The Universal Savings Credit

8/22/2019 The Universal Savings Credit

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The Universal Savings Credit

By Christian E. Weller and Sam Ungar July 19, 2013


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By Christian E. Weller and Sam Ungar July 19, 2013


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1 Introduction and summary

4 Inefficiencies in the current system

10 The Universal Savings Credit balances

and simplifies savings incentives

14 Additional issues related to the implementation

of the Universal Savings Credit

18 Conclusion

20 Endnotes

Contents


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1 Cnt Acan p |Th Unva savn C t

Introduction and summary

Te nancial crisis o 2007 o 2009 ook a remendous oll on household wealh

and shatered he sense o nancial securiy or millions o American amilies.

American households los more han $20 rillion in wealh (in 2012 dollars) in

he Grea ecession, and households sill had $10 rillion less in wealh a he end

o 2012 han hey had beore he crisis.1 Tis massive wealh decline conribued

o a widespread loss o economic securiy, paricularly among lower-income and

moderae-income amilies, single women, and communiies o color.

Tis economic insecuriy can have long-ranging adverse eecs on U.S. economic

growh as American amilies:

Inves less in new businesses, which slows produciviy growh and innovaion

Save less or large long-erm expenses such as reiremen and heir childrens col-

lege uiions, which leads o less-sable nancing or capial invesmens

Become less likely han hey would wih more wealh o swich jobs and careers

when beter opporuniies arise, which slows employees produciviy

Te botom line: Economic insecuriy rom decimaed household wealh oday

could poenially reverberae hrough our naions economy or a long ime

hrough slower growh, ewer jobs, and lower living sandards. Helping house-

holds rebuild heir wealh should hereore be a op policy prioriy.

Te ederal governmen already uses he ax code o incenivize people o save,

ypically hrough ax advanages or paricular orms o savings. Employers and

employees can oen deduc heir conribuions o reiremen savings vehicles,such as 401(k) plans, rom heir axable income, and he capial gains in reire-

men savings plans are no subjec o axaion unil people wihdraw he money.

Te ederal governmen loses income ax revenue ha i oherwise would have

received while people save and hen recuperaes some o he los ax revenue


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when people wihdraw money or reiremen and hen pay income axes. Te

underlying idea is ha hese ax advanages encourage more people o save more

money or reiremen han hey oherwise would have. Similar incenives exis or

people o save or healh care and heir childrens educaion, bu reiremen sav-

ings incenives are by ar he mos prevalen and larges ax savings incenives ha

he ederal governmen oers.

Ye a closer look a he ax incenives or reiremen savings as well as oher similar

incenives or healh care savings and educaional savings suggess ha he curren

sysem suers rom wo key ineciencies:

Upside-down tax incentives: ax deducions carry a greaer value or people

wih a high marginal ax rae han or people wih a lower marginal ax rae.

A person whose las dollars earned all ino he op income ax bracke, or

insance, aces a marginal ax rae o 39.6 percen. Ta is, each dollar o a

ax-advanaged conribuion o a reiremen savings accoun reduces he axesha his person owes o he ederal governmen by 39.6 cens. A lower-income

earner wih a marginal ax rae o 10 percen, however, reduces he money hey

owe o he ederal governmen by only 10 cens or every dollar ha hey con-

ribue o reiremen savings. Te value o he ax incenive is upside down, as i

is almos our imes larger or high-income earnerswho arguably do no need

much help o savehan i is or lower- and moderae-income earners, who

ypically have a hard ime saving.

Savings complexities: Employers and employees can choose rom a wide range

o reiremen savings vehicles. Tere are dened-bene pensions and dened-

conribuion savings plans, he later o which come in a whole hos o favors

401(k)s, 403(b)s, SIMPLEs, SEPs, IRs, and oh IRs, jus o name a ew.

Moreover, all o hese reiremen savings plans come wih heir own rules o

who can save wih hem, how much money people can save, and when he ax

advanages occurduring he conribuion phase, during he invesmen phase,

or during he wihdrawal phase. Tis complexiy oen sands in he way o

people aking ull advanage o all o he ax incenives available o hem.

Because o hese wo ineciencies, he ederal governmen is no geting as muchaddiional savings as i ideally could rom he oregone ax revenue. More ecienly

designed savings incenives, however, would generae more bang or he buck, as

people would save more han is currenly he case or every dollar in ax incenives.


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We propose o vasly simpliy exising savings incenives by urning all exising

deducions ino one single ax credihe Universal Savings Credi. Wih his

credi, people would receive a fa percen o heir conribuions o a predeer-

mined savings accoun, regardless o heir income and how much money hey owe

in ederal income axes. People can use he savings ha hey accumulae wih he

Universal Savings Credi or a wide range o purposes, such as paying or healhcare or educaion, puting a down paymen on a rs residence, saring or expand-

ing a business, an economic emergency such as unemploymen, and reiremen.

We also envision only one se o rules or conribuing money, invesing money,

and wihdrawing money ha will govern savings or hese purposes, as discussed

urher below.

