Americans are living longer, but they are not saving enough to ensure a secure retirement. Of particular concern is the fact that the Baby Boom generation has fallen far behind in saving adequately. In 1997, Congress enacted new laws expanding eligibility for participation in IRAs; establishing Roth IRAs; and enhancing the spousal IRA. Although these are important, successful first steps, Congress needs to do more to give Americans a meaningful opportunity to save for retirement.

Current law places annual limits on IRA savings. Individuals sometimes forego making an IRA contribution in a particular year because of insufficient income, illness, temporary unemployment, or a decision to stay home with children. Annual contribution limitations prevent these individuals from making-up for lost retirement savings once the cash-flow crisis is over or their income rises. Congress should permit a simple mechanism that allows individuals to make "catch-up" contributions to IRAs in order to make up for past years when they were unable to contribute.

Since the 1970s the U.S. personal savings rate has declined steadily. During the 1960s and 70s, our national savings rate averaged around 8% per year. In the last half of the 80s, it dropped to about 5.5% and in the 90s it has dropped to a 3.6% annual average. Last year, the savings rate was an anemic ½ of 1 percent, the lowest level since the Great Depression of the 1930s. Although there are many variables that affect the savings rate over the short-term, the long-range trend of American savings is clearly going in the wrong direction and needs to be reversed.

Absent changes in law and behavior, Social Security, employment-based pension plans, and personal savings (through IRAs and other vehicles) will be inadequate to meet the retirement needs of the baby boom generation. Under current law, Social Security will be paying out more in benefits than it collects in revenues by 2014; its trust fund will be depleted by 2034. That is because Americans will be living longer and spending more years in retirement, at the same time the active workforce will be shrinking.

Of particular concern, older Baby Boomers do not appear to be increasing their level of retirement savings as they move into their mid-to-late 40s. The rate of savings should increase with age, but to date, the Baby Boomers are failing to make up for inadequate savings in the past. According to Stanford economist Douglas Bernheim, boomers on average have less than 40 percent of the amount needed to avoid a decline in their standard of living in retirement.

Helping Americans Save When They Can

People approaching retirement age become more focused on retirement needs. As millions of baby boomers move through their 50s and 60s, many will find that they have depleted their savings raising children and sending them to college. As they become "empty-nesters," the need to catch-up on their retirement savings will become clear. Although some complex catch-up designs would cause administrative problems, a simple catch-up rule that allows somewhat greater contributions as individuals approach retirement age would recognize that savings behavior goes through cycles.

Women are more likely to have left the paid workforce for a period of time to care of children or elderly parents. During those years they were probably not eligible (or did not have the resources) to make retirement savings contributions. Allowing an IRA catch-up would help ensure that a woman’s decision to fulfill family responsibilities does not necessarily result in retirement insecurity.

Americans who are approaching (or have reached) age 50 did not have IRAs or 401(k) plans available through most of their working careers. They did not have the opportunities to save that are available today. Instead, due to changes in the structure of the American workplace, many are caught in the transition from a relatively robust system of defined benefit pensions to the self-reliance focus of today's defined contribution landscape. Allowing baby boomers the chance to catch-up in their retirement savings is not only fair, it is critical to helping them achieve retirement security.