President Clinton’s recently announced plan to provide government-funded retirement accounts to middle- and lower-income consumers is a good idea but has a slim chance of passing Congress in its present form, many experts say.
The so-called Universal Savings Accounts–or USAs–are targeted at families earning less than $100,000 a year to provide them a strong incentive to save for retirement.
“It’s a very good deal for all Americans, even people who don’t directly benefit from it, simply because it will encourage people to begin saving on their own,” said Martha Priddy Patterson, a consultant in accounting firm KPMG’s compensation and benefits practice in Washington. “It will create savings accounts for those who absolutely refuse to do it on their own.”
Workers who qualify would automatically get refundable tax credits of up to $300 a year per person that would be deposited directly into their USA accounts. For couples filing joint tax returns, that would mean up to $600 a year.
Tax credits are worth more than tax deductions because credits are a direct, dollar-for-dollar reduction in a person’s tax liability, while tax deductions lower taxable income.
To encourage workers to do their part in saving for retirement, the government would throw in an additional dollar-for-dollar match–also in the form of a tax credit to be deposited in workers’ USA accounts–for money that workers save in USA accounts or employer-provided savings plans.
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Automatic and matching government contributions wouldn’t be taxed when deposited to USA accounts, and earnings would grow tax-deferred until retirement.
When workers withdraw the money at retirement, they would be taxed on the funds, except 15 percent of each withdrawal. The 15 percent represents voluntary contributions that would have already been taxed.
The Clinton plan recognizes the fact that women are more likely to spend time out of the labor force than men and have lower average earnings than men. Spouses of workers are eligible for the USA tax credit even if they don’t work.
“They targeted it on a per-person basis so that both persons receive the accounts if it is a wage earner with a stay-at-home spouse,” Patterson said. “It’s important for women because women spend their older years alone.”
Experts said USAs are sorely needed because Americans aren’t saving enough for retirement.
In a March survey conducted by Strong Funds, a Milwaukee mutual fund company, close to 18 percent of the more than 650 surveyed said they don’t save any of their pay. An additional 21 percent said they save less than 10 percent of their income.
Many Americans don’t have retirement plans at work. White House officials said 73 million Americans don’t have employer-provided pensions, 50 percent have no pensions whatsoever, and about 18 percent have IRAs.
For those workers, anything that spurs them to save is a big help, personal finance experts said.
The accounts would give workers what’s essentially free money, said Russell Morgan, senior consultant at Watson Wyatt Worldwide in Dallas, an employee benefits consulting firm. “Nobody else offers you free money unless it’s a 401(k) with matching money,” he said.
However, the account wouldn’t allow workers to borrow money from the USA or withdraw money for financial hardship, which most 401(k)s do, Morgan said.
No money could be withdrawn from a USA before a worker turns 65. Once withdrawals start, workers could not make additional contributions to the account.
As much as personal finance experts advise against borrowing against retirement money unless it’s an absolute last resort, the feature is appealing to many workers, Morgan said. The lack of that feature in USA accounts is “a disincentive,” he said.
Despite its strong features, the Clinton proposal has little chance of passing Congress in its present form, some experts said.
“The president’s overall budget raises taxes on some Americans to give tax cuts to others, which divides our country and isn’t fair,” said Rep. Bill Archer (R-Texas), chairman of the House Ways and Means Committee. “Most importantly, these accounts would do absolutely nothing to shore up Social Security’s long-term financing problems, which is my No. 1 priority for America’s retirement security.”
At the same time, Archer praised Clinton’s idea of using private accounts to boost retirement savings.
Archer is developing his own plan for Social Security reform.
Darcy Olsen, a Social Security expert at the Cato Institute in Washington, a libertarian research organization, said USA accounts won’t solve the root of why low-income workers struggle with saving for retirement: that they just don’t earn enough.
“The truth is that low-income workers face formidable obstacles to saving,” she said. “The most fundamental is their low incomes rarely cover basic living expenses. A worker’s ability to save money is not altered by giving him a place to deposit money he simply does not have.”
Moreover, the Clinton plan would cost lots of money, said the Profit Sharing/401(k) Council of America in Chicago, which represents 401(k) participants and companies with 401(k) plans.
“Do the small individual contributions justify the administrative cost, which is approximately $80 per participant per year in the private system?” asked David L. Wray, president of the council. “The burden and expense on the government would be too great and the gain too little.”
The USA account also would not make it easier for already confused workers to choose among the many types of retirement products, experts said.