Can Tax Policy Increase Saving?

Can Tax Policy Increase Saving?

Can Tax Policy Increase Saving?
June 11, 2024
National saving consists of (1) business saving by corporations; (2) personal saving by
individuals; (3) saving (or more often dissaving) by the federal government; and (4) saving by
Jane G. Gravelle
state and local governments. Policymakers have been concerned about the declining and low U.S.
Senior Specialist in
national saving rate, especially following declines in personal saving during the 1980s and 1990s
Economic Policy
and increased dissaving by the federal government during full-employment years. Policymakers

have also expressed concern about the adequacy of personal saving for retirement, emergencies,
Donald J. Marples
and education. At times, economists and legislators have advanced tax policies to address these
Specialist in Public Finance
issues.

At the federal level, increasing taxes to reduce the deficit would likely increase federal

government saving (or reduce dissaving), thereby raising the national saving rate. Increasing the
personal saving rate through tax policy is more difficult. Economic research using models that assume rational, informed
behavior by individuals who are saving for retirement has shown that reducing taxes on capital income is unlikely to increase
saving much, if at all.
Further complicating matters, many economists believe models that assume rational, informed behavior do not realistically
portray saving behavior by human beings with imperfect information, who may rely on rules of thumb (such as saving a
certain percentage of income or saving toward a target amount) that do not respond positively to lower tax rates. Data also
show that individuals save for many purposes other than retirement, and that precautionary savings are the more important
goal than retirement for most families. Individuals tend to have short planning horizons that are inconsistent with so-called
life-cycle saving models, though older and higher-income individuals tend to consider longer planning horizons. Given this
context, economists and legislators who aim to encourage saving for retirement, emergencies, and education have proposed
policy interventions that are informed by empirical evidence about individuals’ observed saving behaviors.
About half of individuals in retirement do not have adequate income from savings as measured by a replacement ratio for
their income while working. This partly stems from lower-income individuals who find saving difficult, and from others who
are in the financial position to save enough but do not. Research has found a significant percentage of households with
inadequate retirement income across all income levels. Policies that increase participation in employer retirement plans,
which are already tax favored, might encourage adequate saving for retirement. Evidence suggests individuals are more likely
to participate in employer plans with automatic enrollment, such as automatic individual retirement accounts (auto-IRAs)
developed in some states, wherein employers reflexively set up savings plans that are managed by third parties and deduct
employee contributions to the plans unless employees opt out. Lower-income individuals are less likely to be able to save and
may be discouraged from saving by asset tests in transfer programs. In general, but especially for lower-income individuals,
Social Security is the main source of retirement income, and some Social Security recipients are below the poverty line. Tax
options are unlikely to encourage savings for these individuals, although altering Social Security to increase benefits for low-
income households and revising asset tests could help more low-income workers remain out of poverty in retirement.
Surveys indicate that most individuals are unprepared for emergencies. Almost 40% of respondents state that they would be
unable to address a $400 emergency with cash, and almost half state that they do not have the recommended amount of total
savings to cover three months of living expenses. Lack of resources to meet an emergency occurs across the income
spectrum, but is more pronounced at low incomes. Evidence indicates that having a savings account and being financially
literate contributes to better preparation. Employer-sponsored savings plans, such as auto-IRAs that are not for retirement,
and financial literacy training are options to encourage saving for emergencies.
In the education context, cost is a barrier to enrolling and remaining in college. The tax code provides benefits for college
savings accounts by exempting earnings from tax and allowing qualified expenses to be tax free on distribution; these plans
account for 9% of college costs and favor high-income individuals. Limited evidence suggests that these tax benefits are not
effective. Some states have developed seed and match incentives (providing small amounts of initial contributions to college
savings accounts and matching individuals’ additional contributions), but these have also had limited effects. Evidence
indicates that grants for students are the most effective way to increase enrollment, though not all students who enroll
actually graduate college. Federal government resources of this type are limited; Pell grants, the major grant program,
account for 5% of college costs. To increase college graduation rates, policymakers may want to consider merit-based aid.
Merit-based aid could raise equity and access concerns.
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Contents
Introduction ..................................................................................................................................... 1
Concerns About the Inadequacy of National Saving ....................................................................... 1
Background: National Saving ................................................................................................... 1
Policy Option: Increase Taxes to Reduce the Deficit ................................................................ 4
Policy Option: Cut Taxes on Corporations ................................................................................ 5
Policy Option: Reduce the Tax Rate on Capital Income for Individuals .................................. 6
How Income and Substitution Effects Theoretically Affect Saving ................................... 6
Empirical Estimates of the Intertemporal Substitution Elasticity ....................................... 8
How Realistic is the Life-Cycle Model? ........................................................................... 10
Behavioral Economics and Rules of Thumb for Saving .................................................... 11
What Do Individuals Say About Their Saving Behavior? ................................................. 11
The Adequacy of Retirement Saving ............................................................................................. 14
Are Individuals Currently Saving Enough for Retirement? .................................................... 14
Why Do Individuals Who Could Save for Retirement Fail To Do So? .................................. 16
Policy Options to Increase Saving for Retirement for Those Able to Save ............................ 17
Policy Options for Low-Income Individuals ........................................................................... 18
Inadequacy of Saving for Short-Term Emergencies ...................................................................... 20
Policy Options ......................................................................................................................... 21
Saving for Education ..................................................................................................................... 22
Sources of College Funding .................................................................................................... 22
Tax Benefits ............................................................................................................................ 23
Evidence on Effectiveness of Tax Incentives for College Saving ........................................... 24
Policy Options ......................................................................................................................... 25

Figures
Figure 1. Net National Saving Rates ............................................................................................... 2
Figure 2. Components of National Saving ...................................................................................... 3
Figure 3. Components of Investment .............................................................................................. 4
Figure 4. Distribution of Household Planning Horizons ............................................................... 12
Figure 5. Household Planning Horizons: by Progress Toward Savings Goal ............................... 13
Figure 6. Household Planning Horizons: by Retirement Income Adequacy ................................. 14

Tables
Table 1. Stated Reasons for Saving (%) ......................................................................................... 11
Table 2. Average Household Planning Horizons in Years: by Age and Income Groups ............... 12

Contacts
Author Information ........................................................................................................................ 26

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Introduction
National saving consists of four basic types of saving: business saving by corporations, personal
saving by individuals, saving (or more often dissaving) by the federal government, and saving by
state and local governments. Policymakers have been concerned about the declining and low U.S.
national saving rate, especially following declines in personal saving during the 1980s and 1990s.
More recently, the increased dissaving of the federal government during full-employment years
has also reduced the national saving rate. Congress has shown interest in tax policies that could
address inadequate personal saving, especially for retirement, emergencies, or education.
This report discusses both general and specific issues about saving and how tax policies may
affect saving based on evidence from economic research. An important focus of this research is
whether reductions in taxes on capital income increase saving. After a general discussion in the
next section, subsequent sections will focus specifically on retirement saving, saving for
emergencies, and saving for education.
Concerns About the Inadequacy of National Saving
Policymakers have been concerned about the declining and low U.S. national saving rate,
especially following declines in personal saving during the 1980s and 1990s and increased
dissaving by the federal government during full-employment years.
Background: National Saving
In a closed economy, investment equals saving. Investment in the economy determines the
growth in the capital stock and therefore affects overall economic growth. Holding labor constant,
growth in the capital stock also increases wages. These effects are generally viewed as desirable.
From the standpoint of economic theory, however, increasing growth by increasing saving is a
trade-off between present and future consumption. That is, there is a cost to saving, as it reduces
current consumption and wellbeing. That trade-off between present and future consumption
means increased saving may or may not be optimal.
Some of the concern about saving is because the saving rate has declined over time, which
potentially reduces the capital stock and wages. However, investment and the capital stock are
also affected by investment from abroad. The United States is a net importer of capital, and thus
net investment—which affects the capital stock—is larger than national saving. This flow of
capital from abroad can support a higher growth rate and higher wages than would otherwise be
the case, but the rights to income from that capital investment accrue to foreigners. Therefore,
unlike domestic saving, capital investment from abroad does not reflect a reduction in
consumption today in exchange for more consumption in the future. Thus, this higher level of
investment does not translate into future consumption for U.S. individuals. National investment
has also generally declined over time, but not as much as national saving, particularly since the
end of the Great Recession. Figure 1 shows national investment and national saving since 1960.
Initially, saving exceeded investment and the United States was a capital exporter, but around the
late 1970s, investment began to exceed saving and the United States became an importer of
capital.
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Figure 1. Net National Saving Rates
As a Percentage of GDP, 1960-2022

Source: “National Income and Product Accounts, Table 1.1.5 Gross Domestic Product and Table 5.1 Saving
and Investment by Sector,” U.S. Bureau of Economic Analysis (BEA), https://www.bea.gov/products/national-
income-and-product-accounts.
Because of international capital flows, an increase in national saving will not translate dollar for
dollar into an increase in national investment. However, Figure 1 indicates a close relationship, in
part because international capital is not perfectly mobile. Moreover, to the extent that increases in
saving reduce foreign capital inflows, they also reduce the claim that foreigners hold over future
income.
Figure 2 shows recent contributions of each component of national saving—business saving by
corporations, personal saving by individuals, saving (or more often dissaving) by the federal
government, and saving by state and local governments—as a percentage of GDP.1 Business
saving has been fairly steady over time, generally between 2% and 3% of GDP. Personal saving
has varied much more, with saving rates generally falling since the mid-1980s. The personal
saving to GDP ratio tends to rise during recessions, most recently in 2008 and after (the Great
Recession and prolonged recovery) and in the pandemic years of 2020 and 2021; saving generally
increases during recessions while the size of the economy (GDP) shrinks.2 Saving decreased in
2022, though data for the first two quarters of 2023 indicate a rise in the personal saving rate to
around 4%. The federal government has typically dissaved by running deficits, that is, incurring
more in increased current spending than in receipts (except for the brief period 1999-2001). The
deficit has been larger during recessions and recoveries due to automatic stabilizers and explicit
countercyclical policies. State and local saving or dissaving has historically been relatively small.

