Issue Brief: Improving the Saver’s Credit for Low and Moderate Income Workers

A series of legislative fixes – some small and others more substantial – would make the Saver’s Credit less complex and more likely to achieve its intended goal of providing greater incentives and increase retirement savings.

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.

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:

1. 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.
2. 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.
3. Increase the percentage of workers eligible for the credit. By increasing the income limits, more people would be eligible for the credit.
4. Replace “cliff” income limits. Replace the three levels of credit based on exact-dollar income limits with one level that is phased out gradually.
5. 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.
6. 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.