A series of structural and administrative changes to the Saver’s Credit would make the program less complex and more likely to achieve its intended goal of encouraging low- and moderate-income workers to save for retirement, according to a new report.
The September 2017 issue brief, “Improving the Saver’s Credit for Low and Moderate Income Workers,” by Jennifer Erin Brown of the National Institute on Retirement Security and David John with AARP, contends that the credit is underutilized because it is unnecessarily complex to claim, not widely known, and because many low- to moderate-income taxpayers do not make a contribution to a retirement savings plan.
Brown and John explain that one of the primary requirements to be eligible for the credit is making contributions to a qualified retirement plan or IRA. About 55 million U.S. workers do not have an employer-based payroll deduction retirement plan, so the lack of access is a key factor hindering millions of taxpayers from taking advantage of the credit, they argue.
Even though workers without an employer-based plan could use an IRA to save, the authors emphasize that only about 1 in 20 workers with earnings of $30,000 to $50,000 a year and no access to a payroll deduction plan actually contribute to an IRA consistently.
Moreover, while the number of taxpayers claiming the credit has increased to nearly 8 million in 2014, the authors calculate that between 2008 and 2013 only about 4% to 5% of all tax filers claimed the credit out of nearly 10% of all returns eligible to claim the credit.
In addition to lack of access, the authors suggest that other reasons for the underutilization include failure to file for the credit or insufficient tax liability. The report further notes that because of the steep drops in the credit rates as a percentage of contributions, taxpayers can lose a significant amount of the credit by earning just a single dollar in additional income.
Brown and John suggest some options for strengthening the credit:
- Change the tax credit to a savings match. Eligible savers would receive a match equal to 50% 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, resulting in a higher amount of retirement savings.
- Simplify claiming the credit. Allow eligible taxpayers to claim the credit on the 1040-EZ tax form rather than just the 1040 “long-form.”
- 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 credit. Include information about the credit 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 authors conclude by noting that the single biggest change for improving retirement security would be converting the credit to a savings match, thus “increase[ing] savings for the target population and reduc[ing] potential costs that states and the federal government may otherwise face in providing for those who retire with little more than Social Security benefits.”
While legislation has been introduced in Congress over the past two years to increase the income limits, make the credit refundable and ease the complexities for claiming the credit, no action has been taken.