1 Net savings government reflects receipts minus current spending. Thus, dissaving by the federal government does not
correspond to the deficit, but the deficit minus net investment.
2 Liviu Voinea and Prakash Loungani, “Excess Savings Are Recession-Specific and Compensatory: Evidence From the
US,” Intereconomics, vol. 57, no. 4 (2022).
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Figure 2. Components of National Saving
As a Percentage of GDP, 1960-2022

Source: “National Income and Product Accounts, Table 1.1.5 Gross Domestic Product and Table 5.1 Saving
and Investment by Sector,” BEA, https://www.bea.gov/products/national-income-and-product-accounts.

While the business saving rate has remained relatively stable, personal saving as a percentage of
GDP began to decline in the 1970s. That overall downward trend continued in subsequent
decades, reaching a low of 2.1% in 2005. Although the rate subsequently increased, it never
returned to the rates of 8% to 10% seen in the 1960s, with the exception of 2020-2021, when
spending was constrained by the pandemic.
Economists have advanced numerous theories for this decline, including the slowing of income
growth in the mid-1970s, which occurred on a global basis for developed countries and was
accompanied by a global decline in saving.3 When faster income growth resumed in the United
States in the mid-1990s but the saving rate remained low, it is thought that additional income was
instead allocated to home purchases and mortgage payments, which increased substantially as
home-ownership rates grew. The collapse of housing values in the financial crisis was
accompanied by a recovery of personal saving. Another theory is that the shift from defined
benefit pensions to defined contribution retirement plans (both of which are included in personal
saving), with the latter available for early withdrawal or borrowing, contributed to the decline in
personal saving.
Personal saving rates also tend to be lower in the United States than in most other developed
countries. One group of researchers has theorized that the regional and racial diversity in the
United States may lead to more conspicuous consumption by those in poor states, racial
minorities, and rural areas, who are stereotyped as being more likely to be poor. According to this
theory, those populations’ consumption is used to signal that they are not poor. Another theory

3 These theories are summarized in Derek Thompson, “Why Don’t Americans Save More Money,” The Atlantic, April
19, 2016, https://www.theatlantic.com/business/archive/2016/04/why-dont-americans-save-money/478929/.
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that has been put forth is that the greater income inequality in the United States, accompanied by
greater wealth, has led middle-class Americans to consume more to keep up their relative
position.4
Another way to consider trends in investment in the United States is to look at trends in
investment by businesses, households and institutions, the federal government, and state and local
governments. Investment that increases the capital stock is net investment and consists of total
spending on investment goods minus depreciation of current assets. These investment goods
include structures, equipment, and intellectual property products. Economists and policymakers
often think of business saving as the capital stock that affects production. Purchases of owner-
occupied housing by individuals are also investments. Federal government investment includes
military structures, equipment, and research as well as spending on infrastructure and government
research. State and local investments include investments such as school buildings, infrastructure,
and recreational facilities. Figure 3 shows total investment by each sector as a percentage of
GDP.
Figure 3. Components of Investment
As a percentage of GDP, 1960-2022

Source: “National Income and Product Accounts, Table 1.1.5 Gross Domestic Product and Table 5.1 Saving
and Investment by Sector,” BEA, https://www.bea.gov/products/national-income-and-product-accounts.
Policy Option: Increase Taxes to Reduce the Deficit
One tax policy option to increase the national saving rate is to increase tax collections to reduce
the federal deficit, thereby increasing federal government saving. This increase would be partially

4 For some evidence, see Kerwin Koffee Charles, Erik Hurst, and Nikolai Roussanouf, “Conspicuous Consumption and
Race,” The Quarterly Journal of Economics, vol. 124, iss. 2 (May 2009), pp. 425-467.
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offset by a decrease in personal saving because some part of the reduced after-tax personal
income would also result in reduced personal saving, with the degree depending on whose
income is reduced. Higher-income individuals generally have higher saving rates than lower-
income individuals. There is a large and mixed literature estimating the propensity to consume
out of additional income, which depends on how consumption is defined and whether the income
increase is permanent or transitory. Nevertheless, the aggregate data on saving out of income
shows relatively low saving rates persisting over long periods of time as income per capita
increased (real GDP per capita has more than tripled since 1960).5 Thus, the offset from decreased
personal saving is likely to be small.
In addition to this option being a direct route to increasing national saving, it also addresses a
series of other issues concerning the unsustainability of current debt levels and the pressure a
growing debt places on available federal budget resources, especially if interest rates remain
higher than they have been in recent years.6 Given projected revenues and spending, the debt is
growing faster than GDP, which is unsustainable in the long run.7

Reduce Spending to Reduce the Deficit
Although this report focuses on tax policy, deficits can also be reduced by reducing spending. Similar to tax policy,
this would be challenging and require making trade-offs such as (1) limiting the provision of defense and domestic
public goods; (2) reducing transfers to persons, including entitlements for the elderly and those with low income;
and (3) reducing support for state and local governments. The effect this would have on saving would depend on
where the spending reductions occur. A more thorough discussion of these issues can be found in CRS Report
R45717, Addressing the Long-Run Deficit: A Comparison of Approaches, by Jane G. Gravelle and Donald J. Marples.
Policy Option: Cut Taxes on Corporations
Some proponents of increased national saving advocate for tax cuts on corporations. How
effective this policy approach would be depends on a number of considerations.
First, tax cuts to corporations can increase incentives to invest and attract equity capital from
abroad, which can increase economic growth and wages, although income for future consumption
does not increase because the return from that capital is paid abroad. However, a corporate rate
cut can also decrease capital from abroad because it reduces the value of interest deductions. If
debt is more mobile than equity, then net foreign inflows can decrease. Incentives that affect
investment (regardless of whether the investment is debt or equity financed), such as accelerated
depreciation, more clearly encourage investment than do rate cuts.8
Second, some economists have argued that investment increases with cash flow. Theory indicates
that cash flow alone should not increase investment, except perhaps in the case of liquidity-

5 See “FRED Economic Data: Real gross domestic product per capita,” Federal Reserve Bank of St. Louis,
https://fred.stlouisfed.org/series/A939RX0Q048SBEA.
6 See CRS Report R47877, Deficit Spending During Higher Inflation and Interest Rates: Implications for Debt
Sustainability, by Lida R. Weinstock.
7 See U.S. Government Accountability Office (GAO), The Nation’s Fiscal Health: Action Needed to Address Projected
Unsustainable Debt Levels, GAO-23-106873, June 6, 2023, https://www.gao.gov/products/gao-23-
106873#:~:text=GAO's%20long%2Dterm%20projections%20show,to%20the%20long%2Dterm%20outlook.
8 CRS Report R45186, Issues in International Corporate Taxation: The 2017 Revision (P.L. 115-97), by Jane G.
Gravelle and Donald J. Marples, calculates the effective tax rates for corporate investment before and after the 2017 tax
revision and finds that including debt finance significantly reduces the effect.
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constrained firms that have desirable investments but lack financing. On the whole, most
empirical evidence finds small effects.9
Third, there is the question of whether a corporation acts independently of its shareholders. If it
acts on behalf of shareholders, then a large cash flow that does not change investment incentives
or changes them in a limited way would lead to most cash flow being distributed to shareholders
to direct to alternative uses.
Fourth, corporate rate cuts largely go to existing capital, compared to investment incentives that
affect new investment, so that even a large corporate rate cut can have a limited effect.
Corporate tax cuts were a prominent aspect of the 2017 tax revision (P.L. 115-97). The law cut the
corporate tax rate from 35% to 21% and provided full expensing (bonus depreciation) for
equipment (although that provision is being phased out).
Simple observation (see Figure 1) after the 2017 tax cut did not show an increase in private
investment compared to net private saving; both changed little in the following two years,
suggesting little evidence of an inflow of capital. Similarly, business saving (retained earnings of
corporations) generally remained at its historic levels. The data did show a noticeable increase in
stock buybacks, which suggests that the cash flow was primarily used to distribute cash flow to
shareholders.10
Whether or not a tax cut for corporations can increase investment, any such effect is offset by the
increased federal deficit and debt, which reduces funds available for investment, unless increased
investment increases income and taxes enough to offset the tax cut. If not, the debt will grow
continually. In the long run, a stand-alone corporate tax cut is likely to reduce investment. How
quickly this occurs depends on the magnitude of any increased investment.
Policy Option: Reduce the Tax Rate on Capital Income for
Individuals
It is sometimes taken for granted by policymakers that reducing taxes on capital income will
increase personal saving. Unlike the option of reducing the deficit, however, this approach will
not necessarily increase saving, in theory, because of income and substitution effects. This basic
theory abstracts from the difference between corporate and personal saving, treating individuals
as if they “see through the corporate veil,” thereby treating corporate saving as part of personal
saving.
How Income and Substitution Effects Theoretically Affect Saving
Economic theory does not provide a definitive answer on how individuals will respond to
increased returns to investing. The impact of rising returns to saving results in two opposing

