In this brief, TCF's senior fellow and economist Bernard Wasow finds that the complex set of tax breaks in the tax code, which are intended to encourage household saving for retirement, "violate almost every standard of good policy: they are enormously complicated, costly, and ineffective." He also points out that the current policy mostly benefits the wealthy. He proposes three straightforward reforms that would better target incentives to the families who need them most:
- Consolidate the more than twenty tax breaks for retirement saving into two or three.
- Convert all the tax deductions into tax credits that are refundable.
- Focus tax breaks on the first $3,000 of retirement savings per year.
The brief demonstrates how consolidating tax breaks would make retirement savings more understandable to workers, which would increase participation in retirement savings plans. This reform also would reduce the transaction costs in the financial services industry that arise when a worker has multiple retirement accounts, costs that ultimately reduce the nest egg of the retiree. For the plan to work, it would also require that tax credits should focus on achieving a minimum level of saving for retirement and must encourage such basic saving by all families, not just the wealthiest ones. As part of that strategy, Wasow advises that low income households that increase savings but have little to no income tax liability should receive the tax credit as a refund.
Click here for a complete list of the Security and Opportunity Agenda reports available online.
The Security and Opportunity Agenda is an initiative that consists of a series of short, engaging publications putting forward policy ideas for addressing the most serious challenges facing the United States. Each brief provides an overview of the nature of the problem to be confronted, a summary of public opinion data about the issue, an explanation of the proposed solutions and evidence that they will work, and an estimate of the costs involved. The series is intended to offer journalists, congressional staffers, and others concerned with current policy debates a concise guide to the problem and a clearly stated idea for a solution.
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