"How Congress Could Help Low-Income Families Build Financial Security"
On Thursday, Rep. Jose Serrano (D-NY) and 20 co-sponsors introduced a bill to increase working families’ savings. The Financial Security Credit Act of 2013 would offer a 50 percent match on up to $1,000 of savings for single people who earn less than $41,625 and couples who earn less than $55,500. These savings could be in the form of a retirement account, an education savings account, U.S. savings bonds, CDs, or even some savings accounts. To keep the match of up to $500, families would need to hold onto the savings for at least eight months. And the bill includes a provision for tax filers without savings accounts—31 percent of all U.S. households and 45 percent of those who earn less than $50,000—who would be able to open an account when they file their taxes, pending new rules from the Treasury Department.
The bill would begin to address the upside-down nature of savings incentives in the tax code. The benefit of tax deductions is almost four times higher for high-income earners than lower-income ones. Of the estimated $158 billion in annual tax expenditures for retirement savings, only about $1 billion rewards savings by low-income families through the Saver’s Credit. But because that credit is not refundable—in other words, you can’t claim it if you don’t owe taxes—the 27 million families that currently receive tax refunds through the Earned Income Tax Credit can’t take advantage of it. And for low-income families, the option of locking away savings for retirement with the possibility of penalties if they need to take money out early may not be attractive. A refundable, matching credit would be a much stronger savings incentive.
The Financial Security Credit is based on evidence from a national pilot, SaveUSA, that began in New York City in 2008 and grew to include Newark, Tulsa, and San Antonio in 2011. At free Volunteer Income Tax Assistance sites, low-income tax filers were offered a 50 percent match on their savings of up to $500 if they put part of their tax refund in a savings account and didn’t tap the funds for one year. Two-thirds of the participants—with average incomes of only $18,000—were able to hold onto their savings over the year and keep the match.
This is a significant development. Saving is hard. One study of low-income tax filers found that while 69 percent planned to save or build assets with a portion of their refund, only 47 percent actually did. Without the right incentives and structures, it is easy for tax refunds to become a “leaky bucket” instead of savings.
But Americans are in need of more savings. About half report that they could probably not, or definitely not, come up with $2,000 in 30 days to deal with an emergency, according to a survey by research firm TNS Global. And while the official poverty rate is about 15 percent, nearly three times as many Americans lack sufficient assets, aside from homes and cars, to get by at the poverty line for three months if they lost their jobs. Without savings, these families may fall victim to high-cost, predatory loans when trouble strikes—like payday and auto title loans that can charge triple-digit interest rates.
The Financial Security Credit isn’t perfect. Eligible savings vehicles under this credit would need to be monitored for fees that can erode the value of accounts. For example, fees in 401(k) retirement savings plans may eat away 20 to 30 percent of savings over time. And it only fixes one piece of a complicated set of savings vehicles that predominantly support savings for those who are already saving. The Center for American Progress has proposed a Universal Savings Credit that would make savings incentives equal for all earners by converting savings-related deductions into a credit that would provide the same incentives for all tax filers. Depending on how this credit is structured, it could include a matching component for low-income tax filers along the lines of the Financial Security Credit.
But the Financial Security Credit is a starting point to talk about increasing savings for those who need it most—a pathway to building financial security and growing the middle class.
Joe Valenti is the Director of Asset Building at the Center for American Progress Action Fund.