Transcript
J. MARK IWRY: So the strategy with the Saver's Credit was to level the playing field, to some degree, by using a tax credit instead of a deduction. A tax credit mechanism is such that the value of the benefit is independent of the marginal income tax rate, at least if it's a refundable credit, and this credit was designed to be progressive; that is, higher rates of credit for higher incomes—50-percent credit—higher rates for lower incomes, obviously—50-percent credit for people whose income is $30,000 or lower, joint HEI; 20-percent credit for people whose HEI is between $30- and $32,500; and a 10-percent credit above that.
The credit, of course, is not equivalent to a match; that is, it's a government match, but the rate of matching, if you were to compare it to an employer's 401(k) matching contribution, is a little misleading. For a 50-percent credit, you're looking at the equivalent of a 100-percent match of the individual's contributions. You put a dollar in, the government puts 50 cents in your 1040, in effect. It offsets your tax liability by 50 cents, so that your net out of pocket is only 50 cents. Yet the dollar you put in stays in that account. So you end up with a dollar in tax-favored savings, and you only are out of pocket 50 cents. So it's like a 1-to-1 match, even though it's a 50-percent tax credit.
The way the Saver's Credit was enacted though, it was missing four key features. As we designed and proposed it, it was not intended to be temporary, though in the legislation in 2001 that enacted it, it sunsets after 2006. It was a 50-percent credit that was refundable, and therefore available to 60 million households with incomes below $30,000 in joint AGI. Of those 60 million, though, only 10 million actually get anything out of the credit, and virtually none of them get the full $1,000 credit for a $2,000 contribution because it was enacted on a nonrefundable basis.
It was also designed to reach tens of millions of households who were above the income level that it reaches, that is, above $50,000, and the 50-percent credit rate, which covers only people up to $30,000 before it phases down between 30 and 50. That 50-percent credit rate was designed to go all the way up to people earning $50,000 or even higher in the original proposals.
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