American families deserve a serious policy debate on retirement security

American families deserve a serious policy debate on retirement security
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With the debate on tax reform in full swing in Congress, tax incentives for savings appear to have avoided the chopping block. Yet, while sparing them doesn’t make it harder for American families to save for retirement, it doesn’t make it any easier either. There is much tax bill amending and horse trading still to come, so it is far too early to take our eyes off the ball. If tax reform does eventually pass, and tax breaks for retirement remain untouched, we cannot declare victory. Instead, Congress should expand support for savings, and make that support simple and fair.

The debate on tax benefits, which would have reduced the current threshold for tax deferred savings in 401(k)s and similar plans from $18,000 to as little as $2,400, was always difficult to justify based on policy grounds. Half of all American households have less than $59,000 set aside for retirement. Families need more incentives to save, not less.

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There’s been no shortage of thoughtful analyses of the shortcomings of this approach. Chief among these concerns is the tremendous uncertainty that this major shift in tax policy would create. In our voluntary system, which relies on employers to offer plans, the likelihood of workers saving is largely driven by their employer’s decision to provide retirement benefits.

Many firms do, but others, especially small firms, do not. Given this role as a gatekeeper to savings, removing a key incentive for owners, which is their ability to deduct their own savings from current year taxes, would reduce savings for both current and future employees. According to a recent survey of large employers, nearly eight in 10 believe that savings would go down.

Moreover, little is known about the effect the change might have on the automatic features that have proven so effective in encouraging savings. If we’ve learned anything over the past decade in retirement policy, it’s that simplicity is key. Proposals that lower savings thresholds are anything but simple. They would reduce take home pay and tax contributions at dual rates, among other key changes that amount to a big step in the wrong direction.

Sensible tax reform should include expanded incentives to save, and directing those additional incentives at those who need them most. Rather than continue treating retirement security as an afterthought, Congress could make real progress with a series of pragmatic reforms that have enjoyed bipartisan support over the years.

First, tax reform could expand access to workplace plans. There are a range of policy solutions, at both the federal and state level, that would either require or incentivize employers to offer simplified plans. These include the federal automatic individual retirement account proposal, or “auto IRA,” as well as several new programs that are beginning to roll out in Oregon, California, and a handful of other states. They are based on the premise to provide firms that don’t currently offer plans with a simple alternative that minimizes administrative and legal burdens.

While the auto IRA has languished on Capitol Hill, a proposal for “open multiple employer plans” that allow firms to band together to ease costs and regulatory requirements is another promising approach that passed out of the Senate Finance Committee with unanimous support last year. While none of these solutions would solve all the of challenges facing our retirement system, they would expand access for those who are left out of the current system and lay the groundwork for further improvements.

Second, Congress should improve the effectiveness of savings incentives for working and middle class Americans. In their current form, the vast majority of these incentives are channeled to higher earners, leaving out many low and middle income families. The saver’s credit, a little known tax credit that was originally intended to encourage lower income households to save, is poorly designed and underutilized.

Due to complex eligibility restrictions and an unwieldy claiming process, fewer than 10 percent of all taxpayers are eligible for the credit and just over half of those actually claim it, according to research from the National Institute on Retirement Security. Tax reform legislation should make the credit refundable, which would go a long way toward creating a fair and more equitable set of incentives.

These proposals come with a price tag, which is why they must move through the broader framework of tax reform. But smart and effective retirement policy must be about more than paying for other priorities. Members of Congress should take this opportunity to expand incentives that would allow Americans to retire with the dignity and stability that they earned through a lifetime of work.

Jeremy Smith is the director of the retirement savings initiative in the financial security program at the Aspen Institute.