Our current system for encouraging savings is woefully inadequate. High-income earners are triple winners. First, they are the most likely to have employer-provided 401(k)s with generous company matches. Second, because many have business income, they have access to other tax-deferred savings options, like SEP IRAs. Third, and most importantly, being in the 35 percent tax bracket gives them $0.35 in tax benefits for every $1.00 they put away. In contrast, low-income earners are the least likely to have an employer plan and if they pay no income taxes they get no incentive from retirement savings deductions.
At the same time, our system is as full of holes as Swiss cheese: half of working families lack an employer-provided retirement plan in any given year. Amongst families closest to retirement (those 55-59), half have $10,000 or less in an IRA or 401(k). This has had a sizable impact on the economy: Our private savings rate has plummeted from 2.3 percent in 2000 to -1.8 percent in the third quarter of last year—the lowest since the Great Depression.
A Universal 401(k) would ensure every American has access to a savings plan, with generous matching funds. Building on the model of the Clinton USA accounts proposal, the Universal 401(k) would provide:
- A $2-to-$1 matching credit for the first $2,000 low-income families save each year
- A $1-to-$1 match for middle-income families
- A $0.50-to-$1 match for those in the upper middle class
Also, a Flat Tax Incentive could be used to encourage savings. It would provide every American a flat 30 percent refundable credit for retirement savings, regardless of their income.
Ideally, workers would be automatically enrolled in new accounts. We should also authorize workers to automatically deposit portions of their EITC or Child Tax Credit refunds directly into these accounts to help low- and moderate-income families build nest eggs.
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