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
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
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