9 See Jonathan Lewellen and Katharina Lewellen, “Investment and Cash Flow: New Evidence,” Journal of Financial
and Quantitative Analysis, vol. 51, no. 4 (August 2016), pp. 1135-1164, https://faculty.tuck.dartmouth.edu/images/
uploads/faculty/jonathan-lewellen/Investment_and_cashflow.pdf for a review of the literature. Their study found larger
effects.
10 See S&P Dow Jones Indices, “S&P 500 Buybacks Set Quarterly and 12-Month Records—Again,” press release, June
16, 2022, https://www.spglobal.com/spdji/en/documents/index-news-and-announcements/20220616-sp-500-
buybacks.pdf and Yardeni Research, “Corporate Finance Briefing: S&P 500 Buybacks & Dividends,” 2023.
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effects on saving behavior. The income effect is expected to result in individuals saving less.11 In
contrast, the substitution effect is expected to result in individuals saving more.12
Economists generally use a life-cycle model to estimate how changes in rates of return (i.e.,
interest rates) affect savings. The model is based on the notion that people save to smooth
consumption over their lifetimes and need to accumulate savings at some period in their lives to
provide for consumption in retirement. This model is widely used by academics and in some
government models, including a version used by the Joint Committee on Taxation for dynamic
scoring.13 It has been subject to criticism by a growing number of behavioral economists who
have presented evidence that the life-cycle model is not a realistic depiction of saving behavior.14
To explain how these different forces work, consider a simplified example of a two-period choice.
An individual has wages of $200 and lives for two periods, working in the first period and retiring
in the second period. The after-tax rate of return is 10%. Total consumption in the two periods is
larger when more wages are saved, and thus there is an incentive to save more to increase
consumption in the second period. The individual wants to have consumption in each period that
is not too much different and also values consumption less in the second period because of the
time value of money and the possibility that he or she might die before enjoying that
consumption. Thus, the individual would like to spread consumption over both periods. Assume
in this example that because of these offsetting effects the individual chooses to consume equal
amounts: $104.76 in each period. The $95.24 in savings will earn 10%, leaving $104.76 ($95.24
times 1.10) in the second period. That higher return effectively means that foregoing $1 of
consumption today will pay for $1.10 of future consumption. The lower price of future
consumption creates an incentive to shift more consumption to the second period (in this case,
precisely offset by the probability of dying). This incentive effect is the substitution effect.
Now suppose the taxes were reduced so the after-tax return rises to 15%. If the individual
continues to consume $104.76, the higher rate of return will allow $109.52 in the second period,
an increase of 4.5%, so consumption can increase without any additional saving. In fact, the
individual can actually consume more in this period and still consume more in the second period.
That is the income effect.
At the same time, the incentive to consume in the future has increased while the probability of
dying has not changed. If there is no substitution response and the individual still wishes to
consume equal amounts in each period, consumption can rise to $106.98, and savings will
decrease from $95.24 to $93.02. For saving to increase, the substitution effect must be large
enough to offset the income effect. The change in the incentive to save is determined by the
percentage change in price and is referred to as the intertemporal elasticity of substitution, that is,
the percentage change in the ratio of first-period consumption to second-period consumption

11 The income effect is expected to diminish individual savings and investment because as the rate of return to saving
increases, individuals have to save and invest less of their income to achieve a given level of income in the future. For
example, if an individual has a target savings goal for retirement, an increase in the rate of return to saving allows an
individual to save less and still reach that target goal for future consumption during retirement.
12 In opposition to the income effect, as the return to saving increases, individuals are expected to increase the amount
they save. This is referred to as the substitution effect. As the return to saving increases, the price of current
consumption increases in relation to future consumption, and individuals substitute current consumption for future
consumption.
13 See CRS Report R43381, Dynamic Scoring for Tax Legislation: A Review of Models, by Jane G. Gravelle for a
discussion on dynamic scoring models.
14 See Melissa A.Z. Knoll, “The Role of Behavioral Economics and Behavioral Decision Making in Americans’
Retirement Savings Decisions,” Social Security Bulletin, vol. 70, No. 4 (2010), https://www.ssa.gov/policy/docs/ssb/
v70n4/v70n4p1.html
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divided by the percentage change in the relative price of second-period consumption (the latter of
which is 1/(1+i) where i is the interest rate). If the intertemporal elasticity of substitution is equal
to one, saving will not change; if it is lower than one, saving will decrease, and if it is higher than
one, saving will increase.
There is a further wrinkle to the income and substitution effects. Suppose the individual only
partially retires and earns $100 in the second period. Again, suppose the incentive effect is offset
by the probability of dying and consumption is the same in each period. In this case, consumption
in the first period is $152.38 and the $47.62 in savings will earn 10% and provide $52.38 in the
second period to add to the $100 in wages. Now the income effect on second-period consumption
is smaller. If first-period consumption remains the same, the $47.61 in savings will be $54.76,
raising the second-period consumption to $154.76, which is a 1% increase.
This means that the substitution effect can be smaller and still increase saving. In this example,
the substitution elasticity would have to be higher than 0.36 for saving to increase. This second
effect that lowers the required elasticity is called the human wealth effect.
A life-cycle model in practice includes individuals with an adult lifetime of about 55 years, all at
different ages combined. Individuals generally want to keep consumption relatively smooth while
wages are smaller in the beginning of the work period, then increase in middle age and become
zero in retirement. Individuals initially dissave when younger, then save as wages rise, then
dissave in retirement. Models also generally allow for bequests to be given and received. Given a
retirement period, the income effect (which affects the present value of consumption) will be
larger than the human wealth effect. The size and direction of the effect on saving depends on
these effects and the substitution effect.
In addition, when considering the effects of taxes on the rate of return, models allow for
differences in marginal and average changes in taxes on income, which can result from graduated
tax rates. If the change in the average tax rate on capital income is smaller than the change in the
marginal tax rate, then it is more likely that the substitution effect will dominate and saving will
increase.
Empirical Estimates of the Intertemporal Substitution Elasticity
During the 1970s and 1980s, a number of studies estimated the effect of the rate of return on
saving by using aggregate time series data for saving rates and rates of return to estimate the
savings elasticity. The evidence generally showed small, possibly negative saving responses.15 In
general, the evidence suggests savings are not responsive to rates of return (a zero elasticity).
Partly because of growing interest in intertemporal models, researchers began to study
intertemporal substitution elasticities rather than the effect of rates of return on saving rates.
Robert Hall conducted the pioneering study of intertemporal substitution elasticities,16 and found
that the elasticity was extremely small, could be zero, was statistically insignificant, and was no
more than 0.2. Hall noted that the small elasticities arise from consumption growth being steady
relative to interest rates that fluctuate significantly. Early surveys of the value led to the use of

15 These studies are reviewed in Jane G. Gravelle, The Economic Effects of Taxing Capital Income (Cambridge, MA,
MIT Press, 1994), p. 27. The most recent study was Jonathan Skinner and Daniel Feenberg, “The Impact of the 1986
Tax Reform on Personal Saving,” in Do Taxes Matter? The Impact of the Tax Reform Act of 1986, Ed. Joel Slemrod
(Cambridge MA: The MIT Press, 1990).
16 Robert E. Hall, "Intertemporal Substitution in Consumption," Journal of Political Economy, vol. 96, no. 2 (April
1988), pp. 339-357.
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elasticities of 0.25 to 0.33.17 Most subsequent studies produced elasticities below 0.5, although
some studies estimated elasticities in excess of one.
Professors at Prague’s Charles University prepared a 2013 meta-analysis (i.e., a large analysis that
combines data from many studies) of estimates of the intertemporal elasticity of substitution
across many countries; they found an overall elasticity of 0.5 for the world on average and 0.6 for
the United States.18 The authors cautioned that the estimates were too large in value because of
publication bias.19 Havraneka, a coauthor of this meta-analysis, subsequently published the basic
(worldwide) results after correcting for estimated publication bias.20 The correction indicates that
the elasticity for macro aggregate studies is zero (as Hall originally found). In the basic case
(without selecting across studies for other characteristics), the elasticity for micro studies (which
were about a quarter of the studies) was 0.2. This study suggests that an elasticity of zero to 0.2
might be in order.
One problem with all of these studies is that the interest rate is not an exogenous variable, and
both interest rates and consumption may be influenced by the same variables. Some techniques
attempt to address that. However, one recent study addressed this issue directly using a feature of
the United Kingdom (UK) mortgage market to estimate the intertemporal substitution elasticity.21
In the UK, mortgages are short term and homeowners must refinance every few years. Interest
rates rise in discrete amounts (notches) depending on the loan-to-value ratio. Thus, they present
an exogenous change in interest rates: if individuals give up more in current consumption through
less equity extraction, they can get lower interest rates and more consumption in the future. With
a substitution elasticity, loan-to-value ratios should bunch precisely at the points where the ratios
are just low enough to allow a lower interest rate. The authors found that although there is
bunching at the notch points, there is not enough to justify high intertemporal substitution
elasticities, and they estimate an elasticity of 0.1.
If the intertemporal elasticity is this small, it is more likely that cuts to the taxes on capital income
would have a smaller, or even a negative, effect on saving in these theoretical models. A study

