Just a generation ago, Americans rested easy knowing that if they worked hard and followed the rules they could count on a secure retirement. Today thoughts of retirement no longer center on new hobbies and extra time with grandchildren. Instead, long term financial planning causes great stress and angst for most American workers.

The days of working 40 years at one company and retiring with a pension and a gold watch are over. Workers are now more likely to have multiple jobs over the course of a working lifetime and companies have moved away from defined benefit plans. Coupled with decreased average wages and a widening income gap, Americans find themselves more vulnerable to financial hardships during retirement.

The statistics are startling. Only 55 percent of full-time American workers hold a job with a retirement savings plan. Of those who are offered a savings plan, one-quarter turn them down. According to U.S. Bureau of Economic Analysis, America has witnessed a declining savings rate since 2000, with a negative savings rate for 2005 - the first negative rate since the Great Depression.

Saving for retirement is especially difficult for low- and middle-income families that have little discretional income. And government incentives to promote savings, most often in the form of tax credits, are typically directed to higher income families - those that are least likely need an extra push to prepare for the future.

In order to address this problem, Congress enacted the Saver’s Credit in 2001 as part of the Bush administration’s tax cut legislation. Middle- and low-income families, those who make less than $50,000 per year, can receive a nonrefundable tax credit if they make voluntary contributions to retirement savings accounts such as a 401 (k), IRA or other employer-sponsored plans.

Credits apply to retirement savings of up to $2,000 per year and their rates decline as household income rises.

Even though the Saver’s Credit is targeted to middle- and low-income families, very few people who fall in the required income range actually receive any benefits because the credit is non refundable. Therefore, people with no tax liability - meaning they don’t earn enough to pay federal income taxes - cannot take advantage of this savings incentive.

According to an Urban Institute-Brookings Institution Tax Policy Center report, of the American’s that make $50,000 or less per year, only 14 percent could receive any benefits from contributing to a retirement account. Alternatively, 86 percent who qualify get nothing. Furthermore, the report notes that only 0.1 percent of filers meet the income criteria to receive the full credit if they contribute the $2,000 maximum amount to a retirement account.

In order better increase savings among low- and moderate-income families, the Saver’s Credit should be updated. Specifically the next president and Congress should:

• Make the credit refundable. A refundable Saver’s Credit would remove the income floor that the nonrefundable credit sets. Families who make less than $50,000 per year, contribute to a savings account, but make too little to pay income taxes should not be penalized.
• Create a 50 percent match for all incomes below $50,000. The progressive structure of the current Saver’s Credit (matching rates fall as incomes rise) is opposite from most other tax incentives that subsidize savings. In order to simplify the credit and create greater fairness, all families that make less than $50,000 should receive a 50 percent matching contribution on all retirement savings up to $2,000 per year.
• Make the Saver’s Credit permanent. With the above modifications, the credit can create a new population of savers. Therefore the Saver’s Credit should be made permanent so that it is not used as a political bargaining chip every time it is up for renewal.

As it stands now, the Saver’s Credit is no more than a benefit in name only. With these changes, the credit will actually benefit the targeted population and provide greater incentives for families to save for retirement. A modified Saver’s Credit will help extend the American Dream to everyone, regardless of income.

This entry was posted on 11.07.2007 at 4:10 pm and is filed under Uncategorized, Economic Opportunity, Helping Families, Ending Poverty. You can follow any responses to this entry through the RSS 2.0 feed. You can skip to the end and leave a response.