Hillary Clinton and Donald Trump should commit to making it a priority of a new administration to enhance and modernize the retirement saver's tax credit, which was enacted under the Economic Growth and Tax Reconciliation Relief Act of 2001.
Increasing saver's credit would yield value for business and labor
The saver's credit, a cornerstone of the act, is a federal tax credit designed to incentivize lower-income working Americans to save for retirement through qualified retirement savings vehicles such as 401(k) and 403(b) plans, and individual retirement accounts.
Depending on adjusted gross income and filing status, individuals can claim a credit for 50%, 20% or 10% of the first $2,000 contributed annually, yielding maximum credits of $1,000, $400 or $200, respectively, to eligible savers.
According to the IRS, more than a decade after passage, a paltry 12% of eligible filers claimed the saver's credit. The most recent figures show credits totaling just over $1.2 billion were claimed on nearly 6.9 million individual income tax returns, with average credits of $215 for joint filers, $165 for heads of household, and $127 for single filers.
Since enactment of the saver's credit, American households have faced strong economic headwinds.
• Disposable income. Average disposable income stagnated as average earnings barely kept ahead of the consumer price index. Between July 2001 and June 2016, the Bureau of Labor Statistics reports earnings increased 37.8% while the CPI increased 35.8%.
• The working poor. During the past 15 years, the BLS' most recent data show a significant increase in those classified as the “working poor.” As a percentage of the total labor force, the working poor rose to 6.3% in 2014 from 4.7% in 2001.
• The rising cost of health care in retirement. Recent estimates for health-care costs in retirement signal additional bad news for individuals with little or no retirement savings. According to a 2015 Employee Benefit Research Institute study, “to have a 90% chance of covering all health-care costs in retirement, a man and woman would need about $124,000 and $140,000 respectively.”
Participation in defined contribution retirement savings plans will falter among those in greatest need. Sustained economic headwinds resulting in more working poor with less disposable income will equate to lower savings rates among a growing number of non-highly compensated employees. This outlook impacts everyone associated with the long-term success and survival of these plans, and could potentially add greater stress to entitlements.
Specifically, the two presidential candidates should commit to doubling the maximum saver's credit by 2018, so lower-income workers saving in qualified retirement accounts could claim on the first $4,000 contributed during the year maximum credits of $2,000, $800 or $400 to eligible savers. The saver's credit limit should be indexed so contribution maximums adjust to wage and CPI increases.
This proposal is bipartisan and aligned with programs advocated by both presidential candidates. Ms. Clinton and Mr. Trump each have expressed concern for those on the lower rung of the economic ladder and could tie this proposal to their professed campaign promises to help the working poor.
Enhancing the saver's credit is integral to improving our nation's retirement readiness.
For lower-income workers participating in qualified plans, this proposal could boost wealth accumulation, encourage better savings habits, and make health care in retirement more affordable.
For employers offering 401(k) and 403(b) plans, especially those in the retail, food/hospitality, and health-care industries, this would be welcome news. (While providing tens of millions of positions for entry-level and low-income workers, many employers struggle to maintain adequate participation in their plans because of low savings rates by those same groups of employees.)
For our nation, it could reinforce a culture of financial wellness and retirement readiness and reward individual responsibility. It could also reduce the need for drawing on the financially burdened entitlement programs by millions of future participants and reduce the need for state governments to create a hodgepodge of mandated payroll-deduction programs.
Inside Washington, proposals like this one require Joint Committee on Taxation and possibly Congressional Budget Office scoring, or revenue/cost estimates of legislative proposals. We believe the projected cost would be affordable and worthwhile.
Modernizing the saver's credit is a simple concept that both candidates should embrace. The idea would garner bipartisan support if policymakers recognize — as they did in 2001 — that it is a wise investment in our future.
Tony Verheyen is executive director of the Plan Sponsor Council of America, Chicago.