The Maximum IRA Contribution Limit Is Not Indexed for Inflation.

Americans are living longer, but they are not saving enough to ensure a secure retirement. 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.

Personal savings are a critical component of a financially secure retirement. IRAs have proven to be the most effective incentive for promoting personal savings. For the more than 50 million workers who are not covered by an employment-based retirement plan, IRAs may be the only retirement savings opportunity. However, of all retirement savings plans, only the IRA limit has never been indexed for inflation.

The limit on IRA contributions has been stuck at $2,000 since 1981. If the IRA contribution limit had been adjusted for inflation since IRAs were created in 1974, Americans could now contribute about $5,000 per year to an IRA.

As things stand today, the maximum IRA contribution is not adequate to meet the growing retirement needs of Americans. Future retirees can look forward to longer life expectancies and more years in retirement. That means there is an even greater need for retirement savings than there was in the past.

That growing retirement savings need, combined with rapid inflation in medical costs (which are especially important for those in retirement) and the long range financial problems of the Social Security Trust Fund, make adequate retirement savings all the more imperative. Yet, the current IRA contribution limit has not even kept pace with inflation. Savings of $2,000 per year is simply not adequate and sends a confusing signal to the American people.

Since the 1970s the U.S. personal savings rate has declined steadily. Last year, the savings rate was 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.

In particular, older Baby Boomers are not 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.

Over the past decade, opportunities to save through IRAs (and employment-based retirement plans) have been constrained by Federal budgetary pressures. This type of short-range thinking has been counterproductive and has suppressed the growth of IRAs and hindered retirement savings generally.

Increasing the IRA contribution limit would provide Americans with an opportunity to set aside a more meaningful amount for retirement. In particular, increasing the limit on IRA contributions would allow individuals to contribute more in years when they have the resources to do so. For example, women who left the paid workforce for a period of time to raise children could save more through an IRA during the years after their children are grown.

The 1998 EBRI Retirement Confidence Survey finds more than four out of five Americans do not believe that people in the United States save enough money for retirement (82%); this perception has remained unchanged for the past seven years.

Numerous studies show that IRAs generate savings that help people prepare for retirement. Significantly, nearly 70 percent of baby boomers surveyed said they would save more if IRAs were expanded.