Commentaries

Posted: Oct 10, 2007 | Author: Pamela Villarreal

Hillary's New "American Retirement Account:" The Saver's Credit Repackaged?

Any proposals to eliminate tax penalties to get individuals to save for retirement are worthy of consideration. But what about plans that reward savers with government funds? Presidential candidate Hillary Clinton is proposing American Retirement Account plans, which offer low- to middle-income families the opportunity to save money in tax-advantaged retirement accounts. In addition:

• For the first $1,000 of savings, the federal government would offer a dollar-for-dollar matching tax credit for married couples earning up to $60,000 a year, a 50 percent match for couples earning between $60,000 to $100,000 annually, with a gradual phaseout for those earning over $100,000.
• The matching contribution would be available to those in existing 401(k) plans, or for those not in 401(k) plans who wish to start American Retirement Accounts, which will operate similarly to 401(k) plans, but will be portable from job to job.
• The plan will encourage employers to provide savers the option of having a portion of their salaries directly deposited into an American Retirement Account, like existing 401(k) plans; it will also provide tax incentives for small businesses to offer the plans

But this proposal is nothing new under the sun. A little-known tax credit currently in existence, known as the Saver's Credit, works in a similar fashion:

• 
  It provides a federal match of 50 percent for up to $2,000 of savings for married couples with adjusted gross incomes of up to $31,000; the matching rate drops to 20 percent for couples earning up to $34,000 and 10 percent for couples earning up to $52,000.
• The Saver's Credit applies to any employer-sponsored individual retirement account, such as a 401(k) or 403(b), or traditional and Roth IRAs.

While American Retirement Accounts go further by offering higher income thresholds and small business incentives that the Saver's Credit does not, there is no guarantee that Hillary's plan will get people to save. For one thing, many people are not taking advantage of the already-existing Saver's Credit. And low-income families who would like to must show they actually owe income taxes, since the credit is not refundable. According to the Brookings Institution, only about one-sixth of tax filers who are within the income limits to qualify for the credit receive it, since the majority has no income tax liability (due to other tax credits and deductions available to low-income households).
Reform policies put forth by the NCPA and Brookings Institution include:

• Tweaking the existing Saver's Credit by making it refundable; those who are truly eligible for it can take advantage of it.
• Requiring that employees' 401(k) plans are automatically rolled over into another qualified plan or an IRA when they terminate employment, so they avoid taking a potentially taxable distribution.

Proposing a plan that will cost about $25 billion a year (paid for by keeping the estate tax in place) is overkill. Improving existing incentives to save would be easier and more efficient.

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