Removing Barriers to Retirement Savings in Medicaid and SSI

Most low-income families have inadequate retirement savings. They also are much less likely than higher-income households to participate in employer-based retirement savings plans or to have individual retirement accounts (IRAs). Fewer than 8 percent of individuals age 16 through 59 with household income below the poverty line hold a 401(k) retirement account or an IRA. Individuals with extremely low earnings, part-time employees, and employees with less than a high school diploma are especially unlikely to participate in an employer-based retirement plan. Moreover, even when low-income households participate in retirement saving plans, they tend to contribute a smaller share of their income than higher-income households do. In recent years, policymakers have expressed growing interest in increasing retirement saving by low-income households. For many very low-income households, Social Security benefits — or Social Security benefits plus benefits from the Supplemental Security Income (SSI) program — do not provide even a poverty-level income. In 2004, the typical (or median) household in the bottom fifth of the income scale that had managed to save for retirement had only about $5,000 in its retirement accounts, a fraction of what would be needed on top of Social Security and SSI benefits to avoid poverty in old age.3 If low-income families can accumulate some retirement savings to supplement their public benefits, fewer of them will be poor in retirement. Moreover, the federal government provides more than $100 billion in tax benefits each year to encourage retirement saving, primarily through employer-based retirement plans and IRAs. These subsidies disproportionately benefit affluent individuals: in 2004, about 70 percent of the tax benefits from new contributions to 401(k) plans went to the top 20 percent of tax filers.5 Encouraging low-income households to build some retirement savings could modestly reduce these large inequities.