The voices of Tax Policy Center's researchers and staff
The Bush Administration's 2009 budget, released last week, contained a proposal to reform the tax incentives aimed at encouraging additional retirement saving. The Administration's plan calls for the consolidation of the various types of Individual Retirement Accounts (IRAs) into a single Retirement Savings Account (RSA). RSAs would have the characteristics of a Roth IRA—that is, once contributions are made to the account, both the account balance and eventual distributions would never be taxed. There would be no income restrictions on participation, and the annual contribution limit—initially set at $5,000 per person—would be indexed to inflation. TPC researchers commented on the RSA proposal and found it to be regressive, expensive, and a poor incentive for additional saving. While the Administration deserves credit for trying to improve incentives for retirement saving, the RSA proposal is a poor prescription for our nation's low-saving disease. There is a better way to encourage Americans to save for retirement: an expansion of the Saver's Credit.
The Saver's Credit, available to low and middle-income households, provides taxpayers with a match (at a rate of 10, 20, or 50 percent, dependent on income) for contributions to retirement savings accounts like 401(k)s and IRAs. The match comes in the form of a non-refundable credit, making it attractive to taxpayers in the lower marginal tax rates, but not to those households without income tax liability. In its current form, the Saver's Credit is a worthwhile, but imperfect, incentive for new retirement saving, and can be improved.
First, the saver's credit should be made refundable so that low-income households with little or no income tax liability can benefit from the incentive to save more—TPC researchers have shown that low-income households increase their saving when provided with the proper incentives. Second, the Saver's Credit phase-out limits should be indexed to inflation. In its current form, the phase-out ranges remain constant indefinitely, meaning that the value of the credit erodes with time. Third, the Saver's Credit should be expanded so that more taxpayers can qualify for a matching credit, and those that do qualify should receive the highest match rate of 50 percent; better incentives to save mean more saving.
Making the Saver's Credit refundable, indexing the phase-out ranges, and extending the Saver's Credit so that all households with AGI under $70,000 can receive a 50 percent match (up to $1,000) would cost about $80 billion over five years, equal to about 10 percent of the expenditure for all retirement saving incentives in the tax code. While the cost isn't exactly cheap, this reform would achieve what the Administration's proposal doesn't: higher saving.
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