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In view of the government’s propensity to develop programs to encourage savings, we examine a group of individuals to whom these programs are targeted: low- to moderate-income taxpayers. We show that saving for retirement is not a priority in the lives of these taxpayers. The low priority given to saving is often due to immediate necessary costs such as housing, food, and transportation. However, our study shows that even nonessential items and activities such as cable and internet services or travel are often considered more important than saving. We also show that most of the participants were not even aware of the tax incentives available to them. In light of these results and evidence from other studies showing that individuals will save when given the right opportunities, we support arguments in favor of modifying the current “Saver’s Credit” and adopting the Automatic Individual Retirement Account (IRA) currently proposed in Congress. We also suggest an “opt-out” program offered through direct deposit or small employers along with a government match as an alternative way of packaging incentives for retirement savings. By making the retirement vehicle readily available with a transparent, immediate match, the effectiveness of the incentive should increase dramatically for those qualified.


Working Paper #1034

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