Are you saving enough for retirement?  It can be a struggle even for those of us who do not live paycheck to paycheck.  For the working poor, the challenge must seem truly daunting.  Yet, Social Security payouts average only a little more than the poverty line, and benefits seem far more likely to decline than to increase in the future.  For those on the margins of poverty, putting money aside today may be critical to avoid a financial crisis in old age.

Should government step in to promote retirement savings by the working poor?  Vada Lindsey thinks so.  In a new paper on SSRN, she proposes reforms to the earned income tax credit that would push recipients to put a portion of their tax refunds into retirement savings.

Vada’s proposal has many intricacies, but the core features include an automatic allocation of ten percent of EITC benefits to a retirement plan, IRA, or other investment vehicle, plus a matching contribution from the government for additional savings beyond the automatic ten percent.  EITC recipients could opt out, but the default position would be in favor of savings. 

Vada’s proposal is inspired, in part, by the work of Richard Thaler and Cass Sunstein on “choice architecture,” which is described in their 2008 book Nudge: Improving Decisions About Health, Welfare, and Happiness. As Vada puts it, “The choice architect attempts to persuade, or ‘nudge,’ people to make certain choices that the architect perceives to be beneficial for those people” (112).  Structuring the retirement savings choice as an opt-out instead of an opt-in is a good example of the sort of “nudge” that Vada is attempting to deliver.  This is soft paternalism — people are not required to do the things that are thought to be in their own best interests, but are induced to make the “right” choices through careful framing of the options available to them.

Vada’s paper, entitled, “Encouraging Savings Under the Earned Income Tax Credit: A Nudge in the Right Direction,” appears at 44 U. Mich. J. L. Reform 83 (2010).  Here is the abstract:

During 2007, 3.6 million or 9.7% of people in the United States age 65 or older were below the poverty level. In light of the number of elderly people living below the poverty level, it is important that everyone, including low-income workers, have the opportunity to save for retirement. Low-income workers face many challenges to saving for retirement. The barriers to saving include the lack of access to retirement plans and lack of investment savvy. For example, only 42% of workers employed in service occupations in the private industry have access to employer retirement plans. The percentage drops to 39% for part-time employees.

This Article proposes that the earned income tax credit (EITC) be expanded to encourage saving to help reduce the poverty level. The Article argues that the EITC should be structured to “nudge” low-income workers to invest in retirement plans and individual retirement accounts to lower the likelihood that they will live below the poverty level at retirement. The Article then discusses the importance of saving and the ways in which the government has encouraged lower income workers to accumulate wealth. Because these efforts have not succeeded in increasing the savings rate of low-income workers, the government must take additional measures to encourage them to save. This Article outlines a detailed plan for the adoption of a saving component to the EITC and outlines the importance of automatic contributions in conjunction with the EITC to maximize the success of the saving component. The plan also includes a government match in certain circumstances but requires forfeiture of the match for early withdrawals.