Thought Leadership Thursday
National Action is Needed to Boost American Savings
Thought Leadership Thursday Article
Tomorrow, May 29th, “National 529 Day,” offers an opportunity to reflect on the ways in which personal savings programs like 529 College Savings, 529A Achieving a Better Life Experience (ABLE), and state-administered retirement plans are helping more families save. Yet, as we celebrate 529 day amidst the Covid-19 pandemic, May 29 also provides us a harsh reminder of what we’ve known for years: millions of American families lack the cash savings to weather a rainy day, let alone put money aside for college and retirement.
If families are to build the savings necessary to fund the American dream of education, financial stability, and a decent retirement, bold action by state and federal governments is needed to make savings vehicles more accessible and more valuable for all.
Even before Covid-19 put millions of Americans out of work, families found it far too difficult to save for planned milestones, such as higher education or an unexpected bump in life, such as a disability in the family. In its sobering 2019 review of the economic well-being of US households, the Federal Reserve reported that 40% of Americans do not have the cash savings to cover an unexpected $400 bill. 60% of young people pursuing a bachelor’s degree reported taking on debt to pay for it – double the rate from 30 years prior.
In the past few decades, federal and state governments have created various programs to help Americans save, including the 529 college, 529A ABLE, and state-administered retirement savings programs. As the Treasurer of the State of Illinois and Trustee of Illinois’ individual savings plans for college, retirement, and disability, one of my major roles is to help families save. But encouragement, marketing, and financial education alone will not ensure all Americans save enough to pay for these expenses.
Our country needs to help families save and to make those savings more valuable. 529 college savings plans provide many insights into what works well and what steps federal and state governments should take to maximize the value of all savings programs:
Ensure savings programs are accessible to all: Our country can take meaningful steps to ensure all existing savings programs are accessible to all. An alarming 35% of private sector workers do not have access to an employer-provided retirement plan. ABLE accounts, a way to save private funds for the expenses associated with living with a disability, are only available to individuals who experienced the onset of disability before age 26, denying access to approximately 6 million Americans who would otherwise be eligible. Because 529 funds are included in the FAFSA calculation for college financial aid, many low-income families are reticent to save in a 529 for fear it may reduce their eligibility for financial aid. Federal and state government must take steps to ensure universal access to retirement, disability, and college savings plans by ensuring all workers have access to a retirement plan, expanding eligibility for more disabled individuals to open ABLE accounts, and eliminating 529 plan savings from the FAFSA financial aid calculation.
Expand meaningful tax benefits at the federal and state level: Investors in a 529 plan benefit from multiple tax benefits. Savings in a 529 plan grow tax-free and can be withdrawn tax-free if used to pay for qualified higher education expenses. Many states also offer state income tax deductions for contributing to a 529 plan. To maximize the value of saving for college, tax benefits can be expanded to include a federal tax deduction for 529 contributions and federal tax incentives for employers to contribute to their employees’ 529 accounts. Similar tax benefits should be made available for savers in state-sponsored retirement plans and ABLE accounts.
Ensure universal portability and affordability: 529 plans are highly portable and increasingly affordable. Funds saved in one state’s plan can be used to pay for school in any state and can easily be rolled into the plan of another state. Savers in the Illinois Bright Start 529 program, for example, can create an account with no minimum contribution, minimum balance, or annual account fee. National legislation can help empower more state governments to implement retirement and other savings vehicles that are as portable and affordable as 529 plans.
Codified through bipartisan legislation in 1996, 529 savings and prepaid plans have grown to include over 14 million accounts in all 50 states saving over $350 billion for college, trade school, vocational school, and apprenticeships. The success of 529 plans demonstrates that action taken to make all savings programs more attractive and more valuable can incentivize millions of families to save more for college, retirement, disability, and rainy days.
In recent months, we’ve been reminded that the national government can act decisively to help American families. The time is long past due for similar action, using 529 plans as a blueprint, to help all families more easily and effectively save for the American Dream.
Illinois State Treasurer
Chair of the College Savings Plans Network