Center for American Progress

RELEASE: Shortfalls of Existing Retirement Savings Incentives in the U.S. Tax Code Contribute to the Looming Retirement Crisis
Press Release

RELEASE: Shortfalls of Existing Retirement Savings Incentives in the U.S. Tax Code Contribute to the Looming Retirement Crisis

Washington, D.C. — America’s middle class faces a burgeoning retirement crisis—but changes to the U.S. tax code could help alleviate the crisis and help Americans save for life after work, says a new issue brief from the Center for American Progress and The New School’s Schwartz Center for Economic Policy Analysis. The brief, co-authored by Christian E. Weller and Teresa Ghilarducci, notes that the growing retirement crisis results in part from inefficient savings incentives embedded in the U.S. tax code. Existing savings incentives can be overwhelming and incredibly complex and often benefit higher-income earners more than middle- and lower-income earners. In addition, as savings incentives fail to prepare households adequately for retirement, the public loses out on increasingly large amounts of tax revenue that otherwise would have been collected without tax breaks.

A key obstacle to achieving retirement security is people’s inability to save enough money. On average, Americans need to save between 10 percent and 20 percent of their salaries each year outside of Social Security to ensure a secure retirement, yet nearly one-third of working-age Americans has no retirement savings or pension at all. Saving enough is especially difficult for lower-income earners, who are less likely to have retirement plans through their employer. Low-income earners also pay a lower net of tax rate of return and pay higher fees. As a result, the existing tax structure has failed to adequately prepare most people for retirement.

“Social Security’s retirement age is increasing, defined benefit pensions have declined, and labor and financial markets have become risker,” said Christian E. Weller, Senior Fellow at CAP and co-author of the brief. “While the tax code offers a number of saving incentives, they are complex, skewed toward higher-income earners, and ultimately inefficient. Such shortcomings of existing savings incentives need to be addressed.”

“Tax reform will be at the top of the agenda for the next president; so will the looming retirement crisis,” said Teresa Ghilarducci, Professor of Economics at The New School and Director of the Schwartz Center for Economic Policy Analysis (SCEPA). “The good news is that we can take a strong first step to fix the retirement crisis through tax reform by transforming the retirement savings tax deduction into a refundable tax credit.”

These savings incentives exacerbate inequities in a system that relies heavily on employer-based retirement savings such as 401(k) plans, as access to employer-based plans is unevenly distributed. Today, more than half of all working-age households are expected to be at risk of having to cut back their standard of living when they retire. Tax reform could play an integral part in addressing the looming shortfall in retirement savings, largely by simplifying savings incentives and better targeting incentives to lower- and middle-class Americans who truly need help preparing for retirement.

Click here to read “The Inefficiencies of Existing Retirement Savings Incentives” by Christian E. Weller and Teresa Ghilarducci.

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For more information on this topic or to speak with an expert, contact Allison Preiss at [email protected] or 202.478.6331.