This article also appeared in Washington Monthly’s Republic 3.0 blog on February 9, 2016.
Last month, the White House announced a major new push to increase access to workplace retirement accounts and make them more portable. The package of policy ideas, which will be featured in the President’s budget being released today, included the expanded use of multiple employer plans (an idea discussed at Aspen FSP’s most recent Summit), pilot funding to test innovative portable benefit designs (in part to address the growing contingent workforce), and a new requirement on employers to open their retirement plans to long-term, part-time workers.
These are in addition to other retirement policies the administration has recently unveiled, like a proposal to better align the interests of financial advisors with those of their clients; regulations from the Department of Labor paving the way for state retirement programs; and myRA, a new effort launched last year that establishes a no-fee, no-risk retirement starter account administered by the US Department of Treasury.
One item missing from this otherwise impressive list of administration priorities is the Saver’s Credit, which is long overdue for improvement. It is the one and only federal retirement tax benefit that combats wealth inequality –by offering low- and moderate-income Americans a tax credit, rather than a deduction, for retirement account contributions.
While the White House is right to be focused on expanding coverage and portability, the adequacy of savings is also paramount. Gaining access to a retirement plan through work is an essential first step, but it is much less effective if it is not paired with matching funds from employers or public sources. Current research indicates that, even among the few low-income Americans who are nearing retirement with a retirement account in hand, the median balance of those accounts is just $13,000. Thankfully, Social Security will provide most of these workers a basic level of monthly income in retirement, but, without supplemental personal savings, those benefits are often too meager to maintain retirees’ standard of living.
As Aspen FSP argued in a 2012 issue brief, a government matching contribution deposited directly into savers’ retirement accounts could be the missing piece of this puzzle, boosting retirement account balances with both new government dollars and an increase in individuals’ own retirement contributions. The current Saver’s Credit falls short of this potential for a number of reasons, chief among them its lack of refundability, which eliminates the credit’s value for the more than 40% of Americans who owe no federal income tax. Moreover, instead of landing directly in the saver’s retirement account, the current credit simply flows to the saver in the form of a lower tax bill, encouraging consumption rather than asset building. The credit is also difficult to claim, requiring a complicated calculation and the filing of extra paperwork. The Obama Administration recognizes these shortcomings and has proposed improvements in the past, but Congress has failed to act.
Enter Senator Wyden (D – Oregon), ranking member of the powerful Senate Finance Committee, who introduced a new Saver’s Credit bill last week. Among other things, it would make the credit refundable, deposit the money directly into taxpayers’ savings accounts, and simplify the credit schedule. By fixing many of the problems with the current Saver’s Credit, this legislation would help low- and moderate-income families build up adequate retirement account balances, providing much-needed financial security in their golden years. Senator Wyden’s approach to reforming the Saver’s Credit would go a long way toward addressing the needs of the millions of Americans worried about their retirement security.
Reforming the Saver’s Credit would also enhance nascent state retirement programs, which will be the subject of a future post. Stay tuned.
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