17 Auerbach and Kotlikoff report the results of nine different studies that ranged in value from less than 0.1 to more
than 1. The median value was around 0.3 and a weighted average of eight of them using the mid-point of each range
(and excluding a study by Mankiw, Rotemberg, and Summers in which it is clear the authors were not very satisfied
with the model) yielded an estimate of 0.39. See Alan J. Auerbach and Laurence J. Kotlikoff, Dynamic Fiscal Policy
(Cambridge University Press, New York, 1987). They adopt a value of 0.25. Elmendorf undertakes a survey of the
studies most commonly cited and obtains a weighted average of 0.37; he uses 0.33 in his work. See Douglas W.
Elmendorf, “The Effect of Interest-Rate Changes on Household Saving and Consumption,” Federal Reserve Board,
June 1996, https://www.federalreserve.gov/pubs/feds/1996/199627/199627pap.pdf.
18 Tomas Havraneka, et al., “Cross-Country Heterogeneity in Intertemporal Substitution,” University of Michigan,
William Davidson Institute, Working Paper no. 1056, August 2013, https://deepblue.lib.umich.edu/bitstream/
handle/2027.42/133075/wp1056.pdf. A meta-analysis does not simply average results of studies but weights them
according to the number of observations and sometimes by confidence intervals.
19 Publication bias is a problem widely recognized in many fields. Basically, if theory indicates an elasticity should be
positive, and the estimate is negative, peer reviewers are less likely to recommend publication, editors are less likely to
publish, and researchers, expecting the unlikelihood of publishing, tend not to submit their articles (which often involve
a fee) or even prepare a working paper. Yet, when a large number of estimates have been made, because of the
fundamental theory of statistical estimation, some would be negative (particularly if the true value is low). Publication
bias also suggests that estimates of the elasticities are probably too large in absolute value.
20 Tomas Havranek, “Intertemporal Substitution: The Importance of Method Choices and Selective Reporting,” Journal
of the European Economic Association, vol. 13, no. 6 (2015), pp. 1180-1204.
21 Michael Carlos Best et al., “Estimating the Elasticity of Intertemporal Substitution Using Mortgage Notches,”
Review of Economic Studies, Oxford University Press, vol. 87, no. 2 (2020).
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that examined the effects of the income, wealth, and substitution effects in a life-cycle model
using a 0.33 substitution elasticity generally found that the savings elasticity is negative.22
How Realistic is the Life-Cycle Model?
The life-cycle model developed as a way to be consistent with economic theory about optimal
choices for consumption in the present and future. The model reflects choices to save by rational
individuals who have perfect information about the future (including how income and interest
rates change in response to a policy change). Critics in the growing field of behavioral economics
have argued that this model is unrealistic, as human beings do not have the information and
cognitive skills to make these choices.23 Moreover, these failures to optimize are not random, as
individuals are more likely to use rules of thumb, such as saving a fixed share of income or
saving toward a target amount. Human beings are also characterized by procrastination and lack
of self-control. Individuals may have “mental accounts” and save differently within these
accounts (e.g., checking accounts, savings accounts, retirement accounts). A further information
constraint occurs when determining the effect of taxes, since individuals do not generally know
their marginal tax rates.24
The life-cycle model is also inconsistent with observation. A life-cycle model would show that
while income is low in the early years, higher in the middle years, and lower at retirement,
consumption should be relatively smooth. Data indicate, however, that consumption closely
tracks income and both income and consumption are hump shaped.25 Researchers have
considered a number of modifications to improve the fit of these models, including liquidity
constraints and precautionary saving, which both reduce the response of saving to the interest
rate. Data from the Survey of Consumer Finances (SCF) indicate that precautionary saving (in
case of a negative life event such as job loss or poor health) as well as saving for specific targets
(education, a down payment on a house, a durable purchase) are important motives, as shown in
Table 1.26 These types of targets suggest an increase in the interest rate would reduce saving.

22 Douglas Elmendorf, The Effect of Interest Rate Changes on Household Saving and Consumption, Federal Reserve
Board, June 1996, https://www.federalreserve.gov/pubs/feds/1996/199627/199627pap.pdf. Elmendorf also included the
change in the value of existing assets, which tend to increase saving, but that would not be relevant for a tax change.
23 See, for example, Richard H. Thaler, “Psychology and Savings Behavior,” American Economic Review, vol 82, no. 2
(May 1994), pp. 186-192, and Melissa A. Z. Knoll, “The Role of Behavioral Economics and Behavioral Decision
Making in Americans' Retirement Savings Decisions,” Social Security Bulletin vol. 70, no. 4 (2010),
https://www.ssa.gov/policy/docs/ssb/v70n4/v70n4p1.html.
24 This literature is reviewed in Jane G. Gravelle and Sean Lowry, “The Affordable Care Act, Labor Supply, and Social
Welfare,” National Tax Journal, vol. 69 no. 4 (December 2016), pp. 863-882.
25 Orazio P. Attanasio and Guglielmo Weber, “Consumption and Saving: Models of Intertemporal Allocation and Their
Implications for Public Policy,” Journal of Economic Literature, vol. 48, no. 3 (September 2010), pp. 693-751, and
Richard H. Thaler, “Anomalies: Saving, Fungibility, and Mental Accounts,” Journal of Economic Perspectives vol. 4,
no. 1 (Winter 1990), pp. 193-205.
26 The Federal Reserve Board’s Survey of Consumer Finances (SCF) is a triennial survey that contains information on
families’ balance sheets, the attitudes of U.S. households toward financial risks, and (among other things) their most
important saving and planning horizons.
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Table 1. Stated Reasons for Saving (%)
By Age and Income Group

Age 25-39
Age 40-49
Age 50-59
Bottom
Bottom
Bottom

Half
Top Half
Half
Top Half
Half
Top Half
Retirement
10.8
26.2
14.5
32.6
26.5
50.4
Precautionary
44.2
47.5
41.9
44.1
39.2
36.0
Housing
14.2
8.5
10.4
2.3
5.0
0.6
Purchases
10.6
5.5
11.6
8.3
15.3
4.8
Education
3.6
2.9
8.4
6.4
3.1
2.9
Other
14.2
9.4
10.6
6.2
6.4
4.7
Cannot Save
2.3
0.1
2.7
0.2
4.5
0.6
Source: CRS tabulations of the 2022 Survey of Consumer Finances.
Notes: Columns may not sum to 100% due to rounding.
Table 1 emphasizes three findings. First, the data show that precautionary saving is the most
significant motivation for most age and income groups. Precautionary saving has also grown
relative to other types of saving since the 2019 SCF, perhaps indicating that the COVID-19
pandemic may have affected saving decisions. Next, retirement is the second-most important
reason for saving for the majority of age and income groups. The retirement motive is stronger
for older age groups and higher-income groups. Finally, in each age grouping the households in
the lower half of the income distribution are more likely than those in the upper half to cite saving
for concrete and nearer-term objectives as a primary motivation.
Behavioral Economics and Rules of Thumb for Saving
Lessons drawn from behavioral economics suggest potential alternative approaches to saving
based on rules of thumb. One approach is to save a certain percentage of income. In this scenario,
a fraction of any gains from increased interest rates will be saved and a fraction, generally much
larger, will be consumed depending on income levels (since higher-income individuals tend to
save larger fractions of their income). Another approach involves saving aimed at achieving a
specific target amount for retirement. In this strategy, the dollar amount of income saved will
decline when the interest rate rises and increase when it falls. Another rule of thumb, often
advised by financial planners, aims to replace a certain fraction of consumption in retirement.
Financial planners also often advise an emergency fund equal to three months of income.
Evidence also indicates a status quo bias in making decisions.27 When given the opportunity to do
something or do nothing, individuals are more likely to do nothing. To some extent, therefore, tax
policy can be used to create a status quo, with the most obvious example being the requirement
for automatic enrollment in tax-favored retirement plans, as discussed subsequently.
What Do Individuals Say About Their Saving Behavior?
Numerous surveys document that individuals are concerned about their personal finances. One
recent survey found that 40% of respondents thought they were in good or great shape financially

27 William Samuelson and Richard Zeckhauser, “Status Quo Bias in Decision Making,” Journal of Risk and
Uncertainty, vol. 1 (March 1988), pp. 7-59.
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and roughly one-third said they are spending more than they can afford on a monthly basis.28
Other surveys found that 45% of workers think it is unlikely they will save enough for
retirement29 and less than half of individuals could pay for an unexpected expense of $1,000 from
savings.30
Other surveys use indirect approaches to tease out more easily generalizable information on how
individuals think about their saving decisions and how different situations affect their thinking.
This approach assumes that a positive relationship exists between planning horizons and saving—
with short planning horizons associated with a lower taste for saving. The most recent SCF,
conducted in 2022, found that most households had planning horizons between 1 and 10 years, as
shown in Figure 4.
Figure 4. Distribution of Household Planning Horizons

Source: CRS calculations using the 2022 SCF.
The SCF also found that average planning horizons are broadly longer for older individuals than
younger individuals and for higher-income individuals than lower-income individuals, as shown
in Table 2.
Table 2. Average Household Planning Horizons in Years: by Age and Income Groups
Age Group
25-39
40-49
50-59

Average Horizon
3.4
4.1
5.0

Income Group
Bottom Quartile
2nd Quartile
3rd Quartile
Top Quartile
Average Horizon
2.8
3.7
4.4
5.7
Source: CRS calculations using the 2022 SCF.
Planning horizons may differ based on individuals’ financial situations and anticipated expenses.
Figure 5 presents planning horizons based on progress toward saving for an anticipated expense
in the next 10 years. It shows that individuals who have already saved for an anticipated expense

28 Mary Ellen Cagnassola, “Is It a Good Time to Save Money? 91% of Americans Think So,” Money, February 29,
2024.
29 Lane Gillespie, “Survey: 56% of Americans Feel Behind on Saving For Retirement,” Bankrate, September 23, 2023.
30 Lane Gillespie, “Bankrate’s 2024 Annual Emergency Savings Report,” Bankrate, February 22, 2024.
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have longer planning horizons than those who are still saving toward the anticipated expense or
are not saving toward an expense.
Figure 5. Household Planning Horizons: by Progress Toward Savings Goal

Source: CRS calculations using the 2022 SCF.
Progress toward less-defined goals also affects planning horizons. Figure 6 presents planning
horizons based on individuals’ expectations of retirement income adequacy. It shows that
individuals who expect they will be either satisfied or very satisfied with their retirement income
have longer planning horizons than individuals who expect to be less satisfied with their
retirement income.
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Figure 6. Household Planning Horizons: by Retirement Income Adequacy

Source: CRS calculations using 2022 SCF.
The Adequacy of Retirement Saving
Are Individuals Currently Saving Enough for Retirement?
Concern about saving sometimes focuses on whether individuals are saving enough for
retirement. From an economic standpoint, the best way to answer this question is to examine
replacement ratios—that is, how much income is available in retirement compared to the working
years. In general, that ratio can be lower than 100% because individuals in retirement are subject
to lower taxes, no longer have to save for retirement or children’s education, and do not have
work expenses. For middle-class individuals, the optimal ratio is typically estimated at between
65% and 75%.31
Many complexities arise in measuring replacement rates, both in the denominator (e.g., lifetime
earnings or recent earnings) and in the numerator. In the numerator, for example, earnings would
include wages, Social Security benefits, defined benefit pensions, cash transfers, and perhaps
distributions from retirement accounts. Theoretically, earnings should include in-kind benefits
such as Medicare, but this measure is difficult and the denominator should also include in-kind
benefits. Some might argue that earnings should include potential earnings from assets that are
not in the flow of income (such as capital gains) and can be spent down.
Concern about the adequacy of retirement savings for lower-income workers centers on Social
Security replacement rates, as Social Security payments may be the major source of income for
such retirees. The Congressional Budget Office (CBO) estimates that, on average, Social Security
replaces 39% of the last five years of substantial earnings and 55% of lifetime earnings for the