Our goal is o end he curren sysem o upside-down savings incenives and o

sreamline savings incenives o make i easier or people o undersand wha hey

can save, how much hey can save, and when hey can wihdraw heir money.Lower-income households, who need more help in saving, will ge more help

rom he new ax incenives han rom he exising ones, and everybody will nd i

easier o undersand ax incenives. Te resul o hese changes should be more-

ecien savings incenives and hus more saving.

More savings are good no only or individuals bu also or he economy as a

whole. Building wealh more quickly increases economic securiy. People will

have more money available or shor-erm emergencies and or longer-erm goals

such as buying a house, saring a business, and sending heir children o college.

Greaer shor-erm and long-erm economic securiy should ranslae ino aser

economic growh, as people can beter handle changes in he economy. More

economic securiy will allow people o ake a longer-erm view and beter plan or

possible economic changes such as sending children o college, saring a business,

and swiching jobs and careers.


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Inefficiencies in the current system

Existing tax incentives are skewed toward the rich

Exising savings incenives in he ederal ax code are mosly deducions rom ax-

able income. Employee and employer conribuions ino a ax-advanaged savings

planprimarily ino reiremen savings vehicles such as 401(k) plans, IRs, and

dened-bene pension plansypically reduce he axable amoun o income

or employees and employers. Te money in a ax-advanaged savings vehicle hen

accumulaes wihou employers and employees having o pay axes on he capialgains in he savings plans. axes are due, however, when money is wihdrawn or

reiremen or oher purposes.2

Te ederal governmen uses hese ax incenives primarily o ge people o save

or reiremen, bu similar ax incenives exis or healh care savingsino Healh

Savings Accouns, or example, which allow people o pay or healh care coss

ha are no covered by insuranceand or childrens college educaion o subsi-

dize uiion paymens.

Te percenage o he conribuion o a ax-advanaged savings plan ha can be

deduced rom axable incomehereby lowering ones ax burdenis deer-

mined by a households ax bracke: Te more a axpayer makes, he more hey

are incenivized o save. Te highes ax brackeor hose annually making

more han $400,000 individually or $450,000 joinlyis 39.6 percen.3 Tose

Americans orunae enough o earn more han ha sum o money pay 39.6

percen o every dollar above ha ceiling in axes, bu hey are also able o deduc

39.6 cens o each dollar conribued o an eligible 401(k) or IR rom heir oal

ax burden. Tis is also rue or conribuions o eligible Coverdell Educaion

Savings Accouns, or ESAs, or anicipaed college uiion expenses and eligibleHealh Savings Accouns, or HSAs, or savings oward medical care.


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Te riches Americans are also hose who are mos likely o have access o an

employer-sponsored savings plan in he rs place, allowing hem o build a

healhy nes egg wih unneeded ax incenives. Sixy-seven percen o workers

making $70,000 or more a year paricipae in an employer-sponsored reiremen

plan, bu ha number drops o precipiously or lower-income households. Only

32.4 percen o workers making beween $20,000 and $29,999 a year paricipaein an employer-sponsored plan, and jus 6.9

percen o hose making less han $10,000

a year paricipae.4 Similarly, higher-income

earners are more likely o ge access o healh

savings accounshrough so-called caeeria

bene plans such as ax-advanaged parking

and ransporaion and child care expenses

rom heir employers.5

Empirical evidence shows ha higher-incomeearners only replace nonax-advanaged savings

wih ax-advanaged savingsha is, higher-

income earners would save similar amouns

wihou savings incenives.6 Tis ineciency

means ha he ederal governmen may spend

as much as $92 billion in scal year 2013 on

reiremen savings incenives or he op quin-

ile o earners alone, wihou acually increasing

personal savings beyond where savings would

have already been i axpayers in he op h o he income disribuion save as

much as hey do wih or wihou he ederal ax benes.7

On he oher hand, middle-class amilies in he 20 percen o 30 percen ax brack-

es are less likely o ake advanage o exising incenives because hose incenives

do no reward long-erm nancial planning nearly as well.

Te sysem oers even less help or lower-income Americans, who do no have as

srong o an incenive o save as he rich. Working amilies in he 15 percen ax

bracke are only able o claim 15 cens or every dollar conribued o a deducion-eligible savings plan, and mos working amilies generally do no receive he

bene o employer 401(k)-plan conribuions eiher. Tis is in spie o he ac

ha hey are he amilies who need he mos help o build long-erm wealh in

imes o economic uncerainy and nancial insecuriy.

Figure 1

Total Employee Participation in Employer Sponsore

Defined Benefit and/or Defined Contribution

Retirement Plans, by Annual Earnings

0%

10%

20%

30%

40%

50%

60%

70%

80%

Less than

$10,000

$10,000

$19,000

$20,000

$29,000

$30,000

$39,000

$40,000

$49,000

$50,000

$75,999

$7

Source: Craig Copeland, Employment-Based Retirement Plan Participation: Geographic Dierence

Trends: 2011 (Washington: Employee Benefts Research Institute, 2012).


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Indeed, some working-class amilies pay no ederal income ax a all , hough hey

do pay payroll axes. Tis is one o he mos imporan aces o he naions pro-

gressive sysem o axaion: Te working poor, who sruggle o make ends mee on

a day-o-day basis, should no be orced o pay ederal axes beyond heir means.

