Unpacking Universal Savings Accounts

Some groups are calling on Congress to establish a new type of tax-advantaged account — universal savings accounts similar to those in Canada and the UK — which proponents say would encourage saving while “unlocking” account holders’ money. But the proposal is not without cost concerns.

According to a recent Tax Foundation report, there are at least 11 types of “tax-advantaged saving vehicles” under current law. Those vehicles all target specific types of savings, specifically savings for retirement, education, disability, health, dependent care, and emergencies. The Tax Foundation says that a “simpler solution” is needed that allows Americans to save in a tax-advantaged account “for any reason without penalty or excessive paperwork.”

Senate Finance Committee members delved into universal savings accounts during a May hearing focused on yet another specific type of tax-advantaged account, the 401Kids Savings Account, proposed by Senator Bob Casey (D-PA) and Representative Don Beyer (D-VA). (S 3716/HR 7162)

However, hearing witness Veronique de Rugy of George Mason University’s Mercatus Center disagreed with the Democratic lawmakers’ approach, saying that the “first best solution is to reform the Tax Code to remove the disincentive to save.” She said that universal savings accounts would be a better addition to the Tax Code because they would provide an option to families that are hesitant to use spending-specific tax-advantaged accounts that “lock up” their money, penalizing withdrawal should a different need arise.

Adam Michel of the Cato Institute described universal savings accounts as an “on-ramp to the rest of the savings ecosystem that we currently have for people who are, frankly, scared of locking their money up until retirement or having to earmark it for education.” At the May hearing, Michel said the accounts would give “more people access to the systems” that are now primarily used by people who are able to make long-term planning decisions — opening savings up to those who anticipate a potential need to withdraw money in the short-term. Universal savings accounts are “widely used across the income distribution” in UK and Canada, explained Michel, and “would be a great addition to the next round of tax reform” in the US.

In its June 17 report, the Cato Institute urged Congress to create a universal savings account where “income saved in the account would be taxed only once — but without restrictions on when or how funds could be spent.” The report suggests a maximum annual contribution level of $10,000 with no withdrawal restrictions.

The Tax Foundation followed up on their report with a June 25 webinar touting the benefits of universal savings accounts. According to speaker Chris Edwards of the Cato Institute, the current Tax Code is “biased against savings.” He explained that “conservative, market-oriented economists tend to think that the income tax double taxes savings … and it encourages people to consume now rather than saving for the future.” But “savings are a good thing, and we don’t want to have a Tax Code that distorts end-game savings,” explained Edwards.

In Canada and in the UK, there has been bipartisan support for these types of accounts, said Edwards. The Canadian accounts — known of as tax-free savings accounts — are basically “super-charged Roth IRAs” that allow people to save in a tax-advantaged account but make withdrawals “at any time for any reason.” They have an annual contribution limit of Can$7,000 in 2024.

Though they were introduced by the conservative government, tax-free savings accounts are also supported by liberal government and over 60% of Canadians hold the accounts, said Edwards. They have become “enormously popular,” and politicians would not be able to “eliminate them even if they wanted to,” he added.

The accounts have bipartisan support in the UK as well, said Edwards. The modern version of the accounts, known of as individual savings accounts, was established by former Prime Minister Tony Blair’s Labour government, Edwards explained. But “they’ve been expanded over the years by both parties.”

In the UK, the annual contribution limit on the accounts is currently £20,000. And the accounts have “essentially … wiped out the double taxation of savings in Britain for everyone except the folks at the very top,” Edwards said, adding “that is a fantastic thing.”

The bipartisan support for the accounts in Canada and the UK, said Edwards, “provides long-term stability for people” because “they know they can plan their finances based around these accounts.”

Cost concerns.

Not all agree that universal savings accounts are the right approach — and dissenters are typically focused on the cost. In an analysis of a 2018 Republican proposal to establish universal savings accounts, the Center on Budget and Policy Priorities (CBPP) concluded that without any income ceiling for participation or limits on withdrawal purposes, individuals would be encouraged to shift savings out of taxable accounts.

This shift, the CBPP said, would result in significant declines in federal revenue. The group pointed to the Joint Committee on Taxation’s estimate that allowing $2,500 annual contributions to universal savings accounts — the amount proposed in the 2018 Republican-backed bill — “would cost $8.6 billion over ten years.”

And in fact, according to the Cato Institute’s June report, Roth-style universal savings accounts “with an annual contribution limit of $10,000 a year would reduce revenue by $4 billion a year.”

In its May report, the Tax Foundation modeled a universal savings account program with a $9,100 contribution cap for 2025, indexed for inflation thereafter, for a ten-year period. However, that model contains an offset that may prove to be unpopular — ending the tax advantages of contributing to health savings accounts.