Tax credits would help narrow wealth disparities and bolster retirement savings

As congress has been grappling with wealth disparities between America’s white and minority workers, there has been bipartisan support in Washington, D.C., for measures to assist those who are historically underserved or under-saved in our national system for accumulating and incubating retirement savings.

On the heels of the Setting Every Community Up for Retirement Enhancement (SECURE) Act, there are different packages of proposed “SECURE Act 2.0” legislation making their way through the House of Representatives and the Senate. The House Ways and Means Committee unanimously passed the Securing a Strong Retirement Act earlier this year. The Senate’s version, the Retirement Security and Savings Act, was introduced ahead of the Senate Finance Committee’s July 28 hearing on how Congress can take measures to help Americans save more for retirement.

Both legislative packages seek to increase the 401(k) “catch-up” contribution limit to $10,000, and the SIMPLE IRA contribution limit to $5,000, for those nearing retirement age. They also propose to index allowable IRA catch-up contributions to inflation.

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In addition, both bills address the Saver’s Tax Credit. Currently, this is a non-refundable tax credit that can be claimed by taxpayers making salary-deferral contributions either to employer-sponsored retirement savings plans, or traditional/Roth IRAs. The size of the tax credit depends on a taxpayer’s adjusted gross income and contribution amounts. The Senate’s package would expand the existing income thresholds under the saver’s tax credit, and refund the credit directly into low-income taxpayers’ retirement accounts.

Another Senate bill would go even further. The Encouraging Americans to Save Act (EASA) introduced by Sen. Ron Wyden (D-Oregon), a ranking member of the Senate Finance Committee, and six fellow Democrats proposes to transform the current non-refundable saver’s tax credit into a government-matching, refundable contribution of up to $1,000 per year for lower- and middle-income taxpayers who are enrolled in 401(k) plans or have opened IRAs.

This legislation would make the full 50% credit rate available to couples earning annual income of up to $65,500 and single taxpayers earning up to $32,500 a year. (Currently, only households with up to $39,000 in annual income and singles earning $19,500 per year are eligible for the maximum 50% saver’s tax credit rate.) Under EASA, the saver’s tax credit would be refunded directly into 401(k) plans and IRAs. It also would apply to contributions made to tax-advantaged savings and investment accounts for individuals with disabilities known as ABLE, with credits refunded directly into those ABLE accounts.

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EASA also includes a COVID-19 recovery bonus credit, which would offer up to $5,000 in extra government-matching contributions for the first $10,000 that taxpayers save over a five-year period starting in 2022.

We fully support any government measure to help more Americans increase their savings for retirement — and industry research indicates that refunding the saver’s tax credit directly into taxpayers’ 401(k) accounts and IRAs would indeed make meaningful progress toward closing our country’s massive retirement savings shortfall.

The Employee Benefit Research Institute (EBRI) pegs the U.S. retirement savings shortfall — the amount of savings needed for Americans to enjoy financial security in retirement — at a whopping $3.83 trillion. Preliminary EBRI analysis estimates that refundable saver’s tax credits would reduce the retirement savings shortfall by an estimated $198 billion over the course of a generation. Minority participants in the U.S. retirement system would also benefit: refundable saver’s credits would reduce the retirement savings shortfall for minorities by an estimated $95 billion, including $31 billion for Black participants and $51 billion for Hispanics.

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If legislation making the saver’s tax credit a directly refundable benefit is ratified, then we need to ask how the credits will be transferred into taxpayers’ retirement savings accounts. The U.S. Treasury and U.S. retirement system will require a nationwide network that enables the seamless movement of tax refunds into active 401(k) accounts and IRAs.

Our auto portability solution for small-balance job changers, which has been live for four years, is powered by a “match” algorithm and “locate” technology. Together, they identify multiple accounts held by a plan participant, helping ease the movement of savings from a terminated account into an active account in the plan of the participant’s current employer.

As our solution for auto portability continues to be adopted by more defined contribution plans and recordkeepers, the infrastructure also grows — enabling the seamless transportation of assets not only between 401(k) plans, but from the U.S. Treasury to savings accounts across the U.S. retirement system.

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EBRI predicts that about $2 trillion in additional retirement savings would be preserved in the U.S. retirement system over a 40-year period if access to auto portability was available for all account balances. That extra savings would include about $191 billion for an estimated 21 million Black Americans, and $619 billion for all minority workers.

Plan sponsors and recordkeepers can play an important role in helping improve retirement outcomes for millions of hard-working Americans. By adopting solutions that enable seamless plan-to-plan asset portability, they can also ensure that if the Saver’s Tax Credit becomes a refundable benefit, this tax credit can be easily consolidated into taxpayers’ active retirement savings accounts.