This article first appeared in the Governing Institute’s VOICES blog on February 26, 2016.
The country’s retirement crisis, caused in large part by a stubbornly high number of Americans without access to a savings plan at work, is getting worse. The percentage of private-sector workers whose employers sponsor a retirement plan decreased from 59 percent in 2000 to 51 percent in 2013. Congress has been unable to tackle the challenge. Thankfully, however, state governments have not been similarly paralyzed, and many of them are eagerly stepping into the void left by federal inaction.
California, Connecticut, Illinois, and Oregon have led the way by devising state programs that, when launched, will automatically enroll workers without access to an employer-based plan in an Individual Retirement Account (IRA) managed by the state. Other states are working on similar plans.
These programs will help millions of low- and moderate-income Americans take a major step toward greater retirement security. In fact, for many of these uncovered workers — who typically work for small businesses at below-average wages — these programs will offer their first chance to open a retirement account at work.
Recognizing this, state program administrators have recently been coalescing around the idea of higher default contribution rates. The thinking is twofold: Not only would higher rates mean more retirement security for families but also lower start-up and administrative costs for the programs themselves, since having more total assets under management would give states more bargaining power when contracting with third-party investment managers and record-keepers.The next challenge, however, will be making sure that workers’ contributions are enough to produce sufficient retirement income. IRAs don’t accept employer contributions and have low annual contribution caps. Moreover, the customary default contribution rate for employer-based plans is just 3 percent, which is likely too low to produce an ample retirement nest egg.
For those same reasons, state programs would benefit from a revamped Saver’s Credit, a federal tax credit targeted at low- and moderate-income Americans that matches a portion of their contributions to retirement savings accounts. Under the current credit, low- and moderate-income savers receive a credit of between 10 percent and 50 percent of their retirement-account contributions up to $2,000 ($4,000 if married filing jointly). Because the credit targets the same families most likely to be enrolled in the new state retirement programs — and least likely to receive any employer match to their retirement accounts — it could provide a further boost to families’ retirement security as well as to state programs’ long-term financial health.
However, as the Aspen Institute’s Financial Security Program has noted previously, the Saver’s Credit falls short of its potential. First, it isn’t “refundable,” so the nearly half of American households that owe no federal income tax get no benefit from the credit. That means that the vast majority of low- and moderate-income Americans have no public incentive to save, a marked contrast to the billions of dollars of tax subsidies funneled to high-income savers.
Second, instead of being delivered directly into the saver’s retirement account, the current credit flows to the saver in the form of a lower tax bill, which encourages consumption rather than asset-building. Some federal lawmakers have called for making the credit refundable and depositing the money directly into taxpayers’ savings accounts, which would encourage higher contributions from individuals and supplement those contributions with an expanded tax benefit. The end result, along with higher default contribution rates for state plans, would be significantly more retirement money for working Americans.
Steps like these aren’t going to resolve the nation’s retirement crisis all by themselves, of course. But by helping millions more families get on track for a financially secure retirement they could go a long way toward turning things around.
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