In recent years policymakers and employers have
increasingly shifted the responsibility of retirement planning from employers
to employees, often to the determent of lower-income workers whose biggest
retirement asset is a pension from their employer.
As a cost cutting measure, employers are now less likely
to offer new employees pension plans which pay a retirement benefit in the form
of a lifelong annuity and more likely to contribute to a defined contribution
plan. Often referred to by their place
in the tax code (401k, 403b, etc), these plans are more like savings accounts
maintained by employers on behalf of each participating employee. In short, this means that people have to
save more in order to get by in retirement, says Woodstock Institutes Nathan
Paufve, who recently published an analysis of the credits impact. This trend has been accompanied by a massive
decline in personal savings rates.
The challenge to save for retirement presents an even
bigger problem for low-income people, who often lack the disposable income for
savings and cannot access the generous savings incentives commonly offered to
middle- and upper-income workers. In
2005 alone, the federal government spent $120 billion in tax credits that
mainly benefited middle- and upper-income workersa fraction of the incentive
offered by this tax credit, or any other existing savings incentive for
lower-income people. But when given the
opportunity and the incentive, there is strong evidence that lower-income
people do saveoften at extremely high rates.
This new tax credit is a modest step toward increasing the savings
incentives offered to lower-income households.
To qualify for the credit, a person must be 18 years old
or older, can not be a full-time student, and can not be claimed as a dependent
on someone elses tax return.
Additionally he/she must have an adjusted gross income in 2006 no higher
than $50,000 for married filing jointly, $37,500 for head of household, and $25,000
for single or married filing separately.
The maximum contribution that will be matched is $2,000 and the matching
rate depends on the filers income and filing status. While the stated matching rate is 50 percent
(i.e. a maximum of $1,000 for a $2,000 contribution), the effective after-tax
matching rate can be as high as 100 percent, or even 200 percent if the
employer also makes a matched contribution.