Matching Private Savings with Federal Dollars: USA Accounts and Other Subsidies for Saving

Abstract

The Clinton Administration has proposed a new savings initiative called "Universal Savings Accounts" or a "USA Accounts." These accounts would provide low and middle income workers with automatic annual contributions for retirement savings. They also borrow the popular technique of matching contributions from the private pension system and surround it with a new federal program of savings incentives and subsidies. Similar proposals for individual savings accounts - the Bipartisan Social Security Reform Act of 1999 and the 21st Century Retirement Act - have also been introduced in Congress as part of the debate over Social Security. The federal government currently supports savings by providing indirect subsidies through the tax code to the pension system. These three proposals envision a new role for the federal government in leveraging individual savings through direct, progressive incentives and subsidies. The paper analyses these proposals on four dimensions: incentives and subsidies; ease of use; coordination with other savings vehicles; and administrative expense. It finds that all three proposals are innovative approaches to increasing retirement savings. They are also all targeted to an appropriate population, low and middle income workers, which in reality could use some help from the government in saving for retirement. USA Accounts offer more generous federal contributions for savings at very modest income levels and devote most of their resources to those most in need of assistance. They also work best with the private pension system. But these are all very complex programs, and participation rates for voluntary contributions may be low. All proposals will be expensive to implement and administer. The paper suggests that federal resources might be better spent on direct subsidies for the poor in retirement than on a complicated incentive program which may produce only a marginal increase in savings. It might also be better to target savings incentives to those who can afford to save and are motivated to respond. One alternative to consider is subsidizing contributions into IRAs and other 401(k)-type plans while providing very similar rules for taxing contributions and benefits. This would preserve the incentives for savings that are the essence of these proposals while reducing their complexity and cost.