Whether or not squabbling in the US Congress over Iraq and homeland security has pushed reform of 401(k) personal pension plans off the agenda, one thing is already clear: Congress is unlikely to pass any law that increases national savings or helps to expand the number of Americans with meaningful retirement savings accounts.

All the pension reform proposals now being considered are focused on those who already have such accounts. A bill passed by the House of Representatives would give 401(k) holders new rights to sell stock in their own companies and diversify their investments. George W. Bush wants to accelerate increases in the upper limits on contributions to 401(k)s and Individual Retirement Accounts. This would affect between 3 per cent and 5 per cent of American workers.

Completely missing is anything that would help the tens of millions of American families that are currently left out of the private retirement savings system. According to US Census figures, the number of workers participating in a 401(k)-type plan declined to 43 per cent in 2001 from a high of 45 per cent in 2000. More than half of families hold no assets in an account such as a 401(k) or IRA.

Some 92 percent of working poor families and 74 per cent of Hispanic workers lack even an employer-provided retirement account, according to the Census. Others falling through the cracks include about 80 per cent of part-time workers, and employees of small businesses.

Post-Enron reforms will do little for these tens of millions because they fail to address the backwards nature of the current national savings policy. As the only tool the nation employs to encourage savings is tax deductibility, the more you earn the easier the government makes it to save; the more you struggle to make ends meet, the more it tells you you're on your own.

If a husband and wife make $500,000 a year, and are in the 38.6 per cent federal tax bracket, they receive a 38.6 cent tax break for every dollar they save. A couple earning $50,000 get 15 cents per dollar saved. But the 33 million people who make too little to owe income tax – who may earn up to $25,000 – receive no inducement to save. So, of the $125bn the government forgoes in revenue on retirement benefits, only 2.1 per cent goes to the bottom 40 per cent of workers.

The government needs to find a way to turn its saving policies the right way up. One way to accomplish this would be through progressive savings accounts offering incentives such as refundable tax rebates, or matching contributions, for the working poor and those on moderate incomes. Such accounts would help not only lower earners but women who work part-time or have to leave the workforce periodically to raise children.

Under a version of this proposal supported by the Clinton-Gore administration, a family of four making $40,000 that contributed $700 a year to a savings account would see their savings grow over 40 years to more than $250,000. Another way to stimulate such accounts would be to encourage private sector efforts to expand access by enrolling all employees.

Such accounts would do far more than current pension proposals to increase national savings. Those who are well-off tend to respond to new incentives simply by shifting their existing savings from non-tax- preferred to tax-preferred accounts. Progressive savings accounts, by contrast, encourage those who are not already saving to do so.

A positive contribution to national savings is especially critical now, since the fiscal discipline of the mid- to late-1990s, responsible for increasing national savings in the face of declining private savings, has deteriorated dramatically. Congress and the president should strike a bargain on fiscal policy that combines spending restraint with freezes on future rounds of tax cuts for the well-off. Most of the money saved could be split between paying down the federal deficit and increasing private savings through progressive savings accounts.

A savings agenda of this kind would help to maintain recent productivity gains, contribute to closing the wealth gap, and make an eventual reform of Social Security pensions more palatable. When the Congress does find the time to take up pension reform, it should remember the tens of millions of Americans who are not fortunate enough even to have a 401(k) to worry about.

Gene Sperling is a senior fellow at the Center for American Progress.

This column originally appeared in the Financial Times Oct. 14, 2002.

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