New retirement plan proposal would mandate employer contributions

Representative Joseph Crowley (D-NY), Vice Chairman of the House Democratic Caucus, has proposed a new retirement plan that would mandate both employer and employee contributions. Rep. Crowley unveiled the proposed new retirement plan in a major policy address highlighting the savings and retirement security crisis in America at the Center for American Progress Action Fund.

SAVE UP Accounts

Under Rep. Crowley’s plan, employers with 10 or more employees that do not currently offer a retirement plan would be required to open a retirement account—referred to as a federally-established Secure, Accessible, Valuable, Efficient Universal Pension (SAVE UP) account—for every employee. According to Crowley’s Building Better Savings, Building Brighter Futures proposal, these SAVE UP accounts would be similar to the Thrift Savings Plan offered to federal government employees, with government oversight, private management, and a limited number of low-fee index fund options.

Unlike other retirement plan proposals, including President Obama’s myRA^SM and automatic IRA proposals, employers would be required to make contributions to each employee’s SAVE UP account. Rather than a percentage of wages, employers would be required to contribute a defined amount per hour, adjusted annually for inflation.

Employees also would be required to contribute to their SAVE UP account once established, at an initial contribution rate of three percent of their pre-tax income, with contributions gradually increasing over time. Employees would, however, be able to opt out of participation. All contributions would be pretax, earnings would be tax-free, and withdrawals during retirement would be taxed as ordinary income.

The new retirement plan sets a target benefit amount, but payout levels are not guaranteed. Instead, the plan includes a feature to ensure that investment risks are spread among all plan participants to reduce the investment risks to each plan participant. As proposed, in years with above-average returns, some of the stock market gains would be channeled into a collective investment pool. In years with below-average investment returns, the excess funds would be apportioned among the plan participants to help protect against huge swings in the markets, such as those that occurred during the 2008 financial crisis.

Tax Incentives for Small Businesses

In his Building Better Savings, Building Brighter Futures proposal, Rep. Crowley also proposed tax credits for small businesses that are helping their employees save for retirement. A small business would receive a refundable tax credit equal to the value of its contributions to the retirement accounts of up to 10 employees, up to a maximum of $10,400 per year for five years. The refundable tax credit would be available to any small business with less than $5 million in annual gross receipts. And, because the tax credit is refundable, any eligible employer, including start-up companies that may not yet be profitable, would be eligible to receive the credit.

USAccounts

In addition to SAVE UP accounts, Rep. Crowley has proposed creating USAccounts that would give every child, upon birth, a new individual savings vehicle. The accounts initially would be funded with a $500 contribution from the federal government. Families could make subsequent contributions of up to $2,000 annually, post-tax, to each child’s USAccount. For families below certain income levels, contributions would be matched dollar-for-dollar by the federal government, up to $500 per account, per year.

Crowley’s USAccounts proposal also includes another contribution match through the Child Tax Credit. Families eligible for the Child Tax Credit, who make a contribution to their child’s USAccount, would receive a matching amount—up to $500 annually per account—as an increase in their refundable credit when filing their federal income tax returns for the following year. This contribution match would be in addition to the dollar-for-dollar match that families below certain income thresholds receive, which is made directly into the USAccount.

USAccount contributions could be withdrawn tax free to fund higher education. And, unlike some other tax-advantaged savings vehicles, USAccounts would not count toward a family’s determination of student tuition assistance or calculation of their need for other federal programs. Once a child is no longer a dependent, USAccount funds could be rolled over into a Roth-style savings vehicle.

Other Savings Initiatives

Rep. Crowley’s Building Better Savings, Building Brighter Futures outlines a series of other initiatives to encourage personal savings, expand employer-provided retirement plans, and strengthen the Social Security system. These include initiatives to

• promote financial knowledge and a greater understanding of savings options through partnerships with stakeholders and educational institutions;
• make the myRA program permanent to ensure that all workers have access to a long-term, stable savings option;
• encourage and reward saving through tax credits;
• reduce policies that discourage saving; and
• strengthen Social Security funding by eliminating the cap on a worker’s earnings that are taxed to pay for Social Security.

Rep. Crowley’s plan has not yet been introduced as a bill in Congress. And although Crowley also sits on the powerful House Ways and Means Committee, this by no means assures that the legislation, once introduced, will become law. Further, in the wake of the Patient Protection and Affordable Care Act and its employer mandate, many in Congress are apprehensive about placing any new mandates on businesses, as Crowley’s SAVE UP proposal would require.

Nevertheless, Crowley’s series of initiatives are significant in that they reflect the belief of some in Congress that current retirement savings initiatives are not meeting the needs of lower- and middle-income Americans, and that these Americans are not fully benefitting from the post-2008 economic recovery. As with efforts to increase the minimum wage and address the gender pay gap, Crowley’s savings initiatives are likely to become part of the broader discussion of income inequality, which is almost certain to be a major theme in the 2016 presidential campaign.