Retirement Saving for Middle- and Lower- Income Households: The Pension Protection Act of 2006 and the Unfinished Agenda

William G. Gale,
William G. Gale The Arjay and Frances Fearing Miller Chair in Federal Economic Policy, Senior Fellow - Economic Studies, Co-Director - Urban-Brookings Tax Policy Center

J. Mark Iwry, and
J Mark Iwry
J. Mark Iwry Nonresident Senior Fellow - Economic Studies, Visiting Scholar, Wharton School, University of Pennsylvania

Spencer Walters

April 1, 2007


The proposition that public policies can and should be used to encourage retirement saving among middle- and lower-income households commands broad, bi-partisan support. Perhaps the most promising recent development in this area has been the rise of the automatic 401(k). Plan sponsors and policy makers are increasingly interested in using automatic or “opt out” 401(k)s to promote retirement security among rank-and-file employees. Because these workers also need meaningful financial incentives to save, the Saver’s Credit, which interacts constructively with automatic 401(k) features, is specifically targeted to help them.

The Pension Protection Act of 2006 (PPA) took significant steps to encourage the use of automatic 401(k)s and the Saver’s Credit. However, much remains to be done. This policy brief describes the automatic 401(k) and the Saver’s Credit, assesses the effects of the recent legislation, and outlines the next steps needed to promote retirement saving for middle- and lower-income workers, focusing on four initiatives:

• Fulfilling the potential and expanding the implementation of the automatic 401(k);

• Creating automatic IRAs for the 75 million workers who have no employer retirement

• Expanding the Saver’s Credit, making it refundable, and converting the credit to a
flat-rate match; and

• Changing current rules that penalize saving by limiting eligibility for government
programs based on 401(k) or IRA savings.