By: Jennifer Waters
January 27, 2010
CHICAGO (MarketWatch) -- President Obama's proposed initiatives aimed at bringing peace of mind back to middle- and low-income earners won't do much to stimulate the economy and in general don't help the unemployed but could represent a tiny beacon for many struggling Americans in this recessionary storm.
The bevy of policy changes Obama proposed this week -- and likely will raise in his State of the Union address Wednesday -- include making the child-care tax credit, saver's credit and student-loan repayment rules more generous and favorable to middle-class families. Also, he reiterated his proposal to create employer-directed retirement-savings accounts. These are all programs that mainly apply to people who have jobs.
"These proposals are all promising to help families and workers who are struggling or underemployed and will have a positive impact on those who do have jobs," said Rob Seltzer, an independent certified public accountant and personal financial specialist in Beverly Hills, Calif. "I don't know how much impact they'll have."
Here's a look at what the White House proposed and how it might affect some families and individuals.
Child-care tax credit
The president wants Congress to nearly double the child-care tax credit and to expand the number of households eligible for it. Under the plan, households making $85,000 or less a year would be eligible for a 35% credit of their child-care expenses, up from 20% now. For a family with two children and a household income of $80,000, the credit would jump by as much as $900, to $2,100 from $1,200. See the fact sheet on WhiteHouse.gov.
That might be the tipping point for families with a stay-at-home parent whose salary doesn't cover the costs of child care. "It gives more incentive to going back to work by helping to weigh the cost benefit of going back to work," Seltzer said.
Capping student-loan payments
College graduates who are struggling with staggering debt because of the skyrocketing costs of tuition will get a reprieve under Obama's plan. Consider, too, that two-thirds of graduates are carrying an average student-loan debt of $23,000. The administration is asking Congress to limit a borrower's monthly payment to 10% of the graduate's discretionary income -- what they have left after paying living expenses.
A single borrower who owes $20,000 and whose first job earns him or her $30,000 would pay $115 a month, instead of $228 under the standard 10-year repayment plan.
"It makes the payback a little more bearable," said Mark Luscombe, a principal analyst with CCH Inc., a Riverwoods, Ill., tax publisher and unit of Wolters Kluwer. There's also a piece in the proposal that calls for forgiving loans after 10 years for those who pursue civil service jobs and after 20 years for those who take other career paths.
Automatic IRA deposits
The government wants to make it easier for employers without retirement programs -- generally small businesses -- to set up individual retirement accounts to which employees would automatically contribute. This could be monumental considering that roughly half of the workforce -- about 78 million people -- doesn't have employer-based retirement accounts. They wouldn't be mandatory, but employees would have to opt out and the White House expects that most won't do that. Past government studies have shown that opt-in programs see a mere 15% participation rate while this opt-out decision could boost participation to 80%.
"There is a huge chunk of folks out there who just don't have enough money for retirement," said Carol Wayman, director of federal policy at the Corporation for Enterprise Development. The CFED estimates that one out of five people don't have enough for retirement, and Social Security is the sole source of income and for more than 30% of seniors; Social Security represents 90% of retirement income.
"This is a huge opportunity to build the infrastructure for wealth building," she said.
Simplify the Saver's Credit
This is another CFED favorite because it is a savings-incentive program that has seen very little participation. The administration will ask Congress to expand and simplify the credit to match 50% of the first $1,000 saved by families earning up to $65,000.
That would mean the family would get a $500 check if they put at least $1,000 into savings. Right now the threshold is $33,000 and the credit is nonrefundable, meaning that those who don't make enough money to pay taxes -- about 35% of all tax filers -- don't get the match. Under the proposal, they would.
"This is a great incentive," Wayman said. "The most that people are really able to save to this level of income is about $500 a year. If a household saves $1,000, that's really an achievement."
Jennifer Waters is a MarketWatch reporter, based in Chicago.