The Pro-Growth Progressive by Gene Sperling

Author:Gene Sperling
Language: eng
Format: epub
Publisher: Simon & Schuster
Published: 2005-07-15T00:00:00+00:00

Toward a Universal 401(K)

The right way to fill the gaping holes in our Swiss cheese savings system is to extend the features of our current system that work the best for all Americans. The more we learn about savings behavior, the more it is clear that encouraging savings among those who are either not saving or saving too little will require two things: providing greater matching financial incentives to encourage even hardpressed families to save and making it as easy and automatic as possible for these families to do so. Luckily, we have an effective model. Workers who participate in generous 401(k)s already reap the benefits of this system. What is needed is a Universal 401(k) system for all Americans. 26

A Universal 401(k) can bring equity and efficiency to our system for encouraging savings by turning our current upside-down incentives right side up. Under the Universal 401(k), the government would offer a new retirement account with matching tax incentives to every working family. A Universal 401(k) would use refundable tax credits to match contributions made by those who need the most incentive to save—lower- and middle-income workers. For low-income families, the government could offer a generous $2-to-$1 matching tax credit on the first $2,000 that they accumulate in retirement savings. In other words, if a low-income family could save $667 a year, the government would contribute an additional $1,333 into their Universal 401(k). One hopes that the power of the 2-to-1 match and the prospect of accumulating $2,000 in annual savings would compel millions of families to get into the habit of saving at least $667 a year. We could also consider offering so-called starter funds—automatic tax credits deposited into a family’s Universal 401(k) for a limited time period, to help give families an initial boost to save.

For middle-income families, the government could offer a somewhat less generous but still powerful $1-to-$1 match on savings, so that if a family contributed $1,000 to their Universal 401(k) they would get an additional $1,000 in matching funds. For more upper-middle-income families, the government could consider offering a 50 cent credit for every dollar of initial savings as well.

Some conservatives in Congress and the White House may argue that the government matches of a Universal 401(k) in the form of refundable tax credits are just a new entitlement. What they probably won’t mention is that each and every one of them is currently offered a government-sponsored savings plan and a match out of taxpayer dollars, just as I was when I was at the White House. The federal Thrift Savings Plan (TSP) offers all federal employees a 401(k)-type account and a generous match. It is worth asking why members of Congress and White House staff can receive a matching credit from the taxpayer when they save, but the same arrangement for hardworking families represents an entitlement.

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