* Low-income people more likely to tap retirement funds for
* People need better ways to save, experts say
* Lack of emergency savings also a concern
* Expanded tax credits, annuities, other changes at play
* Options limited amid tight budgets, Washington gridlock
By Susan Heavey
WASHINGTON, Feb 5 For too many of Vada Lindsey's
lower-income clients, their hard-earned 401(k) accounts become
go-to emergency funds when they are faced with unexpected cash
Each year, Lindsey, a tax lawyer in Milwaukee, Wisconsin,
who helps some of the city's poorest residents, sees people
yanking money from already modest retirement accounts to deal
with unexpected moves, job losses and other emergencies.
"We are not talking about people squandering the money, for
the most part," says Lindsey, who also teaches law at Marquette
University. "If you need food, then you're going to pull that
out to take care of your family."
Her experience underscores recent industry data that shows
Americans who earn less are more likely to tap their 401(k)
plans early for cash. Furthermore, many workers are stepping
away from workplace plans altogether, according to other recent
These trends, coming amid potential changes to Social
Security, government budget pressures and the nation's growing
wealth gap, are raising concerns about the potential increased
risk of poverty facing Americans as they age and prompting calls
for possible policy solutions aimed at low-earning workers.
"We need new plan types," said Karen Friedman, policy
director of the Pension Rights Center, an advocacy organization.
So-called defined-contribution plans like 401(k)s, which
require workers to set aside and manage their own savings, have
been criticized in recent years for favoring high earners and
being inadequate for low earners. Even so, companies have
largely switched to this model over traditional defined-benefit
Proposals floated by private groups like the National
Institute on Retirement Security (NIRS) and the National Academy
of Social Insurance include expanding tax credits for low- and
middle-income earners who contribute to such plans and putting a
floor on Social Security benefits so that even those at the
lowest benefit level could stay above the poverty line,
currently $15,510 for a couple.
Senator Tom Harkin (D-Iowa), chairman of the Senate
Committee on Health, Education, Labor and Pensions, has been
pushing his own plan to create a national private pension plan.
The Obama administration has also proposed allowing workers
to use their 401(k) money to buy annuities that would give them
guaranteed monthly income for life once they retire. It has also
regularly proposed having small businesses set up automatic
individual retirement accounts for workers so money could be
directly swept from their paychecks into personal accounts even
if their employers don't have retirement plans.
So far, Congress has failed to bite on these ideas. Like
many other proposals, they really don't address the issue facing
Lindsay's clients - that low-income workers can't afford to save
as much as experts say they will need for retirement.
Advocates like Diane Oakley, director of NIRS, concede that
Congress isn't likely to craft a narrow approach bolstering
benefits for low-income workers at the expense of programs
helping upper-middle and high earners. But the issue could be
addressed as part of larger efforts to rethink the U.S. tax
code, reform pension systems and overhaul Social Security.
David John, a retirement and asset analyst at the
conservative Heritage Foundation, says there is bipartisan
concern about protecting the poorest retirees.
Washington analysts, however, are skeptical that such
big-ticket and controversial projects will be tackled in a
session already dominated by more immediate fiscal concerns on
top of immigration and gun measures.
CASHING FUTURE CHECKS NOW
A report released last month showed those who earn less than
$50,000 a year - slightly less than median income, according to
Census Bureau figures - were more likely to turn to their
401(k)accounts for a loan or to cash out their plans before
Overall, 30 percent of households with less than $50,000 in
annual income cash them out, compared with about 12 percent of
those making $100,000 to $150,000 and nearly 8 percent for those
making more than $150,000, according to the findings from Hello
Wallet, a financial advisory firm.
Investment industry representatives dismissed the findings,
saying they exaggerated 401(k) borrowing and that the plans are
designed for hardship withdrawals if needed.
"These accounts were never intended to be impenetrable
lockboxes," said the Investment Company Institute, which
represents mutual fund and other investment companies, in an
Penalties - including a 10 percent early withdrawal fee and
taxes - aim to deter pre-retirement withdrawals. But they offer
little pause when folks urgently need cash, say financial
experts who work with low-income families. Higher earners also
tap into 401(k)s for loans, but they tend to do so for more
strategic reasons such as buying a house.
Experts say the 401(k) "leaks" show most people lack basic
emergency funds, especially as the U.S. economy continues to
"Stagnant wages and rising costs are making it tougher and
tougher for people to save," Harkin said at a Senate hearing
last week on retirement issues. The gap between what Americans
should have for retirement and what they actually have saved is
estimated to be as high as $6.6 trillion, he said.
One way to help spur more contributions is to upgrade the
existing savers tax credit for low- and moderate-income
taxpayers - turning it into a refundable credit that could be
directly deposited into a retirement account, the way a 401(k)
match would be.
That could boost balances for struggling savers, said
Heritage's John, who also helps lead the retirement security
project at the Brookings Institution, another think tank.
Another option would be for employers to set up 401(k)-like
"platforms" that make it easier for workers to stash away funds
for certain uses such as emergencies or a house, he said.
Social Security calculations could be adjusted to help those
with long-term, low lifetime earnings qualify for the program,
according to Melissa Favreault, an income and benefits expert at
the Urban Institute, a progressive policy group.
That could be especially key as other data shows a growing
number of Americans just aren't saving in employer-based plans,
sacrificing long-term stability to focus on short-term needs.
A report last week by the Corporation for Enterprise
Development (CFED), a nonprofit research and policy group aimed
at lifting lower- and middle-class Americans, found the
percentage of workers in employer-based retirement plans has
dropped in about 25 states.
Some U.S. states such as California and New York are also
pushing separate saving programs to help people who make less
save more. Last year, California launched a controversial
state-run retirement savings plan for workers in the private
sector, the first such program in the country. A New York City
program, SaveUSA, also allows those with lower incomes to open
special savings accounts when they file their taxes.
Plans like Harkin's that lock up the money until retirement
could offer a better model for young people and others now most
likely to "breach" their 401(k) under the current system, said
Pension Rights Center's Friedman.
"It's the middle-income, lower earners that are probably
going to pull out that money, and those are the people who are
going to need the money most. So, it's a system that kind of
works against itself," she said.
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