31 Patrick J. Purcell, “Income Replacement Ratios in the Health and Retirement Study,” Social Security Bulletin, vol.
72, no. 3 (2012), https://www.ssa.gov/policy/docs/ssb/v72n3/v72n3p37.html.
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median-income worker.32 The adequacy of Social Security benefits depends, in turn, on the cohort
of the beneficiary and his or her income when working. About 15% of long-career workers
(workers with at least 20 years of significant earnings) born in the 1940s receive scheduled Social
Security benefits that are below the poverty level. In comparison, CBO projects that about 13% of
those born in the 1960s will receive benefits that are below the poverty level, and 6% of those
born in the 1980s will do so. (These calculations assume Social Security benefits will not be
changed in the future.) This share is projected to fall because the poverty level is indexed by
inflation while initial Social Security benefits rise with wage growth.
Social Security is the single most important source of retirement income.33 In 2005, for those ages
64 to 65, it accounted for 39% of income. Excluding wages—which accounted for 20% and were
not likely to continue into future years—Social Security accounted for 49% of income. This share
fell with income: Social Security was 55% of nonwage income for the lowest quintile, while it
was 51% in the middle quintile and 37% in the highest quintile. The next-largest source was
assets, including retirement accounts, which provided 32% of nonwage income. Thus, individual
savings were an important part of nonwage income. Defined benefit pensions accounted for 13%
in the lowest quintile, rising to 16% in the highest. Given the importance of asset income, it
remains of concern to policymakers that enough saving occurs both inside and outside of
retirement plans.
Data from a 2017 survey for individuals aged over 65 confirmed the importance of Social
Security benefits for most incomes, although the survey population included people who had not
retired and partial retirees. The median income share from Social Security for the lowest quintile
was 83%, although that group also had the lowest share of earnings and may have reflected a
group with more retirees.34 These data also separated retirement income (in both defined benefit
and defined contribution plans) from other-asset income.
A 2012 study indicated that median replacement ratios were relatively high at 71% in the first
year of retirement considering only income flows, but fell to 58% by the 10th year.35 These
amounts were higher if the value of assets was taken into account. If income was measured by
converting nonhousing wealth into an annuity, the replacement rate was 90% in the first year and
74% in the 10th year. If housing wealth was also annuitized, the median was 100% in the first year
and 83% in the 10th year.
These rates were subject to wide dispersion. While more than half the population appeared to
have adequate retirement savings, the data indicated that 25% of the population had replacement
rates of less than 49%, declining to 41% by the 10th year when income flows were considered.
Over the same time frame, these rates declined from 61% to 55% when annuitized nonhousing
wealth was included, and from 68% to 61% when all annuitized wealth was included. The data
also indicated that significant fractions of the population experienced low replacement rates
throughout the income distribution: in each quartile of preretirement income, those with
replacement rates at the 25th percentile replaced about half of their income.

32 U.S. Congressional Budget Office (CBO), Social Security Replacement Rates and Other Benefit Measures: An In-
Depth Analysis, April 2019, https://www.cbo.gov/system/files/2019-04/55038-SSReplacementRates.pdf.
33 Andrew G. Biggs and Glenn R. Springstead, “Alternate Measures of Replacement Rates for Social Security Benefits
and Retirement Income,” Social Security Bulletin, vol. 68, no. 2 (2008), https://www.ssa.gov/policy/docs/ssb/
v68n2/v68n2p1.html.
34 CRS In Focus IF12330, Retirement Income Security: Issues and Policies, by Zhe Li, Paul S. Davies, and Elizabeth
A. Myers.
35 Patrick J. Purcell, “Income Replacement Ratios in the Health and Retirement Study,” Social Security Bulletin, vol.
72, no. 3 (2012), https://www.ssa.gov/policy/docs/ssb/v72n3/v72n3p37.html.
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Among retirees without labor income, a significant share of those who rely on Social Security and
have no other savings have reported that they are struggling financially. According to a Federal
Reserve survey, 47% of retired individuals without private income (relying on Social Security and
other cash transfers) indicated that they were not doing okay financially, whereas 22% of those
with a pension made that indication.36 (These numbers may also correlate with income.)
Higher-income individuals aged over 65 have substantial shares of income from assets outside of
pensions, according to Census data.37 These data may understate the importance of income from
assets, especially for those with the highest measured incomes, as these households probably still
work. The highest decile probably includes more households that have not retired and thus may
have lower shares of income from pension assets (39% from wages, 23% from pensions, and 13%
from other-assets income). In the second-highest decile, wages fall to 15% of income, reflecting a
group largely retired, with 35% from pensions and 15% from asset income. Thus, while pensions
are a larger source of income on average, there are significant contributions from other-asset
income. Moreover, this asset income may understate the potential for nonretirement assets to
contribute to income because of unrealized capital gains. These higher-income individuals also
tend to own homes, and thus benefit from not paying rent and the possibility of selling or
borrowing against the home to provide income. An earlier study indicated that, at the 90th
percentile of wealth among those aged 65 to 69, housing wealth was 1.6 times (or 60% larger
than) financial wealth.38
These data suggest that retirees can be divided into three types:
• those who appear to be adequately funded in retirement and have significant
sources of other wealth that enable them to not depend only on Social Security
and pension income;
• those who have adequate replacement income but could have saved more, as
indicated by the significant portions of individuals across all income quartiles
who have replacement rates below 50%; and
• those whose incomes are so low they cannot afford to save, and generally must
rely on Social Security and other public transfers. This group also experiences a
cost to saving due to asset tests.
Why Do Individuals Who Could Save for Retirement Fail To Do
So?
Turning to the second group, those with the potential to save for retirement but who choose not to
do so, much of the attempt to understand and consider remedies is drawn from the psychological
and behavioral economics literature addressed above.39 That literature focuses on issues such as
procrastination, inertia, complexities in making decisions, lack of self-control, and lack of

36 Board of Governors of the Federal Reserve System, Economic Well-Being of U.S. Households in 2022, May 2023,
https://www.federalreserve.gov/publications/files/2022-report-economic-well-being-us-households-202305.pdf.
37 Daniel Thompson and Michael D. King, “Income Sources of Older Households: 2017,” U.S. Census Bureau, Current
Population Reports, February 2022, https://www.census.gov/content/dam/Census/library/publications/2022/
demo/p70br-177.pdf.
38 James Poterba, Steven Venti, and David Wise, “The Composition and Drawdown of Wealth in Retirement,” Journal
of Economic Perspectives, vol. 25, no. 4 (2011), pp. 95-18, https://www.ncbi.nlm.nih.gov/pmc/articles/PMC3937807/
#:~:text=For%2058%20percent%20of%20households,levels%20of%20total%20net%20worth.
39 This evidence, along with some of the remedies proposed subsequently, are also addressed in CRS Report R46441,
Saving for Retirement: Household Decisionmaking and Policy Options, by Cheryl R. Cooper and Zhe Li.
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financial literacy. A more fundamental reason that these individuals might not save enough is the
lack of access to employer plans.
A significant share of individuals do not have access to employer-sponsored retirement plans,
especially among low-wage workers.40 According to March 2023 Bureau of Labor Statistics data,
73% of all workers had access to pension benefits, but 49% of workers in the lowest wage
quartile had such access, compared to 92% in the highest quartile. Since participation is voluntary
in some cases, the discrepancy in coverage take-up is greater: 56% of all workers participate in
pension plans, but that share is 28% for the lowest quartile and 94% for the highest quartile. In
the middle-income quartiles, both access and participation are incomplete. In the second-highest
quartile, 73% of workers have access and 53% participate; in the third-highest quartile, 83% have
access and 70% benefit.
Participation in individual retirement outside of employers is lower. About 23% of households
have individual retirement accounts (IRAs); 6.7% of households with incomes under $30,000
have an IRA, compared to 54% of those with incomes over $125,000.41 IRAs tend to be less
attractive than employer plans because most of the latter—about 70% according to one study42—
have an employer match, so that failing to participate at some minimal level leaves money on the
table, which is not the case for IRAs. An IRA outside the employer also requires an active
decision to set up and contribute, which the literature suggests may reduce take-up rates.
Policy Options to Increase Saving for Retirement for Those Able to
Save
In general, reducing tax rates on capital income is not likely to increase saving for the reasons
discussed earlier. In addition, most individuals already have access to tax-favored retirement
accounts that effectively exempt the income saved from tax.43 However, evidence does not clearly
indicate that these retirement plans increase overall saving.44 Such plans are disproportionally
concentrated in higher incomes, and these individuals may reduce ordinary saving to invest in
tax-favored saving vehicles.
Since these tax benefits already exist, proposals to encourage saving for retirement have focused
on increasing access to and participation in employer plans. Policy proposals toward those ends
have included mandatory employer-sponsored IRAs, automatic enrollment in these accounts, and
automatic escalation of contributions, as discussed in a recent CRS report.45 These policy options
are based on evidence that participation in employer plans increases if employees have to opt out
rather than opt in. The CRS report cited above discusses a wide range of other options, including

40 “Table 1. Retirement Benefits: Access, Participation, and Take-Up Rates,” U.S. Bureau of Labor Statistics,
https://www.bls.gov/news.release/ebs2.t01.htm.
41 See CRS Report R46635, Individual Retirement Account (IRA) Ownership: Data and Policy Issues, by Elizabeth A.
Myers.
42 Human Interest, “401(k) employer match rules: 10 things for employers to know 2023,” January 12, 2024,
https://humaninterest.com/learn/articles/10-things-employers-need-to-know-about-401k-employer-match/.
43 Traditional 401(k)s and IRAs allow an up-front tax deduction and exemption of earnings with taxation of
withdrawals, which is the equivalent of exempting the returns from saving because the upfront deduction—given
constant tax rates—offsets the present value of the tax on withdrawals. Roth style 401(k)s and IRAs exempt earnings
from tax.
44 See CRS Report R47492, Tax-Advantaged Savings Accounts: Overview and Policy Considerations, by Brendan
McDermott.
45 CRS Report R46441, Saving for Retirement: Household Decisionmaking and Policy Options, by Cheryl R. Cooper
and Zhe Li.
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information reporting, increasing the age of required mandatory distributions, and other measures.
The recent Secure 2.0 Act of 2022 (P.L. 117-328) included a provision for automatic enrollment,
but it is limited to new retirement plans and exempts new and small firms. There is also a credit
for small businesses that set up auto-enrollment.
Some businesses do not want to operate plans because of regulatory complications. One option is
the “auto-IRA,” which has been adopted by a number of states.46 In these plans, firms deposit
payroll deductions into individual employees’ accounts unless the employees opt out. The
deductions are deposited into large central funds with professional management, freeing
employers from oversight duties. Mandating this approach at a federal level could be an option.47
The federal tax credit currently available to small firms that set up regulated plans could be
extended to firms that set up auto-IRAs to offset the plans’ administrative costs.
Policy Options for Low-Income Individuals
Lower-income individuals have a number of reasons for not saving, including saving in
retirement accounts. Many find saving difficult because they need their income for basic
necessities. According to the 2022 SCF, 13% of the lowest quintile had a retirement account with
a median balance of $17,500. Almost all had a transaction bank account (96%) with a median
balance of $900. About the same share had any form of financial assets, with a median balance of
$1,400. (They were more likely to have equity in a home, with 42% owning their home with a
median value of $145,000, and 12% having home-secured debt with a median value of
$65,000.)48
Lower tax rates are not likely to affect the saving choices of low-income individuals, since many
pay nothing or little in income taxes. Current law has a retirement savers tax credit that is limited
to low-income individuals, but it is not refundable and has been little used.49 The Secure 2.0 Act
of 2022 converts this credit to a savers match. The match—which is scheduled to take effect in
2027 and will be deposited directly into individuals’ retirement savings accounts—could increase
take-up compared to the credit.
Lower-income individuals also may not need to save for retirement because Social Security offers
a relatively high replacement rate for them. The benefit formula for Social Security includes 90%
of the first tier of average wage-indexed earnings (the first $14,088 in 2024), then a rate of 32%
on amounts up to $84,936.50 Social Security also provides a special minimum benefit for long-
term workers that depends only on years and is approximately the size of the first-tier benefit for
workers with 30 years of covered employment.51

46 Andy Markowitz and Jacqueline Salmon, “How Auto IRAs Are Helping More Workers Save for Retirement,”
AARP, updated April 15, 2024, https://www.aarp.org/retirement/planning-for-retirement/info-2023/states-with-
automatic-ira-savings-programs.html.
47 While auto-enrolment may increase saving, there are ethical concerns about where these types of “nudges” become
manipulation or undermine autonomy or dignity. See Cass R. Sunstein, “The Ethics of Nudging,” Yale Journal of
Regulations, vol. 32 (2015).
48 “Survey of Consumer Finances,” Board of Governors of the Federal Reserve System, https://www.federalreserve.gov
/econres/scfindex.htm.
49 See CRS In Focus IF11159, The Retirement Savings Contribution Credit and the Saver’s Match, by Brendan
McDermott and CRS Report R47492, Tax-Advantaged Savings Accounts: Overview and Policy Considerations, by
Brendan McDermott.
50 See “Primary Insurance Amount,” U.S. Social Security Administration (SSA), https://www.ssa.gov/oact/
cola/piaformula.html.
51 “Special Minimum Benefit,” SSA, https://www.ssa.gov/policy/docs/program-explainers/special-minimum.html.
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CBO analysis indicates that Social Security replaces over 70% of wages at normal retirement age
(based on the past 20 years of earnings) for the lowest quintile.52 The National Academy of Social
Insurance has proposed policies to ensure that long-term, low-income workers remain out of
poverty in retirement, including increasing the minimum benefit for such workers and increasing
benefits for widowed spouses in low-income couples.53 Proponents have suggested a number of
ways that these benefits might be paid for, including lifting the cap on earnings subject to payroll
taxes.
Lower-income individuals may not benefit from saving. Even small accumulations of assets can
disqualify individuals from various types of public assistance. There is an extensive literature on
asset tests and their effect on savings.54 Asset tests have relatively low limits in some cases. For
example, the Supplemental Nutrition Assistance Program (SNAP) has a $2,750 asset limit for
recipients ($4,250 for households with an elderly or disabled member ),55 and Supplemental
Security Income (SSI) has limits of $3,000 per couple or $2,000 for an individual.56 The asset test
for SSI has not been indexed for inflation since 1980. SNAP and SSI are fully funded by the
federal government, but SNAP is administered by the states and there are a number of options and
waivers. Some states have supplements to SSI. States administer Temporary Assistance for Needy
Families (TANF) and Medicaid; benefit availability and size in these programs varies across
states but can be quite low. More than half the states have TANF asset limits between $1,000 and
$2,500.57 Asset tests for Medicaid are also low in many states.58 SNAP does not count retirement
accounts, and Medicaid and SSI do not count retirement accounts that are in payout status. Asset
tests usually exclude items like homes, personal property, and in some cases vehicles.59 The Low

52 CBO, Social Security Replacement Rates and Other Benefit Measures: An In-Depth Analysis, April 2019,
https://www.cbo.gov/system/files/2019-04/55038-SSReplacementRates.pdf.
53 National Academy of Social Insurance, Social Security Benefits, Finances, and Policy Options: A Primer, August
2020, https://www.nasi.org/sites/default/files/research/2020%20Social%20Security%20Primer%20Final.pdf.
54 See, for example, André Victor D. Luduvice and Cornelius Johnson, “Means-Tested Transfers, Asset Limits, and
Universal Basic Income,” Federal Reserve Bank of Cleveland, 2022,
https://www.clevelandfed.org/publications/economic-commentary/2022/ec-202210-means-tested-transfers-asset-limits-
universal-basic-income#cf-fn-3; Henry Chen and Robert I. Lerman, Do Asset Limits in Social Programs Affect the
Accumulation of Wealth?, The Urban Institute, Opportunity and Ownership Project, no. 5, August 2005,
https://www.urban.org/sites/default/files/publication/51686/311223-Do-Asset-Limits-in-Social-Programs-Affect-the-
Accumulation-of-Wealth-.PDF; and Maureen Pirog and Edwin Gerrish, TANF and SNAP Asset Limits and the
Financial Behavior of Low-Income Households, The Pew Charitable Trusts, 2017, https://www.pewtrusts.org/-
/media/assets/2017/09/tanf_and_snap_asset_limits_and_the_financial_behavior_of_low_income_households.pdf.
55 CRS Report R42505, Supplemental Nutrition Assistance Program (SNAP): A Primer on Eligibility and Benefits, by
Randy Alison Aussenberg and Gene Falk. ABLE accounts effectively create a SSI-resource exclusion that permits
qualified individuals to hold more cash assets than they otherwise could without having to spend down their resources
to meet the program’s statutory limits. See CRS In Focus IF10363, Achieving a Better Life Experience (ABLE)
Programs, by William R. Morton and Kirsten J. Colello.
56 CRS In Focus IF10482, Supplemental Security Income (SSI), by Emma K. Tatem and William R. Morton.
57 The Pew Charitable Trusts, Do Limits on Family Assets Affect Participation in, Costs of TANF?, Issue Brief, July 17,
2016, https://www.pewtrusts.org/en/research-and-analysis/issue-briefs/2016/07/do-limits-on-family-assets-affect-
participation-in-costs-of-tanf.
58 MaryBeth Musumeci, Priya Chidambaram, and Molly O'Malley Watts, Medicaid Financial Eligibility for Seniors
and People with Disabilities: Findings from a 50-State Survey, KFF, https://www.kff.org/report-section/medicaid-
financial-eligibility-for-seniors-and-people-with-disabilities-findings-from-a-50-state-survey-issue-brief/.
59 For state-by-state rules for SNAP and TANF, see Jessica Gehr, Eliminating Asset Limits: Creating Savings for
Families and State Governments, Center for Law and Social Policy, April 2018, https://www.clasp.org/
sites/default/files/publications/2018/04/2018_eliminatingassetlimits.pdf.
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Income Home Energy Assistance Program (LIHEAP) does not have an asset test, although states
may impose such tests.60
Saving in retirement accounts does not affect SNAP, but saving for retirement outside of
retirement plans does. In some states, retirement accounts affect TANF and Medicaid
qualification when withdrawals are not occurring. Asset tests may disincentivize saving by
denying individuals benefits or causing them to lose benefits until their savings reach very low
levels.
Several proposed options could enable public assistance programs to identify the needy without
disincentivizing saving. For example, asset tests could exclude all savings in retirement accounts,
or programs that use asset tests could raise their limits. Alternatively, asset tests could be
completely eliminated and income from otherwise includable assets could be imputed to income
(net of actual interest and other income received from assets) to reflect a contribution over time.
This approach is used for federal housing programs that do not have an asset test.61
Aside from addressing asset tests, Congress might consider expanding SSI. The Center on Budget
and Policy Priorities reported that 4 out of 10 SSI recipients are below the poverty level and
suggested updating asset and income limits, indexing them for inflation going forward, and
raising the basic benefit.62 The center also suggested simplifying or eliminating the in-kind
support and maintenance rules, as well as expanding the program to once again cover lawful
permanent residents who are not citizens (who were covered before 1996) and residents of
territories.
Inadequacy of Saving for Short-Term Emergencies
The car or the furnace breaks down. A temporary illness prevents the family earner from working
and causes medical copayments to increase. The main wage earner loses his or her job. These are
all common examples of occasional expenses that indicate a need for some type of precautionary
saving.63
Data from a 2022 Federal Reserve survey indicated that 63% of respondents could pay for a $400
emergency cost with cash or cash equivalent (a credit card that is paid off at the next cycle).64

60 CRS Report RL31865, LIHEAP: Program and Funding, by Libby Perl. Few states impose asset limits, see “LIHEAP
Heating Eligibility Assistance: Assets Test,” LIHEAP Clearing House, https://liheapch.acf.hhs.gov/tables/
assets.htm#:~:text=For%20more%20information%20on%20variations,tests%2C%20contact%20the%20LIHEAP%20C
learinghouse.&text=Each%20household's%20resources%20may%20not%20exceed%20%243%2C000.&text=%2410
%2C931%20for%20a%20single%20person,to%20%2421%2C870%20maximum%20per%20household.
61 See CRS Report R42734, Income Eligibility and Rent in HUD Rental Assistance Programs: Frequently Asked
Questions, by Libby Perl and Maggie McCarty.
62 Kathleen Romig and Sam Washington, Policymakers Should Expand and Simplify Supplemental Security Income,
Center on Budget and Policy Priorities, May 4, 2022, https://www.cbpp.org/research/social-security/policymakers-
should-expand-and-simplify-supplemental-security-income.
63 The discussion here deals with saving for transitory events and not for permanent events such as a disability that
requires early retirement or limits work options, death of the breadwinner, or medical costs due to a permanent
condition. These are events that are more appropriately dealt with by insurance, Social Security benefits for disability
and for survivors, and public safety-net programs. Transitory events would include waiting periods to secure these
benefits. The lack of insurance of some of these events is an important issue not addressed in this report. In particular, a
small and declining share of workers have disability insurance. See Life Insurance Marketing and Research Association
(LIMRA), 2021 Fact Sheet: Disability Insurance Awareness Month, https://www.limra.com/siteassets/newsroom/fact-
tank/fact-sheets/diam-2021-final.pdf.
64 Board of Governors of the Federal Reserve System, Economic Well-Being of U.S. Households in 2022, May 2023,
https://www.federalreserve.gov/publications/files/2022-report-economic-well-being-us-households-202305.pdf.
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Most of the remainder would borrow (credit card, bank loan, or loan from a friend or family
member) or sell assets, and 13% could not pay for it in any way. For more extensive costs, such
as a job loss, 54% of families had enough money saved to cover the recommended three months
of expenses. Others would borrow or sell assets, but 30% indicated they could not pay this
amount in any way. The survey also reported that 28% of families went without some form of
health care because they could not afford it, including 38% of families with income below
$25,000.
Although financial shocks are more pronounced at lower income levels, they are difficult to
address across most of the income spectrum.65 Of households earning above $85,000, 10%
indicated they would have difficulty meeting financial obligations without a shock, but 29%
reported difficulties after a shock. Of those with incomes below $25,000, 30% reported generally
having difficulty meeting financial obligations, but that rose to 68% after a shock.
Although saving for emergencies has received less attention than saving for retirement, there are
some indications that the combination of having a savings account and financial literacy increases
the likelihood of having emergency funds.66 Data indicate that 54% of households have a savings
account and 58% have a money market or savings account. This share varies more by income (39
percentage points) than by age (6.1 percentage points). In the lowest quintile, 30% have a savings
account and 34% have a money market or savings account, rising to 60% and 68% in the top
quintile.67 Compared to a checking account, a savings account might be viewed as more off limits
for day-to-day spending, consistent with the idea of “mental accounts” in the behavioral
economics literature.
Legislation enacted at the end of 2022 (P.L. 117-328, Secure 2.0 Act) contains provisions that
could help address the inadequacy of emergency saving. One of the provisions waives an early
distribution penalty on up to $1,000 withdrawn from certain retirement plans for emergency uses
if repaid within three years. A second provision creates employer-linked emergency savings
accounts up to a limit of $2,500. Both provisions assist only individuals who have the current
capacity to save.
Policy Options
The workplace might be a venue for financial education or forms of auto-savings accounts
outside of retirement accounts. Employers or governments could offer savings matches for
nonretirement savings accounts: for example, New York City pioneered a match for tax refunds if
the refunds are deposited and maintained in a savings account for a year. The match is directed at
low- and moderate-income individuals; it is now used in several cities and has increased saving.68

65 The Pew Charitable Trusts, How Do Families Cope With Financial Shocks?, October 2015,
https://www.pewtrusts.org/~/media/assets/2015/10/emergency-savings-report-1_artfinal.pdf.
66 Mathieu R. Despard, Terri Friedline, and Stacia Martin-West, “Why Do Households Lack Emergency Savings? The
Role of Financial Capability,” Journal of Family Economic Issues, vol. 4, No. 3 (2020), pp. 542-557,
https://www.ncbi.nlm.nih.gov/pmc/articles/PMC7236434/.
67 Steven Brobeck, Traditional Savings Accounts: Are They Still Popular?, Consumer Federation of America, August
2021, https://consumerfed.org/wp-content/uploads/2021/08/Traditional-Savings-Accounts-Are-They-Still-Popular-
Report.pdf.
68 For evidence on the effectiveness of savings matches, see NYC Center for Economic Opportunity, SaveUSA: A
Summary of Findings from MDRC’s SaveUSA Final Impact Report, January 2016, https://www.nyc.gov/assets/
opportunity/pdf/saveusa_findings_at_a_glance_final.pdf. Other pilot matched savings programs appear successful; see
Neighborworks America, Lessons Learned from Matched Savings Programs,
https://www.neighborworks.org/Documents/HomeandFinance_Docs/FinancialSecurity_Docs/ProjectBrief_LessonsLea
rned-MatchedSavingsPrograms.aspx.
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The social safety net offers some assistance for job loss through the unemployment compensation
program provided by the federal and state governments, offsetting some need for personal saving,
but these payments cover about 40% of earnings on average.69 The time period and amount of
such benefits varies among states, with the most common period being 26 weeks. A few states
offer temporary disability unemployment benefits.70 Other public transfers may assist in
addressing prolonged but temporary emergencies. However, public transfer programs’ asset tests
may discourage saving for emergencies, as previously discussed in the context of retirement
savings.
Saving for Education
College saving needs are more difficult to measure than retirement and emergency saving needs.
A 2022 survey of parents indicated that most planned to cover an average of 69% of anticipated
college expenses, but respondents were on track to cover 27% of those expenses on average.71
Surveys indicate that cost is the number one barrier to attending and remaining in college. In a
2023 survey, 55% of unenrolled adults reported cost as a very important reason for not attending
college. Of those enrolled, 41% had considered dropping out; 29% said cost was a very important
reason. Of those enrolled, 58% reported that financial aid (loans, scholarships, and grants) was
very important for remaining in college.72
Sources of College Funding
Data on college financing indicate that parent savings fund 18% of undergraduate college
expenses, with 9% from college savings plans, 7% from other savings, and 2% from withdrawals
from retirement accounts. These shares change over the income classes. For families with less
than $50,000 of income, savings cover 15% of costs (5% from college savings plans, 7% from
other savings, and 3% from withdrawals from retirement plans). For families with over $150,00
in income, savings cover 27% of costs (17% from college savings plans, 9% from other savings,
and 1% from withdrawals from retirement plans).73 Overall, student loans account for 11%, with
6% from federal student loans.74 Parent borrowing accounts for 9%; loans from retirement
accounts are 1%. The average cost of college was significantly larger for the highest income
classes than for the lowest: $32,497 for families with incomes over $150,000, and $22,724 for
families with incomes under $50,000.
The largest source of funding is scholarships and grants, which amount to 29% for families
overall—34% for those with less than $50,000 of income, and 19% for those with more than
$150,000. Federal grants account for a small share of expenses. Grants from governments and

69 Economic Policy Institute, Reforming Unemployment Insurance, June 2021, https://www.epi.org/publication/section-
5-benefit-levels-increase-ui-benefits-to-levels-working-families-can-survive-on/.
70 “Comparison of State Unemployment Laws 2022,” U.S. Department of Labor, https://oui.doleta.gov/unemploy/
comparison/2020-2029/comparison2022.asp.
71 Fidelity Investments, 2022 College Savings Indicator, https://www.fidelity.com/bin-public/060_www_fidelity_com/
documents/about-fidelity/FidelityInvestments2022CollegeSavingsIndicator.pdf. Of the 39% of families with 529 tax
favored savings plan, 37% report being on target, while of families without 22% report being on target.
72 Lumina Foundation, The State of Higher Education, 2023, https://www.gallup.com/file/analytics/505157/state-
higher-education-2023.pdf.
73 Sallie Mae, How America Pays for College 2023, https://www.salliemae.com/content/dam/slm/
writtencontent/Research/HowAmericaPaysforCollege2023.pdf.
74 CRS In Focus IF12267, Direct Loan Program Student Loans: Terms and Conditions, by Alexandra Hegji.
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schools account for 12%. Data on Pell Grants, which are the major federal grant program,75
suggest they account for about 5% of college costs.76 These grants are based on financial need.
The next-largest source is payments out of parents’ current income, which accounted for 22%—
14% for families with less than $50,000 of income and 24% for families with more than
$150,000. Students contribute 9%: 4% from current income, 1% from work/study programs, and
4% from savings.
Federal government direct support for college costs for students is relatively small: grants account
for around 5% and subsidized student loans for 6%.
Student loan repayment often makes it difficult for individuals to save for retirement. For
example, workers who forego employer-sponsored retirement plans in favor of paying off student
loans might miss out on matching employer contributions. The Secure 2.0 Act added a provision
to allow employers that match contributions to tax-favored retirement accounts to treat student
loan repayments as though they were saving in those accounts for the purposes of such matches.
Tax Benefits
The federal government also supports those paying college costs through tax benefits.77 The most
significant benefit is the American Opportunity tax credit, which is worth 100% of the first
$2,000 of qualifying expenses and 25% of the next $2,000, for a total maximum of $2,500.78 If
this amount were claimed in full, it would cover about 9% of costs on average. The credit phases
out for those with moderately high to high income. It is also less likely to benefit low-income
families that tend to have little or no income tax liabilities, although 40% of the credit is
refundable.
Some tax benefits also cover college savings.79 There are two types of tax-advantaged college
savings plans: qualified tuition programs (better known as 529 plans) and Coverdell plans. Both
involve no tax on earnings and no tax on distributions when used for qualified educational
expenses. Both are subject to a 10% penalty on investment returns if used for other purposes.
States sponsor and manage 529 plans, and there are no federal limits or contribution limits; limits
on contributions and amounts in the fund vary by state.80 A few states also offer 529 prepaid
tuition plans, which lock in tuition at current levels. Some states also allow state income tax
deductions for contributions. Coverdell plans are generally self-directed, and annual contributions
are limited to $2,000; benefits are phased out for high incomes.

75 CRS Report R45418, Federal Pell Grant Program of the Higher Education Act: Primer, by Cassandria Dortch.
76 “Trend Generator,” National Center for Education Statistics, https://nces.ed.gov/ipeds/trendgenerator/app/
answer/8/35. The data indicated that 32% of students received Pell Grants which averaged $4,597 in 2021. Based on
the Sallie Mae data, the average cost of college was $28, 026, which suggests these grants accounted for about 5% of
costs.
77 See CRS Report R41967, Higher Education Tax Benefits: Brief Overview and Budgetary Effects, by Margot L.
Crandall-Hollick and Brendan McDermott.
78 CRS Report R42561, The American Opportunity Tax Credit: Overview, Analysis, and Policy Options. For further
information, congressional offices may contact Brendan McDermott.
79 See CRS In Focus IF11254, Major Features of 529 Plans and Coverdells, by Joseph S. Hughes, Molly F. Sherlock,
and Margot L. Crandall-Hollick; CRS Report R42807, Tax-Preferred College Savings Plans: An Introduction to 529
Plans, by Brendan McDermott; and CRS Report R42809, Tax-Preferred College Savings Plans: An Introduction to
Coverdells, by Margot L. Crandall-Hollick and Brendan McDermott.
80 “Compare 529 Plans by Features,” Saving for College, https://www.savingforcollege.com/compare-529-
plans/results?plan_question_id=308&plan_question_id=387&mode=Compare&plan_type_id=&page=compare_plan_q
uestions.
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An alternative to education-specific savings plans is to invest in an IRA, since withdrawals for
educational purposes are exempt from the typical 10% penalty for early IRA withdrawals. IRAs
have annual contribution limits (in 2024, $7,000 plus $1,000 for those aged over 50) and income
phaseouts, so this approach may not be available to all taxpayers (or taxpayers may need the
contributions for their retirement).
College savings accounts may be less appealing than IRAs for some, because the 10% penalty on
investment returns used for noneducational purposes can impose additional costs if children
decide not to go to college or go to a college that is less expensive than anticipated. If those
savings were in an IRA, the parent could maintain the funds for retirement. Recent legislation has
also addressed this issue by allowing 529 accounts to be converted to beneficiary-owned Roth
IRAs, subject to the annual contribution limitation and a total maximum of $35,000.81
College savings accounts and Roth IRAs are treated differently in determining eligibility for
student financial aid. College savings accounts can be included in parental assets (rather than
student assets), which leads to a smaller contribution requirement than would otherwise be the
case. Distributions from college savings accounts are not included in income. Retirement
accounts are excluded assets for determining eligibility, but distributions are included in
income.82
Evidence on Effectiveness of Tax Incentives for College Saving
There is little evidence of tax-favored college savings accounts’ effects on college graduation,
attendance, or saving. An extensive review of the evidence on financial aid indicated that aid
programs increase college attendance, but found no evidence that tax-favored education accounts
increase saving or enrollment.83 The review generally found limited effects from seed and/or
match programs at the state level (where the state provides some initial funds on opening a 529
plan), although one study found an increase in participation and automatic contribution take-up
when states provided help in setting up accounts and contributed initial amounts. The review’s
authors concluded, however, that any effects on savings from these plans would do very little to
affect college affordability. These provisions also tend to benefit higher-income families, not only
because such families make greater use of them (they funded an average of $5,669 in college
costs for those with over $150,000 of income and $1,129 for those with less than $50,000) but
also because those families have higher marginal tax rates.
The extensive review found evidence that direct spending has an effect on enrollment but did not
find the same for tuition tax credits, although the reviewed studies were undertaken before the
credit was made partially refundable. Thus, the credits most likely benefited upper middle- and
higher-income families, who were likely to enroll their children in college in any case. The
researchers suggested that complexities in understanding and applying for aid, as well as
interactions among aid sources that caused benefits from one source to be offset by reduced
benefits from another, made these programs less effective.

81 Lawrence Pon, “The New 529 Rollover to Roth IRA,” Journal of Accountancy, July 26, 2023,
https://www.journalofaccountancy.com/news/2023/jul/the-new-529-rollover-roth-ira.html.
82 CRS Report R44503, Federal Student Aid: Need Analysis Formulas and Expected Family Contribution, by Benjamin
Collins.
83 Susan Dynarski, Lindsay C. Page, and Judith Scott-Clayton, “College Costs, Financial Aid, and Students Decisions,”
Handbook of the Economics of Education, Eds. Stephen J. Machin, Ludger Woessmann, and Eric A. Hanushek, vol. 7
(2023), pp. 227-285. Also available as National Bureau of Economic Research Working Paper no. 30275, July 2022,
https://www.nber.org/system/files/working_papers/w30275/w30275.pdf.
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Policy Options
The evidence from state-level seeded and matched savings programs found that these types of
matches seemed to encourage more saving in 529 accounts, suggesting that plans with a matched
savings program and seed money might be more effective than traditional 529 plans in helping
lower- and middle-class families save for college—though some of this effect is saving shifted
from other types of saving. Outreach would likely also help raise awareness of these options.
Matched savings allow tax benefits to be directed to those without tax liability.
More effective policies might assist with college costs in other ways, such as allowing full
refundability of tuition tax credits or the ability to utilize savings intended for college for other
purposes in certain situations. The latter idea could provide better incentives to save for those
uncertain about college attendance, but would need guardrails to limit use of the accounts as a
mechanism to transfer wealth. Outside of taxes, direct increases in financial aid might be more
effective. The National Academy of Social Insurance has also discussed reinstating student Social
Security benefits for survivors of disabled or deceased parents to children up to age 22.84
Another set of proposals responds to the rapid growth in student loans in recent years. The Aspen
Institute has proposed a variety of public and private policy options.85 Proposals that involve the
federal government include dramatically increasing grants to lower-income students (which have
not kept up with rising college costs), restricting loans for colleges and universities with
demonstrated records of poor outcomes for students, expanding and simplifying income-based
repayment plans and loan forgiveness, and making student debt dischargeable in bankruptcy.
Other proposals include forgiving a certain amount of student debt, setting higher limits for
recipients of Pell Grants, forgiving debt for borrowers below certain income levels, allowing
income-driven repayments, expanding funding to make public colleges and universities tuition
free, broader use of human capital contracts or income share agreements, and expanding access to
career and technical (vocational) education.86
Some research has suggested policies be designed to focus on graduation rather than enrollment,
as college dropouts earn small wage premiums relative to high school graduates. As noted above,
proposals to restrict loans for institutions with poor outcomes are one option. Another is to
consider the likelihood that the student will succeed—that is make loans and grants merit-
based—although merit-based aid raises some concerns about access and equity.87

84 National Academy of Social Insurance, Social Security Benefits, Finances, and Policy Options, August 2020,
https://www.nasi.org/sites/default/files/research/2020%20Social%20Security%20Primer%20Final.pdf. The withdrawal
of these benefits was estimated to reduce college attendance by one-third among children with a deceased parent. See
Susan Dynarski, “The Behavioral and Distributional Implications of Aid for College,” American Economic Review,
vol. 92, No. 2 (May 2002), pp. 279-285.
85 Tim Shaw and Kriese Hansen, Making the Case: Solving the Student Debt Crisis, Aspen Institute, March 23, 2020,
https://www.aspeninstitute.org/publications/solving-the-student-debt-crisis/.
86 Council on Foreign Relations, Is Rising Student Debt Harming the U.S. Economy?, updated April 16, 2024,
https://www.cfr.org/backgrounder/us-student-loan-debt-trends-economic-impact#:~:text=
Many%20experts%20and%20policymakers%20agree,goals%20while%20exacerbating%20racial%20inequality. See
CRS In Focus IF11269, An Economic Perspective of Income Share Agreements, by Mark P. Keightley for more
information on income share agreements.
87 See Carlos Garriga and Mark P. Keightley, A General Equilibrium Theory of College with Education Subsidies, In-
School Labor Supply, and Borrowing Constraints, Federal Reserve Bank of St. Louis, Working Paper no. 2007-151A,
October 2007, https://s3.amazonaws.com/real.stlouisfed.org/wp/2007/2007-051.pdf
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Author Information

Jane G. Gravelle
Donald J. Marples
Senior Specialist in Economic Policy
Specialist in Public Finance

Disclaimer
This document was prepared by the Congressional Research Service (CRS). CRS serves as nonpartisan
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under the direction of Congress. Information in a CRS Report should not be relied upon for purposes other
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