Improving Access to the Retirement Saver’s Credit

The saver’s credit, established by the Economic Growth and Tax Reconciliation Relief Act of 2001 and made permanent in the Pension Protection Act of 2006, has enjoyed success, but it could be even more successful with ongoing promotion and the implementation of policy reforms for its expansion, suggests a new study.

In its 22nd Annual Transamerica Retirement study, “The Saver’s Credit: A Tax Credit That Pays to Save for Retirement,” the Transamerica Center for Retirement Studies says that the number of U.S. tax filers who have claimed the credit increased from 5.3 million in 2002 to 9.6 million in 2019.

The average amount of the credit dipped from $199 in 2002 to $191 in 2019. On the other hand, the annual cost of the saver’s credit to the federal government has grown from $1.06 billion in 2002 to $1.84 billion in 2019, the study says.

The TCRS study finds that only 48% of workers at for-profit companies are aware of the saver’s credit. Awareness is even lower among workers who are more likely to be eligible to benefit from it. Part-time workers are less aware than full-time workers (40% vs. 50%) and women are less aware than men (41% vs. 54%).

The study says employers play an essential role in facilitating retirement savings by providing workplace retirement savings plans, such as 401(k) or similar plans, or payroll-deducted IRAs. Workers with access to those plans are more likely to save for retirement than those without them.

Workers at for-profit companies with a household income of less than $50,000 have saved $3,000 in all household retirement accounts, and workers with a household income of $50,000 to $99,999 have saved $42,000, compared with $172,000 among those with a household income of more than $100,000, the study says. Part-time workers’ savings are substantially less than full-time workers’ ($29,000 vs. $74,000) and women’s savings are less than half that of men’s ($43,000 vs. $91,000). These vulnerable groups could especially benefit from the saver’s credit, the TCRS notes.

Communicating information about the saver’s credit can be valuable for employees, but the study found that only 43% of employers both are aware of the credit and actively promote it to their employees. Large and medium-size companies are more likely to promote the credit—75% and 64% of them do, respectively—than small companies, of which only 36% do. Additionally, the study found that 38% of employers were not even aware of the credit.

To help improve retirement security, especially among vulnerable demographic groups, the study says a collective effort is needed to maximize the impact of the credit. The study recommends implementing an educational campaign to promote the saver’s credit and how to claim it.

The study also suggests policymakers consider opportunities to enhance and expand the credit by making the saver’s credit refundable so that all retirement savers who meet the income and eligibility requirements can fully benefit. Currently, the credit only benefits those with a tax liability, but by making it refundable, low- to middle-income workers without a tax liability would be incentivized to save and benefit.

The study also suggests eliminating the non-income-related eligibility requirements, which hold that one must be 18 or older, cannot be a fulltime student and cannot be claimed as a dependent on another’s tax return. The current requirements exclude younger workers who should be encouraged to start saving as early as possible so they can maximize their long-term savings horizon and benefit from the potential compounding of investments.