Savers Competition Can Really Help Low- and Middle-income Workers – Retirement Research Center

Promote its availability, automatic admission and ensure easy access to state-automatic IRA participants is key to success.

I have always been a big fan of government competitions for retirement savings provided by low- and middle-income workers. These workers pay little income tax, have little retirement savings obtained from tax preferences, and have the ability to shelve only modest amounts. Indeed, the game including the new saver is one of the few redemption features of Safe 2.0.

Therefore, I am glad that a recent study by Morningstar provides some estimates of the possible impact of savers on retirement wealth. Still, I’m still upset about how this new rule actually works.

Under a new plan starting in 2027, the government will provide 50% of the races for eligible taxpayers in the first $2,000 donations of the retirement plan. Qualifications are based on family income. Single taxpayers with $20,500 or less are eligible for the full competition, with a price of $35,500 during the competition phase. For couples, the comparable figure for the full game is $41,000 and the game is $71,000 in phases.

Saver’s game replaces Saver’s credit plan, which is often seen as a failure – less than 6% of taxpayers claim to receive credit in 2021. The main problem is that credit is non-refundable, which means it can only be used to reduce taxpayers' income tax liability. Moreover, interaction with the child tax credit means that the credit of savers is not usually fully applicable to taxpayers with children. Apart from these restrictions, most workers simply don’t know about the plan.

The game of new savers is trying to solve these problems. Most importantly, the game is refundable. That is, the legislation turns it from credit for reducing liability into government matching donations kept in taxpayer retirement plans. In addition, the legislation includes some Treasury funds to raise public awareness of the availability of the program.

As one would expect, Morningstar Research estimates confirm that savers’ matches could have a meaningful impact on the retirement wealth of Gen Z and millennial workers – those who will spend a large portion of their work under the new plan. The analysis is performed under four behavioral schemes:

1. No behavior change: The game is only used by low to moderate income savers who have been expected to be kept in retirement plans.
2. New savers: Due to the incentives to save games, individuals who do not save baseline will start saving. The answer is based on a 2024 survey that requires respondents (not yet saving) the possibility that they start saving.
3. New savers and active savers savers savers save more: In addition to assuming new saver input (Scheme 2), this situation assumes that active savers will increase savings to get a full match. Likewise, the possibility is based on a 2024 survey.
4. The higher likelihood of new savers and active savers savers savers save more: this situation increases the probability assumed in Scheme 3.

The results show that, depending on behavioral response, saver matches may increase retirement wealth of Z and millennials at 65 years old (see Figure 1).

Although the results are encouraging, I continue to worry about this mechanism. How will the government know where to send the game and how will it move funds mechanically? How does the saver's game be associated with the Rose account for after-tax donations? With Roths currently being used in the state automated IRA program, states will need to ensure workers have access to separate traditional accounts to receive savers’ matches. So far, they seem to be stepping up, but the withdrawal process may still be difficult to understand. For example, how can people explain that they can withdraw their contributions to Roth tax exemption immediately, if they are 59½ years old, the income from these contributions is tax-free, and the taxable savings game donations donations, for 59½?

So while it's nice to have some understanding of the impact of saver game, I would feel better if I understood how this thing actually works. Like every successful program, savers’ matches need to be easily and automatically. The amount is moderate, so participants should not be punished for their mistakes. And, someone who is smarter than me can find a clear way to explain withdrawal options. Savers’ game is a wonderful step forward to make it work.