CHANGES TO SAVER’S CREDIT WOULD SUBSTANTIALLY IMPROVE RETIREMENT SAVINGS FOR LOW AND MODERATE INCOME WORKERS
Lack of Retirement Plans is Key Factor Obstructing Millions of Americans from Reaping the Benefit of Tax Credit
Webinar on Thursday, October 12th at 11:00 AM ET
WASHINGTON, D.C., September 26, 2017 – A new report says that the underutilized Saver’s Credit can be modified so that it encourages low and moderate income taxpayers to save for retirement. A series of legislative fixes – some small and others more substantial – would make the program less complex and more likely to achieve its intended goal of providing greater incentives and increase retirement savings for those Americans who need it the most.
Possible structural and administrative changes to the program are contained in a new Issue Brief, Improving the Saver’s Credit for Low and Moderate Income Workers. The study is co-authored by Jennifer Erin Brown, manager of research with the National Institute on Retirement Security and David C. John, senior strategic policy advisor with AARP.
“Americans are deeply worried about how they are going to pay the bills when they are no longer able to work. The typical working family should be anxious because they have not been able to save anything for retirement,” says study co-author Jennifer Brown. “It is imperative that policymakers look at ways to make it easier for Americans to save at a time when the nation faces a massive retirement savings shortfall. Modifying the Saver’s Credit would be a step in the right direction because it would eliminate some unnecessary hoops and hurdles for middle and low income workers to save for retirement,” Brown said.
“Reforming the Saver’s Credit would help low and moderate income workers supplement Social Security benefits by increasing their retirement savings,” David C. John said. “Providing a benefit to those who save encourages people to build their own retirement security, and it reduces their need for other taxpayer financed services. The relatively small cost of an improved Saver’s Credit could make a big difference in the future.”
In 2001, Congress created the Saver’s Credit to help low and moderate income workers who contribute to a retirement plan. From 2006 – 2014, only about three to five percent of eligible tax filers claimed the Saver’s Credit. The credit is underutilized because it is unnecessarily complex to claim, not widely known, and because most low-and moderate-income taxpayers do not have access to a retirement savings plan with their employer.
Potential options for strengthening the Saver’s Credit include:
- Change the tax credit to a savings match. Eligible savers would receive a match equal to 50 percent of the amount of retirement contributions during a tax year. The match would be claimed through tax returns and would go directly into a retirement savings account. The match would remain in the account until the saver reaches retirement age, resulting in a higher amount of retirement savings because investment earnings on the match would be added to the account.
- Simplify claiming the Saver’s Credit. Allow eligible taxpayers to claim the Saver’s Credit on the Internal Revenue Service (IRS) 1040-EZ tax form rather than just the 1040 “long-form,” similar to other popular tax credits.
- Increase the percentage of workers eligible for the credit. By increasing the income limits, more people would be eligible for the credit.
- Replace “cliff” income limits. Replace the three levels of credit based on exact-dollar income limits with one level that is phased out gradually.
- Increase awareness of the Saver’s Credit. Include information about the Savers Credit in information to participants in new state-sponsored retirement savings plans, including their year-end statements.
- Create state tax benefits. Encourage states to create additional tax benefits that would supplement and link to the federal Saver’s Credit similar to 529 college savings plans.
The National Institute on Retirement Security is a non-profit, non-partisan organization established to contribute to informed policymaking by fostering a deep understanding of the value of retirement security to employees, employers, and the economy as a whole. Located in Washington, D.C., NIRS’ diverse membership includes financial services firms, employee benefit plans, trade associations, and other retirement service providers. More information is available here.
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