Because heir marginal ax bracke is zero percen, however, hey are able o

deduc zero percen o money saved oward reiremen, educaion, or healh care.For hese Americans, here is no incenive rom ax deducions o save oward

heir living expenses in reiremen.

Tese upside-down savings incenives resul in a pronounced imbalance in who

benes rom he ax deducions on he books. Te ederal governmen orgoes

abou $140 billion in revenue annually rom ax deducions or conribuions o

savings, bu only 3 percen o ha $140 billion goes o he botom 40 percen o

earners, who need he mos help o save. On he oher hand, 80 percen goes o

he op 20 percen o earners, wih almos 50 percen o he ax subsidies going o

he op 10 percen o earners.8

Academic research also conrms ha ax incenives are he leas-eecive way o

generae new savings in he highes ax bracke o earners.9 Tese high-income

earners are largely aking advanage o incenives in he ax code o be rewarded

or behavior hey would have engaged in anyway.

A poenial counerargumen may be ha low-income Americans would no ben-

e rom savings incenives anyway since hey canno save, as hey need o spend

all o heir money on lies necessiies. Academic sudies have shown, however,

ha low-income households can and do indeed save wih argeed and progressive

incenives. From March 5 o April 5, 2005, 14,000 ax lers a H& Blocks in low-

o middle-income neighborhoods o S. Louis, Missouri, were randomly assigned

maching oers or IRs o zero percen, 20 percen, and 50 percen up o $1,000

($2,000 or married ax lers). Only 3 percen o lers ook he zero percen

maching oer, while 8 percen and 14 percen o lers acceped he 20 percen

and 50 percen maching oers, respecively. Te lower incenive o 20 percen

alone caused nearly hree imes as many people o sign up or an IR han he plan

wih no incenive a all.10


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A similar experimen in ulsa, Oklahoma, lends urher credence o he willing-

ness o low-income Americans o build long-erm wealh, nding ha paricipans

were capable o planning and implemening heir nancial goals over a muli-

year ime horizon.11 Low-income amilies were encouraged o se up Individual

Developmen Accouns, or IDAs, a orm o subsidized savings accoun in which

wihdrawals can only be made or cerain auhorized purposes such as purchasinga home or saring a business. o incenivize he use o hese accouns, wihdraw-

als or purchasing a home were mached a a 2-1 rae and were mached or all

oher allowed purposes a a 1-1 rae, wih $750 in wihdrawals per year eligible

or maching. Te program had signican avorable impacs on asse-building

among low-income persons.12

Te botom line is ha lower-income Americans would likely save more han hey

currenly do i hey received higher savings incenives han hey currenly do.

Confusion over existing savings incentives results in saver paralysis

Te ax codes incenives o encourage reiremen, educaion, and healh care sav-

ings are so conusing ha even hose households ha would like o ake advanage

o hem are deerred rom doing so. Tey nd i dicul o nd a way hrough he

red ape creaed by governmen incenives and privae plans.

Te reiremen savings sysem alone is a complex web o accouns and incenives

ha is dicul o navigae wihou he assisance o a nancial proessional.13 Te

conusing naure o his sysem may be bes illusraed graphically. (see Figure 2)


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10 Cnt Acan p |Th Unv a s avn Ct


balances and simplifies

savings incentives

Balancing incentives

Addressing he upside-down savings incenives and heir complexiy could creae

more savings or millions o middle- and low-income households. Congress should

ac o replace he various employer and employee deducions o reiremen, healh,

and educaion savings accouns wih one Universal Savings Credi, or USC.

Because his incenive is a ax credi raher han a ax deducion, i equally rewardseach dollar saved, wheher rom a axpayer in he 39.6 percen bracke or a axpayer

in he 10 percen bracke. Imporanly, he credi will be revenue neural. Ta is,

he money o nance i will come rom ending he curren sysem o savings incen-

ives. Te credi will be a fa maching percen o all conribuions o qualied

savings vehicles. Te savings incenives will only depend on he amoun saved.

Wha would he credi rae look like? Currenly, a axpayer receives a ax bene

by deducing he conribuions o a reiremen savings accoun, or insance,

rom heir axable income. So a axpayer wih income in he 15 percen marginal-

income ax bracke as heir highes ax bracke who conribues $2,000 o a

reiremen savings accoun lowers he amoun o income axes he or she owes by

$30015 percen o $2,000. Pu dierenly, he oal savings o $2,000 includes

$1,700 o income ha he axpayer would have had even aer axes and an implici

governmen conribuion o his or her savings o $300. Te governmen essen-

ially subsidized each dollar conribued o a savings accoun wih 17.6 cens

$300 relaive o $1,700o ax savings.

A ax credi, however, works dierenly han a deducion. A axpayer conribues

a xed amoun o money o a qualied savings accoun, and he governmenprovides a proporional conribuion o ha savings accoun in he orm o he

ax credi. Te axpayer will ypically claim a credi on his or her annual income

ax ling or he previous year. So a axpayer in he 15 percen income ax bracke

would need o receive a credi o 17.6 cens or each dollar saved in order o be as

well o as wih a ax deducion.


