Rep. Jose Serrano Introduces “The Financial Security Credit Act of 2013”

The Asset Building Program has long supported creating a flexible tax credit, targeted at low- and moderate-income Americans, to support savings. We’ve called the concept the “Financial Security Credit.” Today, that proposal moved one step closer to becoming policy, as the “Financial Security Credit Act of 2013” was introduced by Rep. Jose Serrano (D-NY-15).

The government annually spends hundreds of billions of dollars in incentives for families to save and build wealth through the tax system. Yet ordinary families struggle desperately to save. What’s wrong here? Delivering savings supports the way we do has several problems, first low-income and moderate-income families are not eligible for most of these tax incentives. Instead, the benefits accrue largely to upper-income individuals and families. According to the Congressional Budget Office, the top twenty percent of income earners will capture two-thirds of the $140 billion in subsidies for retirement alone this year. With these benefits concentrated at the top, lower-income workers struggle to build the savings they need for a secure retirement. The Employee Benefit Research Institute (EBRI) reports that 66 percent of workers have some retirement savings. However, half of all workers have less than $25,000 in savings and investments and that 28 percent of workers have less than $1,000 in savings. Clearly our retirement savings supports are not working well for much of the population.

The second part of the problem is that the government’s single-minded focus on retirement savings is ignoring the reality of most Americans lives. According to the Corporation for Enterprise Development (CFED) 43.9 percent of American households live in liquid asset poverty. That is, if they lost their job, they couldn’t get by for three months at the poverty level on just their savings. These families are financially vulnerable, living paycheck to paycheck and are more likely to use wealth stripping, rather than wealth building, financial products. Beyond that, emphasizing retirement savings alone leads many to shortchange emergency savings. According to researchers at Hello Wallet, over a quarter of workers with a 401(k) style plan have taken an early withdrawal from their account, most of them to meet basic needs in the absence of emergency savings.

Current policy rewards the wealthy for the saving they were going to do anyway, leaves out ordinary Americans, and contributes to growing wealth inequality. It’s time to do something different. The Financial Security Credit directly addresses these issues by using the federal tax system to provide these families with the same kind of incentives that upper-income families have long enjoyed for saving. Eligible families would:

• Apply for the Financial Security Credit at tax time on their federal income tax form;

• Have the ability to divert a portion of their tax refund into the approved savings product of their choice, or;

• Open an approved savings product directly on the tax form, and;

• Receive a 50 cent match on every dollar of savings, up to $1,000 saved, held for at least eight months.

New York City’s Department of Consumer Affairs Office of Financial Empowerment (OFE) has played a key role in building toward this step. Their $ave NYC pilot project showed the possibility of this approach, attracting enough support to launch the Save USA expansion project and demonstrating that there’s an appetite for a proposal like the Financial Security Credit, that even very low-income individuals will participate, and that the savings makes a difference in their lives.

The tax code should promote savings, opportunity, and economic mobility for all Americans, not just those that have already made it. The Financial Security Credit is step toward achieving those goals. Congratulations and thanks to Rep. Serrano and his co-sponsors for taking this concept and turning it into legislation. When Congress returns from its recess in September and takes up tax reform, these ideas need to be part of the debate.