ISSUE BRIEF Improve Incentives to Increase the Rate of Personal Saving for Retirement Having enough money to live comfortably in retirement is a major concern to Americans today and into the next century. Baby boomers have started to turn 50. Studies show that they are saving at one-third the rate needed to maintain their current lifestyles in retirement. To add to these concerns, Social Security Trustees report that the Social Security cash benefit trust funds will be exhausted in 2032. Further, Americans have a longer life expectancy and therefore have to stretch their retirement income further. When Americans retire, they rely on three sources of income – Social Security, pensions, and personal savings. Individual Retirement Accounts provide incentives to increase personal savings. We Need to Encourage Americans to Save: Saving is a key component to economic policy. Americans today are saving less than at almost any time since World War II. The United States has one of the lowest saving rates of the industrialized nations. As a nation, this low savings rate leads to higher interest rates and slower economic growth. For individuals (in particular the Baby Boom generation), our low savings rate will lead to a retirement savings crisis unless we find a way to change people's attitudes about saving – to find a mechanism to convince people to rearrange their priorities. Further expansion of Individual Retirement Accounts (IRAs) that would encourage all Americans to save is one of the best incentives available. Numerous surveys show that Americans are not saving enough for a comfortable retirement. The Merrill Lynch Baby Boom Retirement Index has consistently shown that, on average, Americans are saving about one-third the rate needed to maintain their lifestyles in retirement. Scudder Kemper Investments, Inc. recently released the results of its survey conducted in the spring of 1998, which shows that: "more than one-third of Americans in their early 60s say they either currently do not have – or expect not to have – enough money in retirement to live at a desired standard." The survey also showed that "60% of those in their early 50s say they currently do not have, or expect to have, enough money in retirement to live at their desired standard." Recently in the fall of 1997, the American Council on Life Insurance sponsored a survey, which found that: "mid-life baby boomers are in widespread denial about the serious financial implications of retirements that could last as long as 30 years. Close to two-thirds of non-retired respondents felt that they were at least somewhat well prepared for retirement. But, the survey concludes their confidence is undermined by a missing link between saving and investing now, and how well they will manage things they can't predict during their lengthy retirement years." Over the past several years a significant amount of academic research on the effectiveness of IRAs has been published. Top academic economists have found that IRAs increase saving. The list includes Martin Feldstein (Harvard), David Wise (Harvard), Treasury Deputy Secretary Lawrence Summers (former Harvard economist), James Poterba (MIT), Steven Venti (Dartmouth), Jonathan Skinner (University of Virginia), Richard Thaler (Cornell), and Glenn Hubbard (Columbia). Current Savings Incentives: The Taxpayer Relief Act of 1997 included provisions that enhanced Americans' ability to save through IRAs: Traditional IRA - Tax deductible $2000 annual contributions to IRAs are available to an individual who has income below statutory income limits or is not an active participant in an employer-sponsored retirement plan. The Taxpayer Relief Act of 1997 gradually increases income limits for fully deductible IRAs to $50,000 for individuals and $80,000 for couples by the year 2007. Penalty-free withdrawals can be made for a first home purchase (up to $10,000), higher education expenses, after attaining the age of 59 and 1/2, on or after death or disability, qualified medical expenses and certain unemployment expenses. Spousal IRA - An individual who does not participate in an employer-sponsored retirement plan is eligible to make a fully deductible $2000 annual IRA contribution even if that person's spouse participates in an employer-sponsored retirement plan for those couples whose adjusted gross income is up to $150,000. Roth IRA - Non-deductible $2000 annual contributions can be made to an IRA for those individuals with an adjusted gross income of up to $95,000 and couples with adjusted gross incomes of up to $150,000. Qualified distributions from a Roth IRA are tax-free. Provide All Americans with Incentives to Save – More Needs to be Done: While many Americans can find a savings vehicle in a traditional or Roth IRA, more needs to be done. An IRA that is available to every American will lead to the type of advertising that will increase savings by all Americans. Before 1986, the IRA worked because banks, mutual funds, brokerage houses and insurance companies were competing to "sell savings." Instead of selling goods, Madison Avenue was selling investment. Universal IRA availability is what led to the advertising of IRAs in the mid-80s. The income limits imposed on IRA eligibility led directly to a dramatic reduction in advertising and a resulting reduction in retirement savings. If we are to get all Americans focused on the importance of saving, we need to recreate and expand the type of saturation advertising that made IRAs so successful a decade ago. Universal availability of a meaningful tax-advantaged IRA is the only way to ensure the level of advertising that is needed to get that job done. The Roth IRA, a new retirement savings vehicle further illustrates this point. Since the beginning of 1998, when many Americans became eligible for a Roth IRA, brokerage houses, mutual fund companies, insurance companies and banks began to advertise. As a result there has been a significant increase in Americans using this important savings tool as well as the traditional IRA to save for their retirements over the previous year. If Social Security reform includes means testing its recipients, it is extremely important to provide all Americans with an incentive to save today for tomorrow's retirement. It would not be a very popular policy that would require Americans to pay Social Security tax, not provide sufficient benefits upon retirement and also not encourage savings through incentives such as a universally available IRA. Expanded Individual Retirement Accounts – Personal Savings Incentives: The IRA is a proven savings vehicle that is popular with Americans and good for the economy. IRAs promote self-reliance by encouraging Americans to prepare for retirement while at the same time providing the economy with the investment capital it needs to grow. Expanding IRAs is a good public policy that is good for America. The Taxpayer Relief Act of 1997 included provisions that significantly increased eligibility to IRAs. However, these provisions could be further enhanced to provide Americans with incentives to save. IRAs that have no income limits, thereby being universally available to all Americans, would lessen confusion and provide all Americans with an opportunity to prepare for their futures. Universal IRAs are administratively simple to understand and implement. Increasing the contribution limits would enable Americans to save more for their retirements. Contribution limits for IRAs have not been increased since 1981. Allow Americans to "catch up" on their retirement savings for times in their lives when they were unable to save; e.g. they were setting up a household, raising children, caring for elderly or sick parents, etc. Encourage more savings among senior citizens by eliminating minimum required distributions from IRAs at age 701/2. Improving incentives to increase the rate of personal saving by enhancing IRAs are a relatively small investment that should be made in America's future. IRAs provide exactly that type of long-range savings incentive that we need to fuel long-term economic growth. Those savings will be available in the future to provide funds for Baby Boom retirement and other critical national needs. The benefits of a more secure retirement for Americans and expanded economic growth will more than offset their relatively modest costs. The Savings Coalition of America was established in 1991 to support incentives to increase personal savings in the United States. Its main objective is to win passage of expanded Individual Retirement Account (IRA) legislation for all Americans. There are 75 member organizations of the Savings Coalition representing a wide variety of private interests including home-building, realtors, intangible assets, trust companies, health care industry, engineering, consumer, education and business groups, banking, insurance, securities and financial services. If you would like information on the Savings Coalition of America please direct inquiries to The Savings Coalition of America, 1225 I Street, NW, Suite 500, Washington, DC 20005 (202) 682-4736.