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Tis is jus an illusraive example, bu he ax credi or savings should be sruc-

ured such ha mos axpayers will be eiher as well o or beter o wih he

Universal Savings Credi han hey are wih curren savings incenives in he orm

o ax deducions. Mos exising proposals o conver ax deducions ino ax cred-

is envision ax credis o abou 15 percen o 20 percen across he board o all

axpayers, up o a predeermined maximum annual savings amoun, which wouldoer larger savings incenives or he majoriy o axpayers han he curren sysem

o deducions does.17 Te ax Policy Cener also ound ha an 18 percen mach-

ing ax credi is he equivalen o a 15 percen reiremen savings deducion.18

Te same sudy rom he ax Policy Cener concludes ha a 30 percen credi

across he board would be revenue neural. Ta is, he majoriy o axpayers

would eiher receive a larger ax bene rom a ax credi han rom he curren

sysem o ax deducions or he credi would have no eec on heir ax liabiliy.19

Conribuion maches should be progressive so ha lower-income earners receivea relaively larger mach, such as a 2-1 mach or 1-1 mach, assuming sucien

unds are available.

axpayers would receive he governmen maches, up o a maximum annual

conribuion amoun. Te maximum annual conribuion amoun would need o

be se once he credi rae is esablished, such ha he Universal Savings Credi is

revenue neural relaive o he exising sysem o ax deducions. Ta is, he newly

creaed sysem o savings incenives would no cos he governmen more han

he exising sysem o savings incenives, bu i would be more ecien and hus

generae more privae savings rom individuals han is currenly he case.

Curren savings incenives also include he ax-ree receip o realized capial

gains, dividends, and ineres paymens rom invesmens in a qualied accoun.

As such, here is an upside-down elemen o he ax reamen o he invesmen

gains since capial gains, dividends, and ineres paymens are subjec o some

progressive axaion, wih larger invesmen gains incurring relaively larger axes.

axpayers wih larger invesmen gains consequenly receive a proporionally

larger savings incenive due o he curren ax reamen o invesmen gains.


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Tis comparaively larger ax incenive or higher-income earners when money

is saved is ose by he ax reamen when he savings are spen. All o he pas

conribuions and invesmen gains are subjec o income axaion once axpayers

wihdraw heir money rom heir accouns. Federal income axes are sill progres-

sive, so ha higher-income earners pay a larger share o heir income in axes when

hey wihdraw money. Our proposal envisions ha he ax reamen o inves-men gains in savings accouns and o wihdrawals rom such accouns remains

he same as is currenly he case.

Simplifying incentives

Te Universal Savings Credi will no make any disincion beween savings pur-

poses o eliminae he labyrinh o exising savings incenives. Ta is, people can

use he credi o save or educaion, homeownership, healh care, and reiremen.

Allowable reasons or wihdrawals rom hese savings accouns should machhe reasons or exising allowable hardship wihdrawals in reiremen savings

accouns, including reiremen, down paymen or a primary residence, an unem-

ploymen spell, medical bills, and educaional expenses. Te fexibiliy o use

money or a wide range o reasons should encourage people o save more money

han hey would have saved in more resriced savings.

Tere should be a limi or prereiremen wihdrawals, however, in order o pre-

ven abuse. Households should only be able o wihdraw he acual amoun neces-

sary or he wihdrawal reason, along wih a predeermined percenage o heir

accrued savings or emergencies beore age 62. Saring a age 62, however, house-

holds should be permited o wihdraw all o heir money or reiremen income.

Limiing he amoun ha people can wihdraw rom heir savings accouns in any

one insance will mean ha money will acually be available he nex ime hey

need o dip ino heir savings and or reiremen.

A subsanial share o savings could also pass on o heirs, as savers do no always

spend all o heir savings during heir lieime. Te curren sysem consequenly

requires ha savers sar o wihdraw a minimum amoun o heir savings a a

specic age, ypically once hey urn 70-and-a-hal years old. o limi he publicsax liabiliy, USC-eligible accoun holders should also be required o make a mini-

mum wihdrawal when hey reach a cerain agesay, 70-and-a-hal years o age,

which maches he exising minimum-required wihdrawal rules or reiremen

plans. Tis would make clear ha savings are mean o suppor peoples incomes

when oher income sources are no longer available.


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People can apply he newly creaed credi o exising savings accouns such as

IRs and 401(k)s, as well as o dened-bene pensions, bu new conribuion

and wihdrawal rules will also apply. Conribuion rules, or insance, will be he

same or IRs and or 401(k)s, unlike in he curren sysem, which ses lower

conribuion limis or IRs han or 401(k)s. Savers can also wihdraw money

rom hese accouns or reasons oher han reiremen. Te poin o mainainingexising plans is jus o make i easy or people o coninue saving in ways ha are

already amiliar o hem.

All savings in accouns ha are eligible or he credi should also have deaul

invesmen opions. Tese deaul invesmen opions will auomaically apply

unless savers speciy oher invesmen opions. Tis will help avoid siuaions

in which saved money simply sis in an accoun and does no earn any ineres.

