Policy and Communications Director
New Federal Credit Encourages Lower-Income Workers to Save for Retirement
But low personal savings rates still threaten retirement
Says new Woodstock Institute report
Saving for retirement just got a little easier, thanks to a recently reworked tax credit available to lower-income families contributing to a retirement account.
For taxpayers, it provides an effective after-tax matching rate for the lowest income households of 100 percent of the tax year’s retirement savings. The match rate jumps to 200 percent when an employer match is taken into account. Made permanent as part of the Pension Protection Act of 2006, the Credit will provide approximately $10 billion dollars in tax benefits to about 5.5 million lower-income people over the next 10 years.
Woodstock Institute, a Chicago-based financial think-tank, tracks key savings and debt figures and recently warned consumers and policymakers about the seriously inadequate level of retirement savings for those U.S. households approaching retirement age. As employer-provided pension plans faced reduced pay outs and even insolvency, policymakers and working families need to take a serious look at the state of personal savings. Unfortunately, for most Americans, the results show personal savings in a state of steady decline.
Woodstock Institute found that personal savings as a percent of disposable personal income fell from 12 percent in the early 1980s to 0 percent in 2007. In 1975, total household debt amounted to 44 percent of gross domestic product (GDP) but by 2006 was 96 percent of GDP.
The Saver’s Credit is one strategy to encourage personal savings,” said Woodstock president, Malcolm Bush. “By providing tax incentives to all workers, even very low-income workers, we can increase personal savings rates and ensure retirement security,” he continued.
While the Saver’s Credit is a step in the right direction, it could be improved, said Bush. The credit would be much more useful to lower-income people if it were refundable. Currently, only one-sixth of the 61 million income eligible taxpayers can benefit from the credit because the remainder does not have sufficient federal tax liability. The IRS should also take additional steps to make the credit easier to claim, since, according to a recent study, only about 66 percent of eligible taxpayers are claiming the credit.
Woodstock Institute, founded in 1973, is a
nationally-recognized resource on credit and capital needs of low-income and
minority communities. The Institute engages in applied research, policy
development, and technical assistance to promote community economic