NIRS Makes Suggestions for Improving the Saver’s Credit

In 2001, Congress created the Saver’s Credit, a tax credit available to low- and moderate-income taxpayers who contribute to a retirement savings plan.

Research from the National Institute on Retirement Security (NIRS) found millions of low- to moderate-income individuals have been unable to use the credit, because the primary requirement to file for the credit is contributions to a qualified retirement plan. Among individuals whose income makes them eligible for the credit, many lack access to retirement accounts at work and cannot save through payroll deduction.

In addition, the research found the Saver’s Credit is woefully underutilized. From 2006 through 2014, between 3.25% and 5.33% of eligible filers claimed the credit, and the average value of the credit ranged from $156 to $174 over this time period.

The NIRS says, as currently structured, the Saver’s Credit does not adequately help the low- and moderate-income individuals it was designed to assist. It suggests a series of changes—some small and others more substantial—would enable more of the tax credit’s target population to benefit from the Saver’s Credit and build significant retirement resources.

According to the NIRS’ research paper, potential options for strengthening the Saver’s Credit include:

• Change the tax credit to a savings match. Eligible savers would receive a match equal to 50% of the amount of retirement contributions during a tax year. The match would be claimed through tax returns and would go directly into a retirement savings account. The match would remain in the account until the saver reaches retirement age, resulting in a higher amount of retirement savings because investment earnings on the match would be added to the account. NIRS comments that the match helps members of the target population build their savings balances much faster. This will be especially true for younger savers who will see these increased amounts grow even more over time. For example, according to the research paper, a $1,000 match contributed to a retirement account at age 25 would accumulate to more than $10,000 by age 65, assuming an interest rate of 6%.
• Simplify claiming the Saver’s Credit. Allow eligible taxpayers to claim the Saver’s Credit on the Internal Revenue Service (IRS) 1040-EZ tax form rather than just the 1040 “long-form,” similar to other popular tax credits.
• Increase the percentage of workers eligible for the credit. By increasing the income limits, more people would be eligible for the credit.
• Replace “cliff” income limits. Replace the three levels of credit based on exact-dollar income limits with one level that is phased out gradually.
• Increase awareness of the Saver’s Credit. Include information about the Saver’s Credit in information to participants in new state-sponsored retirement savings plans, including their year-end statements.
• Create state tax benefits. Encourage states to create additional tax benefits that would supplement and link to the federal Saver’s Credit similar to 529 college savings plans.

“Reforming the Saver’s Credit would help low and moderate income workers supplement Social Security benefits by increasing their retirement savings,” says David C. John, senior strategic policy adviser with AARP. “Providing a benefit to those who save encourages people to build their own retirement security, and it reduces their need for other taxpayer financed services. The relatively small cost of an improved Saver’s Credit could make a big difference in the future.”