Can America Save Itself? Tax Reform, Savings and Financial Security
As Congress begins to move towards the first major rewrite of the tax code since 1986, they are presented with an opportunity to solve one of the biggest threats to Americans' financial security: the lack of household savings. Our research shows that as many as 44 percent of American households – about 132.1 million people – don't have a basic personal safety net to prepare for unplanned emergencies or the resources to live three months at the federal poverty line, which for a family of four is just $5,763.
This week, Prosperity Now sponsored a bipartisan policy forum titled: Can America Save Itself? Tax Reform, Savings and Financial Security that brought together two panels of experts to discuss potential opportunities in tax reform as well as other ideas that can help families save and ultimately become financially secure.
The keynote panel moderated by Prosperity Now's president, Andrea Levere, consisted of Representative Richard Neal (D-MA), Representative Jim Gerlach (R-PA), and Jonathan Mintz, Commissioner of the New York City Department of Consumer Affairs.
Representative Richard Neal (D-MA) spoke about the behavior and thinking around personal and retirement savings, noting that many Americans (mainly younger) are not actively planning for retirement. He emphasized the need for additional savings by pointing out that income from social security alone is not enough for retirement. The Congressman highlighted the Automatic IRA Act of 2012, a bipartisan legislative proposal he last introduced during the previous Congress that would provide tax incentives to employers to set up Automatic IRA accounts to promote retirement savings at the workplace. Representative Jim Gerlach (R-PA) echoed Representative Neal's comments but also added that as the House tax writing Committee works on tax reform he hopes to see a good, comprehensive piece of legislation that achieves three things: simplifies the tax code, is more equitable and encourages investment in the domestic economy.
Jonathan Mintz, Commissioner of the New York City Department of Consumer Affairs, spoke about need to provide an on-ramp for families to stabilize their finances in the short-term as well as build long term savings by making it as easy as possible for them to save. Commissioner Mintz discussed New York City's SaveUSA initiative that is incentivizing families to save by strategically targeting them during a time when many receive a large sum of money at one time – tax season. The SaveUSA initiative partners with Volunteer Income Tax Assistance (VITA) sites throughout New York City to offer the opportunity to open a SaveUSA account at the time of filing with participants required to save a portion of their refund for a year and every dollar saved earns them a .50 match for up to $500.
The second panel of key experts, moderated by Prosperity Now Founder Bob Friedman, were asked to present one policy idea that they believed could help to support savings.
Pamela Everhart of Fidelity Investments spoke about the importance of defaults in program design and the role of employer-sponsored saving. She proposed changing the federal government's guidance to employers on Safe Harbor 401(k) accounts from the current 3% savings default rate to 6%. She highlighted the level of inactivity seen on the part of the participant as another barrier for families to save enough for retirement with about 59% of workers within Fidelity's portfolio staying at the 3% default rate. By changing the Safe Harbor guidance to require employers to set a 6% automatic savings default it would greatly help families save early, save more, and save enough for a range of retirement needs.
David John of The Heritage Foundation talked about the United Kingdom's innovation with "corporate platform" accounts as an encouraging, flexible, and portable tool that can allow participants to simultaneously save for retirement while saving for other non-retirement related purposes. The accounts could greatly help with retirement account leakage as the non-retirement savings can be structured to meet needs such as mortgages, debt reduction, educational expenses, and a variety of other purposes. In addition, these accounts can also provide many lower income participants a bridge to other previously unknown savings opportunities and because of their portability they can include targeted financial literacy trainings as milestones are reached.
Reid Cramer of the New America Foundation discussed the need to elevate the conversation that savings are not just a long-term issue but also an intermediate and short-term issue. He highlighted the Financial Security Credit, which would replace the existing saver's credit to help encourage, incentivize, and reward families who save.
Lisa Mensah of the Aspen Institute spoke about seizing the tax reform debate to address savings and financial security. She highlighted the Freedom Savings Credit, which would also expand the existing saver's credit – currently missing about 69 million eligible Americans – by providing a match incentive to promote and reward saving.
The current tax code, as noted in our report, is upside down as it rewards millionaires an average of $96,000 a year in federal subsidies and tax breaks for their efforts to save, while those earning $19,000 a year or less receive less than $5 apiece. If we can turn this aspect of the tax code right side-up, provide the right tools and incentives and target families during key moments, many will save and ultimately achieve financial security.
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