Saving the wealthy

February 07, 2003

TRYING TO calculate the impact of President Bush's radical plan to eliminate taxes on savings? Ask yourself if your own family would benefit more in the long run if:

Social Security and Medicare continue meeting their obligations.

Or a family of four can sock away as much as $45,000 a year in permanently tax-free accounts, plus $24,000 in employer-sponsored retirement plans.

That's $69,000. Haven't heard much on this? Oh, that's right, the president didn't even mention this tax revolution in his State of the Union address.

Maybe that's because its dramatic expansion of tax-free saving would mainly benefit the well-off at massive cost in lost tax revenues over the long term - further putting the spiraling federal budget deficit on a collision course with rapidly rising demands on Social Security and Medicare.

And, yes, buried in the president's proposals are changes likely to induce the vast majority of workers to save less.

The net result over time may well be reduced national saving - not increased, as President Bush claims.

On the surface, the president's proposals for three new savings accounts have appeal:

Every adult and child could contribute $7,500 a year after taxes to a Lifetime Savings Account (LSA), which would grow tax-free and from which he or she could freely withdraw. There's nothing like this now.

All earners could put another $7,500 after taxes into Retirement Savings Accounts (RSAs), similar to tax-free Roth IRAs now limited to $3,000 a year. Traditional IRAs, now providing up-front tax breaks to couples making less than $64,000, would end.

Various employer-sponsored savings plans - including 401(k) and 403(b) plans - would become Employer Retirement Savings Accounts (ERSAs), with few changes save for relaxing the limits on participation by high earners.

All this would simplify the confusing array of retirement and employer-sponsored saving accounts, expand non-taxable savings opportunities, and, the president says, spur economic growth with a big increase in national savings. But for most, as with his other tax proposals, this glitter isn't golden.

First, this is a huge windfall for the relative few able to save tens of thousands of dollars a year. Much of the LSA and RSA contributions likely would be transfers from taxable accounts of the well-off. As it is, a low percentage contribute the $3,000 limit to IRAs, and they would have much less to reason to save without the IRA tax break.

Moreover, 401(k)s would be less available. Small businesses now offer these to their workers often because it's the only way owners can set up plans for themselves. With two new tax-free accounts enabling couples to put away $30,000 a year, there would be a lot less incentive to sponsor such plans.

As to economic growth, Mr. Bush says what's good for the well-off is good for the nation. That's not the case here, says the Center on Budget and Priorities, which predicts that additional growth in the federal deficit from the president's proposal would outstrip any increase it would produce in private savings. That's a net national savings loss, the opposite of his stated goal.

If Mr. Bush truly wanted to spur greater savings in a fiscally responsible way, he would raise income and contribution limits for tax-deductible IRAs. He would also provide more incentives for employers to offer retirement plans and for workers to participate. But such ideas don't fit this administration's regressive tax agenda.

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