President Obama is proposing several measures to help older Americans save for retirement, care for relatives and help their kids pay for college.
“I know the anxieties that are out there right now,” Obama said Wednesday night in his State of the Union address to Congress. “That’s why we’re nearly doubling the child-care tax credit, and making it easier to save for retirement by giving every worker access to a retirement account and expanding the tax credit for those who start a nest egg.” He also proposed large funding increases for federal programs that directly help family caregivers.
Most of Obama’s proposals must be approved by Congress to go into effect. But several of them have broad backing and are already included in bills that have been introduced. “I think they are going to pass,” says Carol Wayman, director of federal policy for the Corporation for Enterprise Development, a nonprofit think tank and advocacy organization. “This is a high priority.”
Here are the details of the proposals, many of which emerged from a yearlong series of meetings held by the Middle Class Task Force created by Obama and chaired by Vice President Joe Biden.
This would compel employers who do not have a retirement plan to automatically enroll each employee in direct-deposit individual retirement account (IRA) plans, unless the employee opted out. It would offer new tax credits to help employers pay administrative costs.
The retirement plans would be the same as IRAs or Roth IRAs that individuals currently can open for themselves. This is an idea that has been kicking around Washington at least since 2007, when a similar plan was introduced in bills by Sen. Jeff Bingaman, D-N.M., and Rep. Richard Neal, D-Mass.
Current law offers low-income taxpayers a tax credit ranging from 10 to 50 percent of the money they put in a retirement plan, whether it’s their own or their employer’s plan. The maximum credit is $1,000 for unmarried filers and $2,000 for married filers. But it’s a complicated credit to calculate, tops out for families earning $55,500, and is not refundable—you can’t take advantage of the credit unless you owe federal income taxes.
For 2009, only people earning less than $16,500 ($33,000 for couples) qualified for the 50 percent credit. That meant it was difficult for people whose incomes were low enough to qualify to actually afford the contribution needed to snag the full credit.
The new proposal would match 50 percent of the taxpayer’s first $500 in retirement contributions ($1,000 for joint filers), and deposit that amount directly into the taxpayer’s retirement account. The credit would also be refundable, and eligibility would be extended to taxpayers earning up to $65,000. Families earning up to $85,000 could claim a partial credit.
While the maximum amount of the credit is lower, the proposed formula would allow many more people to take the credit and get the full 50 percent match.
“This will increase the net worth and retirement security of millions of low- to moderate-income working American families,” says Wayman. A similar bill has already been introduced in the House by Rep. Earl Pomeroy, D-N.D.
Tighter 401(k) regulations
Several legislators and the Department of Labor have already put 401(k) rules under a microscope following the market meltdown of 2008 and early 2009. Some of these changes would require legislation; others could be done by the administration by amending regulations. Obama wants to:
- Increase fee disclosure to employees, so they could easily see how much they were paying for plan management.
- Push employers to provide impartial investment advice to employees.
- Promote annuities and other products that would guarantee permanent income streams.
- Require additional disclosure and analysis from target-date funds, which are increasingly popular and promote themselves as one-decision solutions to retirement investing.
Help for caregivers
This is a two-pronged approach:
- The Obama plan would increase the child- and dependent-care tax credit for middle-income Americans. Though many people focus on this as a child-care credit, it also can be claimed by people taking care of older parents who live with them and whom they can claim as dependents. The proposal will nearly double the credit for middle-class families making less than $85,000 a year by increasing their credit rate from 20 percent to 35 percent of care expenses. Nearly all eligible families making less than $115,000 a year would see a larger credit. Families could claim up to $3,000 in expenses for one dependent, or $6,000 for two. The credit for a family having two dependents and making $80,000 a year would increase by $900, from $1,200 to $2,100.
- The second piece of the caregivers package cheered many organizations that work directly with caregivers. It would add $102 million in direct funding to state and local aging offices so they could provide more guidance, meals, transportation and other services. This could increase the budgets of these programs by a third. “We are so excited about it,” said Sandy Markwood, chief executive officer of the National Association of Area Agencies on Aging. “From our perspective, it’s exciting because it’s not just directing people, it’s helping the caregivers in a very rich way.”
College loan help
Obama would limit the share of graduates’ paychecks that is dedicated to paying off their student loans. Monthly loan payments would be limited to 10 percent of pay above a basic living allowance. Debt that remained after 20 years (10 years for people working in public service jobs) would be eliminated. This proposal, too, is a boost for older Americans, many of whom are trying to help their kids pay down college loans even as they care for their parents and try to save for their own retirements.
The reaction to the proposals from consumer and family advocacy groups was strongly positive. “We are extremely excited about this,” says Jordan Green, program manager of the National Alliance for Caregiving. AARP CEO A. Barry Rand says, “AARP is encouraged by the president’s commitment to help older Americans get through the challenges of a rocky economy. … It’s clear that much work remains to help millions of older Americans who face tough challenges getting through today and preparing for tomorrow.”
Linda Stern is a freelance journalist who writes about financial issues.