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Last month, a weekend of basement cleaning uncovered decades-old records of my first tax-advantaged individual retirement account (IRA) and three employer-sponsored retirement accounts I opened in my early twenties. My dad helped me open that first IRA with earnings from my high school job as a babysitter. He made saving easy for 16-year-old me – and helped me build retirement-saving habits as a young adult worker.But today, saving for retirement is hard for many adults with low-to-moderate incomes and harder still for many Black and Hispanic workers. What policies can make saving for retirement easier for everyone?
The House Ways & Means Committee included two ideas in its $3.5 trillion budget reconciliation bill that could help. One would require most employers to automatically enroll their workers in retirement savings plans. The other would make the current Saver's Credit partially refundable so those without any income tax liability would become eligible.
Some context first. The median age of US workers is about 42. Median household income is $67,520. The median retirement account balance in the US is $65,000. The median retirement account balance of White Americans ($80,000) is more than twice that of Black Americans ($35,000) and larger than that of Hispanic Americans ($31,000) and other people of color ($47,000). And in March 2020, only 52 percent of private industry workers had access to defined contribution retirement plans.
Low- and middle-income workers can benefit from an improved Saver’s Credit.
The Saver’s Credit, first enacted in 2001, created a government match of between 10 percent and 50 percent (depending on income) for retirement savings contributions of low- and middle-income workers. Contributions to 401(k) plans, other employer-sponsored plans, or IRAs are eligible.
Workers earning less than $33,000 ($66,000 for married couples filing jointly) can claim a tax credit between $1,000 and $2,000, depending on income and filling status. However, the current credit is not refundable. That means those with too little income to owe federal income taxes get no benefit.
The credit is also underused. Experts estimate only 5 percent of eligible filers claim it. And a recent survey found that only 35 percent of workers with household income under $50,000 even are aware of the credit.
The Ways & Means bill attempts to correct some the credit's design flaws. It would make up to $500 of the Saver’s Credit refundable. And the money would be deposited directly into the filer’s retirement account, rather than being sent to workers, who could use it for other purposes.
More low- and middle-income workers need access to employer-based retirement plans.
The other major change would require most employers that don’t offer retirement plans to start offering them in 2023 and to auto-enroll their workers. While workers could opt-out, decades of research suggests relatively few will.
With the exception of governments and churches, employers with at least five workers would have to automatically enroll new hires or pay an excise tax of $10 per day per worker, up to $500,000 annually. Employers would automatically deposit 6 percent of a new employee’s wages into a tax-advantaged retirement plan, and that contribution would over time grow to 10 percent. The model is based on successful state programs in California, Illinois, and Oregon.
Together, the expanded Saver’s Credit and the auto-enrollment provisions would reduce federal revenues by about $47 billion over 10 years. It would be paid for by tax provisions including curbs on the ability of the very wealthy to use existing retirement savings vehicles as tax shelters.
A better Saver’s Credit and more access to retirement plans? A good start.
Even if Congress doesn’t pass these measures, it could at least help more workers learn about and claim the current Saver’s Credit.
The Ways & Means bill is only a start. The Brookings Institution’s David John and Mark Iwry and my TPC colleague Bill Gale propose a variety of additional ways to improve the current retirement savings system for low- and middle-income workers.
They’d create a national dashboard where savers could find and consolidate lost or forgotten accounts—a common problem for workers who move from job-to-job. They also would make employment-based retirement accounts such as 401(k)s portable, so workers could consolidate them and take them from job-to-job. Personally, I love this idea—especially after finding that file box in my basement.
Not everybody has a dad like mine. Policymakers should make saving for retirement easier for everybody. I hope they will.
Posts and comments are solely the opinion of the author and not that of the Tax Policy Center, Urban Institute, or Brookings Institution.