President’s 2013 Budget Would Enable Almost All Americans to Save for Retirement

By :: February 16th, 2012

The new 2013 budget unveiled by President Obama on Monday again contains the Automatic IRA, which was developed by Brookings' Retirement Security Project in conjunction with The Heritage Foundation. This year's  version includes an important change that will also encourage more employers to offer a 401(k) account to their workers. However, important changes to the Saver's Credit that  had been in previous budgets failed to make it this year.

Nearly half of American workers - an estimated 78 million- currently have no employer-sponsored retirement savings plan. The Automatic IRA is a simple, easy to administer and understand system that is designed to meet the needs of small businesses and their employees.

Employers facilitate employee savings without having to sponsor a 401(k)-type plan, make matching contributions or meet complex eligibility rules. Employees are enrolled automatically into an IRA with a simplified system of investment choices and a set automatic savings level. However, they retain complete control over all aspects of the account including how much to save, which investment choice to use, or even whether to opt out completely.

Automatic IRAs also offer savings options for the self-employed and independent contractors, and  provide those who are changing jobs the ability to continue their retirement savings.

The new 2013 budget would also double the size of the tax credit that employers receive in return for starting a new 401(k) plan from $500 annually for three years to $1,000 annually for the same period. This increase will ensure that the credit covers more of an employer's costs, and should encourage more employers to offer such a plan.

This is a very good move, but the annual credit could be still further expanded to $1,500 for three years as will be proposed by a new House bill coming from Rep. Richard Neal (D-MA).  As Congress examines the proposal, it will have the opportunity to also expand the smaller credit that would be offered to employers that start an Automatic IRA to ensure that they are fully reimbursed for all expenses connected with starting and operating such an account for their workers.

A disappointing development is the failure to again include proposals to expand and improve the Saver's Credit by making it fully refundable. The Saver's Credit is an incentive for middle-and lower-income taxpayers to save in 401(k)-type accounts or IRAs.

Retirement Security Project research found that more than 69 million taxpayers had income that was low enough for them to be eligible for the Saver's Credit in 2007. However, nearly 45 million of these filers actually failed to qualify for the credit because they had no federal tax liability. If the Saver's Credit was made refundable as RSP has proposed and deposited directly into the account as a match for savings, those 45 million taxpayers could have taken advantage of the program and had significantly higher retirement savings.



  1. Michael Bindner  ::  11:33 am on February 16th, 2012:

    Such savings plans further erode the connection between stock ownership and control of the firm, since most fund managers focus only on return, not on how firms are managed to serve the long term needs of all stakeholders, which is ultimately better for investors. Employee-ownership through insured personal accounts in Social Security would be a much better option, especially if the insurer was empowered to intervene when manaagement is either reckless or too conservative.

  2. Ralph H  ::  4:41 pm on February 16th, 2012:

    So we are going to have the government fund IRA’s for people who pay no federal tax. No wonder we have a deficit.

  3. Ginter Vurlicer  ::  5:23 am on February 20th, 2012:

    Look at the savings rate (and attitude) in countries, like Germany, where the economies are doing well and then look at the savings rate in the US. We tax withdrawals from long term savings accounts as if they are “income” instead of taxing only the real profit — after adjusting the investment basis up to current dollars. If we are going to encourage a higher rate of savings that is essential to driving the business economy (in addition to the effect of consumer spending), we need to correct the unfairness of treating withdrawals from long term savings as “income.”

    We only tax business profits, not their income (gross sales), but we tax the gross income of individuals, ignoring most of their “cost of doing business,” like the family’s food, clothing, shelter, education, medical care, transportation, etc.

    Why don’t we treat each individual as a business entity that contributes to society by trading time and talent for spendable money and who gets the same tax treatment (net profits only after deducting expenses) as any larger business entity?

    Why don’t we stop talking about an income tax system and start talking about a profit tax system?