Savers will over ime experience aser growh wih heir savings han wih holding

money solely in cash.

Te Inernal evenue Service should also provide an opion or auomaic conri-

buions o any savings accoun eligible or he Universal Savings Credi on annual

ax-reund ling orms. Tis will increase paricipaion in he savings accouns

eligible or he credi and hus raise peoples savings over ime.


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Additional issues related to

the implementation of the

Universal Savings Credit

Tis repor aims o make he argumen or ending he exising upside-down ax

preerences ha provide he larges savings incenives or households who do

no need much exra help o save and he smalles incenives or households who

arguably need he mos help. Tis repor also argues ha a change rom savings

incenives in he orm o ax deducions o reundable ax credis should go along

wih a large-scale simplicaion o exising savings incenives. Tere are a number

o pracical issues, however, ha require addiional atenion.

Trading off maximum contributions and credit rate

Tis proposal envisions a fa credi or all axpayers, poenially coupled wih a

progressivelargercredi or lower-income axpayers. axpayers would receive

he credi up o an annual maximum conribuion o all accouns combined. Te

implemenaion o he Universal Savings Credi would be revenue neural relaive

o he exising sysem o ax deducions. In oher words, he proposed sysem o

he Universal Savings Credi likely will change who receives ax benes or sav-

ings bu no how much he ederal governmen spends on such incenives.

Te combinaion o revenue neuraliy, annual maximum conribuions, and a fa

credi rae implies ha here is a radeo beween maximum conribuions and he

credi rae. A higher maximum conribuion per axpayer means ha more conri-

buions are eligible or he credi, hus reducing he money available or he credi.

Consider a basic numeric example o illusrae his poin. Les say, or argumens

sake, ha he amoun annually available or savings incenives is $100 billion or

2013. Te ederal governmen could, or insance, allocae his money as a 33.3percen credi or all axpayers, wihou a progressive mach.20 Te maximum

amoun ha all axpayers ogeher could conribue would hen be $300 billion,

since $100 billion is equal o 33.3 percen o $300 billion. Assume again, or argu-

mens sake, ha his means ha he maximum amoun ha any axpayer could


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conribue and qualiy or he credi or each dollar hey conribue o a savings

accoun is equal o $10,000 in 2013ha is, each axpayer can conribue a

maximum o $10,000 and receive $3,333 as credi rom he ederal governmen.

Te governmen may alernaively decide o raise he maximum savings amoun

by 25 percen o $12,500. Assuming ha his will increase oal savings by, or

insance, 10 percen o $330 billion21

or 110 percen o $300 billionhe credirae would have o all o 30.3 percen, since $100 billionhe oal amoun

available or he crediis equal o 30.3 percen o $330 billion. Te numbers will

obviously no line up his way in realiy, bu he basic poin remains ha a higher

maximum allowable conribuion will mean a lower credi, and a lower maximum

allowable conribuion will mean a higher credi.

Dieren groups o axpayers will bene rom eiher a higher maximum amoun

or a higher credi. Mos lower- and moderae-income axpayers will nd i dicul

o save housands o dollars each year and hus will never come close o maximum

allowable amouns, which are currenly $17,500 or 401(k) plans, or insance. Assuch, a axpayer who can realisically save only $2,000 per year will no see any

disadvanage rom policymakers lowering he maximum conribuion amoun

rom, or insance, $17,500 o $10,000. A credi o 33.3 percen compared o a

credi o 25 percen on $2,000 o annual savings, however, will provide he ax-

payer an addiional $166 per year in his example. Lower- and moderae-income

axpayers will mos likely bene more rom a higher credi han rom higher

maximum conribuion amouns.

Higher-income earners will likely bene rom being able o save larger amouns

and receive he ull credi or heir savings. Les say ha he choice is beween

a maximum conribuion amoun o $5,000 a a fa credi o 33.3 percen and a

maximum conribuion amoun o $10,000 a a fa credi o 25 percen. In his

example, a axpayer who can conribue $10,000 will receive eiher a credi o

$166.50 or o $250, depending on which combinaion o maximum conribuion

amoun and credi rae policymakers choose.

Te quesion is how much more sensiive savings are o changes in he credi rae

compared o changes in he maximum conribuion amouns or lower-income

and middle-income households, who need o increase heir savings more hanhigher-income earners. Te a priori assumpion is ha a higher credi is beter

han a lower credi, bu he empirical quesion is where he ideal maximum sav-

ings cuo should be o help lower-income and middle-income households mos

in saving or heir uure. William G. Gale, co-direcor o he ax Policy Cener,


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concluded in a 2011 sudy ha a revenue-neural credi, assuming he same

conribuion limis as beore, would equal 30 percen.22 Lower conribuion limis

han currenly are in place would allow or eiher a larger credi or all axpayers or

or he creaion o a progressive mach or lower-income axpayers.

