Automatic IRAs, refundable savings credit could benefit lower-income workers, GAO finds

Proposals to create automatic IRAs and a refundable savings credit could result in sizable increases in retirement income for lower-earning households, according to a recent report issued by the Government Accountability Office (GAO).

The GAO was asked to review tax incentives for contributions to defined contribution (DC) plans and automatic IRAs. The GAO examined (1) the earnings and tax rates of households that do not have DC plans or IRAs, (2) the effects of the saver’s credit on retirement income, and (3) the effects of automatic IRAs on retirement income, especially for low- and middle-income workers. The GAO examined the characteristics of households that do not take advantage of these tax incentives using data from the 2010 Survey of Consumer Finances, simulated the effects of the saver’s credit and automatic IRAs, and reviewed related proposals.

Households without employer-sponsored DC plans or IRAs had lower incomes and tax rates than households with those plans, and are also likely to have limited additional resources to draw upon in retirement, according to GAO estimates. The median adjusted gross income for households without DC plans or IRAs was $32,000, compared to $75,000 for those that did have them. The median marginal tax rate for households without DC plans or IRAs was 15%, compared to 25% for households with those savings vehicles. The GAO noted that a defined benefit (DB) plan could provide a monthly benefit during retirement years for those without a DC plan or IRA; however, in 2010 only 15% of married households and 11% of single households without a DC plan or IRA had a DB plan.

Effect of saver’s credit

The existing saver’s credit tax incentive could result in small increases in a household’s retirement annuity – that is, the household’s annual retirement income received from DC or DB plans, the GAO found.

The GAO report estimates that, on account of this credit, the median annuity increase for households in the lowest earnings quartile ($929-34,377) would be $155. If, however, the saver’s credit was refundable (i.e., could generate a tax refund in excess of tax paid), it could result in larger increases in households’ annuities across all earnings levels, and the median increase for households in the lowest earnings quartile would be $876 per year.

Automatic IRAs

Implementing automatic IRAs, unless waived by participants, could expand retirement coverage and modestly increase retirement annuities for households at all earnings levels, the GAO found.

Specifically, 7% of all households could receive retirement annuities from automatic IRAs even though these households had no DB or DC plans, according to GAO’s projections. Workers with DB or DC plans could also benefit from automatic IRAs at certain points in their lifetime if their jobs do not offer such plans.

Moreover, the report found that low-income workers could see a sizable increase in their annuities under automatic IRAs and the existing saver’s credit – the projected median dollar increase for these households’ annual retirement annuity would be $479.

Source: GAO-13-699, “Automatic IRAs: Lower-Earning Households Could Realize Increases in Retirement Income,” August 2013.

For more information on this and related topics, consult the CCH Pension Plan Guide, CCH Employee Benefits Management, and Spencer’s Benefits Reports.

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