Hill Forum on Tax Reform Elevates Financial Security and Savings Policies

After spending a few hours on the Hill this morning, we have both good news and bad news. The bad: No one in Congress appears to be working to avert the so-called “sequester.” The good: key tax writing committees of both the House and Senate are hard at work evaluating proposals and developing plans to reform the tax code. Those reforms could make it easier for Americans to save money, and become more financially secure – if they’re done correctly. How do we help ensure that the reforms will help – not hurt – average Americans? CFED (an organization dedicated to promoting economic opportunity) hosted a forum today called “Can America Save Itself?” to highlight a range of promising (and often bipartisan) strategies to leverage the tax reform process to promote asset building, thereby making it easier for Americans to cope with emergencies, save up for a big purchase like a home, or live comfortably in retirement. As CFED President Andrea Levere noted, Americans of all income levels struggle to save and remain financially stable. Roughly 44 percent of all Americans are living in liquid asset poverty, meaning they do not have enough funds on hand to survive at the poverty level for three months in the absence of income. While concentrations of liquid asset poverty are higher at low-income levels, the challenge of living “paycheck to paycheck” is still present well up the income ladder.

As the Assets Report depicts (and CFED’s own Upside Down report shows), the tax code in its current state delivers tremendous benefits in the form of tax-preferred savings accounts (such as 529 college savings plans and 401(k) retirement accounts) and tax deductions (such as the mortgage interest deduction). However, higher-income Americans currently receive the overwhelming majority of these benefits. This creates an upside-down subsidy system, where those with the greatest need actually receive the least.

Two members of Congress who have managed to work across the aisle to promote more equal access to savings opportunities spoke at the forum. Representative Richard Neal (D-MA) and Representative Jim Gerlach (R-PA) discussed the need to support the savings ambitions of all Americans regardless of income level. Doing so ensures a stable future for individuals and families, but is also critical to the country’s stability as a whole. Neal pointed to the Auto-IRA, a legislative proposal that would build upon existing retirement savings infrastructure, as one way to improve financial security in a bipartisan way. He also conveyed support for maintaining tax incentives that help Americans put money away for retirement. Gerlach emphasized three key priorities for the tax reform conversation. As Congress debates the merits of various changes to the tax code, Gerlach would like to see the system simplified, made more equitable, and used to promote more domestic investment. Both sought policy strategies that encourage responsible savings behaviors. 

Jonathan Mintz, Commissioner of the New York City Department of Consumer Affairs, emphasized the importance of creating tangible and accessible pathways to saving for people of all incomes. He highlighted the work happening in New York to promote saving at tax-time with incentives for lower-income New Yorkers who split their tax refunds and put some money away in savings through the city’s Save USA initiative. Save USA is a rare initiative as it is not intended to be taken to scale, but instead to serve as a model for a federal proposal, such as the Financial Security Credit, that could deliver a nationwide savings incentive to low- and moderate-income families.  

Bob Friedman, founder of CFED, asked a panel of experts on savings policy to identify the most promising policy ideas to support savings. These ideas include:

• Combat inertia: Pamela Everhart, of Fidelity Investments, spoke about how the human tendency toward inaction poses challenges for people saving for retirement. As she explained, for those who do have access to workplace retirement accounts, the default contribution rate is often too low to generate adequate savings. Raising the standard default rate suggested in guidance from the federal government from 3 percent to 6 percent would have a major impact on long-term savings and work to utilize inertia on behalf of Americans retirement savings. 
• Investigate “platform accounts”: David John, of the Heritage Foundation, outlined a savings innovation borrowed from the U.K.: the platform account. As his 2012 brief on the proposal explains more fully, these accounts bridge the gap between non-retirement savings needs with the longer term retirement savings goals. Features such as automatic enrollment, portability, and financial education targeted to an individual’s life situation all enhance this tool’s ability to improve short and long term financial security.
• Support lifelong savings: Reid Cramer, the Asset Building Program’s director, encouraged policymakers to look beyond retirement when supporting saving. As CFED’s data shows, Americans have a range of short and long term savings priorities but our current system is oriented solely toward the long term. A Financial Security Credit would build on the existing Saver’s Credit by opening the credit up to people making contributions to a much wider array of savings vehicles and would create a progressive match to boost the savings of lower-income people. 
• Use savings to move up the economic ladder: Lisa Mensah, with the Aspen Institute, spoke about the foundational role savings play in helping lower-income households move up the economic ladder and into the middle class. Tax reform creates an ideal moment to bring asset building principles into the broader policy conversation. She highlighted Aspen’s work on the Freedom Savings Credit, which provides a more substantial retirement savings incentive for lower-income taxpayers.  

We’re going to have a video recording of the event up here on the blog in the next few days. In the meanwhile, check out live tweets from the event here and here.

Update: Here’s the video of the whole event: