While saving for retirement is a big challenge for middle-class families, the middle class is left behind by the retirement savings system in crucial ways. One of these ways is through tax breaks.

The tax breaks designed to increase Americans’ retirement savings disproportionately benefit high-income households and do little to assist middle-class families, according to new research from the National Institute on Retirement Security (NIRS). According to the report, more than half of the tax breaks for defined contribution (DC) plans and Individual Retirement Accounts (IRAs) go to those in the top 10% by income.

The report also notes that the top 30% of workers by income receive 89% of the present value of tax benefits for DC plans and IRAs, leaving a “missing middle,” since the tax code offers inadequate benefits for these working Americans to save for retirement. On top of this, these middle-class workers face rising retirement costs, often lack retirement plans at their jobs, and need more than just Social Security to maintain their standard of living.

In a news release announcing the report’s findings, NIRS executive director Dan Doonan said, “saving for retirement is one of the biggest financial challenges facing middle class families. But the middle class is left behind by the retirement savings system in key ways, including tax breaks.”

But there are possible solutions. The report noted that solutions to these inequities should focus on increasing participation in the retirement savings system and ensuring working families also receive adequate incentives to save for retirement. Some potential solutions could focus on building upon Social Security, either through benefit changes or allowing the program to integrate lifetime income options for savers. Reforming the tax expenditures themselves, by eliminating the deduction-based system and replacing it with a refundable credit, is another possibility.

Other solutions could focus on increasing access and participation in savings plans, which some states are doing for workers who lack workplace plans, making it easier to participate.

Finally, curbing abuses on the existing system would ensure that the significant sums of federal tax revenue dedicated to retirement security are directed at generating retirement income.

“It’s encouraging that policymakers are examining the nation’s retirement savings shortfall,” said Doonan. “But it will be important to really drill down to understand what policy levers can make a difference for the millions of middle-class Americans who are not accumulating adequate retirement savings.”

As an example, Doonan noted that “policy areas to look at would be strengthening Social Security, increasing access and participation in retirement plans, reforming the deduction-based tax system, and ensuring the tax breaks are directed at generating retirement income. Together, such policy changes could make a real impact toward ensuring working Americans will have ample income to be self-sufficient and maintain their standard of living in retirement.”

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