Retirement Security Project

The Saver's Credit: Issues and Options

Abstract

This paper provides an overview of the rationale, history, and possible modifications to the saver's credit, which was enacted as part of the 2001 tax legislation. The tax system in general provides little incentive for participation in tax-preferred saving plans to households who most need to save more for retirement and who, if they do contribute, are most likely to use the accounts to raise net saving. By contrast, the tax code provides its strongest incentives to those who are generally already better prepared for retirement, and who are more likely to use tax-preferred vehicles as a shelter than as an opportunity to increase overall saving.

The saver's credit helps to correct this "upside down" structure of tax incentives for retirement saving. It is the first and only major federal legislation directly targeted to promoting tax-qualified retirement saving for moderate- and lower-income workers.

The limited experience with the saver's credit to date has been encouraging. Options for strengthening the credit include making the credit refundable, making it permanent, expanding it to provide larger incentives for middle-class households, and rationalizing the phase-out of the credit. Such changes—which are under active consideration by leading pension policymakers —would help lower- and middle-income families save for retirement, reduce economic insecurity and poverty rates among the elderly, and raise national saving.