Confronting the Retirement Savings Problem: Redesigning the Savers’ Credit
50 Pages Posted: 4 Apr 2016 Last revised: 7 Feb 2017
Date Written: February 2, 2017
Increasing saving for retirement is one of the most important challenges the United States, similarly to many other Western government, faces: the aging population could render public retirement and pension funds insolvent in the not-so-far future. The problem of insufficient retirement savings is especially acute among low-income earners. The main policy tool the United States employs in order to enhance retirement savings of low-income earners is the Savers’ Credit, which provides a nonrefundable tax credit to low-income earners that save for retirement. Although the federal government has been willing to provide billions of dollars’ worth of credits to potential recipients, studies have demonstrated that the actual impact of the credit is fairly limited due to its low take-up rate. The surprising inefficacy of the credit has intrigued scholars, who have attempted to provide explanations for its failure. This Article identifies a central weakness of the Savers’ Credit that has not received sufficient attention: the exceptionally high value of the loss of liquidity to low income earners as a consequence of the sanction on early withdrawals. The high value they attribute to the liquidity lost as a result of the participation in the scheme, deters them from participating. While the loss of liquidity seems as an inherent feature of any scheme incentivizing retirement saving, this Article offers an alternative version of the credit that can overcome the caveats: the Savers’ Continuous Credit. The Savers’ Continuous Credit is based on an ex-ante Pigovian subsidy regime — one that provides a benefit for retirement savings without sanctioning early withdrawals. The ex-ante regime subsidizes actions that have increased the expectancy of generating a public good, even if that public good is not ultimately produced. This Article examines the general features of the ex-ante Pigovian subsidy regime, which is relevant to a wide set of legal fields. It also analyzes other economic and behavioral advantages of the Savers’ Continuous Credit in addition to the solution it provides to the low take-up rate of the Savers’ Credit.
Keywords: retirement saving, tax policy, savers credit, ex-ante subsidy
JEL Classification: H24, H41
Suggested Citation: Suggested Citation