Treatment of ex isting savings vehicles

Te Universal Savings Credi could be applied o any savings accoun as long as

i is properly regulaed by he relevan regulaory agencies, such as he Securiies

and Exchange Commission, he Inernal evenue Service, and he Deparmen o

Labor, among ohers. Conribuions o exising savings accouns such as 401(k)

plans and IRs can quali y or he credi, as can newly creaed savings accouns.

Exising savings accouns, however, would have o operae under he uniorm new

rules ha would apply o all qualied savings vehicles. Exising savings vehiclesor reiremen, or example, include dened-conribuion savings accouns, such

as 401(k) plans and IRs, and dened-bene pensions, such as single-employer

pensions and muliemployer pensions. Dened-conribuion accouns oer savers

more invesmen and wihdrawal choices, bu hese choices also come wih higher

coss and greaer risks han is ypically he case or dened-bene pensions. All o

hese savings vehicles could heoreically coninue o exis, bu hey would oper-

ae wih a uniorm maximum conribuion amoun, a uniorm credi or conribu-

ions, and a uniorm se o deaul rules or wihdrawing unds.23

I is enirely possible ha he creaion o he Universal Savings Credi, which ax-

payers could use in fexible ways o save or whaever purpose is mos imporan

o hem, will lead o a prolieraion o new savings vehicles. People could heorei-

cally go shopping or savings vehicles ha beter mee heir needs han exising

savings plans since savings would be less ehered o employers han is currenly

he case. Financial-service providers could respond o his growing demand by

oering a range o savings plans ha currenly do no exis. Policymakers could

encourage he creaion o low-cos and low-risk savings opions where hey do

no already exis. Te Universal Savings Credi should hence be implemened

joinly wih a new ype o low-cos accoun or low- and middle-income house-holdspreerably he Cener or American Progresss Secure, Accessible, Flexible,

and Ecien, or SAFE, plan24bu here are a variey o proposed programs ha

would also provide low-income workers wih more-secure and lower-cos reire-

men savings vehicles.25 Any such proposal, joined wih he Universal Savings

Credi, would ensure ha savers no only save more money bu also ha heir

money is saely invesed or uure purposes.26


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Tracking annual contribution limits

Te new sysem o savings wih he Universal Savings Credi will allow savers o

save as much ouside o an employer-sponsored savings plan as wih an employer-

sponsored savings plan such as a 401(k) plan. Te maximum conribuion limi

will consequenly apply o each axpayer, no o an individual accoun. Tisrequires, hough, ha some eniy will keep rack o how much each axpayer has

already conribued o one or more qualied accouns. I seems easies o keep

rack o all conribuions hrough he IS, since he ax auhoriy will also admin-

iser he paymen o he credi by handling a axpayers annual ax reurn.

The employer-based savings system

Te Universal Savings Credi will inerac wih he exising employer-sponsored

sysem in dieren ways since his proposal envisions wo criical changes ohe ax reamen o employer-sponsored savings. Firs, he annual conribuion

limi applies uniormly regardless o wheher a axpayer saves in an employer-

sponsored savings plan or no. Second, employers could no longer deduc heir

conribuions o reiremen savings plans so ha axpayers could receive higher

credis han hey oherwise would. Te proposed credi will be revenue neural.

ax incenives ha are currenly beneing employers would direcly bene

employees under he proposed credi. Tese changes may lead some employers

o cu back or weaken heir exising reiremen savings plans, especially exising

dened-bene pensions.

Bu he sreamlined savings incenives ha will be ied o axpayers could also

resul in larger paricipaion raes in some dened-bene pensions. Te credi

would allow axpayers o shop around or he bes opion or heir money. Tere

is no reason why some exising dened-bene pensions, such as muliemployer

plans in he privae secor or public-secor plans, should no be able o oer

reiremen savings opions o individuals who wan o inves heir savings and ax

credis wih hem.27 Some axpayers who currenly do no paricipae in a dened-

bene plan will wan o use heir money o ge access o hese benes. I is hus

conceivable ha he Universal Savings Credi will ranslae ino a greaer parici-paion in dened-bene pensions. Ta is, he newly creaed credi could resul

no only in more people saving more bu also in more people enjoying low-cos,

low-risk reiremen benes.


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Conclusion

Te ederal ax code should help low- and middle-income Americans sruggling

o rebuild he wealh hey los over he course o he Grea ecession, bu odays

ax incenives or savings are more o an obsacle han an aid. Te curren sysem

is demonsrably skewed in avor o hose who acually need he leas help build-

ing wealh, and i remains so complex ha even hose low- and middle-income

Americans who are posiioned o bene simply canno navigae i a all.

Te Universal Savings Credi will correc his imbalance and simpliy hesysem. Wih his credi in place, he American people can nally begin o shi

rom riaging heir nances in he shor erm o building sabiliy and securiy

or he long erm.


22/25


About the authors

Christian E. Weller is a Senior Fellow a he Cener or American Progress and

a proessor o public policy a he McCormack Graduae School o Policy and

Global Sudies a he Universiy o Massachusets Boson. His areas o exper-

ise include reiremen income securiy, macroeconomics, money and bank-ing, and inernaional nance. He is also a research scholar a he Universiy o

Massachusets Amherss Poliical Economy esearch Insiue and an insiue

ellow a he Universiy o Massachusets Bosons Geronology Insiue. Prior o

joining he Cener, he was on he research sa a he Economic Policy Insiue,

where he remains a research associae.

