Auto IRAs would help low-income people save for retirement

If more plan sponsors offered automatic IRAs, those who make the lowest amount of money would benefit, according to a study by the Government Accountability Office.

Households without employer-sponsored defined contribution plans or individual retirement accounts had lower incomes and tax rates than households with those plans. They also are more likely to have limited additional resources to draw upon in retirement, the GAO found.

The average income for households without retirement plans was $32,000, compared to $75,000 for those who did have them.

The median marginal tax rate for households without DC plans or IRAs was 15 percent, compared to 25 percent for households with those savings vehicles. A defined benefit pension plan could provide a monthly benefit during retirement years for those without a DC plan or IRA; however, in 2010 only 15 percent of married households and 11 percent of single households without a DC plan or IRA had a DB plan.

GAO conducted its study because it was asked to review tax incentives for contributions to DC plans and automatic IRAs. The agency examined the earnings and tax rates of households that do not have DC plans or IRAs, the effects of the Saver’s Credit on retirement income, and the effects of automatic IRAs on retirement income, especially for low and middle-income workers.

Automatic IRAs are just one proposal in President Barack Obama’s fiscal year 2014 budget that would impact retirement savings in the United States.

The existing Saver's Credit tax incentive could result in small increases in a household's retirement annuity -- that is, the household's annual retirement income received from DC or DB plans. GAO estimates that, on account of this credit, the median annuity increase for households in the lowest earnings quartile ($929-$34,377) would be $155.

If, however, the Saver's Credit was refundable — it could generate a tax refund in excess of tax paid — it could result in larger increases in households' annuities across all earnings levels, and the median increase for households in the lowest earnings quartile would be $876 per year.

Implementing automatic IRAs, unless waived by participants, could expand retirement coverage and modestly increase retirement annuities for households at all earnings levels. Specifically, seven percent of all households could receive retirement annuities from automatic IRAs even though these households had no DB or DC plans, according to GAO's projections. Workers with DB or DC plans could also benefit from automatic IRAs at certain points in their lifetime if their jobs don't offer such plans.

Low-income workers could see a sizable increase in their annuities under automatic IRAs and the existing Saver's Credit — the projected median dollar increase for these households' annual retirement annuity would be $479.


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