Could the Saver’s Credit Enhance State Coverage Initiatives?

At any given moment, about half of private sector workers are not covered by any sort of employer-sponsored retirement plan. This coverage gap means that many households must rely exclusively on Social Security in retirement. Since most of those without coverage work for small employers, policymakers for decades have tried to solve the problem by introduc­ing simplified retirement plans. But these initiatives have not worked. Recognizing the difficulty in getting small busi­nesses to adopt plans, the Obama Administration proposed “Automatic IRAs” in 2009 to cover the uncovered. But no progress has been made at pass­ing federal legislation. So several states have stepped into the breach and are setting up their own plans for uncovered workers. These state initiatives could potentially be enhanced by the federal Saver’s Credit, an existing tax incentive that could, in essence, provide a match on contributions to a state plan. But the current credit is limited and not refundable; proposed legislation would extend the credit and make it refundable. This brief, using Connecticut as an example, examines the effectiveness of the current Saver’s Credit and the proposed changes. The discussion proceeds as follows. The first section describes the coverage problem, the state initiatives in general, and Connecticut’s tentative plan in particular. The second section presents the current version of the Saver’s Credit and how it works in theory and practice. The third section describes the impact of a typical legislative proposal to expand the Saver’s Credit and make it refundable. The final section concludes that, in its current form, the Saver’s Credit is limited in its effectiveness as a government match mechanism. However, changing the phase-out structure and making the credit refundable could considerably enhance state retirement initiatives by encouraging participation and increasing the amount of money going into the plans.