Sam Ungar is a Special Assisan or Economic Policy a he Cener or American

Progress. Sam graduaed magna cum laude rom Georgeown Universiy wih

a bachelor o ars in governmen in May 2012. He inerned a he Cener in

2011 on he Doing Wha Works projec and has also inerned a Lake esearchParners, Common Cause, and on Capiol Hill. He originally hails rom Scoch

Plains, New Jersey.

Acknowledgements

We are very graeul o Michael Etlinger, Seh Hanlon, and Kity ichards or

oering us heir experise on a range o complex issues. All errors are our sole

responsibiliy.


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Endnotes

1 Auth cacuatn ba n Ba gvn th Fa rv st, ra Z.1 F FunAccunt th Unt stat (2013).

2 rth irA an rth 401(k) cv a nt taxavanta. Cntbutn t th t avn

an ccu at a taxa ha a n c tax, butnvtnt an an thaa th avnaccunt a tax .

3 American Taxpayer Relie Act o 2012, pubc la 240,112th Cn., 2n . (Janua 1, 2013).

4 Ca Can, ent-Ba rtnt panpatcatn: gahc dnc an Tn, 2011(wahntn: e Bnt rach inttut,2012); Ca Can, ent-Ba rtntpan patcatn: gahc dnc an Tn,2007 (wahntn: e Bnt rach int-tut, 2008).

5 data U.s. Buau lab stattc, NationalCompensation Survey(U.s. datnt lab, 2013).

6 ec m. enn an wa g. ga, Th ect 401(k)

pan n Huh wath (wahntn: Natna Bu-au ecnc rach, 2000); dan J. Bnjan,d 401(k) ebt inca savn?,Journal oPublic Economics 87 (5) (2003): 12591290.

7 F unta ata Cnna Butoc, Th dtbutn maj Tax exntu nth invua in c Tax st (2013), avaab athtt://.cb.v/ubcatn/43768. Th Cn-na But oc, CBo, un that th ncn vnu cct th t qunt taxabtn th cunt tax t an a t n hchcntbutn t tnt accunt tax ana nc an n hch nvtnt ann ntnt accunt tax a na nvtntnc a $92 bn.

8 lna Buan an th, dtbutna ect dn Cntbutn pan an invua r tnt

Accunt (wahntn: Tax pc Cnt, 2004); sthHann, Tax exntu th wk: Tax-d r-tnt savn, Cnt Acan p, Janu-a 19, 2011, avaab at htt://.acan./u/n-vnnt/n/2011/01/19/8862/tax-xntu--th-k-tax--tnt-avn/.

9 enn an ga, Th ect 401(k) pan n Hu-h wath; Bnjan, d 401(k) ebt incasavn?

10 eth duf an th, savn incntv l-an m-inc Fa: evnc a Fexnt th H&r Bck, The Quarterly Journal oEconomics 121 (4) (2006): 13111346.

11 g m an th, evauatn th Acanda dntatn: Fna evauatn rt

(Cab, maachutt: Abt Acat inc., 2004),avaab at htt://.uc.u/t/cha/idAa/ubcatn/abt%20Add%20na..

12 ib.

13 paa pun an C. eun stu, rat Ttn pnn r (phaha: pnn rachCunc, 2004). Th tnt t an acx n 2013 a t a n 2004.

14 ga r. mtta an sthn p. Utku, Can Th BT much Chc n a rtnt savn pan? (VaF, pnnvana: Vanua Cnt rtntrach, 2006).

15 shna sth-ina an th, H much Chc

T much? Cntbutn t 401(k) rtnt pan. inova s. mtch an sthn p. Utku, ., Pension De-sign and Structure: New Lessons rom Behavioral Finance(N yk: ox Unvt p, 2004).

16 pnt Av pan n Tax r, Simple, Fair,and Pro-Growth: Proposals to Fix Americas Tax System(U.s. datnt th Tau, 2005), . 15.

17 r Atan an th, rn ou Tax st,rucn ou dct (wahntn: Cnt A-can p, 2012); Natna Cn n Fca r-nbt an r, Th mnt Tuth (2010);pt dnc an Ac rvn, rtn AcaFutu: rvvn th ecn, Cuttn snn andbt, an Catn a s, p-gth Tax st(wahntn: Batan pc Cnt, 2010); danBanan an th, otn t r th duc-tn H mta intt (wahntn: Uban-

Bkn Tax pc Cnt, 2011).

18 wa g. ga, A pa t rtuctu rtntsavn incntv n a wak ecn th ln-Tdct (wahntn: Uban-Bkn Tax pcCnt, 2011), avaab at htt://.bkn.u/~/a/ach//a/2011/9/08%20tnt%20ncntv%20a/0908_tnt_n-cntv_a..

19 ib.

20 incun a v atch nt chan thxa nc t taxa b a vatch u b an th a v nc, h tca nt hav nuh n t cntbut atth axu aunt, a hat a atcaunt u b.

