ECONOMIC ARGUMENTS IN SUPPORT OF
BIPARTISAN RETIREMENT SAVINGS LEGISLATION

• Tax Relief Should Be Structured to Spur Savings as well as Consumption. The drive for tax relief has gained added momentum in light of the slowdown in the U.S. economy. Many policymakers point to the need to cut taxes in order to spur additional consumption by Americans, which will in turn boost corporate sales and strengthen the economy. Others also note the importance of providing working Americans with the resources to pay down debts they may have accumulated in recent years. Yet in addition to encouraging Americans to consume and to reduce debt, it is critical that any tax relief package also encourage Americans to save. Savings not only strengthens the long-term financial security of individuals and families but also produces a number of positive effects for the U.S. economy as a whole. Moreover, savings incentives are proven to be an efficient use of federal government tax expenditures.

• Retirement Savings Incentives Provide Individual Tax Relief Not Corporate Tax Breaks. The bipartisan retirement savings legislation focuses squarely on providing tax relief to individuals through expansion of tax-preferred savings vehicles. Expanding the IRA limit to $5,000, expanding the 401(k) limit to $15,000 and providing a $5,000 catch-up contribution for older workers all provide meaningful tax assistance to individual Americans. The bipartisan retirement savings legislation addresses the same need for individual tax assistance as proposals to reduce marginal rates, eliminate the marriage penalty and expand the child tax credit.

• Retirement Savings are an Important Source of Investment Capital and an Engine of Economic Growth. One of the most important ways retirement savings aids our national economy is by providing a ready source of investment capital. Assets in employer-sponsored retirement plans and IRAs total more than $5 trillion (Joint Tax Committee, 1999) and pension plan assets account for 26.2% of all equity holdings and 12.3% of all taxable bond holdings in the U.S. (EBRI, 2000). Additional retirement savings increases the pool of capital, which permits greater production of goods and services and makes possible additional productivity-enhancing investments by corporations. These investments in turn raise real wages for both skilled and unskilled workers. Increased capital accumulation also generates additional corporate tax revenue for the federal government (Feldstein, 1995). The bipartisan retirement savings legislation contains incentives for employers to initiate tax-qualified retirement plans and for individuals to save in these plans (and in IRAs), which will help increase the pool of investment capital and spur these beneficial economic effects.

• Retirement Savings Incentives Are Needed to Raise Historically Low Savings Levels. While our nation's personal savings rates (annual personal savings as a percentage of disposable income) hovered between 8% and 11% from 1964 to 1986, they have fallen precipitously in recent years. The annual personal savings rate was only 2.2% in 1999 and fell to -0.1% in 2000, the first negative annual savings rate recorded by the Commerce Department's Bureau of Economic Analysis since 1933. These U.S. savings levels lag substantially behind those seen in other major industrialized nations of the world. Indeed, the monthly U.S. personal savings rate figure for December 2000 reached a truly dismal level of -0.9%. These reduced rates reflect not only declining savings by individuals but also declining corporate contributions to employer-sponsored retirement and savings plans. (Employer contributions are counted as part of personal savings since by law they must be for the benefit of the employee participants in the plans). In fact, more than half of the decline in the personal savings rate since the early 1980's is attributable to declining employer contributions (Schieber, Joss & Kulash, 1999). These reduced contributions resulted largely from legal restrictions adopted since the mid-1980's limiting corporate contributions to employer-sponsored retirement plans. As discussed above, declining savings rates -- whether due to reduced individual or employer contributions -- have detrimental consequences not only for families' financial security but also for our economy as a whole. To reverse this harmful savings trend, we need both to enact incentives to spur individual retirement savings as well as to remove the funding and contribution restrictions that have reduced employer retirement plan contributions. The bipartisan retirement savings legislation contains needed reforms in both these areas. For individuals, the legislation will expand IRA and 401(k) savings limits, institute catch-up contributions and reduce vesting schedules. For employers, it will increase the dollar limits on company contributions to savings and profit-sharing plans and remove funding restrictions and excise taxes that have restricted contributions to pension plans.

• Tax Expenditures for Retirement Savings Produce Substantial Retirement Benefits for Workers. While the federal tax expenditure for pensions and retirement savings is significant, evidence demonstrates that this expenditure is a highly efficient use of federal dollars. Data shows that the benefits paid by employer-sponsored pensions are 4.6 times as large as the foregone federal tax collections attributed to them (Department of Commerce, 1998; OMB, 2000). The investments in the employer-sponsored pension system contained in the bipartisan retirement savings legislation would clearly be a sound federal expenditure that will translate into meaningful retirement benefits for American families.

• Retirement Savings Incentives Can Raise Federal Revenues. Not only do the federal tax expenditures for retirement savings efficiently produce retirement benefits for working Americans, they can actually raise federal revenues when analyzed over the long-term. For example, a recent study (Dusseault & Skinner, 2000) indicates that the federal tax revenues ultimately collected on Individual Retirement Accounts (IRAs) exceed the federal tax expenditures associated with the IRA tax preference. Since IRA contributors in the study earned a higher rate of return than the Treasury paid on the bonds necessary to finance the IRA tax preference, the taxes on the IRA distributions covered not only the costs of the original tax expenditure (with Treasury bond interest) but also the costs of the taxes that would have been collected had the original IRA contributions been left in taxable accounts. If one assumes that savings in IRAs merely substitutes for savings in taxable accounts (which many economists dispute), the study concludes that IRA contributions from 1982 to 1997 produced a net gain in federal revenue of $14 billion. The study further demonstrates that if every dollar in IRA contribution does, in fact, represent 26 cents in new savings, then the net revenue gain to the federal treasury was $54 billion.

• Americans are Behind in Their Retirement Savings and Need Help Catching Up. Only 43% of surveyed American workers feel they will have enough income for basic expenses in retirement (EBRI Retirement Confidence Survey, 2000). Unfortunately, 44% of families who guess their retirement needs underestimate what level of resources it will take to live adequately in retirement (Quicken Fiscal Literacy Survey, 2000). The typical baby-boomer has only 40% of the savings needed in order to avoid a decline in standard of living during retirement (Merrill Lynch Baby Boom Retirement Index, 1995) and only 44% of working households are projected to accumulate retirement savings that will be adequate to meet retirement needs (Montalto, 2000). In fact, a 45-year-old worker who has not yet begun to save will need to set aside 22% of pay each year until age 65 in order to replace just half of current income in retirement (CED, 1995). The additional incentives and tools in the bipartisan retirement savings legislation (increased IRA and 401(k) limits, catch-up contributions, reduced vesting schedules) will help Americans make up this lost ground and build the retirement assets they need for a secure retirement.