Previous efforts to improve retirement savings for low-income households have not been successful, according to a statement from Penn Wharton University. The university has just released its new, exemplary plan to improve retirement savings for these households, which is designed not to burden employers with higher administrative costs or contributions.
The Penn Wharton Budget Model (PWBM) is a new policy developed by the Wharton School of the University of Pennsylvania in response to questions from policymakers that could create automatic retirement savings accounts for more than 56 million low-income Americans by 2030.
The plan calls for the federal government to establish personal individual investment accounts for eligible individuals based on the earned income tax credit criteria in three different flavors:
- Small: 10% contribution rate of earned income; annual maximum contribution of $2,000Contributions are reduced by 30% for earned income of USD 50,000 or more.
- medium: 10% contribution rate of earned income; annual maximum contribution of $2,250Contributions are reduced by 30% for earned income of USD 50,000 or more.
- Large: 10% contribution rate of earned income; annual maximum contribution of $2,500Contributions are reduced by 30% for earned income of USD 50,000 or more.
Under the PWBM policy, individuals could potentially have over $200,000 in retirement savings in automatic retirement accounts.
The pension fund is designed to grow by the federal government making annual contributions to individual retirement savings accounts; households or employers are not required to contribute. In return, those individuals would forgo the tax breaks they receive for investing in 401(k) plans.
The existing plan projects that the federal government will spend about $1.25 trillion over the next decade to subsidize retirement savings in 401(k) plans and similar retirement savings plans.
The PWBM analysis projected savings for three types of savers by age 65 under its plan:
- A person aged 24 in 2025 with the lowest average annual income ($12,700) could have an account balance of $125,000.
- A person aged 26 in 2025 with an earned income of $27,900 could have an account balance between $150,000 and $200,000.
- A saver aged 24 in 2025 who has the highest average annual income of $59,300 could have a retirement account balance between $100,000 and $125,000.
The government’s plan provides for contributions of 10% of earned income, reaching a maximum of $2,000, $2,250 and $2,500 in each of these three scenarios, with contributions gradually decreasing by 30% once earned income reaches $50,000.
Currently, 401(k) and similar plans primarily benefit higher-income households, Wharton said. Automatic retirement accounts will pass more of those benefits to lower-income households without affecting the retirement savings of higher-income households. “The idea was to take the money we would have otherwise spent and give it to low-income households,” Wharton said. Kent SmettersFaculty Director at PWBM.
As a nonpartisan research think tank, however, PWBM does not advocate for policy changes. “We are not proposing anything or saying Congress should do this,” Smetters said. “We are simply showing how it could be done.”
Congress is actually trying to improve retirement savings for millions of low- and middle-income American workers. The Retirement Savings for Americans Act was first introduced in the Senate in 2021 and reintroduced in 2023. The bill would provide federal subsidies for low- and middle-income workers, with subsidies gradually phasing out at the middle income level.