21 mt taxa nt cntbut th annua axuaab aunt t th tax-avanta avnaccunt. Th Tax pc Cnt un that jut 6cnt k cntbut th axu a-ab aunt n 2003. s Jantt Kaach an th,makn maxu U Tax-d rtntAccunt (wahntn: Uban-Bkn Tax pcCnt, 2005).

22 ga, A pa t rtuctu rtnt savnincntv n a wak ecn th ln-T dct.

23 Th thaa an a aut a-nthat , av can tha n th a-nun th cntactua a t a a t thaa an. sav cu, n tanc, at nvt th n n -nuanc annut thata a t nc un tnt n xchan vn u th tunt t u th avn -

ca xn, ucatn, an th c an.Th chc nvn un th Unva savnCt ncu th chc t tct n tn av vau th acat bnt th tctn than th tctn.

24 dav maan, makn savn rtnt ea,Cha, an m scu (wahntn: Cnt Acan p, 2012). Th sAFe an a v-u ca th cctv n-cntbutn an.
http://www.cbo.gov/publication/43768http://www.americanprogress.org/issues/open-government/news/2011/01/19/8862/tax-expenditure-of-the-week-tax-deferred-retirement-savings/http://www.americanprogress.org/issues/open-government/news/2011/01/19/8862/tax-expenditure-of-the-week-tax-deferred-retirement-savings/http://www.americanprogress.org/issues/open-government/news/2011/01/19/8862/tax-expenditure-of-the-week-tax-deferred-retirement-savings/http://www.americanprogress.org/issues/open-government/news/2011/01/19/8862/tax-expenditure-of-the-week-tax-deferred-retirement-savings/http://www.usc.edu/dept/chepa/IDApays/publications/abt%20ADD%20final.pdfhttp://www.usc.edu/dept/chepa/IDApays/publications/abt%20ADD%20final.pdfhttp://www.brookings.edu/~/media/research/files/papers/2011/9/08%20retirement%20incentives%20gale/0908_retirement_incentives_gale.pdfhttp://www.brookings.edu/~/media/research/files/papers/2011/9/08%20retirement%20incentives%20gale/0908_retirement_incentives_gale.pdfhttp://www.brookings.edu/~/media/research/files/papers/2011/9/08%20retirement%20incentives%20gale/0908_retirement_incentives_gale.pdfhttp://www.brookings.edu/~/media/research/files/papers/2011/9/08%20retirement%20incentives%20gale/0908_retirement_incentives_gale.pdfhttp://www.brookings.edu/~/media/research/files/papers/2011/9/08%20retirement%20incentives%20gale/0908_retirement_incentives_gale.pdfhttp://www.brookings.edu/~/media/research/files/papers/2011/9/08%20retirement%20incentives%20gale/0908_retirement_incentives_gale.pdfhttp://www.brookings.edu/~/media/research/files/papers/2011/9/08%20retirement%20incentives%20gale/0908_retirement_incentives_gale.pdfhttp://www.brookings.edu/~/media/research/files/papers/2011/9/08%20retirement%20incentives%20gale/0908_retirement_incentives_gale.pdfhttp://www.usc.edu/dept/chepa/IDApays/publications/abt%20ADD%20final.pdfhttp://www.usc.edu/dept/chepa/IDApays/publications/abt%20ADD%20final.pdfhttp://www.americanprogress.org/issues/open-government/news/2011/01/19/8862/tax-expenditure-of-the-week-tax-deferred-retirement-savings/http://www.americanprogress.org/issues/open-government/news/2011/01/19/8862/tax-expenditure-of-the-week-tax-deferred-retirement-savings/http://www.americanprogress.org/issues/open-government/news/2011/01/19/8862/tax-expenditure-of-the-week-tax-deferred-retirement-savings/http://www.americanprogress.org/issues/open-government/news/2011/01/19/8862/tax-expenditure-of-the-week-tax-deferred-retirement-savings/http://www.cbo.gov/publication/43768


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25 F a ua -ct an -k avnvhc, Chtan w an A Hbun, statt th rcu: pc otn stat gvnnt tpt pvat sct rtnt savn,Journal oPension Benefts 18 (1) (2010): 3747.

26 ruatn n t a vn c attntn t thct an k acat th tax-avanta avnthan cunt th ca. Th Cnu Fnanca p-tctn Buau a a cuca n nun thatav av an nvt th n n aatvhc, a hth th xtn t

tax uctn ta n a hth a n cattax ct ac t.

27 mut an an ubc-ct an aaa tanan ntt that a t u t tack anana nvua v th cu th ca. it b a t ana cntbutn nvuat a n-bnt nn an th bnt a cah-baanc-an ua ath than a tatnana-ava-a ua, but a t bntua hu b ab t accat nvuacntbutn.


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The Center for American Progress is a nonpartisan research and educational institute

dedicated to promoting a strong, just, and free America that ensures opportunity

for all. We believe that Americans are bound together by a common commitment to

these values and we aspire to ensure that our national policies reflect these values.

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international problems and develop policy proposals that foster a government that

is of the people, by the people, and for the people.

Documents

The Universal Savings Credit