What is AMERICA’S CHALLENGE?
The oldest of the 76 million baby boomers turned 50 in 1996. They also entered their peak earning and saving years. Facing rising education costs for their children, elder-care costs for their parents, escalating medical expenses, impending retirements, and longer life spans, baby boomers heeded warnings that they were not financially prepared for the future. They began shifting their assets to take advantage of the superior returns in equity investments. This money has provided a solid base for the stock-market expansion, but the current savings rate is simply not sufficient to fund the retirement of the baby boom generation.
Forty-one percent of all workers, however, have accumulated less than $50,000, and nearly one fourth of all workers have saved less than $10,000 toward retirement.
Seventy percent of workers now have a savings or investing strategy for retirement, and more than half of current workers have personally tried to calculate how much money they will need to live comfortably in retirement. Forty-one percent of all workers, however, have accumulated less than $50,000, and nearly one fourth of all workers have saved less than $10,000 toward retirement.
Congress took important first steps in 1997 to improve Individual Retirement Accounts and to help more Americans save and invest. Lawmakers raised the income limits determining whether taxpayers could deduct IRA contributions from their federal income taxes; enhanced the spousal IRA; and, created the “Roth IRA”—named after its proponent, former Sen. William V. Roth, Jr.— which allows savings to accumulate and then be withdrawn upon retirement tax-free.
Studies show that as much as 90 percent of the money going into traditional IRAs represents new savings, not simply money that has been shifted from one account to another. Prior to 1986—when Congress drastically reduced IRA tax incentives—the tax-deferred vehicles were enormously popular and boosted individuals’ personal savings.
Congress should add a periodic adjustment feature to the income limits that govern IRA eligibility. Although income limits for deductible IRAs will rise gradually over the next few years, participation by middle-income workers will continue to be restricted unless these limits are also adjusted for inflation.