Summer 2008

Saver's Credit Aids Limited- and Moderate-Income Workers Saving for Retirement

Submitted by: ICMA-RC

Expanding the program, raising income ceilings could boost savings further

The Saver's Credit, promoted as an incentive to increase retirement savings among low- and moderate-income workers in the Economic Growth and Tax Relief Reconciliation Act of 2001, was made permanent in the Pension Protection Act of 2006.

Here's how it works. Depending on income and tax filing status, workers can reduce their taxes up to $1,000 as a reward for contributing at least $2,000 annually to an IRA, 401(k), 457 and other tax-advantaged retirement plans. Married couples with incomes of up to $52,000 in 2007 are eligible for the tax credit. For heads of household, the income limit is set at $39,000; married individuals and singles with incomes of up to $26,000 also are eligible for the credit. There are additional qualifications related to adjusted gross income (AGI) levels, and to keep pace with inflation, income limits are adjusted annually.

In the six years since it was first available for workers, the Saver's Credit has grown in use, though its impact on retirement savings for low- and moderate-income workers has been muted by its limitations. In 2005, the latest year for which figures are available from the Internal Revenue Service, nearly 5.3 million tax returns were filed, with the average credit for joint filers of $216. Single filers received an average credit of $140 and heads of households got $149. In all, credits totaled more than $900 million, less than 10 percent of the total tax incentives aimed at retirement savings of almost $150 billion.

Expanding coverage

Bills aimed at increasing the numbers of those who benefit from the Saver's Credit were introduced late last year in both the House and the Senate. One proposal would make the Saver's Credit "refundable." Another would expand the Saver's Credit to college tuition savings plans through contributions to Coverdell and 529 education plans. Workers who contributed to these plans would receive a tax credit for up to 50 percent of their contribution, or up to $1,000.

Making the Saver's Credit "refundable" could raise participation levels in this group and broaden its benefits to the very neediest workers. Currently, only workers who earn enough to owe income taxes at the end of the year are eligible for the credit. However, making the Saver's Credit available - refundable - to workers in this group who make contributions to a qualified retirement plan could significantly boost participation.

Brookings Institution researchers found that making the credit refundable would put an extra $2 billion to $3 billion into retirement savings for limited-income workers (Improving the Saver's Credit, July 2004). Typically, the credit would be deposited directly into a qualified retirement savings plan, a further incentive to save.

Raising income limits significantly would also add billions to moderate-income workers' retirement savings. According to the Tax Policy Center, each $10,000 rise in the income limit for married couples would add $3 billion to $5 billion annually to retirement savings. While these sums still fall far short of the $150 billion in tax incentives that were given in 2006, they are aimed squarely at a segment of Americans most in need of a reliable retirement savings plan. At a time when the first of millions of baby boomers are stepping into retirement, planning for the least prepared of them becomes a critical task.

Overcoming obstacles

For these measures to become law, they would have to be included in a major tax bill. In an election year, chances for the introduction of such a bill are less likely. Changes such as these in the Saver's Credit would result in the loss of billions in tax revenues, and that, too, would be a major obstacle to passage.

But there are steps that can be taken to improve their chances. First, for any measure with such a significant impact on tax revenues to be enacted, a broad constituency that includes public-sector employers must support it. In addition, high-profile public activities, such as National Save for Retirement Week each fall, could be an important vehicle in promoting change at the grassroots level.

Proposed legislation

The bills that would most directly improve the Saver's Credit are:

The Retirement Savings for Working Americans Act (H.R. 2724), sponsored by Reps. Rahm Emanuel (D-IL), Jim Ramstad (R-MN) and Peter Welch (D-VT), the bill is still awaiting a hearing in the House Ways and Means Committee.

The New Savers Act (S. 1967) sponsored by Senators Hillary Clinton (D-NY) and Gordon Smith (R-OR) has been pending action by the Senate Committee on Finance since last fall.

The Women's Security Act (S. 1288) sponsored by Senators Gordon Smith (R-OR) Jeff Bingaman (D-NM), John Kerry (D-MA) and Olympia Snowe (R-ME) has been pending Senate Finance Committee action since it was introduced over a year ago.