-sharing companies, and has a percentage of his or her earnings subtracted from each one and then funneled into a single retirement account).
These plans could be sponsored by states as well as a cohort of gig economy companies, said John of the Brookings Institution.
In addition, some of the states that are working on state-sponsored retirement plans, like Oregon, plan to offer the accounts to independent contractors in the near future, he said.
Digital apps are also moving into the void. Lyft offers a service to its drivers called Honest Dollar, and Uber offers a retirement savings option to drivers in some cities through Betterment. Both apps are voluntary, investing platforms.
In Casper, Wyoming, certified public accountant Vikki Nunn is working on a solution for her clients, many of whom have lost their jobs as the coal industry declines there. Those clients are often brought back by the companies they worked for as consultants.
“If I have to go out and do the research and speak to someone, it’s a lot more pressure. “
One male client who was in charge of safety at a coal mine was laid off in his 50s, she described. He was no longer able to contribute with his employer to his 401(k).
“He was losing out on some of his highest-earning years,” Nunn said.
Nunn’s experiences moved her to manage people’s solo 401(k)s — a 401(k) for sole proprietors where the saver can make contributions as both the employer and employee. While many larger companies offer these accounts, she said, they can often be too complicated for people to figure out without one-on-one help.
John said he expects these solutions to gain steam, as more people join the gig economy.
“It wasn’t more than a few years ago that this was an unrecognized problem,” he said. “This is going to be a growth part of the debate, both in terms of public policy and innovation.”