Why Gig Workers Face Retirement Challenges

The gig economy is hot. But when it comes to retirement, perhaps not.

The number of workers employed in non-full-time alternative work arrangements is rising rapidly, but these "gig" workers face daunting challenges preparing for retirement.

The big problem stems from work outside the structure of benefits and automated contributions that full-time work provides. Social Security contributions are not automatic for gig workers, and many under-report their income, shortchanging their future benefits. Retirement saving plans are not as widely available, and even when retirement plans are available, take-up rates are lower, according to research by the Pew Charitable Trusts.

Gig workers are hamstrung by lower earnings and less predictable income streams. A survey last year by the Harris Poll for Prudential found that they had average earnings roughly half of full-time workers ($36,500, compared with $62,700). Just 16% said they had access to an employer sponsored retirement plan; 40% had health insurance, and 5% had short-term disability insurance.

"I'm convinced this is going to be a crucial challenge for retirement security for younger people," says David C. John, a senior strategic policy advisor at the AARP Public Policy Institute. "And it's not a single challenge, because the overall contingent workforce is varied." Indeed, research by John and colleagues notes that some gig workers put in hours equivalent to full-time jobs, but the sector also includes part-time and seasonal workers. Some are white collar consultants or independent contractors, and others are blue-collar workers.

How big is the gig economy phenomenon? One recent study found that it accounted for 15.8% of workers in 2015, up from 10.1% in 2005. Most experts think the trend will only accelerate in the years ahead.

Gig jobs do come with some important benefits: flexible hours and the ability to supplement income, to name just two. For older workers, part-time jobs can help add to retirement security by enabling delayed Social Security claims and helping to build savings.

But if gig work is here to stay as a key part of the workforce, better solutions will be needed to help these workers prepare for retirement.

Social Security Social Security is our only universal, mandatory retirement program. The 12.4% Social Security payroll tax is split evenly between employers and employees, up to the 2018 taxable maximum of $128,400.

Self-employed workers are responsible for the full 12.4% (plus 2.9% for Medicare). Independent contractors deduct half of their Social Security and Medicare taxes, but upfront it looks to taxpayers very much like a very stiff 15.4% flat payroll tax. That encourages many gig workers to look for ways to minimize the amount of income subject to the tax, says Elliot Schreur, a research associate at the National Academy of Social Insurance who has studied retirement and disability protections for independent contractors.

Schreur, citing research by the U.S. Government Accountability Office, concludes that two-thirds of sole proprietors under-report their income.

"Facing a choice of increasing take-home pay now or increasing retirement protection at a far off point in the future, many workers choose the first option, even when that may not be totally optimal from a full life cycle perspective," Schreur says.

"Companies using independent contractors effectively shift some of these costs to workers," he adds.

Schreur thinks the problem could be addressed by making contributions more automatic by either allowing or requiring employers to withhold Social Security for independent contractors, as they do for employees. Likewise, he would like to see a lower cost-burden by letting/requiring employers to make contributions for independent workers.

Retirement Saving Half of American workers don't have access to workplace retirement saving plans, and the share of covered contingent workers is smaller--just 16% of independent contractors have access to employer-sponsored retirement plans, according to Prudential's research.

Pew's research found that young people, Latinos, and African-Americans are hit hardest by the trend. These workers tend to be employed in "lower-hour" industries where part-time work is more prevalent, including retail trade, arts, entertainment, recreation, hospitality and food service. And they are far less likely to have a retirement plan or other benefits, such as health insurance and paid time off.

That means it's important for gig workers to take the wheel and drive their own planning.

"It's very important to automate your tax withholding and retirement account contributions from the very start, and to get some advice from an accountant," says Kerry Hannon, a leading authority on career transitions, personal finance and retirement. Hannon, who has worked independently for years, says she funds an IRA monthly. "But you can also just sweep funds into a money market fund and make your annual contribution at tax time."

AARP's David John thinks fintech companies may have some useful answers that can help gig workers with automation. Some offer automatic deductions into retirement accounts. Lyft drivers can make IRA contributions through Honest Dollar, and Uber has a similar arrangement with Betterment.

Another company, Digit, offers a smartphone app that analyzes the user's bank account, detecting when there is money not needed for immediate expenses and automatically sweeping funds into savings accounts.

John also thinks that state-sponsored IRA programs now proliferating around the country also could help improve coverage, if they expand eligibility to part-time contingent workers. These plans have come under attack by the Trump administration, but states seem undeterred--New York Gov. Andrew Cuomo recently signed legislation for an IRA program that is expected to cover 3.5 million workers eventually. That brings the total number of states that have started their own plans to 10.

And, John thinks Congress should allow formation of Multiple Employer Plans, which are a type of group 401(k) plan formed by groups of employers. They can offer lower administrative costs and a simpler regulatory structure than a 401(k), which would make it easier for companies to offer them to independent workers as well as traditional employees. Currently, such plans can be offered only through state governments, but Congress could amend current law to permit private providers to offer them.

Employer Facilitated Accounts John's more sweeping proposal would be to restructure retirement accounts so that they follow workers from job to job. John calls these "employer-facilitated" accounts, in contrast with the current system of employer-sponsored accounts. In this model, employers would be required to give workers the ability to make payroll deduction contributions to portable accounts. This model would include full-time and gig workers.

"It's not an impossible dream, but this is a challenge that is going to need serious attention sooner rather than later," he says.

Morningstar columnist Mark Miller is a nationally recognized expert on trends in retirement and aging. He also contributes to Reuters, WealthManagement.com, and The New York Times. His book, Jolt: Stories of Trauma and Transformation, will be published in February by Post Hill Press. The views expressed in this article do not necessarily reflect the views of Morningstar.com.