The US certainly has a retirement underprovision problem. But like last year's H.R. 1102 bill, the new measure will mainly benefit higher-income workers who are already contributing to plans. Tax credits to help the lower-paid look unlikely as they would be too expensive. Instead, the industry must improve consumer awareness to boost sales.
A bipartisan bill to raise contribution limits on tax qualified retirement plans is soon expected to be introduced in Congress. The proposal will include raising limits for regular and Roth IRAs from $2000 to $5000 by 2003 with indexing for inflation after that and allowing workers over age 50 to contribute $5000 from this year.
The bill will be similar to last July's H.R. 1102, which raised limits on defined contribution plans from $30,000 to $40,000, allowed women who had returned to the workplace to make 'catch-up' contributions, allowed rollovers to new employers, and made plans easier to administer. Many members of Congress favor such policies due to the growing interest in saving for retirement, concern over Social Security and the low national savings rate.
Increasing contribution limits without tax incentives, however, will probably not increase plan coverage or contribution levels significantly because it does not address those who do not currently contribute or cannot contribute the maximum. The main concern over H.R. 1102 was that it would only benefit those able to make maximum contributions, but amendments to provide tax credits to lower-income workers and small businesses was narrowly vetoed, and it is unlikely the incoming Bush administration would approve any similar proposal. It's just too expensive. Tax credits, which would amount to some $54 billion, could not be paid for without raising income taxes or diverting funds from going into Social Security.
However, retirement savings do not have to depend purely on external factors. The industry can take actions to boost growth regardless of tax incentives. Consumer education about savings products is crucial, and is nowhere near as strong as it should be. Vendors can acquire more small business clients by identifying their needs, creating flexible, sophisticated products, educating plan participants and better servicing. More generally, there is much that can still be done to boost sales by improving product selection, marketing, distribution and partnership strategies.