After a Rough Start, the Senate Moves to Help Working Families Save
Earlier this month, Senator Ron Wyden (D-OR) introduced a bill to help working families save for retirement. By increasing the effectiveness of the Saver’s Credit and restoring the myRA program, the Encouraging Americans to Save Act (S. 3636)—or EASA—will help low-income Americans increase their access to retirement accounts and build retirement savings. This follows the introduction of the Strengthening Financial Security Through Short-Term Savings Plans Act (S.3218), a bill that will make it easier for employers to offer emergency savings accounts to their workers with the sole purpose of helping them save for unexpected emergencies.
Unfortunately, beyond this, the current Senate and House have done little to help working families save or improve their financial security. One of their biggest legislative victories, the passage of the Tax Cuts and Jobs Act, actually harms working families by enriching the wealthy and corporations with tax cuts while inflating the federal deficit and debt—which in turn could lead to cuts for important safety net programs.
By recognizing that different kinds of savings are important for working families’ financial well-being, the new bills are a promising start to get Congress back on track. Working families need help saving for the now, soon and later—including saving for emergencies, larger asset purchases and retirement. Below are some the key steps these bills would take, along with additional steps Prosperity Now would like to see in the next Congress.
Increasing Access to Retirement Accounts
According to the National Institute on Retirement Security (NIRS), more than 100 million people of working age do not have a retirement account. Despite this large savings gap, the current Congress and administration have pulled back on promising initiatives that could have increased retirement security for many households. This includes repealing regulations that made it easier for individual states to adopt automatic enrollment programs and ending myRA.
The EASA bill would reestablish the myRA program, which was designed by the U.S. Department of the Treasury to make it easier for low-income households to save for retirement by focusing on simplicity, affordability and safety. It existed only a short time before the Trump Administration terminated the program. Reestablishing it would provide households with an easy-to-manage retirement savings option, increasing the number of working families with retirement accounts.
Building Retirement Savings in the Long Term
NIRS also finds that over three-quarters of households in the country haven’t set aside enough savings to meet even conservative estimates of what they’ll need for a comfortable retirement.
To help working families increase their retirement savings, EASA makes critical changes to the Saver’s Credit. The Saver’s Credit provides a tax credit to eligible low-income households—those making less than $64,000 if married filing jointly, and $32,000 for a single filer—equal to a percentage of the contributions made to a qualified retirement account. Depending on filing status and adjusted gross income, the tax filer would be eligible for 50 percent, 20 percent or 10 percent of their retirement contribution amount (the maximum credit amount is $2000 for an individual and $4,000 for married couples). The average value of the credit ranged from $156 to $174 from 2006 to 2014. Unfortunately, the credit is currently non-refundable, which means people without tax liability cannot benefit from it.
EASA would change this by making the credit more streamlined and refundable, which would open it to people who owe no taxes. Specifically, it would provide a 50 percent tax credit on up to $1,000 of contributions to an eligible retirement account by individuals earning up to $32,500 a year and couples earning $65,000 a year. And instead of using the credit to offset taxes owed, it would be deposited directly into the individual’s retirement account, whether employer-sponsored like a 401(k), a separate account like an IRA or a myRA account. This will ensure the credit directly bolsters the long-term savings of working families rather than just being added to their tax refund amount.
Securing Emergency Savings in the Short Term
Working families are also struggling to save for emergencies. Forty percent of Americans cannot handle a financial emergency without borrowing or selling something. Having little to no emergency savings makes it harder for families to even start thinking about long-term savings.
The Strengthening Financial Security Through Short-Term Savings Plans Act (S.3218) would help employers offer emergency savings accounts to their workers. Through automatic contributions towards short-term savings, these accounts would help employees prepare for financial emergencies. We highlight this model for saving in the workplace in our recent report, Saving for Now & Saving for Later.
Facilitating Large Asset-Building Purchases in the Medium Term
Lastly, for the medium term, families need help saving for big asset purchases such as homes, higher education and small business. One example of government-supported, medium-term savings is the Assets for Independence program (AFI). This program encourages earnings, savings and self-sufficiency by offering matching funds and other incentives to help low-income workers save their own money and build assets.
In the next few months, we will release a proposal to support and encourage working families to save for important assets. We hope to see movement in the Senate to encourage this kind of saving next year as well.
Next Steps for Congress
The next Congress should pass the Strengthening Financial Security Through Short-Term Savings Plans Act and EASA to help working families save for now and for later. It should also take steps to advance medium-term savings and remove barriers to saving for working families. Changing the tax code from upside down (benefiting primarily the wealthy) to right-side up (helping our most vulnerable families) is key.
There will be much more activity on tax policy early next year and throughout the next Congress. To stay updated on these issues, join our Campaign to Turn the Tax Code Right-Side Up!